KSLU Solved Question Papers
Banking Law
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 8
2017 Jun Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 8 Banking Law 2017 Jun Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2017 Jun examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2017 Jun examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2017 Jun examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Explain the functions of Commercial Bank.[16]
Answer
For full marks, cover: what a commercial bank is and the kinds of commercial banks in India; the legal map of its functions (section 5(b) and the fifteen clauses of section 6(1) of the Banking Regulation Act, 1949, the bar in section 6(2), section 8 and section 19); the primary functions (deposits, as a debt: Foley v. Hill; advances and the charging of interest: Central Bank of India v. Ravindra); credit creation with a worked figure; agency and general utility functions; dealing in loans and stressed assets (ICICI Bank v. Official Liquidator of APS Star Industries); the developmental role in India; what a commercial bank may not do; a table linking each function to its clause.
What a commercial bank is
A commercial bank is a bank run as a business. It takes deposits from the public and uses them to lend and invest. It earns the difference between what it pays depositors and what it charges borrowers. It serves traders, industry, farmers and households alike.
In India the commercial banks are of five kinds. They are the public sector banks (the State Bank of India and the nationalised banks) and the private sector banks. Then come the foreign banks with branches here, the regional rural banks and the small finance banks. Co-operative banks do similar work but belong to the co-operative sector.
Where the functions come from in law
A commercial bank cannot choose its business freely. The Banking Regulation Act, 1949 draws the boundary.
- Section 5(b) defines the core. "Banking" means accepting public deposits for lending or investment. The deposits are repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
- Section 6(1) then lists, in clauses (a) to (o), the other forms of business a banking company may carry on "in addition to the business of banking".
- Section 6(2) is the fence: "No banking company shall engage in any form of business other than those referred to in sub-section (1)."
- Section 8 forbids trading in goods, except to realise a security.
- Section 19 lets a bank form subsidiaries only for business allowed by section 6(1), or with the Reserve Bank's leave.
So every function described below is lawful only because one of these clauses allows it.
The primary functions
1. Accepting deposits. This is the function that makes an institution a bank. A bank offers savings, current, fixed and recurring deposits to suit different savers. The law treats a deposit as a loan to the bank. In Foley v. Hill, (1848) 2 HLC 28, Foley had put about 6,117 pounds into an account in 1829 at three per cent interest. In 1838 he sought an account in equity, and the bankers pleaded limitation.
The House of Lords upheld the bankers. Lord Cottenham said money paid into a bank "ceases altogether" to be the depositor's money. It becomes the banker's own, and the banker must repay an equal sum when asked. The banker is a debtor, not a trustee. This is what lets a commercial bank lend its depositors' money at all. It is also why the depositor is only an unsecured creditor, and why deposit insurance exists.
2. Lending and advancing money. Section 6(1)(a) allows "the lending or advancing of money either upon or without security". A commercial bank lends in several forms:
- term loans, repaid in instalments over years, for machinery, housing or education;
- cash credit, a running limit against stock or book debts, for working capital;
- overdraft, drawing beyond the balance in a current account up to a limit;
- bills discounted or purchased, giving a trader money now on a bill payable later; and
- non-fund facilities such as letters of credit and guarantees, where the bank pays only if called upon.
Charging interest. Interest is the bank's main income, and the courts have set its limits. In Central Bank of India v. Ravindra, (2002) 1 SCC 367, a loan carried eleven per cent interest with quarterly rests. The question was whether interest compounded at each rest became part of the principal. A Constitution Bench held that interest capitalised at agreed rests becomes part of the principal sum adjudged on the date of the suit. But penal interest may be charged only once for one default and may never be capitalised. The case shows that lending is a regulated function, not a free bargain.
Credit creation
A commercial bank does not lend only the cash it holds. When it lends, it usually credits the borrower's account. That credit becomes a deposit, which is lent again, in this bank or another.
