Banking Problems & Rationals

Contents of 2nd Edition - February 2004 Priced Rs.150

Authorised by : N S Toor and Arundeep Singh

The book contains descriptive text on Banking Law and Practice, Conventional and priority sector loans, Foreign Exchange, financial developments followed by banking rationales and banking problems as they appear, particulary in State Bank examinations. It can be used for situational decision making problems for Senior Management examinations. It helps the candidate in preparing himself well for the examination which ultimately helps him to be successful in the examination.
The book is available with the publishers M/s Skylark Publications, 1/5, Bhagat Singh Lane, Gole Market, New Delhi Phone 011 23361 966. It is priced at Rs.150.

Few sample quetions/answers are given as under:

Banking Rationales

1 Banks obtain confidential reports about prospective borrowers/guarantors.

Rationale: While sanctioning credit facilities, the banks have to take proper precautions to ensure that the repayment of the disbursed loans take place in time. In addition to the financial viability, it is important that the appraisal of the man behind the project is carried properly with regard to his integrity, dealings with the other persons in the trade and his business acumen. Information about all these aspects is available through confidential reports only and not from the financial statements alone.

2 Debit and credit summations are given importance while renewing the cash credit limits.

Rationale: The level and kind of operations in the cash credit accounts are reflected through the debits and credits in the account. The regular debit and credit indicates that the financed unit has been functioning and sales and purchases are taking place regularly. Further, where the level of sales is more than the credits in the account, the bank also comes to know whether the financed unit is having the current or other account with some other bank. The recovery of interest debited in the account is also possible only when there are regular operations, which saves the account from becoming NPA.

3 All over-drawings in loan accounts are allowed with the permission of the Manager only. Why ?

Rationale: Over-drawings in loan accounts amount to allowing additional credit facilities, over and above the already sanctioned amount, which need decision making at appropriate level. Only the manager can decide such issues after taking a rational view of the prevalent circumstances and conduct and value of loan account. The powers to allow overdraft, are as such, vested with the branch manager only.

4 Major changes have been introduced in Indian banking during 1991 onwards.

Rationale: Indian banking system was exposed to global standards during the year 1991 to make the system competitive and self sustaining. For this purpose, there was need to introduce capital adequacy, asset quality and transparency guidelines. With the introduction of these standards, many other changes were also warranted.

5 A very high level committee called Asset Liability Committee (ALCO) monitors the ALM process in the Asset Liability Management system in a bank.

Rationale: Assets and liabilities in present day banking impact the profitability of a bank in various ways due to a number of risks such as risk due to interest rate movement, risk of maturity mismatch, interest rate sensitivity risk etc. These risks are required to be managed by following a macro policy, that could be laid by Head Office of a bank. It having effect on the entire bank itself, has to be monitored at a very high level, in the bank.

6 Banks now a days are preparing themselves to adopt USGAAP.

Rationale: In order to ensure long term viability and also to meet the future competition, the banks will have to have global presence and also follow the accounting practices which are accepted throughout the globe. The generally accepted accounting practices being followed in US are accepted by the investors and customers throughout the world. Adoption of US accounting practices would help a banking institution to get itself accepted globally and attract global business on the strength of its own.

7 While payment of a lost cheque is stopped, the payment of lost currency or bank notes is not stopped.

Rationale: A cheque is issued by the customer on which he remains liable to the payee or holder only unless it is paid. In case of such cheque being misplaced, the payment can be obtained by someone else and the drawer may continue to be liable to the actual payee or holder. In case of bank or currency notes, they continue to be legal tender under the provisions of Section 13 of Coinage Act 1906 and RBI Act 1934. Any one can obtain payment of such notes and Section 28 of RBI Act absolves RBI of its liability when payment of the currency note is obtained by its bearer.

8 An endorsement appearing on a bearer cheque is ignored by the paying bankers.

Rationale: A bearer cheque is negotiated by delivery as per Section 47 of NI Act. Where such cheques are endorsed, the paying bank need not verify the regularity or otherwise of the endorsement since such cheques are always bearer and payment to a bearer is considered to be a payment in due course. A paying banker gets protection on payment of bearer cheque with endorsement thereon u/s 85 (2), by taking no cognizance of such endorsement.

