LLM Group 2 Business Law Banking Laws 2016 Question Paper with Solutions

The Bank as statutory monopolist

The three heads set by this question are the three monopolies the Reserve Bank of India Act, 1934, and the statutes around it confer. Section 22 gives it the sole right to issue bank notes. The Foreign Exchange Management Act, 1999, makes every dealing in foreign exchange lawful only through a person authorised by the Bank. And section 42 of its own Act compels every scheduled bank to hold its reserves with it, which makes the Bank the sole supplier of the settlement money in which interbank obligations are discharged.

Reading the question this way is what turns a list into an argument. A central bank's power over the economy is not administrative but proprietary: it controls the quantity and price of the one asset every bank must hold, and it controls access to the currency in which cross border payment is made.

Section 33 fixes the cover. Since the Reserve Bank of India (Amendment) Act, 1957, India has used the minimum reserve system: the assets of the Issue Department must include gold coin, gold bullion and foreign securities of an aggregate value of not less than two hundred crore rupees, of which gold is not less than one hundred and fifteen crore rupees, the rest being rupee securities and eligible bills. The proportional reserve system it replaced had required forty per cent cover in gold and sterling. The change matters in principle: the size of the note issue ceased to be governed by a metallic proportion and became a question of monetary policy.

Section 26(1) makes every note legal tender guaranteed by the Central Government, and section 26(2) is the withdrawal power. It permits the Central Government, on the recommendation of the Central Board and by notification, to declare that any series of notes of any denomination shall cease to be legal tender save at a specified office and to a specified extent.

The monopoly has since been extended to digital currency without a new statute. The Finance Act, 2022, amended the definition of "bank note" in the Reserve Bank of India Act to include a note issued in digital form, which read with section 22 authorises the issue of central bank digital currency. The wholesale pilot of the digital rupee began on 1 November 2022 and the retail pilot on 1 December 2022. The technique is worth noting: Parliament widened the definition of an existing instrument rather than creating a new one, so the digital rupee is legal tender on precisely the same footing as a printed note.

(a continued) Exchange control

Exchange control is the second monopoly and it is the head this paper adds. Its history is a change of legislative philosophy that a good answer states in one line: the Foreign Exchange Regulation Act, 1973, prohibited every foreign exchange transaction except as permitted, and made contravention a criminal offence; the Foreign Exchange Management Act, 1999, which replaced it with effect from 1 June 2000, permits every transaction except as restricted, and makes contravention a civil matter punishable by penalty.

Section 3 contains the prohibitions, forbidding dealing in foreign exchange otherwise than through an authorised person, and forbidding the practices historically used to move value outside the banking system, including making a payment to or for the credit of a person resident outside India otherwise than as permitted, and entering into a transaction by which a right to receive foreign exchange is created without repatriation. Section 10 provides for the authorisation of authorised persons by the Reserve Bank, which is the operative control, since every lawful foreign exchange transaction must pass through one. Sections 13 to 15 deal with penalties, adjudication and compounding, and section 37A, inserted in 2015, permits the seizure of equivalent Indian assets where foreign exchange or foreign assets are held abroad in contravention.

The connection to a bank is direct. An authorised dealer is almost always a bank, so a large part of the Act operates through the banking system, and a bank that permits a remittance without the documentation the Bank's directions require is itself liable. Exchange control is therefore not a separate subject but a compliance obligation running through every branch that handles a foreign transaction.

As bankers' bank the hook is section 42. Every bank in the Second Schedule must maintain with the Reserve Bank a cash reserve of such percentage of its net demand and time liabilities as the Bank notifies. The Reserve Bank of India (Amendment) Act, 2006, removed the earlier floor of three and ceiling of twenty per cent with effect from 22 June 2006, and omitted section 42(1B), so that no interest is paid on those balances. The companion requirement is the statutory liquidity ratio in section 24 of the Banking Regulation Act, 1949, subject to a statutory ceiling of forty per cent. At the policy of August 2026 the cash reserve ratio stands at three per cent and the statutory liquidity ratio at eighteen per cent.

