JVIRAHYAS@GMAIL.

COM CUSTOMER ACCOUNTS

TThe relationship between a banker and his customer begins with the opening of an account by the former in the name of the latter. As all accounts are opened with a deposit of money by the customer, they are called deposit accounts. The bulk of the resources of a bank are mobilized by accepting deposits from the public. Accepting of deposits of money from the public (as mentioned earlier) is among the most important functions of a banker (Banking Regulation Act, 1949). The banker solicits deposits from the members of the public belonging to different walks of life, engaged in numerous economic activities and having different financial status. The nature of banking facilities sought by them, therefore, will vary widely. Banks have, therefore, introduced different types of accounts with various facilities and privileges. Customarily, bank accounts are classified into two categories : (i) demand deposits (these are further divided into savings and current accounts) and (ii) time or fixed deposit accounts. There are several others which are variations of these such as unfixed deposit accounts, recurring deposit accounts, the suviddha scheme and the likes. These variations are designed to appear different to attract deposits Some banks also issue cash certificates or certificates of deposit to solicit deposits for a fixed period. This section discusses bankers practices in relation to the opening and operation of different types of customer accounts. Types of Deposit Accounts Deposit Accounts are of two types 1. Fixed or time Deposits and Demand Deposits (Current Accounts and Savings Accounts) Fixed Deposit Accounts

The Reserve Bank of India, in its Master Circular dated July 16, 2004 defines fixed or term deposits as, a deposit received by a bank for a fixed period and which is withdrawable only after the expiry of the said fixed period and shall also include deposits such as Recurring, Cumulative, Annuity, Reinvestment deposits, Cash Certificates, and so on. These are deposits placed with the bank for a fixed period. This period is specified at the time of placing the deposit. The deposits are, therefore, called Fixed, Time or Term Deposits. A Fixed deposit is repayable on the expiry of the period specified by the depositor. If a person intends to utilize the money he has for a purpose after a few years, he may deposit it for 3, 5 or 6 years, whereas if his requirement is to meet some urgent need in the near future, the fixed deposit may be made for 3, 6 or 9 months. As the date of repayment of a fixed deposit is determined in advance, the banker need not keep more cash reserves against it and can utilize such amount more profitably. The banker therefore offers a higher rate of interest on such deposits because the depositor parts with liquidity for a definite period. .A small variation of this is a Notice Deposit which is a term deposit for a specific period but withdrawable on giving atleast one complete banking days notice.

Rates of Interest on Fixed Deposits The Reserve Bank had pre liberalization (upto the early 1990s) stipulated the rates of interest that banks may pay on Fixed Deposits. However, with liberalization the RBI has now permitted banks to fix their own rates on fixed deposits of different maturities. Banks are required to disclose in advance the schedule of interest rates payable on deposits. Interest should be paid as detailed in the schedule and should not be negotiated between the banker & depositor. Changes in the rates offered must be approved internally by a Competent body properly authorised in the Bank. Minimum Maturity The minimum period a fixed deposit may be accepted is 15 days. However if the deposit is for Rs. 15 lakhs or more, the minimum period would be 7 days. Recurring Deposit or cumulative deposit accounts A variant of the standard fixed or term bank accounts is the recurring deposit or cumulative deposit account. This account is intended to inculcate the habit of saving on a regular basis as an inducement is offered in the form of comparatively higher rate of interest. A depositor opening a recurring deposit account is required to deposit an amount chosen by him, generally a multiple of Rs.5 or 10, in his account every month for a period selected by him. The period of recurring deposit varies from bank to bank. Banks open such accounts for periods ranging from 1 to 5 years. The rate of interest on the recurring deposit account is more favorable than the rate of interest on the saving bank account because the former partly resembles the fixed deposit account. According to a directive of the Reserve Bank, banks are required to ensure that the rates of interest offered by them on recurring deposits are generally in line with the rates prescribed for various term deposits. The rate of interest is, therefore, almost equal to that of the fixed deposit account. In case a depositor is compelled to close the account before its maturity, the bank pays no interest if the deposits are made for less than 3 months, interest at 1-1/2% is payable for deposits made up to 6 months, up to 4% for deposits made up to 12 months and 1% below the rate applicable to a recurring deposit of the period for which the deposit has actually run in case of deposits are held for over year. The accounts are transferable from one branch to another without charge. A recurring deposit account can be opened by a person, by more than one person jointly or severally, by a guardian in the name of a minor and even by a minor. While opening the account, the depositor is given a Pass Book which is to be presented to the bank at the time of monthly deposits and repayment of amount. Instalments for each month should be paid before the last working day of that month. Accumulated amount with interest will be payable after a month of the payment of the last instalment. In a computerized environment a passbook may not be available.

Additional Interest to bank staff and their exclusive associations.

Employees are usually given an additional 1% per annum interest. This is subject to the condition that the bank should obtain a declaration from the depositor that the monies deposited to the account belong to him/ her. These are payable to those accounts opened in the name of: A member or a retired member of the banks staff either singly or jointly with any member of his/ her family, or The spouse of a deceased member or a deceased retired member of the banks staff or An association or fund, members of which are the members of the banks staff. There are some conditions, however. The additional interest will be payable only so long as the person continues to be eligible for the additional interest or (if he becomes ineligible) till the maturity of his term deposit. If employees have been taken over as a result of an amalgamation, the additional interest will be permitted if the interest at the contractual rate together with the additional interest does not exceed the rate given to the employees of the bank. Bank employees Federations in which the employees are not direct members will not be eligible for the additional interest.

Deposits of Chairman, Managing Director and Executive Director A bank may at its discretion pay an additional 1% p.a. on deposits accepted/ renewed from the Chairman, Managing Director or Executive Director of the Bank. They are not allowed this facility after their tenure. A fixed/term deposit becomes due for payment on the working day following the expiry of the specified period of deposit. If such due date of payment falls on a holiday or Sunday or non-business working day, banks are permitted by Reserve Bank to pay interest at the originally contracted rate on the deposit amount for such holiday/non-business working days which fall between the date of maturity and the date of payment on the succeeding working day. Additional interest to armed forces The RBI permits a public sector bank to pay additional interest of 1.28% per annum over and above the normal rate of interest permissible on term deposits for 2 years and above of Army Group Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and Asir-Force Group Insurance Society (AFGIS) only, if provided such deposits are not in any way linked with payment of insurance premia by the bank. Fixed Deposit Schemes for Senior Citizens Reserve Bank of India has also permitted the banks to formulate fixed deposit schemes specially meant for senior citizens on which they may offer higher and fixed rates of interest as compared with normal deposits. The higher rate offered is between % p.a. and 1% p.a. These schemes will also incorporate simple procedures for automatic transfer of deposits to nominees of the depositors in the event of death.

Renewal Before Maturity : The Reserve Bank has permitted the banks to renew an existing term deposit before maturity without invoking the penalty provided : (i) It is renewed before the date of maturity, and (ii) The period of renewal is longer than the remaining period of the original deposit. In such cases interest will be payable as follows : (i) On the original deposit at the rate applicable to the period for which the deposit has actually run (i.e., from the date of deposit to the date of renewal), prevailing at the time of original deposit (without levying any penalty) : (ii) Interest for the period from the date of renewal will be allowed at the rate prevailing on the date of renewal. Opening and Operation of a Fixed Deposit Account. To open a fixed deposit account a depositor is required to fill in an application form wherein he is required to mention the amount of the deposit and the period for which deposit is to be made. He has to also give his specimen signature. A Fixed Deposit Receipt is thereafter issued to the depositor acknowledging the receipt of the sum of money deposited. It would also state when the deposit will mature (when it has to be repaid), the rate of interest, the amount of interest and the maturity value (amount of the deposit plus interest). This is a requirement as the Reserve Bank of India has made it mandatory to indicate on the Fixed Deposit Receipt the date of receipt, the period for which the deposit has been accepted and due date, as also the applicable rate of interest. Payment of Interest : Interest is usually paid at the maturity of the deposit. Depositors can, however, ask for interest to be paid quarterly or half yearly. In this case, interest will be either added to the deposit or paid into the current/ savings account of the depositor. The depositor is required to present the receipt for the purpose of entry regarding payment of interest on the back of the receipt. Withdrawal of interest or the principal through cheques is not permitted. Neither is the depositor given a cheque book for this purpose, nor is he permitted to use for this purpose the cheque book issued to him for operating a current or a saving account. At the request of the customer, the banker may credit the amount of interest or the principal to his savings or current account from which he may withdraw the interest by the issuance of cheques. The Reserve Bank has directed banks that interest on all types of deposits is payable at quarterly or longer rests. Consequently, interest on fixed and recurring deposits for 12 months and above is paid on quarterly basis. Similarly, under the Reinvestment Plan, interest is compounded quarterly. Though the payment of interest under the Reinvestment Plan and Recurring Deposit Scheme is made at the expiry of the period of the deposit, the Income Tax Department has permitted interest earned on them to be taxed annually and not on maturity. Conversion of a term deposit, a deposit in the form of daily deposit or a recurring deposit for reinvestment in term deposit A bank, on the request of a depositor, should allow conversion of a term deposit , a deposit in the form of daily deposit or recurring deposit to allow the depositor to immediately reinvest the amount lying in the deposit with the bank in another term deposit. The bank should pay interest of such a term deposit without reducing the

interest by way of penalty provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract.

