A bank is a licensed financial institution that receives deposits and makes loans. There are several types of banks including retail banks, commercial banks, and investment banks. A bank customer is a person or entity that maintains an account or has a business relationship with the bank. The main types of bank accounts are savings accounts, fixed deposits, recurring deposits, and current accounts. Savings accounts earn interest and have limits on withdrawals while current accounts are for businesses and allow unlimited transactions but no interest. Opening a bank account requires completing forms, providing identification, making an initial deposit, and receiving account materials from the bank like a passbook or chequebook.

1. BANKING LAW AND
PRACTICE
PART 3
A.SATHYALEKHA.,M.COM.,M.Phil.,NET.,SET., PGDEC.,(Ph.D)
Assistant Professor,
Department of Commerce,
EMG Yadava Women’s College,
Thiruppalai,
Madurai -14

2. What Is a Bank?
A bank is a financial institution licensed to receive deposits and make loans.
Banks may also provide financial services such as wealth management, currency
exchange, and safe deposit boxes. There are several different kinds of banks
including retail banks, commercial or corporate banks, and investment banks. In
most countries, banks are regulated by the national government or central bank.
Definition of Banking
Banking can be defined as the business activity of accepting and safeguarding
money owned by other individuals and entities, and then lending out this money
in order to earn a profit. However, with the passage of time, the activities
covered by banking business have widened and now various other services are
also offered by banks. The banking services these days include issuance of
debit and credit cards, providing safe custody of valuable items, lockers, ATM
services and online transfer of funds across the country / world.

4. WHO IS CUSTOMER OF A
BANK?
According to RBI, a customer of a bank will be one of the
following:
A person or entity that maintains an account and/or has a
business relationship with the bank.
One on whose behalf the account is maintained (i.e. the
beneficial owner).
Beneficiaries of transactions conducted by professional
intermediaries, such as Stock Brokers, Chartered
Accountants, Solicitors etc., as permitted under the law.
Any person or entity connected with a financial transaction
which can pose significant reputational or other risks to the
bank, say, a wire transfer or issue of a high value demand
draft as a single transaction.

5. Banker
The term banking may define as accepting of deposit of
money from the public for the purpose of lending or
investing investment of that money which are repayable on
demand or otherwise and with a draw by cheque, draft or
order.
Features of Banking
The definition of banking describes the following features of
banking.
A banking company must perform both of the essential
functions.
Accepting of deposit.
Lending or investing the same: The phrase deposit of money
from the public is significant. The bankers accept a deposit of
money and not of anything else. The world public implies that
a banker accepts a deposit from anyone who offers his/her
money from such purpose.
The definition also implies the time and made to withdraw the
deposit. The deposit money should be repayable to the
depositor on demand made by the letter or according to the
agreement reached between the two parties.

6. Customer
A person who has a bank account in his name
and for whom the banker undertakes to
provide the facilities as a banker is
considered to be a customer.
To constitute a customer the following
requirements must be fulfilled;
The bank account may be savings, current or
fixed deposit must be operated in his name by
making a necessary deposit of money.
The dealing between the banker and customer
must be of the nature of the banking
business.

8. Relationship as Debtor and Creditor
On the opening of an account, the banker assumes the position of a debtor. A
depositor remains a creditor of his banker so long as his account carries a credit
balance.
The relationship with the customer is reserved as soon as the customer account is
overdrawn.
Banker becomes a creditor of the customer who has taken a loan from the banker
and continues in that capacity fills the loan is repaid.
Banker as a Trustee
Ordinally a banker is a debtor of his customer in the report of the
deposit made by the letter but in certain circumstances, he acts as
trustee also.
A trustee hold holds money or asset and performs certain functions
for the benefit of some other person called the beneficiary.
For example;
If the customer deposits securities or other values with the banker
for the safe custody, the letter acts as a trustee of his customer.

9. Banker as an Agent
A banker acts as an agent of his customer and performs
a number of agency functions for the conveniences of his
customer.
For example, he buys or sells securities on behalf of his
customer, collects check/cheques on his behalf and
makes payment of various dues of his customer.
Special relationship with
customer/obligation of a
banker:
Through the primary relationship between a banker and
his customer is that of a debtor and a creditor or vice
versa, the special features of this relationship as a note
above impose the following additional obligations on the
banker.