Lender of last resort is the third element. Section 17(4) permits advances to scheduled banks against eligible security, and section 18 confers an emergency power to lend to any bank or person against security the Bank would not ordinarily accept, where it considers it necessary in the interest of trade, commerce, industry or agriculture. Section 18 is the true last resort power precisely because it operates outside the ordinary collateral rules. To it must be added the settlement function under the Payment and Settlement Systems Act, 2007, the accounts under section 42 being the accounts across which interbank obligations settle.

What replaced it is Chapter III F, inserted by the Finance Act, 2016. Section 45ZA requires the Central Government, in consultation with the Bank, to determine the inflation target in terms of the consumer price index once every five years; it stands at four per cent with a band of two per cent either way. Section 45ZB constitutes the six member Monetary Policy Committee, chaired ex officio by the Governor with a casting vote, three of its members appointed by the Central Government. Section 45ZN requires the Bank to report to the Central Government if the target is missed for three consecutive quarters. At the meeting of 5 August 2026 the Committee held the repo rate at 5.25 per cent with a neutral stance.

The instruments now used should be named. The repo rate as the policy rate; the standing deposit facility, introduced in April 2022, as the floor of the corridor, which absorbs liquidity without the Bank having to give collateral; the marginal standing facility as the ceiling; open market operations, the cash reserve ratio and the statutory liquidity ratio as the quantitative tools.

The limit was drawn in Internet and Mobile Association of India v. Reserve Bank of India, decided on 4 March 2020. The Bank had directed the entities it regulates to stop providing services in relation to virtual currencies, which cut an entire trade off from the banking system. The Court accepted that the power existed and that the subject was within the Bank's concern, but set the circular aside on proportionality, because the Bank had produced no evidence that any regulated entity had actually suffered loss.

The two together state the principle that runs through this whole answer. Being a statutory monopolist gives the Bank an unusually long reach, over non banks as much as banks and over an entire market's access to payment; and precisely because the reach is so long, the exercise of the power is tested for proportionality in a way that a narrower power would not be.

For full marks, cover: three unrelated heads, so treat them as three parts of roughly equal weight and do not let the first swallow the paper; on (a) section 5(b) taken element by element, then deposits and lending with their legal character and the two cases that fix it; on (b) sections 8 and 9 with the differences set out in a table and the privileges that follow, since the examiner has deliberately paired the two; on (c) the Act, the jurisdiction, the recovery certificate and the appeal, with the decision that upheld the Tribunal and an honest assessment of whether it worked.

Section 6 then enumerates the other businesses a banking company may carry on, and section 6(2) forbids it to engage in any form of business other than those referred to, while section 8 prohibits trading except in connection with the realisation of security. The scheme is one of enumerated powers, and it exists because a bank plays with depositors' money.

On the deposit side the legal character is settled by Foley v. Hill, (1848) 2 HLC 28. Money paid into a bank ceases to be the customer's; it becomes the banker's own, to use as it pleases, with an obligation to repay an equivalent sum on demand. The banker is a debtor and not a trustee or agent. The depositor is therefore an unsecured creditor, which is the premise of the entire regulatory structure: licensing, capital, inspection and deposit insurance all exist because the deposit is a bare debt.

Joachimson v. Swiss Bank Corporation, [1921] 3 KB 110, supplies the qualification. The obligation is to repay on demand made at the branch where the account is kept, during banking hours. Limitation therefore runs from the demand and not from the deposit, so a dormant account does not become time barred, and a customer who sues without demanding has no cause of action.

Lending is constrained by statute as well as by contract. Section 20 prohibits advances on the security of the bank's own shares and to directors and to concerns in which they are interested, which is the provision aimed at connected lending. Section 21 empowers the Reserve Bank to control advances by directions, which is the source of priority sector lending and of the income recognition and provisioning norms. Section 21A provides that a transaction between a bank and its debtor shall not be reopened on the ground that the rate of interest is excessive, which excludes State usury legislation from bank lending.