Maturity of a deposit A fixed/ term deposit becomes due for payment on the working day following the expiry of the specified period of deposit. If such due date falls on a holiday or Sunday or non working day, banks are permitted by the Reserve Bank to pay interest at the originally contracted rate on the deposit amount for such holiday/ non business working day which falls between the date of maturity and the date of payment on the succeeding working day. Overdue Deposit A bank may, at its discretion, renew an overdue deposit or a portion thereof provided the overdue period from the date of maturity till the date of renewal (both days inclusive) does not exceed 14 days. All aspects concerning renewal of overdue deposits may be decided by individual banks subject to their Board laying down a transparent policy in this regard and the customers being notified of the terms and conditions of renewal including interest rates, at the time of acceptance of deposit. The policy should be non-discretionary and non-discriminatory. Issue of term deposit receipt A bank should issue term deposit receipt indicating therein full details, such as, date of issue, period of deposit, due date, applicable rate of interest, etc. Interest on Overdue Deposits . Legally, interest ceases to accrue on fixed deposits after the expiry of the fixed period. However, banks may, at their discretion, allow interest thereafter if the Fixed Deposit or a part thereof is renewed from the date of its maturity to some future date. On such renewed deposit, the rate of interest should be the appropriate rate of interest for the period of renewal as prevailing on the date of maturity. In the case of overdue deposits where the overdue period exceeds 14 days and if the depositor places the entire amount of overdue interest or a portion there of as a term deposit, the bank may fix its own interest rates for the overdue period on the amount so placed as a fresh deposit. Demand by the customer is essential for the repayment of the fixed deposit. On the date of maturity the depositor should present the receipt, duly discharged on its back for payment or renewal. In the latter case, the bank issues a fresh receipt incorporating the revised instructions of the customer. The Reserve Bank has directed that banks may, at their discretion, pay interest on deposits for the overdue period if: (a) (b) The deposit is renewed with effect from the date on which it matured for payment, and The rate of interest allowed does not exceed the rate applicable to the period for which the deposit is proposed to be renewed as ruling on the date of maturity of the deposit.

In April 2001, Reserve Bank of India instructed banks to renew overdue deposits at the rate of interest prevailing on the date of maturity only if the overdue period is upto 14 days. If the overdue period exceeds 14 days, the deposit is to be treated as a term deposit and banks may prescribe their own interest rate for the overdue period. Banks are required to inform depositors their policy on interest on matured deposits at the time of accepting the fixed deposits. In case a portion of an overdue deposit is to be renewed, the bank may allow interest for the overdue period on such portion of the deposit proposed to be renewed. The question whether the bank is liable to pay interest on the amount of fixed deposit after the expiry of the period of the deposit was considered in The Hindustan Commercial Bank Ltd. v. Jagtar Singh (A.I.R. 1974, Punjab and Haryana 208). In this case A deposited with the Bank a sum of money in fixed deposit for 12 months in the name of K, the minor son of J. K. died before the maturity of the deposit. His father J obtained a succession certificate from the Court empowering him to receive the amount of deposit with interest. A filed a suit against J and the bank claiming to be the owner of the amount. The Court issued a temporary injunction restraining the bank from making payment to J. During the pendency of the suit the Court had, on the application of J ordered the Bank either to agree to pay interest or deposit the amount in Court (for investing it in securities). The amount was not deposited by the bank and no subsequent order was passed by the Court. J was declared entitled to recover the amount. The Bank paid the principal and interest for 1 year to J. Thereafter J filed a suit for the recovery of interest for the subsequent period during which the amount remained with the Bank. The Bank contested the case on the plea that after the expiry of the period of deposit, the fixed deposit became a demand deposit and ceased to carry any interest and that the claim of J by way of damages was totally incorrect as there was no implied agreement between the parties to pay the overdue interest or to pay any amount as damages. The High Court held that the question whether a fixed deposit remains a deposit or becomes a loan after the expiry of the period of deposit depends upon the intention of the parties and the implied agreement. The Court held that deposits in banks are normally treated by the banks as payable on demand after expiry of the period of the deposit. Thus, it remains a deposit and not a loan. The Court further held that J suffered a loss of interest because the Bank did not deposit the money in the Court for investment in securities. The Bank having retained the amount was liable to pay interest. Payment Before Due Date. Though a fixed deposit is repayable at the expiry of the specified period, banks also permit encashment of deposits even before the due date if the depositor so desires. Till April 1998, according to the directive of the Reserve Bank, if any deposit was repaid, before the expiry of the period of deposit agreed upon at the time of deposit, the interest on such deposit was payable as follows : (1) (2) First, the rate of interest applicable to the deposit on the basis of the period for which it remained with the bank was determined. Then the said rate was reduced by one per cent point (penal interest).

Example . A deposits Rs.5,000 for a period of 48 months at 10 per cent. After one year he desires premature encashment of the F.D.R. Interest for a deposit for one year is 9 per cent. The banker will pay interest at 8 percent ( 9 percent 1 per cent). According to the Reserve Bank directive banks should not charge the penalty of 1% in case of premature withdrawal of a deposit for immediate reinvestment with it in another term deposit of a longer maturity than the remaining period of the original contract. In April, 1998, Reserve Bank permitted the banks to determine their own penal interest rates for premature withdrawal of domestic term deposits and Non-Resident (NRE) term deposits. This relaxation applied to fresh deposits and renewal of existing deposits. Banks are required to inform the penal rate to the depositors at the time of accepting deposits. The Reserve Bank permits a term deposit to be repaid prematurely on the death of a depositor to the heirs or legal representatives without the payment of any penalty. In such cases the interest payable will be at the same rate as is applicable for the period for which the deposit has actually remained with the bank, i.e., from the date of deposit to the date of payment. Realizing that pre-mature withdrawals of large sums may have an impact on the Asset-Liability Management function in the banks, the Reserve Bank of India decided in April 2001 to grant freedom to the banks to exercise their discretion to disallow premature withdrawals of large deposits held by entities other than individuals and Hindu Undivided families. But banks shall have to inform such depositors their policy of disallowing premature withdrawals at the time of accepting deposits. The Reserve Bank of Indias master circular dated August 14, 2003 and July 16, 2004 states, A bank, on request from the depositor, should allow withdrawal of a term deposit before completion of the period agreed upon at the time of making the deposit. The bank will have the freedom to determine its own penal interest rate of premature withdrawal of term deposits. The bank will ensure that the depositors are made aware of the applicable penal rate along with the deposit rate. However, the bank, at its discretion, may disallow premature withdrawals of large deposits held by entities other than individuals and Hindu Undivided Families. Bank should, however, notify such depositors of its policy of disallowing premature withdrawal in advance i.e. at the time of accepting such deposits. With regards to the deposits placed with All-India Financial Institutions (AIFIs) the RBI Circular MPD.245/07.01.279/2003-04 dated January 5, 2004 states that in case of request for premature withdrawal of term deposits due to medical exigencies, educational expenditure and other such reasons, no interest should be payable in respect of premature withdrawal of deposits before 6 months. In case of premature withdrawal of deposits between 6 and 12 months, interest rate not exceeding the savings bank rate as specified by RBI for the scheduled commercial banks may be paid. Interest payable on the deposit of a deceased depositor A term deposit along with interest at the contracted rate becomes payable on maturity to the heir/legal representative of a deceased depositor. But if the amount of such deposit is claimed before its maturity, the Reserve Bank has permitted the banks to pay applicable interest without charging penalty. If the death of the

depositor takes place before the maturity of the deposit and the deposits are claimed after the date of maturity banks should pay interest at the contracted rate till the date of maturity and thereafter at the rate permissible on the date of maturity. However, in the case of death after the date of maturity of the deposit, the bank should pay interest at the savings deposit rate operative on the date of maturity till the date of payment. If on the request from the claimant, the bank agrees to split the amount of term deposit and issues two or more receipts individually in the names of the claimant/s, it should not be construed as premature withdrawal of the term deposit. The period and aggregate amount of the deposit should not undergo any change. Rounding off of transactions All transactions including payment of interest on deposits/ charging of interest on advances should be rounded off to the nearest rupee. Fraction of 50 paise and above should be rounded off to the next higher rupee and fraction of less than 50 paise shall be ignored. Issue prices of cash certificates should also be rounded off in the same manner . Cheques issued by clients containing fractions of a rupee should not be rejected or dishonored. Advance against Fixed Deposit . The banker may also grant a loan to the depositor on the security of the Fixed Deposit receipt. As regards interest rate on advances against fixed deposit receipts, Reserve Bank of India stipulated on April 29, 1998 that banks should charge interest rate equal to their Prime Lending Rate (PLR) or less. In view of the decline in the Prime Lending Rate subsequently, the Reserve Bank decided in April 1999 that in the case of deposit rate being in excess of the Prime Lending Rate, advances to depositors against Fixed Deposit Receipts can be made by banks without reference to the ceiling of PLR. Banks are permitted to charge suitable interest rates in such cases. The Reserve Bank has advised the banks that they can give loans to depositors against fixed deposits. maintained with them upto to 75 per cent of the total of (i) actual deposits and (ii) the interest accrued thereon up to the time the loans are advanced. These rules are no longer applicable. In its Master circular dated August 14, 2003 and July 16, 2004, the Reserve Bank states, When an advance is granted against a term deposit and the deposit stands in the name of the (1) borrower, either singly or jointly (2) one of the partners of a partnership firm and the advance is made to the said firm (3) the proprietor of a proprietory concern and the advance is made to such a concern (4) a ward whose guardian is competent to borrow on behalf of the ward and where the advance is made to the guardian of the ward in such a capacity the bank would be free to charge interest rate without reference to its Prime Lending Rate including on advances granted against NRE term deposits and paid in foreign currency or rupees. If the term deposit against which an advance was granted is withdrawn before completion of the prescribed minimum maturity period, such an advance should not be treated as an advance against the term deposit and interest should be charged as though it is a regular advance.