10. The obligation to honor the
Check/Cheques
.
A reasonable time for collection.
PrThe deposit accepted by a banker is his liabilities repayable
on demand or otherwise. The banker is therefore under a
statutory obligation to honor his customer’s check/cheque in
the usual course.
According to section 31 of the negotiable instruments. Act
1881 the banker is bound to honor his customer’s
check/cheque provided by following conditions are fulfilled:
Availability of sufficient funds of the customer.
The correctness of the check/cheque.
Proper presentation of the check/chequeoper drawing of the
check/cheque.

11. The obligation to maintain the
secrecy of the customer
accounts
The banker is an obligation to take the utmost care in keeping
secrecy about the account of his customer.
By keeping secrecy is that the account books of the bank will
not be thrown open to the public or government, officials if
the following reasonable situation does not occur,
Discloser of information required by law.
Discloser permitted by bankers’ practice and wages. The
practice and wages are customary amongst bankers permit
disclosure of certain information and the following
circumstances.
With express or implied consent of the customer.
Banker reference.
Duty to the public to disclose.

13. Various Types of Bank Deposits
A bank account serves a lot of purposes for anyone in the
process of financial planning, the three most important ones
being safety, convenience and savings.
Traditionally in India, we have four major types of Bank
Deposits, namely Current Account, Savings Accounts, Recurring
Deposits and Fixed Deposits, each with varying advantages.
However these days, some banks have also introduced many
new products, which combine the features of two or more
types of bank deposits like 2-in-1 Deposits, Power Saving
Deposits, Smart Deposits, etc.
With introduction of new products, there has been cases of
increasing frauds in the bank accounts as well. To safeguard
yourself from these frauds read this Banking awareness
book that includes detailed information about managing your
bank account.

15. Savings Account
A savings account can be opened with a bank or financial institution, to
earn interest on the balance maintained.
This account should be opened with the objective of storing money in
electronic form. These days, most savings accounts can be used for
multiple purposes like paying bills, quick transactions, easy credit, etc.
It offers high liquidity and is very popular among the masses. It does,
however, have cash withdrawal and transaction limits to promote digital
payments.
Banks provide an interest rate which is only slightly higher than inflation,
so it is not very optimal for investment. The interest provided by Public
sector bank is only 4%, however, some of the private banks like Yes
Bank and Kotak Bank offers interest between 6-7%.
Some banks also offer special savings accounts for the various
sections of society, like women, senior citizens, children, etc. Each
come with their own interest rates and withdrawal limits.
To choose an appropriate savings account for yourself, it is best that
you research well about these types before you make your decision.

16. Recurring Deposit
It is a special type of term deposit where you do not need to deposit a
lump sum savings rather a person has to deposit a fixed sum of money
every month (which can be as low as Rs 100 per month).
You should choose a recurring deposit when you want to inculcate the
habit of saving regularly and you don’t have a lump-sum amount to set
aside.
The interest rates on these accounts range from 5% – 7%, and varying
rates are offered to senior citizens. These accounts have maturities
ranging from 6 months to 120 months.
You can also give a standing order to the bank to withdraw a fixed sum
of money from your saving account on every fixed date and the same
is credited to RD account. However, the bank may charge some penalty
for delay in paying the installments.
Another unique feature of this account is that you can take a loan
worth 80-90% of your deposit by using this deposit itself as a
collateral.
There are no premature withdrawals allowed in the account, but
for a penalty, you can close the account before the maturity
date of the deposit.

17. Current Account
A current account is a special type of account that has lower restrictions than a
savings account when it comes to withdrawals and transactions.
It is also known as a demand deposit account and it is meant for businessmen to
conduct their business transactions smoothly.
These accounts should only be opened by you if you are a small businessperson
who has multiple monetary transactions on a daily basis.
These are the most liquid deposits and there are no restrictions on the number
and the number of transactions in a day.
Banks also offer overdraft facilities on these, i.e., they let account-holders
withdraw more money than there is in the account.
Moreover, there is no minimum balance required to be maintained here, unlike
other bank accounts.
With the advancement of digital payments, banks also offer the best online
banking facilities to these accounts, which has helped them contribute more to
develop businesses in the economy.
A disadvantage of these accounts is that banks do not pay any interest on these
accounts. Also, these accounts also charge hefty fees for their services and
maintenance.