(b) Holder and holder in due course

Section 8 defines the holder as any person entitled in his own name to the possession of a promissory note, bill of exchange or cheque, and to receive or recover the amount due on it from the parties to it. The two elements are entitlement to possession in his own name and the right to recover, so an agent, a servant or a person who has found the instrument is not a holder, however firmly he holds it.

The privileges must be given by section number, and they are what make the distinction worth drawing. Under section 20 a holder in due course may recover the whole amount the stamp covers on an instrument delivered blank or incomplete, while any other holder recovers only what was intended. Under section 36 every prior party is liable to him until the instrument is duly satisfied. Under section 42 the acceptor of a bill drawn in a fictitious name cannot set the fiction up against him. Under section 43 absence of consideration is no defence against him.

Under section 53 a holder deriving title from a holder in due course has his rights, so the character once acquired cleanses the instrument downstream. Under section 58, although no possessor may claim on an instrument obtained by an offence or fraud or for unlawful consideration, a holder in due course is expressly excepted. Sections 120 to 122 estop the maker, drawer, acceptor and endorsers from denying the original validity, the payee's capacity to indorse, and the signature and capacity of prior parties. Section 118(g) presumes that the holder is a holder in due course, subject to the proviso that where the instrument was obtained by an offence or fraud the burden shifts back to him.

Its functions are four. First, adjudication: it decides applications by banks and financial institutions for the recovery of debts above the prescribed amount, which was ten lakh rupees originally and twenty lakh rupees since the notification of September 2018, and the jurisdiction of civil courts over such claims is excluded. Secondly, interim protection: it may attach property or grant injunctions to prevent the debtor from disposing of assets pending adjudication.

Thirdly, execution, through a Recovery Officer who enforces the recovery certificate with powers modelled on tax recovery, including attachment and sale, arrest and detention and the appointment of a receiver. Fourthly, and importantly for the borrower, it is the appellate forum under section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, against measures taken by a secured creditor under section 13(4), which makes the same Tribunal the bank's forum in one proceeding and the borrower's in another.

A candid assessment is worth the last two sentences and is what distinguishes a top answer. The Tribunal has been overwhelmed: filings vastly exceeded the capacity created, vacancies were chronic, and disposal has taken years rather than the six months contemplated. That failure is the direct explanation for what came next. The Act of 2002 removed adjudication from enforcement altogether by letting the secured creditor act without a court, and the Code of 2016 moved resolution to a committee of creditors whose commercial decision the tribunal may not review on merits, as Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, held. A specialist tribunal was the first answer to delay; when it did not work, Parliament stopped trying to make adjudication faster and took the adjudication out.

On the holder in due course, the operative modern authority is Rangappa v. Sri Mohan, (2010) 11 SCC 441, decided on 7 May 2010 by three judges. The accused admitted his signature on a dishonoured cheque but denied that any legally enforceable debt existed. The Court held that the presumption under section 139 extends to the existence of a legally enforceable debt or liability, not merely to the issue of the cheque; that section 139 is a reverse onus clause enacted to make negotiable instruments credible; and that it is rebutted on the preponderance of probabilities, the accused being entitled to use the complainant's own material.

Where the holder is a company's officer, the complaint must be framed correctly, and Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661, decided on 27 April 2012, decides how. An authorised signatory of International Travels Ltd. had issued a cheque for Rs 5,10,000 which was dishonoured, and the signatory was prosecuted without the company being made an accused. The Court held that arraigning the company is imperative where the offence is by a company, subject to the maxim lex non cogit ad impossibilia where a legal bar prevents proceeding against it.

The doctrine of the holder in due course serves the other half of the definition. If deposits are to be lent and the resulting paper is to circulate, an instrument must pass from hand to hand without each taker investigating the last, and sections 9, 20, 36, 43, 53 and 58 achieve that by giving the innocent purchaser for value a better title than his transferor had. And the Debts Recovery Tribunal exists because the lending half of section 5(b) fails if the money cannot be got back: it was the first attempt to solve the problem of delay by specialisation, it was upheld in Delhi High Court Bar Association, and its inability to cope is why Indian law has since moved recovery outside the adjudicatory process altogether.