Where an advance is granted against a term deposit that is not in the nature of (1) to (4) above, a bank is free to charge interest rate without reference to the Prime Lending Rate provided the advance is upto Rs. 2 lakhs. However, if the advance exceeds Rs. 2 lakhs, the bank should charge interest at the rate prescribed by the Reserve Bank on advances. A bank, at its discretion, need not apply the rate stipulated for advances upto Rs. 3 lakhs granted to a member/ retired member of the banks staff or the spouse of a deceased member/ retired member of the banks staff against their fixed deposits. Margin on advance against fixed deposit The Reserve Bank states that a bank should maintain a reasonable margin on any financial accommodation allowed against the security of a term deposit. Banks are free to determine on a case by case basis what the margin should be. In normal practice, depending on the bank, the margin varies from 75% to 90% of the deposit. Fixed Deposit Receipts are marked Not Transferable and cannot be transferred by endorsement. The amount can be paid to a third party authorized by the depositor through a letter which should accompany the Receipt duly discharged. Thus the ownership of the Receipt cannot be transferred to a third party but another person may be deputed by the owner to collect the money on its due date. The debt represented by the Receipt may be assigned like any other debt, but a notice of assignment is to be served on the banker for this purpose. Liability of the Banker on Fixed Deposit Receipt : The liability of the banker in respect of fixed deposit receipts was decided by the Punjab High Court and the Supreme Court in the United Commercial Bank Ltd. (Appellant) v. Okara Grain Buyers Syndicate Ltd. (Respondent) (AIR 1968 Supreme Court 1115). The Syndicate deposited a sum of Rs.40,000 with the Bank as a fixed deposit and the Receipt stated that the amount was received from the Syndicate A/c the District Magistrate, Montgomery. The Syndicate was required to make this deposit for the procurement of foodgrains. On the due date the Syndicate served a notice of withdrawal on the Bank and after making an endorsement on that behalf handed over the Receipt to the District Magistrate. Thereafter, the respondent migrated to India leaving all the property and set up a new place of business at Amritsar. On refusal to pay the amount, the Syndicate appealed to the Punjab High Court which held that the deposit was subject to the conditions expressly mentioned in the receipt and no others and the District Magistrate was not given any dominion over the amount of deposit. The High Court ordered for the payment of the deposit money to the Syndicate, which was also required to give an indemnity for restitution of the amount in case the Bank was required to pay the amount to the District Magistrate. On appeal, the Supreme Court upheld the above decision and observed that the deposit receipt was in the name of the Syndicate. Merely because it was made out to the account of the District Magistrate was not by itself sufficient to create any interest in favour of the District Magistrate. In law the District Magistrate was not constituted the owner of the money deposited by virtue of mere delivery of the receipt. In the books of the Bank, the Syndicate was the owner thereof and was alone entitled to demand payment. In terms of the deposit receipt, the receipt was nontransferable and payment of the amount had to be made to the Syndicate. In the absence of any obligation-contractual of fiduciary-undertaken by the Bank in favour

of the District Magistrate, the Bank could not withhold payment of money after the expiry of the period of notice. The Supreme Court also upheld the decision of the High Court directing the Syndicate to given an indemnity to the Bank against any possible loss. Issue of stock invest against term deposits A bank may issue stock-invest against term deposits. Fixed Deposits in Joint Names Often fixed deposits are made with the bank in the joint names of two or more persons payable to either or survivor. Such deposit is, in fact, a joint debt owned by a bank to the depositors. In accordance with the terms of the Receipt it is payable to either of them or the survivor. But the banker faces a number of problems before the date of maturity as stated below :

1. Premature Repayment : If one of the joint depositors requests the banker

for repayment of the fixed deposit before its date of maturity, the banker should do so only after obtaining the consent of the other joint depositor/depositors. One depositor has no right to take back the amount before its maturity. The mandate payable to either or survivor is intended to be applicable only at the time of maturity of the deposit. Till then it remains a joint debt, which may be withdrawn only with the consent of all of them.

2. Loan against F.D.R. If a loan is sought against a F.D.R. by one of the joint
depositors, the banker must require the loan application to be signed by other depositors as well. Or, alternatively, a letter of no objection to the loan being granted to one of them may be taken from the rest of the depositors. The latter may be held as surety also.

3. Request for Duplicate Receipt In case one of the joint depositors informs
the bank about the loss of the FDR and requests it to issue a duplicate one, the banker should insist that such request be signed by all the depositors. It is possible that there might be a dispute between the depositors and the FDR might be in the possession of the other depositor.

4. Addition or deletion of the name/s of joint account holders. A bank

may at the request of all the joint account holders allow the addition or deletion of name/s of joint account holders if the circumstances so warrant or allow an additional individual to add the name of another person as a joint account holder. However, in no case should the amount or duration of the original deposit undergo a change in any manner in case the deposit is a term deposit. A bank may, at its discretion, and at the discretion of all the joint holders of a deposit receipt, allow the splitting up of the joint deposit, in the name of each of the deposit account holders only, provided that the period and the aggregate amount of the deposit do not undergo any change. Loss of Fixed Deposit Receipt Sometimes depositors report to the bank the loss or theft of a fixed deposit receipt and request it to issue a duplicate one. A fixed deposit receipt is not transferable and not negotiable. Any other person, therefore, cannot claim payment of the amount

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covered by the Receipt. However, customers request the banker for the issue of a duplicate one because banks stipulate that the Receipt duly discharged must be surrendered for its repayment. The banker should take the following steps in this regard : (a) A letter signed by the depositor/depositors informing the banker about the loss of the receipt and requesting it to issue a duplicate one, should be obtained. (b) A duly stamped letter of indemnity must be obtained from the depositor/depositors to safeguard the banks interest, in case the original receipt is also presented for repayment. (c) A note to this effect (a new receipt has been issued) should be made in the Fixed Deposit Ledger for future guidance. Change in Names A fixed deposit receipt is issued in the name/names of the depositor/depositors who apply for the opening of a Fixed Deposit Account. Sometimes the banker receives a request for changing the name in the receipt or making an addition thereto or deleting a name therein. Such requests should be complied with very carefully after examining the legal position in each case. If a receipt is issued in the name of an unmarried lady, who requests, after her marriage, to change her surname in the receipt, the banker should comply with such request. Similarly, if a receipt is issued in the name of a person and he wants to add the name of any other person as a joint account-holder, the banker should have no objection to the compliance of the mandate of the customer. But if the receipt is payable to two or more persons and only one of them wants to add a new name thereto, such request should not be accepted unless the consent of the other depositor/ depositors are also secured. Banks may allow addition or deletion of name or names of joint account-holders at the request of all the joint account-holders. According to the Reserve Bank directive, in allowing this facility, there should not be any change in the amount or duration of the original term deposit. If the depositor dies, the bank would allow the name or names of one or more legal heirs or legal representatives to be added jointly or individually. Such deposit can be held jointly in the names of all the heirs or its amount may be split equally in each persons name. Splitting up of Deposit Receipts The Reserve Bank has clarified that if on the request from legal heirs/representatives/nominates, a bank agrees to split the amount of term deposit and issue two or more receipts individually in their names it shall not be construed as premature withdrawal of term deposit, provided the period and aggregate amount of deposit do not change. Similarly, banks are permitted (at their discretion and at the request of all the joint account-holders of a deposit receipt) to split a joint receipt, in the name of each of the joint account-holders only. It is necessary, however, that the period of deposit and the aggregate amount of deposit do not change.