18. Fixed deposit
A fixed deposit (FD) is an investment avenue offered by
banks, financial institutes and Non-Banking Financial
Companies (NBFCs)_that offers guaranteed returns with an
interest rate ranging between 5%-9%.
It gives a higher interest than a regular savings account
and offers a wide range of tenures ranging from 7 days to
10 years.
You should try out a fixed deposit account when you want
to build your habit of investing but your risk appetite is
quite low, since it offers guaranteed returns.
You may or may not have a separate bank account to open
a fixed deposit with the bank. These days, banks also
offer FDs which allow for tax exemptions of up to
₹1,50,000 per year under section 80C of the Income tax
Act, 1961.
Another benefit with FDs is that all interest amount below
₹40,000 are tax-free. Interest amounts above ₹40,000
are subjected to Tax Deducted at Source (TDS).

19. Just like a recurring deposit, you cannot make any
premature withdrawals, but you can prematurely shut
down the deposit. You may be charged some penalty in
case of early closure of FD account.
However, with the focus of government to have a bank
account for everyone under the scheme of Pradhan
Mantri Jan Dhan Yojana, you can open up a bank
account for free if you do not have one and enjoy
various facilities offered by banks.

20. What are the risks of investing in
bank fixed deposits?

21. 1. Liquidity risk:Bank fixed deposits (FDs) can
be easily liquidated. However, a penalty could be levied.
Tax saver FDs cannot be withdrawn before completion of
the 5-year tenure.
2. Default risk:Bank defaults are rare but
possible. However, deposit amount including interest of up to
Rs 5 lakh per person per bank is guaranteed by the DICGC
and any amount over that is subject to default risk.

22. 3. Inflation risk: FD returns at times can
be around the same as inflation or even lower than
inflation rates leading to wealth erosion for the
investor.
4. Interest rate risk: Bank FDs carry
the risk of being locked in for a long tenure at low
rate of return.
5. Reinvestment risk:In a falling
interest rate environment, FDs that are due to mature
will get offered a lower rate at the time of maturity.

24. 1. Decide the Type of Bank Account you want to Open
There are several types of bank accounts such as Saving Account,
Recurring Account, Fixed Deposit Account and Current Account. So a
decision regarding the type of account to be opened must be taken.
2. Approach any Bank of choice & meet its Bank Officer
Once the type of account is decided, the person should approach a
convenient bank. He has to meet the bank officer regarding the opening of
the account. The bank officer will provide a proposal form (Account
Opening Form) to open bank account.
3. Fill up Bank Account Opening Form - Proposal Form
The proposal form must be duly filled in all respects. Necessary details
regarding name, address, occupation and other details must be filled in
wherever required. Two or three specimen signatures are required on the
specimen signature card. If the account is opened in joint names, then the
form must be signed jointly. Now a days the banks ask the applicant to
submit copies of his latest photograph for the purpose of his
identification.

25. 4. Give References for Opening your Bank Account
The bank normally required references or introduction of the
prospective account holder by any of the existing account holders
for that type of account. The introducer introduces by signing his
specimen signature in the column meant for the purpose The
reference or introduction is required to safeguard the interest of
the bank.
5. Submit Bank Account Opening Form and Documents
The duly filled in proposal form must be submitted to the bank
along with necessary documents. For e.g. in case of a joint stock
company, the application form must accompany with the Board's
resolution to open the account. Also certified copies of articles
and memorandum of association must be produced.

26. 6. Officer will verify your Bank Account Opening Form
The bank officer verifies the proposal form. He checks whether the
form is complete in all respects or not. The accompanying documents
are verified. If the officer is satisfied, then he clears the proposal
form.
7. Deposit initial amount in newly opened Bank Account
After getting the proposal form cleared, the necessary amount is
deposited in the bank. After depositing the initial money, the bank
provides a pass book, a cheque book and pay in slip book in the case
of savings account. In the case of fixed deposits, a fixed deposit
receipt is issued. In the case of current account, a cheque book and
a pay in slip book is issued. For recurring account, the pass book and
a pay in slip book is issued.