A worked figure. Suppose banks must keep 20 per cent of each deposit as reserves, a round figure chosen only to make the arithmetic easy. A fresh deposit of Rs 1,000 lets the first bank lend Rs 800. That Rs 800 is deposited elsewhere, and Rs 640 is lent, and so on. In the end deposits can grow to five times the first deposit, that is Rs 5,000. The Reserve Bank limits this power through the cash reserve ratio (now 3 per cent) and the statutory liquidity ratio (now 18 per cent).
Agency functions
Under section 6(1)(b), a bank may act "as agents for any Government or local authority or any other person". For its customers it:
- collects cheques, bills, dividends, interest and rent;
- pays premiums, taxes, loan instalments and bills on standing instructions;
- buys and sells shares and Government securities on their behalf;
- acts as trustee, executor or attorney (clauses (h) and (i)); and
- remits money by draft, NEFT, RTGS and other transfers.
As agent the bank owes care and loyalty, and it must follow the customer's instructions exactly.
General utility functions
These are services open to customers and often to the public. They include:
- safe custody and lockers ("the providing of safe deposit vaults", clause (a));
- letters of credit, traveller's cheques and guarantees (clauses (a) and (e));
- foreign exchange for travel, trade and remittances;
- underwriting issues of shares and loans (clause (d));
- cards, internet and mobile banking; and
- references on a customer's standing, with his consent.
Dealing in loans and stressed assets
A commercial bank may also sell the loans it has made. In ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1, ICICI Bank assigned debts owed by some borrowers to Kotak Mahindra Bank. Kotak then asked to replace ICICI as the secured creditor in a borrower's winding up. The question was whether a bank may assign its debts at all.
The Supreme Court held that such an assignment is part of the business of banking. Section 8 does not bar it, because its Explanation excludes "actionable claims" from "goods". This judgment underpins today's market in non-performing loans and the sale of bad loans to asset reconstruction companies.
The developmental functions in India
Indian commercial banks carry public duties that a purely commercial lender would not choose.
- Priority sector lending. Domestic banks must lend 40 per cent of adjusted net bank credit to agriculture, micro and small enterprises, education, housing and weaker sections. This is under the Directions of 2025.
- Financial inclusion. No-frills accounts, business correspondents and Jan Dhan accounts carry banking to people who never had an account.
- Government business. Banks collect taxes, pay pensions and credit direct benefit transfers.
- Rural branches. Branch authorisation rules require a share of new outlets in unbanked rural centres.
What a commercial bank may not do
- Trade in goods, except to realise its security (section 8).
- Hold non-banking immovable property beyond seven years, extendable by five (section 9).
- Lend to its own directors or firms in which they are interested (section 20).
- Own large stakes in other companies beyond the thirty per cent limits of section 19(2).
- Do any business outside section 6(1) (section 6(2)).
The functions at a glance
| Function | Example | Source in the Act |
|---|---|---|
| Deposits | Savings, current, fixed, recurring | Section 5(b) |
| Lending | Term loan, cash credit, overdraft, bills | Section 6(1)(a) |
| Agency | Collection, standing instructions, executor | Section 6(1)(b), (h), (i) |
| Utility | Lockers, letters of credit, guarantees | Section 6(1)(a), (e) |
| Underwriting | Share and loan issues | Section 6(1)(d) |
| Selling loans | Assignment to another bank or an ARC | Section 6(1)(a), (n) |
| New business | Notified by the Central Government | Section 6(1)(o) |
An assessment
The list of functions has grown far beyond deposits and loans. That growth brings income, but also risk. A bank that sells insurance, manages wealth and underwrites issues has more ways to lose money and to mis-sell to customers. This is why section 6(2) keeps the list closed, section 19 pushes riskier work into subsidiaries, and the Reserve Bank supervises the whole.
Conclusion. A commercial bank's functions are fixed by law. Section 5(b) defines the core of deposits and lending, section 6(1) lists everything else, and section 6(2) forbids the rest. Deposits create a debt the bank may use (Foley v. Hill), lending carries regulated interest (Ravindra), and the system creates credit within the reserve ratios. Agency and utility services, the sale of loans (APS Star Industries) and developmental duties complete the picture. In India a commercial bank is both a business and an instrument of public policy.
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