The premise: who is a customer, and what the relationship is

A person becomes a customer when an account is opened, and duration of dealing is not required. In Ladbroke v. Todd, (1914) 30 TLR 433, a thief who opened an account with a stolen cheque was held a customer from that moment, and in Commissioner of Taxation v. English, Scottish and Australian Bank Ltd., [1920] AC 683, the Privy Council held that duration is not of the essence. In Great Western Railway Co. v. London and County Banking Co., [1901] AC 414, a man who cashed cheques over the counter for years without an account was held not to be a customer, and the collecting bank consequently lost its statutory protection.

The relationship is contractual and its base character is debtor and creditor. Foley v. Hill, (1848) 2 HLC 28, holds that money paid into a bank becomes the banker's own money, to use as it pleases, with an obligation to repay an equivalent; the banker is not a trustee or an agent. Joachimson v. Swiss Bank Corporation, [1921] 3 KB 110, adds that the obligation is to repay on demand at the branch where the account is kept, and Atkin LJ there set out the terms of the implied contract, which are in substance the duties that follow.

The mandate must be genuine, and a forged signature is no mandate at all. In Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666, a company's accountant forged the managing director's signature on numerous cheques over years and the bank debited the account. The Supreme Court held the bank liable to repay: a forged signature is wholly inoperative, the bank pays without authority, and the customer's failure to detect the forgery by examining the statements is not, without more, a defence, since the customer owes the bank no duty to check the pass book. The duty of care runs from the bank to the customer, not the reverse.

The mandate ends when the bank has notice that it has ended, which is why notice of the customer's death, insanity or insolvency, a garnishee order, or a countermand of payment each stops the bank paying.

Duty two: reasonable care and skill, and the protection of the collecting banker

When it collects a cheque the bank acts as its customer's agent, and an agent who receives money for a principal with no title converts the true owner's property. That exposure would make collection impossible, and section 131 of the Negotiable Instruments Act exists to remove it.

Explanation I removes one difficulty: a banker receives payment for a customer even though it credits the customer's account before receiving payment, so giving immediate credit does not by itself convert the bank from agent into holder for value. Explanation II, added by the amendment of 2002 with effect from 6 February 2003, adapts the section to truncation, imposing a duty to verify the prima facie genuineness of the truncated cheque and any fraud, forgery or tampering apparent on its face that can be verified visually.

The paying banker has its own protections and they should be named for contrast: section 85 on a cheque payable to order where the indorsement is regular and payment is in due course, section 85A on a bank's own draft, section 89 where a material alteration is not apparent, and section 128 on a crossed cheque paid in due course, "payment in due course" being defined by section 10.

Duty three: secrecy

The duty of secrecy is a legal duty implied in the contract and it survives the closing of the account. Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, decided as much where a manager told a customer's employer that he had been paying money to a bookmaker, with the result that his contract was not renewed.

The constitutional limit was drawn in District Registrar and Collector, Hyderabad v. Canara Bank, (2005) 1 SCC 496. A State amendment to the Indian Stamp Act, 1899, empowered any officer authorised by the Collector to enter a bank, inspect and seize documents to detect evasion of stamp duty. The Supreme Court struck it down, holding that a customer's documents do not lose their private character by being in the bank's custody, that the customer retains an interest in them, and that an uncontrolled power of search and seizure, exercisable by an unspecified officer without recorded reasons, was an unreasonable invasion of privacy. The decision anticipates Justice K.S. Puttaswamy (Retd.) v. Union of India, (2017) 10 SCC 1, and is now reinforced by the Digital Personal Data Protection Act, 2023.

The locker duty deserves separate mention because a bank denied it for years. In Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, the Supreme Court rejected the contention that a locker hirer is a mere licensee to whom no duty is owed, holding that the customer is entirely at the mercy of the bank because a locker cannot be operated without the bank's key, and directing the Reserve Bank to frame rules. The revised locker directions of August 2021 followed, with a model agreement, a duty of care, and a liability of one hundred times the annual rent where loss is caused by the bank's own negligence, by fire or theft, or by fraud of its employees.