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Deceased Depositors In July 1987 the government advised banks not to insist upon succession certificate where the amount to credit of the deceased depositor does not exceed Rs.25,000. Banks are, at the same time required to observe the usual safeguards in settling such claims including obtaining of indemnity bonds, wherever necessary. Payment of interest on term deposit maturing on holiday/ Sunday/ non business working day The bank should pay interest at the originally contracted rate on the deposit amount for the holiday/ Sunday/ non working business day intervening between the date of the expiry of the specified term of the deposit and the date of payment of the proceeds of the deposit on the succeeding working day. Mode of Repayment of Fixed Deposits The Income Tax Act 1961 provides that a banking company or a cooperative bank shall pay any deposit by an account payee cheque or an account payee draft if (i) The deposit together with interest, if any, payable, or (ii) The aggregate of the deposits held by a person together with interest, if any, payable on such deposits is Rs.20,000 or more. The bank can alternatively repay such deposits by crediting the amount to the savings/current account of the same depositor. Penalty amounting to the sum equal to the amount of the deposit shall be imposed, if the above requirement is not complied with. The Act provides for imprisonment up to a term of two years and a fine up to the amount of deposits for failure to comply with this requirement. Deduction of Tax at Source Section 194A of the Income Tax Act provides for deduction of tax at source from interest on time deposits, payable by a bank or co-operative society, where it exceeds Rs.5,000 in a financial year. For this purpose, time deposit means a deposit repayable after the expiry of a fixed period and excludes recurring deposits. However, interest on time deposits with a primary agricultural credit society, primary credit society or a cooperative land development bank will not be subject to tax deduction at source. Deduction of tax will not be made in case of depositors who furnish an affidavit or statement that their income is below taxable limit or that the tax on their estimated income would be nil. Tax is to be deducted at source at the prescribed rates. At present these rates are: 10% for a resident other than a company and 20% for a domestic company. II. DEMAND DEPOSITS

A demand deposit is a deposit received by the bank which is withdrawable on demand(RBI Master circular dated August 14, 2003 and July 16, 2004). Demand deposits are divided into savings accounts and current accounts

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a) Savings accounts The RBI, in its master circular dated August 14, 2003 and July 16, 2004 defines a Savings Deposit as a deposit account which is subject to the restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the bank during any specified period. A savings bank account is meant to encourage savings and is therefore focused on individuals. By paying interest on the balance in a savings account depositors are encouraged to save or rather maintain deposits in their accounts. As interest is paid and it is intended to encourage savings, banks do impose some restrictions on withdrawals. With the extension of banking facilities during the last decade and the growth of banking habit amongst the people, the savings deposits of all scheduled commercial banks have gone up substantially. Restrictions on withdrawals At present savings bank deposit are subject to restrictions on the number and amount of withdrawals within a specified period. The number of withdrawals over a period of one year is limited to 150. A bank may at its discretion allow additional withdrawals if it is satisfied about the merits of the case. In real life these restrictions are not enforced. Restrictions of Deposits The customer may deposit any amount in the savings bank account. The banks do not accept cheques or other instruments payable to third party for the purpose of deposit in the savings account. Minimum balances Banks have introduced the practice of imposing service charges on savings accounts in which (i) The minimum balance is not maintained. Minimum balances vary from bank to bank. In certain foreign banks, the minimum balance is to be a minimum of Rs. 25,000. In the State Bank of India, the minimum balance expected is Rs.500 for savings accounts with cheque facility in urban centres and metro cities branches. (ii) The number of withdrawals exceeds the above limit (i) and (iii) The amount of withdrawals exceeds the specified limit. Banks waive this charge in case of respectable customers. Banks can, at their discretion, waive these requirements and most banks do (on account of competition). The RBI Master Circular dated August 14, 2003 and July 16, 2004 states, At the time of opening the accounts banks should inform their customers regarding the requirement of maintaining minimum balance and the levying of charges etc., if the minimum balance is not maintained, in a transparent manner. Any subsequent changes in this regard should also be intimated to the account holders. The banks may decide the manner in which the information is made available to the customers. This is again reiterated in DBOD.No. Dir. BC. 78/13.03.00/2003-04 dated April 22, 2004 that the banks should inform, at least one month in advance, the existing account holders any change in the prescribed minimum balance and the charges that may be levied if the prescribed minimum balance is not maintained.

13

Payment of Interest The rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the Reserve Bank. At present the rate of interest on savings deposits is 3.5% (see Master Circular dated August 14, 2003 and July 16, 2004 Annexure 1) The interest is to be calculated on the minimum balance to the credit of the deposit account during the period from the 10th to the last day of each calender month and credited to the account only when it is Re. 1 or more (Master circular dated August 14, 2003 and July 16, 2004). Scheduled commercial banks with deposits less than Rs.25 crores may, at their discretion, give an additional interest of per cent. Regional Rural Banks and local area banks may give an additional per cent (at their discretion). The RBI however states in its Master circular dated August 14, 2003 and July 16, 2004 that these banks are however encouraged not to pay additional interest on saving bank accounts over and above what is payable by commercial banks. The above rate of interest is payable irrespective of whether cheque facility is extended or not. This interest is to be paid at quarterly or longer rests. The State Bank of India credits interest once in a year. The Reserve Bank of India has prohibited the banks opening savings account in the name of any trading or business concern whether such concern is a proprietary one or a partnership firm, a company or an association. The banks should also not open a savings account in the name of : (i) Government departments. (ii) Bodies depending upon budgetary allocations for performance of their functions (i.e. which receive grants, loans, subsidies or subscription to its share capital from Government. (iii) Municipal Corporation/Committees. (iv) Panchayat Samitis. (v) State Housing boards. (vi) Water and sewerage boards/drainage boards. (vii) State text book publishing corporations/societies. (viii) Metropolitan development authority. (ix) State/district level housing co-operative societies (x) Any Political Party (xi) Trading/ business or professional concern (irrespective of whether it is a proprietary, partnership firm, company or an association. This prohibition suggests that a limited company may not open a savings account. Additional Interest to bank staff and their exclusive associations. Employees are usually given an additional 1% per annum interest. This is subject to the condition that the bank should obtain a declaration from the depositor that the monies deposited to the account belong to him/ her. These are payable to those accounts opened in the name of: A member or a retired member of the banks staff either singly or jointly with any member of his/ her family, or The spouse of a deceased member or a deceased retired member of the banks staff or An association or fund, members of which are the members of the banks staff.

14

There are some conditions, however. The additional interest will be payable only so long as the person continues to be eligible for the additional interest or (if he becomes ineligible) till the maturity of his term deposit. If employees have been taken over as a result of an amalgamation, the additional interest will be permitted if the interest at the contractual rate together with the additional interest does not exceed the rate given to the employees of the bank. Bank employees Federations in which the employees are not direct members will not be eligible for the additional interest.

Deposits of Chairman, Managing Director and Executive Director A bank may at its discretion pay an additional 1% p.a. on deposits accepted/ renewed from the Chairman, Managing Director or Executive Director of the Bank. They are not allowed this facility after their tenure. A fixed/term deposit becomes due for payment on the working day following the expiry of the specified period of deposit. If such due date of payment falls on a holiday or Sunday or non-business working day, banks are permitted by Reserve Bank to pay interest at the originally contracted rate on the deposit amount for such holiday/non-business working days which fall between the date of maturity and the date of payment on the succeeding working day. Rounding off of transactions All transactions including payment of interest on deposits/ charging of interest on advances should be rounded off to the nearest rupee. Fraction of 50 paise and above should be rounded off to the next higher rupee and fraction of less than 50 paise shall be ignored. Cheques issued by clients containing fractions of a rupee should not be rejected or dishonored.

b)

Current accounts A current account is defined by the Reserve Bank of India in its Master Circular dated August 14, 2003 and July 16, 2004 as a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance depending upon the balance in the account or upto a particular agreed amount and shall also be deemed to include other deposit accounts which are neither Savings Deposit nor Term Deposit. A current account is a running and active account which may be operated upon any number of times during a working day. There is no restriction on the number and the amount of withdrawals from a current account. As the banker is under an obligation to repay these deposits on demand, they are called demand liabilities of a banker. To meet such liability the banker keeps sufficient cash reserves against such deposits vis--vis the savings and the fixed deposits. Current accounts suit the requirements of big businessmen, joint stock companies, institutions, public corporations, etc., whose banking transactions happen to be numerous on every working day. Special characteristics of the current account are as follows :

15

1. A person opens a current account for his convenience and that of his customers (who are relieved of the task of handling cash themselves and to take the risk inherent therein). The primary object of a current account therefore differs from the object of other deposit accounts which are meant to solicit the savings of the people.

2.