9 Liability of an endorser of a negotiable instrument is similar to principle debtor/guarantor.

Rationale: U/s 35 of NI Act, an endorser is deemed to have impliedly promised that on due presentment, the instrument will be paid and in case of dishonour, the holder will be compensated if he receives a notice of dishonour. As a result, his liability to pay is absolute without any pre-conditions. He is the party, which is liable on the instrument jointly as well as severally.

Banking Problems

1 Mr. Sudhakar Rao payee of a cheque of Rs.20000 endorses the cheque in favour of Sh. Ramanathan in consideration for payment of a previous loan raised by him from Mr. Ramanathan. While he was going to deliver the instrument to the endorsee, Mr. Sudhakar Rao met a fatal accident and died at the spot. Subsequently the cheque was handed over to Mr. Ramanathan by the police at the time of post-mortem. The legal heirs of Mr. Sudhakar Rao disputed this negotiation. What will be legal status of Mr. Ramanathan's claim ?

Answer: As per Section 48 of NI Act, an order instrument can be negotiated by endorsement and delivery. In this case, the payee had endorsed the instrument in favour Mr. Ramanathan but he had not completed the delivery. The handing over of the instrument to Mr. Ramanathan by the police does not amount to delivery. The legal heirs can dispute this negotiation. The legal heirs will become holders of the instruments u/s 8 of NI Act.

2 An order cheque of Rs.12900 drawn in favour of Mr. Chet Ram is presented for payment by one Mr. Shanti Dass in whose favour, Mr. Chet Ram has made an endorsement. The cheque is debited to the ledger and is sent to cashier for payment. The token is also handed over to the cashier and Mr. Shanti Dass puts his signature on the back of the cheque on the request of the cashier as token of having received the payment. At that time, the account holder comes and asks the bank to stop the payment. Mr. Shanti Dass states that he obtained the cheque from Mr. Chet Ram for consideration and the process of payment of cheque has also been completed by the bank. He insists that the stop payment instruction should not be accepted. What should bank do ?

Answer: The stand taken by Mr. Shanti Dass in this case cannot be accepted by the bank as the bank has received the stop payment instruction from the drawer, before parting with the money. The process of payment of the cheque is completed only when the money is actually handed over to the person obtaining the payment. The issue of the cheque having been obtained for consideration will have to be settled by Mr. Shanti Dass with Mr. Chet Ram separately.

3 An order cheque of Rs.35000 drawn by Mr. Ravi Dhawan in favour of one Sh. Ram Rattan is presented for payment by the cashier of the collecting bank, as there is no clearing house. There is an endorsement on the cheque purportedly made by Mr. Ram Rattan reading as ` pay to Mr. Satish Kumar Rs.22500'. The collecting bank's cashier insists on immediate payment. What would you do ?

Answer: This is a case of partial endorsement by the payee of the cheque. Such endorsements are not recognized by the banks as valid negotiations and as per provisions of Section 56 of Negotiable Instrument Act 1881, the paying banks are required to return such cheques to the collecting banks giving reasons to this affect. Accordingly this cheque will be returned by the paying bank.

4 A customer of your branch Mrs. Neelam, has both a saving bank and current account. She issues a cheque for Rs.12500 from the saving bank account, in favour of a local consumer goods dealer. The balance in the saving bank account, however, is Rs.9870 only, but the current account has balance amounting to Rs.6500. What would you do with the cheque?

Answer: Under Section 31 of NI Act, the bank is under an obligation to honour the cheques issued by their customer where they are properly drawn and the concerned account has balance, sufficient to pay the cheque. In the instant case, the customer is not having sufficient balance in the concerned account, but he has funds in other account, which are enough to make payment of the cheque. The bank, however, cannot use the funds lying in current account for paying a cheque in saving bank account, unless the customer specifically authorises the bank to do so. The cheque in question shall be returned unpaid.

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