Statutory duties complete the list. Section 45ZA of the Banking Regulation Act, 1949, provides for nomination in respect of deposits, sections 45ZC and 45ZE for articles in safe custody and for lockers; and the Banking Laws (Amendment) Act, 2025, permits up to four nominees from 1 November 2025, either simultaneously with stated shares or successively. Section 26 requires an annual return of accounts not operated for ten years and section 26A requires such unclaimed balances to be transferred to the Depositor Education and Awareness Fund, the depositor's right to claim from the bank being expressly preserved, which is Foley v. Hill applied: the custodian changes, the debt does not.

By operation of law. Death determines the mandate, the authority to pay being an agency ended by death under section 201 of the Contract Act, and the balance passes to the legal representatives subject to the nomination under section 45ZA. Insanity, on notice, and insolvency have the same effect, the estate vesting in the assignee or liquidator. A change in the constitution of a firm or company closes the account as constituted, and Clayton's case then operates from that date, which is why a bank rules off an account when a partner dies or a surety withdraws.

By act of a third party. A garnishee order under Order XXI Rule 46 of the Code of Civil Procedure, 1908, attaches the balance; so does a notice under section 226(3) of the Income Tax Act, 1961, or an attachment under the Prevention of Money Laundering Act, 2002. Notice of assignment obliges the bank to pay the assignee, and notice of a trust or an adverse claim puts it on inquiry.

Dormancy is not termination. An account unoperated for ten years is reported under section 26 and its balance transferred to the Fund under section 26A, but the debt survives and the depositor may claim it.

For full marks, cover: trace what happens to a depositor's money at each stage of a bank's failure, and hang the sections on that sequence, because the statute reads as a list and the depositor's journey is what makes it an argument; the stages are supervision and directions, moratorium, the fork between rescue and liquidation, the liquidation itself with the priority in section 43A, and deposit insurance; then read prevention backwards from the journey, since every preventive measure is an attempt to stop the depositor reaching the next stage.

(This question is set in identical or nearly identical terms on eight of the eleven papers in this folder. The answer here follows the depositor's money; the sibling papers take the statutory machinery in sequence, the choice between the three resolution tools, and the comparison with the general insolvency law.)

Stage one: the bank is in difficulty, and the depositor does not know

The Reserve Bank inspects under section 35 and may, under section 35(4), prohibit the acceptance of fresh deposits or direct that the bank be wound up. Under section 35A it may give any bank directions in the public interest, in the interests of banking policy, or to prevent the affairs of a bank being conducted in a manner detrimental to depositors, and this is the source of the all inclusive directions that freeze withdrawals.

At this stage the depositor's money becomes unavailable without any adjudication at all, which is what happened at the Punjab and Maharashtra Co-operative Bank from September 2019, where withdrawals were capped at a few thousand rupees and depositors waited more than two years. The lesson is that the depositor's loss begins long before any court is involved.

Sections 36AA and 36AB allow the Bank to remove managerial persons and to appoint additional directors, and section 36ACA to supersede the board. These, with the Prompt Corrective Action framework revised with effect from 1 January 2022, are the tools of early intervention, and their whole purpose is to act while the bank is still solvent.

The first is section 45(4). If the Reserve Bank is satisfied that it is necessary in the public interest, in the interests of depositors, to secure proper management, or in the interests of the banking system as a whole, it may prepare a scheme for the reconstruction of the bank or for its amalgamation with another banking institution. Since the amendment of 2020 it may do this at any other time as well as during a moratorium, so the freeze is no longer a precondition of the rescue. Section 45(5) allows the scheme to deal with the constitution and capital of the transferee, the transfer of assets and liabilities, the rights of members and creditors, the continuance of employees, and the reduction of the interest or rights of members and depositors so far as necessary. Section 45(7) requires sanction by the Central Government, and the sanctioned scheme binds everyone.