As the banker undertakes to make payments and to collect bills, drafts, cheques, etc., the operating cost, i.e., the cost of bank personnel, involved in current account transactions is considerable. It is, therefore, customary for banks not to pay any interest on the credit balance in the current account. A Reserve Bank directive prohibits the payment of interest on current accounts. No countervailing interest should be paid on any current account maintained by a borrower with any bank. Countervailing interest has been defined by the Reserve Bank of India as, any benefit of interest allowed on any account in the nature of current account maintained with the bank by its borrower. Banks may pay interest on the current account of a Regional Rural Bank sponsored by them. The Reserve Bank of India however states, banks are encouraged not to pay interest on the current accounts maintained by RRBs with them. The rate payable, if paid is to be at half per cent below the borrowing rate fixed for the RRB by the sponsor bank. Banks Banks may also, at its discretion pay interest at a rate based on its perception and other relevant factors on the minimum credit balance in the composite cash credit account of a farmer during the period from the 10th to the last day of each calender month. Since May 1983, banks have been permitted to pay interest on balances lying in current accounts in the name of a deceased depositor from the date of death of the depositor till payment to the legal heirs. Interest on such amount is payable at the savings bank deposit rate. It is stated in the RBI Master Circular dated August 14, 2003 and July 16, 2004 that, In the case of balances lying in current account standing in the name of a deceased individual depositor/ sole proprietorship concern, interest should be paid only from May 1, 1983 or from the date of death of the depositor, whichever is later, till the date of repayment to the claimant/s at the rate of interest applicable to savings deposit as on the date of deposit. 3. The State Bank makes no charge for keeping an account provided the balance maintained is sufficient to compensate the bank for the work involved. In case of unremunerative accounts involving lot of work but without the maintenance of sufficient balances, the banker charges incidental expenses from the customer. 4. A current account carries certain privileges which are not given to a savings bank account holder, e.g. (i) Third party cheques and cheques with endorsements may be deposited in the current account for collection and credit. (ii) accounts only. Overdraft facilities are given in case of current

16

(iii) The loans and advances granted by the banks to their customers are not given in the form of cash but through the current accounts.. Opening of Current and Savings Accounts By opening an account with a bank, a person/ company enters into a relationship with the bank. As already noted, the special features of this relationship impose several obligations on the banker. He should therefore, be very careful in opening an account in the name of a customer. Though any person may apply to open an account in his name, the banker reserves the right to do so on being satisfied about the identity of the customer. The following precautions should be taken in this regard :

1.

Application on the prescribed form . The request for opening a savings or current account is made on the prescribed form of the bank concerned. Banks provide separate application forms for opening savings and current accounts for individuals, partnership firms and companies. The applicant is required to mention his name occupation, full address, specimen signature and the name and signature of a referee (introducer). He also undertakes to comply with the banks rules in force from time to time for the conduct of the account. It means that the rules prevalent at the time of opening of an account may be changed or modified by the banker and such modified rules shall be acceptable to the customer. The applicant is also required to submit two/ three photographs of himself (passport size).

2.

Introduction of the Applicant . Before opening a savings or current account in the name of an intending customer, the banker must be satisfied of the true identity of the opener to be satisfied that he is a respectable person. The banker, thus reserves the right not to open an account in the name of a person whose true identity has not been established or who is considered to be an undesirable person, e.g., a thief, robber, etc. The applicant may be introduced to the banker in any of 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. This person introduces the opener by signing on the application form itself along with his full address. The applicant may give the name of any respectable person or that of another bank as referee. The banker 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 the referee sends no reply, the banker should not open the account unless satisfactory introduction is given otherwise. The Reserve Bank has advised the banks that pay books or postal identification cards or identity cards of armed forces/police/government departments or passports may be considered sufficient for establishing the identity of persons desiring to open deposit accounts without cheque facility.

(ii)

(iii)

What Constitutes Proper Introduction ?

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(1) It is necessary that the person introducing the applicant to the banker must himself be a respectable person because the latters opinion about the applicant carries value if he himself commands respect and goodwill. The banker should, therefore, take reasonable care in accepting the introduction or reference from any person. (2) What should be the contents of a proper introduction and what is the duty of the banker in this regard was considered by the Madras High Court in Indian Bank v. Catholic Syrian Bank (1980 TN Law Notes Journal, p.23). In this case the applicant for opening a current account was introduced to the bank by a well known customer of the bank. But what he did was to take the applicant to the bank and informed the branch manager that he was a man from Indore and that he wanted to open a bank account to enable him to purchase carpets. The introducer had not given any assurance that the applicant was known to him or that they had long standing business association and the he was a bonafide customer and account could be safely opened in the name. The High Court therefore held that the bank was negligent in securing a proper introduction of the applicant. The bank ought to have made more enquiries on the credentials of the prospective customer before allowing him to open an account. It may be concluded from the above, that the banker should fully ascertain the true identity of the applicant by other means also, and should not depend exclusively on the casual words of the introducer. The Reserve Bank of India (RBI) has reiterated that the commercial banks should invariably obtain satisfactory introduction in respect of all types of deposits. It has advised the banks to incorporate a certificate in the account opening form in respect of all deposit accounts confirming the identity, occupation and address of the person by the introducer. The RBI has also suggested to the banks to keep a careful watch on the operation of large amounts in new accounts. About the mode of securing introduction, the Reserve Bank has advised banks to send a letter by registered post to the introducer to confirm the introduction in instances where the introducer had not come to the bank at the time of opening the account. Risks in Opening Accounts Without Proper Introduction . The applicant must be properly introduced to the banker. If an account is opened without proper introduction or if the banker is negligent/ careless in this regard cases of fraud or misrepresentation may occur. Not only does the banker run the risk of fraud but the general public may also be deceived by undesirable customers. The banker should be aware of several issues.

(i)

The banker cannot avail of statutory protection. Section 131 of the Negotiable Instruments Act provides statutory protection to the banker, if he collects a cheque, bill, etc., on behalf of a customer who has no title thereto or his title is defective. The collecting banker will incur no liability to the true owner of the cheque provided the former has acted in good faith and without negligence. The banker cannot avail of this statutory protection if he opens an account in the name of

18

an undesirable person without proper introduction and such person sends a stolen or forged cheque for collection and the banker does so. The bankers carelessness to find out the true identity of the customer will constitute a negligence on his part. If undesirable persons are permitted to open accounts in the names of somebody else and they realise stolen or forged cheques through such accounts and later on disappear, the banker remains liable to the true owner of such cheques.

(ii)

Risk in case of overdrafts. If a banker grants an overdraft, even by mistake or by negligence, to a customer who is not properly introduced, he bears the risk of loss in case it is not repaid by the customer. Risk in case of undischarged insolvent . In case of persons who are declared insolvent, all assets or funds are attachable, until or unless he is discharged. The deposits received by a banker from an undischarged insolvent, without proper introduction, carries the risk of attachment. Risk in case of issue of bogus cheques. If a banker provides a cheque book to an undesirable customer not properly introduced, there is the risk that he may defraud the general public by issuing bogus cheques on his account without having sufficient balance.

(iii)

(iv)

The banker must, therefore, seek proper introduction of the applicant for opening a current account, because all the above-mentioned risks may be faced by a banker in case of a current account. The banker may not insist on an introduction if the applicant wishes to open a savings account where only cash operations are permitted, because a cheque book is issued to him and he is not permitted to take overdrafts. But in other cases proper introduction is necessary. No introduction is necessary in case of opening a fixed deposit account for the same reasons. Several banks permit an account to be opened on self introduction. This is where a person opens an account by depositing a cheque drawn by him/ her on an account he/she maintains elsewhere.

(3)

Specimen Signature. The applicant is required to give his specimen signature on a prescribed form, generally a card. The signaturecards are preserved by the banker and the signature of the account holder on the cheques is compared with his specimen signature. If the former differs from the latter, the banker can refuse to honour the cheque. The specimen signature thus protects the banker against forgery. He should be very careful in comparing the signature of the customer given on a cheque with his specimen signature.

(4)

Opening the Account . After the above formalities are over, the banker opens an account in the name of the applicant. It is essential that the applicant deposits some amount at the time of the opening an account. The minimum amount to be initially deposited varies. Some banks stipulate that the minimum deposit should be Rs.500 in case of a savings bank account with cheque book facility and Rs.250 without cheque book facility. There are several banks today who permit the opening of a zero balance account also. According to a decision of the Indian Banks Association (IBA), the minimum

19

initial deposit for opening a current account should be Rs.500 for urban and metropolitan branches and Rs.300 for semi-urban and rural branches. These amounts will also be the minimum balances to be maintained by the account holder. The banker thereafter, provides the customer with (i) a Pay-in-Slip Book; (ii) a Cheque Book; and (iii) a Pass Book and he is thus authorized to operate the account. However, banks do not need to adhere to this decision. Indeed, many banks are not members of the IBA. Circular DBOD.No.BC.136/09.08.001/99-2000 dated January 25, 2000 had advised banks that at the time of opening of current accounts, they should insist on a declaration from the account-holder to the effect that he is not enjoying any credit facility with any other bank or obtain a declaration giving particulars of credit facilities enjoyed by the intending customer with any other bank(s). Besides, in the latter case, the concerned lending bank(s) were required to be duly informed so that suitable precautionary measures, where necessary could be taken by them. Banks are, therefore, once again through DBOD.No.Leg.BC.84 / 09.07.005/2003-04 dated May 15, 2004, instructed to scrupulously ensure that their branches do not open current accounts of entities which enjoy credit facilities (fund based or non-fund based) from the banking system without specifically obtaining a No-Objection Certificate from the lending bank(s). Banks are also advised to note that non-adherence to the above discipline could be perceived to be abetting the siphoning of funds and such violations which are either reported to RBI or noticed during our inspection would make the concerned banks liable for penalty under Banking Regulation Act, 1949. The Reserve Bank, in its circular dated July 29, 2004 (UBD. PCB.Cir No. / 09.11.01/2003-04 has stated that Keeping in view the importance of credit discipline for reduction in NPA level, we advise that at the time of opening of current accounts, the banks should: Insist on a declaration from the account holder to the effect that he is not enjoying any credit facility with any other commercial bank or obtain a declaration giving particulars of credit facilities enjoyed by him with any other commercial bank(s). Ascertain whether he/ she is a member of any other cooperative society/ bank; if so the full details thereof such as the name of the society/ bank, number of shares held, details of credit facilities, such as nature, quantum outstanding, due dates etc.. In the case he/ she is enjoying credit facility from any other commercial/ cooperative bank, the bank opening a current account should duly inform the concerned lending bank(s) and also specifically insist on obtaining a NoObjection Certificate from them. The Reserve Bank a;so states in its circular DBOD. No. Leg.BC.22/09.07.005/2004-05 dated August 4, 2004, where due diligence is carried out on the request of a prospective customer who is a corporate or large borrower enjoying credit facilities from more that one bank, the banks may inform the consortium leader, if under consortium, and the concerned banks, if under multiple banking arrangement.

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Banks may open current accounts of prospective customers in case no response is received from the existing bankers after a minimum waiting period of a fortnight. If a rsponse is received within a fortnight, banks should assess the situation with reference to information provided on the prospective customer by the bank concerned and are not required to solicit a formal no objection, consistent with true freedom to the customer of banks as well as needed due diligence on the customer of the bank. Operating the Bank Account The word operate in relation to a bank account means that the customer deposits further sums of money and cheques, etc., into the bank and withdraws money according to his need for 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 (i) pay-in-slips for depositing money, and (ii) cheques for withdrawing money from the bank.

(i)

The Pay-in-Slip Book Contains slips with perforated counterfoils to be filled in by the depositor himself or by his agent at the time of depositing cash, cheques, drafts, bills, etc., to the credit of the account. Usually every bank supplies free of cost to the customers separate pay-in-slips for depositing (i) cash, and (ii) cheques, etc. Though the size and design of such slips vary from bank to bank, the contents include information relating to the date of deposit, name and account number of the customer, amount be deposited, the denomination of currency notes, etc. (in case of cash only0, the cheque number and the name of the drawee (in case of cheques etc.). After filling in all the details on the foil and the counterfoil, the customer hands it over together with cash to the cashier (in case of cash) or cheques, etc., to the teller or the designated officer (in case of cheques) who acknowledges receipt by signing the counterfoil alongwith the stamp of the bank and returns it to the customer. RBI circular DBOD No. leg.BC. 74/09.07.005/2003-04 dated April 10, 2004 states that no branch should refuse an acknowledgement if the customer tenders the cheques at the counters. The slip retained by the bank is passed on to the clerk concerned for making the credit entries in the account of the customer. The RBI in its Master Circular on Taxes DGBA.GAD(MC)No.H1077/42.01.001/2003-04 dated April 16, 2004 stated that the Income Tax Office will submit with a refund order an advice note for refunds up to Rs.9999. this advise note should be sent along with the refund cheque for clearing. Cheque Drop Box Facility Many branches keep drop box facility at the premises to enable the customer to drop cheques to be credited to their account. This is a convenience especially if one wants to hand over a cheque after office hours. The RBI with its Master Circular of April 10, 2004 (DBOD No. Leg. BC 74/09.07.005/200304 ) recognised this. However no branch should refuse acknowledgement if the customer tenders the cheques at the counters.

(ii)

The Cheque Book contains blank forms of cheques which are used as an instrument to withdraw money from the bank. In case of savings bank account a cheque book is provided to only those customers who undertake to

21

maintain a minimum balance to their credit. Other customers may withdraw from their savings bank account through a withdrawal form available from the bank. But in the latter case it is essential that the Pass Book must accompany the withdrawal form every time. The blank forms of cheques and their counterfoils are serially numbered. The Cheque Book also contains a Requisition Slip which, duly filled in, is presented by the customer for obtaining another cheque book from the bank. The RBI has also in its with its Master Circular of April 10, 2004 (DBOD No. Leg. BC 74/09.07.005/2003-04 ) mentioned that banks should hand over cheque books to clients and / or their authorised representatives at the counters of the branch and that it cannot be insist that it will be sent by courier.

(iii)

The Pass Book is a small handy book issued by a banker to his customer to record all dealings between them. In fact, it is an authenticated copy of the customers account in the account books of the banker. The purpose of issuing a pass book to a customer is to acquaint him periodically with the state of affairs of his account with the bank. The Pass Book also contains rules and regulations governing the savings account. The customer deposits the pass book periodically with the bank for the purpose of recording entries therein. As it passes from the hands of the customer to the banker and vice versa, it is called a Pass Book. A Pass Book is very important to a customer because it enables him to know some of the entries made by the banker in his ledger account, e.g., the amount of interest allowed or charged, the incidental or other charges made by the banker. In business where such entries are many, businessmen prepare Bank Reconciliation Statements with the help of the Pass Book to tally the balance shown in the Cash Book with that given in the Pass Book. The RBI has also in its with its Master Circular of April 10, 2004 (DBOD No. Leg. BC 74/09.07.005/2003-04 ) stated that entries must not be inscrutable in passbooks / statements of account and brief, intelligible particulars must be entered in passbooks / statements of account. Banks may also ensure that they adhere to the monthly periodicity while sending statement of accounts. The following points are important in this connection : (1) Entries in the Pass Book are to be recorded by the clerk of the bank and must bear the initials of the accountant. The customer should not write any entry himself, even for the purpose of reconciling the bank balance. Today, these are entered by the computer. (2) Whenever the banker sends a pass book to the customer, it must show up-to-date entries. (3) If the Pass Book is lost by the customer, a duplicate Pass Book may be issued by the banker and marked as Duplicate.

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(4) In case of a Savings Bank account, the Pass Book must accompany the withdrawal form every time when money is withdrawn through a withdrawal form. Some banks send to customers a Statement of Account periodically, i.e. monthly or quarterly instead of providing the customer with a Pass Book. Such statements shows the relevant entries in the customers account during the given period and are filed by the customer. Operation of Bank Account by Old/Sick /Incapacitated Customers In November 1998, the Reserve Bank of India prescribed the following procedure to enable old/sick/incapacitated account holders to operate their bank accounts. (i) In case of a customer who is too ill to sign a cheque/cannot be physically present in the bank to withdraw money from the bank account, but can put his/her thumb impression on the cheque/withdrawal form, the thumb/toe impression identified by two independent witnesses known to the bank, one of them should be a responsible bank official is acceptable. In case of a customer who is unable to put his thumb impression on the cheque/withdrawal form due to certain physical defect/incapacity, the bank should obtain a mark on the cheque/withdrawal form. This mark should be identified by two independent witnesses, one of whom should be a responsible bank official.

(ii)

The customer may be asked to indicate to the bank the name of the person who would withdraw the amount from the bank. This person should also be identified by two independent witnesses. He should be asked to furnish his signature to the bank. Legal aspects of entries in the pass book Though the Pass Book contains a true and authenticated record of the customers account with the banker, no unanimous view prevails regarding the validity of the entries in the Pass Book. The banker may err in recording the entries in the Pass Book. The question therefore, arises whether the Pass Book constitutes a conclusive proof of the accuracy of the entries made therein. Sir John Pagets View . According to Sir John Paget, The proper function which the Pass Book ought to fulfill is to constitute a conclusive and unquestionable record of transactions between the banker and the customer and it should be recognised as such. After full opportunity of examination on the part of the customer all entries, at least to his debit, ought to be subsequently final, and not liable to be subsequently reopened at any rate to the detriment of the banker. In fact this viewpoint rests on the presumption that the customer is under an obligation to verify the entries made in the Pass Book periodically and if he detects any mistake, he ought to bring it to the notice of the banker within a reasonable period. If he does not do so and remains silent after the receipt of the Pass Book, the customers concurrence regarding the correctness of the entries is taken for granted. In some of the legal judgments, especially in the United States, this viewpoint has been upheld by the Courts. According to this viewpoint, negligence or omission on the part of the customer to examine the correctness of the entries in the Pass Books is a fault on his part and thus makes the Pass Book record as an evidence of settled and accepted account.

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Divergent Viewpoint . The implied obligation on the customer to examine the Pass Book has not been supported in many other judicial decisions in England and India. In the absence of such obligation on the customer, the entries in the Pass Book cannot be treated as a conclusive proof of their accuracy and as settled account. The customer is competent to point out the mistakes or omissions in the Pass Book at any time he happens to know about them. Thus the entries in the Pass Book do not form the conclusive evidence of their correctness or accuracy. The entries erroneously made or wrongly omitted may be either advantageous to the customer or the banker. Both the parties may, therefore, indicate the mistakes or omissions therein and get them rectified. The legal position in this regard is as follows : (i) Effect of Entries to the Advantage of the Customer : The account of a customer may sometimes wrongly show a credit balance, which is larger than the correct balance because of duplication of credit entries or incorrectly entering higher amounts for such entries or due to omission of any debit entry. The legal position of the banker and his customer shall be as follows: (i) The Pass Book is written by the banker and hence the entries therein may form an evidence against the banker. The customer is rightly entitled to believe them as correct and to act on the basis of such entries. If the Pass Book shows a higher balance and the customer withdraws such balance treating it as his own and subsequently spends it away, the banker shall not be entitled to recover such amount wrongly paid to the customer. But the customer shall have to prove that (a) he acted in such manner relying on the correctness of the balance shown in the Pass Book and had no knowledge of the mistakes therein, and (b) he altered his position by spending the same. This benefit has been given to the customer in various judgments because of the presumption that normally a person spends what he presumes to belong to him and if the banker permits him to withdraw excess money on the above presumption, it would be a great prejudice to him if he is called to pay them back. (ii) There are some exceptions to the above mentioned principle of estoppel. If the customer regularly maintains his account books and the bank regularly send him the Pass Book (or statement in lieu of the Pass Book) the customer cannot act on the basis of the above presumption. Though it is not obligatory for him to check the Pass Book (or the statements), it is difficult to establish that he was ignorant about the mistakes in the Pass Book, because he regularly maintained account books. In such circumstances, a constructive notice of the mistake is supposed to have been given to him. The decision of the Madras High Court in Oakley Bowden and Co. vs. The Indian Bank Ltd., (A.I.R. 1964, Madras 202) may be cited in this connection. The brief facts of the case were as follows : Oakley Bowden and Co. had a current account with the Indian Bank Ltd., at its head office at Madras. The company had dealings with two customers at Guntur, who used to pay into the Guntur branch of the bank amounts payable by them to the Company and the said branch used to send advices of the amounts so paid to the head office. The Head Office would credit the said amounts to the current account of the Company with it. The Guntur branch of the bank received two deposits for the credit of the Company in 1952. Each of these credits was advised by a telegram by the Guntur branch to the head office, and the head office credited the account of the Company accordingly.

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The very same two credits were advised by the Guntur branch to the head office by ordinary post also. The head office did not apparently realise that the two credits advised by post related to the identical credits covered by the telegrams. The head office advised the Company by mistake of four credits instead of two. The mistake was detected by the Bank in 1954 and it filed a suit against the company for the recovery of the amounts covered by the duplicate credit entries. The Company in the meanwhile settled its accounts with the customers at Guntur on the basis of the entries communicated to it by the Bank. The Company, therefore, raised the point that the bank was estopped from claiming that the two entries were duplicate entries. The Trial Court and the first Appellate Court held that the Company had the means of knowledge and, therefore, every opportunity to know the real position and, therefore, it could not plead estoppel against the Bank. The Courts were of the view that it was possible for the company to have detected the duplicate credit from perusal of the accounts. On appeal, the Madras High Court held that Generally speaking, a bank owes a duty to its customer to maintain proper and accurate accounts of credits and debits. If a bank makes wrong credit entries without knowing the fact at the time the entries were made and intimates to its customer the credit entries and the customer acting upon the intimation of credit entries, alters his position to his prejudice, the bank, therefore, will be stopped from contending that the credit entries were wrongly made and the amounts covered by them should be refunded to it by the customer. Such an intimation by the bank is obviously a representation made to the customer, which the customer is at liberty, in fact entitled to act upon. Once it is acted upon by the customer in good faith, the Bank cannot reverse the credit entries they made mistakenly and redress. The Court observed that if the Company had even cursorily scrutinized the periodic statements received by it from its two customers, it would have detected that two of the credit entries were in fact only duplicate entries. The Court held that the Company was negligent in scrutinizing the accounts and that it had constructive notice of the duplicate entries and, therefore, it could not raise the plea of estoppel against the bank. It was held that the bank could recover the amounts in question. In S. Kotrabasappa vs. Indian Bank (1990) 69 Company Case 683, the Karnataka High Court held that the customer who has taken unfair advantage of a mistaken credit made by the bank is bound to return or repay the amount according to Section 72 of the Indian Contract Act which states that A person to whom money has been paid or anything delivered by mistake or under coercion, must repay or return it. Effect of the Customer Signing Confirmation Slips The Pass Book itself is not a conclusive proof of a settled account. Banks nowadays periodically issue to the customers confirmation slips which give the balance in the account as on a given date. By putting his signature on a confirmation slip, the customer accepts and confirms such balance. The legal effect of a customers signing the confirmation slip was considered by the Kerala High Court in Essa Ismail vs. Indian Bank Ltd. (1963). The Court observed that unless there is evidence to show

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that the practice or the custom indicated a stated or settled account, the customer is not precluded from questioning the debit entries in a Pass Book but, when confirmation slips are sent and signed by the customer, he will be bound by the debits made. In this case, the confirmation slips were signed by the customer or his authorized agent. Hence the same were binding on him and his heirs and could not be challenged by them. (iii) The banker is entitled to point out to the customer any mistake or omission and have them rectified. On receipt of information of errors, the customer is not entitled to withdraw the excess amount wrongly credited to his account. But the banker should not dishonor the cheques drawn and issued by the customer before the notice of such wrong entry is served on him. If he does so, he will be liable for the consequences of their wrongful dishonour. Effect of Wrong Entries in favour of the Banker . When a credit entry has been totally omitted or its figure has been wrongly stated or any debit entry has been erroneously made in the account of the customer, such entries are favourable to the banker and against the customer. The customer is entitled to get the mistake rectified as soon as he happens to detect it. This right of the customer does not lapse even if he returns the Pass Book without raising objection regarding any entry or he remains silent after the receipt of the Pass Book because, as already noted, the customer is bound to examine the Pass Book periodically and regularly. He is entitled to recover the amount wrongly debited to, or omitted to be credited to his account. The right of the customer to get the mistake rectified is, however, subject to one limitation. If the customer comes to know about the forgery in the cheque and he does not inform the bank, it will constitute a negligence on his part. The customer will, therefore, not be entitled to recover the amount paid by the banker on the forged cheque. Effect of False Entry in the Pass Book The liability of a banker to his customer in case his employee commits an act of embezzlement and makes false entries in the Pass Book was considered by the Supreme Court in State Bank of India vs. Shyama Devi (A.I.R. 1978 S.C. 1263). The brief facts of the case were as follows : A lady opened a savings bank account in the State Bank of India with the introduction by an employee of the bank, who was a close neighbour and good friend of her husband. The ladys husband issued a crossed cheque for Rs. 4,000 made payable to self and that cheque was deposited by the lady to be credited to her account. No receipt for the deposit of the cheque was obtained. Another cheque for Rs. 7000 for transferring the sum to her account was also deposited by her. No receipt was taken from the bank. The employee involved was not at the savings account counter at the time. The employee involved misappropriated them. To cover up the fraud, he made false entries in the Pass Book. It was argued on behalf of the customer that the entries in the Pass Book showing the deposit of these amounts in the savings bank account had admittedly been made by the employee of the Bank. It was further pointed out that this employee had manipulated the accounts of three other depositors also and the bank had reimbursed those customers for the loss. It was urged that the entries in the Pass Book were prima facie sufficient to establish the customers claim. The Bank argued that the customer had entrusted the employee moneys from time to time for depositing in her savings account. In such a situation the employee could

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not be said to have been acting in due course of his employment or as an agent of the Bank. He was only an agent of the customer. If he did not deposit those amounts as directed by the customer and misappropriated the same and to cover up his fraud made false entries in the Pass Book, the Bank could not be liable for the loss. The Supreme Court considered the question whether the amounts were handed over by the customer to the said employee in the course of banks business, i.e., whether the employee acted as an agent of the customer or of the Bank in the course of employment. It was established that the said employee was not, at the relevant times, in charge of the Savings Bank counter at which the savings account of the customer was dealt with. In such a situation he acted as an agent of the customer. His act of misappropriation could not be said to have been committed in the course of his employment with the Bank. Similarly, it cannot be said that false and fictitious entries made by the employee to cover up his fraud made the embezzlement an act committed by the employee in the course of his employment with the Bank. The Supreme Court held that the bank was not liable as the employee had not acted within the scope of his employment with the bank. The account holder had not discharged the onus on her to show that she paid the amount to an employee of the bank and the amount was received by that employee in the course of his employment. The false entry about the deposit of the amount in the pass book will not shift the onus onto the bank to prove to the contrary. Precautions to be taken by the Banker and the Customer 1. The Pass Book must be sent by the customer to the bank periodically and regularly for recording the necessary entries, so that mistakes, if any, may be detected by the customer soon thereafter. Reserve Bank has advised the banks to issue a simple receipt to the tenderer of savings bank Pass Book if it is retained by the bank for updating. The Pass Book must be initialed by the accountant or other responsible officer of the bank, who must ascertain the accuracy of the balance on the date of recording the entries, otherwise the customer will be entitled to act upon the same, if it is wrongly stated. The customer must tally the entries with his own record either the account books or the counterfoils of pay-in-slips and cheques etc. If any inaccuracy is found, the customer must inform the bank immediately to get the mistake rectified. While sending the Pass Book to the customer, the banker should take steps to ensure the secrecy of its contents. The Pass Book must be send in a closed cover.

2.

3.

4.

Closing of a Bank Account. The relationship between a banker and his customer is a contractual one and continues as long as both of them so desire. The relationship may be terminated by either of them by giving notice of his intention to the other party. Moreover, the banker is bound to suspend payment out of the customers account under the compulsion of law. The rights and obligations of a banker in this regard are as follows :

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1. If a customer directs the banker in writing to close his account, the banker is bound to comply with such direction. The latter need not ask the reasons for the formers direction. The account must be closed with immediate effect. The customer should be required to return the un-issued cheques. 2. If an account remains un-operated for a very long period, the banker may request the customer to withdraw the money. Such a step is taken on the presumption that the customer no longer needs the account. If the customer could not be traced after reasonable effort the banker usually transfers the balance to an Unclaimed Deposit Account, and the account is closed. The balance is paid to the customer as and when he is traced. 3. The banker is also competent to terminate his relationship with the customer, if he finds that the latter is no more a desirable customer. The banker takes the extreme step in circumstances when the customer is guilty for conducting his account in an unsatisfactory manner, i.e. if the customer is convicted for forging cheques or bills or if he issues cheques without sufficient funds or does not fulfill his commitment to pay back loans or overdrafts. The banker should take the following steps for closing such an account : a) The banker should give to the customer due notice of his intention to close the account and request him to withdraw the balance standing to his credit. This notice should give sufficient time to the customer to make alternative arrangements. The banker should not, on his own, close the account without such notice or transfer the same to any other branch. b) If the customer does not close the account on receipt of the notice, the banker should send another notice intimating the exact date by which the account will be closed by the banker. During the notice period the banker can safely refuse to accept further credits from the customer and can also refuse to issue a fresh cheque book to him. Such steps will not make him liable to the customer and will be in consonance with the intention of the notice to close account by a specified date. The banker should however, not refuse to honour cheques issued by the customer, so long as his account has sufficient funds in his account. If the banker dishonours any cheque without sufficient reasons, he will be held liable to pay damages to his customer under Section 31 of the Negotiable Instruments Act, 1881. c) In case of default by the customer to close the account, the banker should close the account and send the money by draft to the customer. He will not be liable for dishonouring cheques presented for payment subsequently. 4. On receipt of notice of death of a customer, the banker must stop the operation of his account because the authority of the customer terminates as he dies. 5. If a banker receives a notice regarding the insanity of his customer, he is bound to stop payments from his account.

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6. The relationship between the banker and his customer is also affected if the customer becomes insolvent or the corporate customer goes into liquidation. The credit balance of the customer is transferred to the Official Receiver of the insolvent customer. 7. On receipt of a garnishee order from a Court, the banker is bound to suspend payment from the account of the customer. If the order prohibits the payment of a specified sum from the account, the banker may honour the cheques out of the remainder amount. 8. When the banker has received a notice of assignment of the credit balance in the account of a customer to a third party, the banker is bound to pay the same amount to the said third party.

NOMINATION The Banking Laws (Amendment) Act, 1983 inserted a new Section 45 ZA in the Banking Regulation Act, 1949 to provide for the facility of nomination by depositors in banks. The above section and the rules provide as follows : (1) A single depositor may nominate, in the prescribed manner, a person to whom, in the event of death of the depositor, the amount to his credit may be paid by the banking company. (2) In case of a joint account, all the depositors together may nominate a person to whom, in the event of death of all the joint depositors, the amount to their credit may be paid by the banking company. Thus the nominees right to receive deposit money arises only after the death of all the depositors. There cannot be more than one nominee in respect of a joint account. (3) A nomination can be made in favour of individuals only and not associations, societies, trusts or any organization or their office-bearers. (4) Nomination facility is available to all types of deposit accounts, including the accounts opened for credit of pension. (5) Such nomination confers upon the nominee the right to receive the amount of deposit from the banking company. On the death of the depositor/all the joint depositors, the nominee shall become entitled to all the rights of the latter to such deposit, to the exclusion of all other persons. In case of a Fixed Deposit Receipt, can a nominee request the Bank to permit him to withdraw the fixed deposit amount before the date of maturity, was the issue which was decided by Allahabad High Court in the case of Smt. Parvati V. Central Bank of India (1989) (2) Bank CLR 194. The High Court allowed such premature encashment by the nominee on the ground that Section 45ZA(2) confers all rights of the depositor in relation to the deposit on the nominee. Hence the right to get premature encashment of FDR can also be exercised by the nominee.

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(6) If the nominee is a minor, the depositor/depositors may also appoint any person to receive the amount of deposit in the event of his/ her death during the minority of the nominee. (7) The nomination may be varied or cancelled by the depositor in the prescribed manner. In case of a joint account variation or cancellation of a subsisting nomination can be made by all the surviving depositors acting together. (8) On making payment under the provisions of this section, the banking company shall be fully discharged from its liability in respect of the deposit. (9) The right or claim of any other person against the nominee, to whom any payment is made under this section, shall not be affected by such payment. (10) No other person shall be able to get notice of his claim to such deposits to the banking company. Nor shall the banking company be bound by such notice even though expressly given to it. The above provisions in the Act have been made to facilitate expeditious settlement of claims in the accounts of deceased depositors and to minimize the hardships caused to the family members on the death of the depositors. Legal Status of the Nominee It is necessary to understand the legal position of the nominee with regard to the amount of deposit received by him from the banking company. Does he become absolute owner of such amount or do the claims of other legal heirs of the deceased remain unaffected by such nomination? This question was decided by the Supreme Court in Sarbati Devi vs. Usha Devi, (AIR 1984 S.C. 346) in connection with nomination made in case of an insurance policy. In this case the wife of the deceased policy-holder was the nominee. His mother and minor son claimed their shares from the life insurance money received by the deceaseds wife from the Life Insurance Corporation of India (L.I.C). The Supreme Court held that A mere nomination made under Section 39 of the Insurance Act, does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the Life Insurance Policy on the death of the assured. The nomination only indicates the hand which is authorized to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the Law of Succession governing them. Similarly in a recent case Shri Vishin N. Khanchandani & Another vs. Vidya Lachmandas Khanchandani & Another JT 2000 (a) SC 321, considering the legal position of the Nominee of National Saving Certificates, the Supreme Court held that the nominee is entitled to receive the payment due under the certificate but the amount received is in turn payable to the legal heirs after deduction of debts or other demands lawfully paid or discharged, if any. Such amount received by the nominee, after valid deductions, becomes the estate of the deceased in the hands of the nominee. Such an estate devolves upon all persons who are entitled to succession under law, custom or testament of the deceased.

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Thus it is clear that nominee does not become the absolute owner of the amount received by him. The law of succession will still prevail. Deposit Mobilisation Schemes Banks do not need to procure the prior concurrence of the Indian Banks Association or the prior approval of the Reserve Bank for introduction of their deposit mobilization schemes. Banks, must however ensure that the schemes do not violate any of the directives of the RBI (Master Circular dated August 14, 2003 and July 16, 2004).

Exemptions The rules mentioned so far will not apply to : A deposit received by the bank from institutions permitted to participate in call/ notice/ term money market, for which it has issued a participation certificate, for a period not exceeding 14 days representing money at call or short notice, under the certificate of deposit scheme and under the Capital Gains Account Scheme 1988. Payment of interest on delayed collection of outstation instruments like cheques, drafts, bills, telegraphic transfers, mail transfers and the likes. Prohibitions No bank should: Pay interest on current account except as permitted by the RBI. Pay countervailing interest on any current account maintained with it by its borrowers. Countervailing interest means any benefit or interest allowed on any account in the nature of current account maintained with the bank by its borrower. Discriminate in the matter of interest paid on deposits between one deposit and another, accepted on the same date and for the same maturity, whether such deposits are accepted at the same office or at different offices of the bank except in respect of fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size and single term deposits of Rs. 15 lakhs and above on which varying rates of interest may be permitted based on the size of the deposits. It should be noted that offering varying rates will only apply to single deposits of Rs. 15 lakhs and above. Banks can therefore offer one rate for deposits below Rs. 15 lakhs and a higher rate for deposits above Rs. 15 lakhs. Banks should also disclose their schedule of interest rates. These rates should not be subject to negotiation. Pay brokerage in the form of commission or gift or incentives on deposits in any manner or in any form except commission paid to agents employed to collect door to door deposits under a special scheme, inexpensive gifts not costing more than Rs. 250 and incentives granted to staff members (with the approval of the Reserve bank).

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Employ anyone for the collection of deposits or for selling any other deposit linked products on payment of remuneration or fees or commission in any form or manner except if it is under a special scheme (door to door deposits). Launch prize/ lottery/ free trips oriented deposit mobilization schemes. Resort to unethical practices of raising of resources through agents/ third parties to meet the credit needs of existing prospective borrowers or grant loans to intermediaries. Issue any advertisement/ literature soliciting deposits highlighting only the compounded yield on term deposits without indicating the actual rate of simple interest offered by the bank for the particular period. The simple rate of interest must always be indicated. Pay interest on margin money held in current account. Pay interest on deposits at call receipts issued to contractors for submission to Government and other bodies against money held in current account. Accept interest free deposit other than in current account or pay compensation indirectly. Accept deposits from/ at the instance of private financiers or unincorporated bodies under an arrangement that provides for either the issue of deposit receipts favoring their clients or giving an authority for such clients to receive the deposit on maturity. Grant advances against fixed deposit receipts or other term deposits of other banks.

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