Stage four: the liquidation, and what the depositor actually gets

Section 39 appoints the Reserve Bank, the State Bank of India or another notified bank as official liquidator, so the realisation is conducted by an institution that understands banking assets. Sections 41 and 41A require a preliminary report within two months and a notice calling for claims. Section 42 empowers the High Court to decide all claims.

Section 43A gives depositors a preference, and its terms are the most revealing provision in this Part. After the general preferential payments, the liquidator must pay within three months, first to every savings bank depositor and then to every other depositor, two hundred and fifty rupees or the balance at his credit, whichever is less, in priority to all other debts, with the proviso that a person who is a depositor in both capacities takes two hundred and fifty rupees in all. Only after that are the remaining assets distributed pro rata among general creditors and the depositors for their balances.

So the depositor's journey has two exits. The good one is section 45, where he is transferred to a solvent bank and paid in full. The bad one is section 38, where he receives two hundred and fifty rupees quickly, up to five lakh rupees from the Corporation, and a pro rata share of whatever the liquidator realises for the balance.

Prevention, read backwards from the journey

Stop him reaching stage four, which means resolution rather than liquidation, and that is what section 45 does. The amendment of 2020 removing the need for a prior moratorium is a preventive measure in itself, because it allows the Reserve Bank to act earlier without first freezing the depositors it is trying to protect.

Stop him reaching stage three, which means early intervention: the Prompt Corrective Action framework with its thresholds on capital adequacy, net non performing assets and leverage; the removal powers in sections 36AA to 36ACA; and honest asset classification under the income recognition and provisioning norms made under section 35A, since a bank that can defer recognition can hide a loss until it is fatal.

What actually happened to the depositors of a bank that reached stage three

The journey described above has been travelled, and Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645, decided on 28 August 2006, is the reported case. A moratorium was imposed on Ganesh Bank of Kurundwad and advertised on 7 January 2006. The Federal Bank submitted a proposal the very next day, 8 January 2006, and the Reserve Bank prepared a scheme of amalgamation under section 45(4).

The bank and its shareholders challenged the scheme, objecting to the speed, to the adequacy of consultation and to the extinction of their interest. The Supreme Court dismissed the challenge and upheld the amalgamation, holding that once a moratorium is imposed the Reserve Bank is under a duty to prepare a scheme of reconstruction or amalgamation, and that a scheme merging a weak bank into a strong one in the interests of the weak bank's depositors is exactly what section 45 is for.

Conclusion. Followed through the depositor's money, the winding up provisions of the Banking Regulation Act stop looking like a code and start looking like a last resort that the system is designed never to reach. Section 38 is mandatory in form, section 39 puts the regulator in charge of the liquidation, and section 43A gives depositors a priority, but the priority is two hundred and fifty rupees fixed in 1960, and the real protection is deposit insurance of five lakh rupees payable within ninety days under a section inserted in 2021.

That is why every significant failure of the last twenty years, Global Trust Bank in 2004, Yes Bank in March 2020, Lakshmi Vilas Bank in November 2020 and the Punjab and Maharashtra Co-operative Bank in January 2022, was resolved by a scheme under section 45 and not by a winding up. The systematic measures for preventing winding up are therefore best understood as attempts to stop the depositor moving from one stage of that journey to the next: entry control and governance at the first, prudential floors at the second, early intervention and honest asset classification at the third, and a resolution power that can be used without freezing depositors at the fourth. The 2020 amendment, which allows a scheme to be prepared without a moratorium, is the clearest illustration, because it removed the one step in the sequence that injured the depositors the section exists to protect.

(a) Good lending principles and lending to the poor

The canons of lending are safety, liquidity, profitability, purpose, diversification and, in India, the national interest. Safety means the borrower must be able to repay from the cash flow of the activity financed, security being a second line and not the first. Liquidity means the bank's assets must mature in a pattern that lets it meet demand deposits, since it borrows short and lends long. Profitability means the spread must cover the cost of funds, the operating cost and the expected loss. Purpose means the end use must be identified and verified, because a loan for one purpose diverted to another is the commonest route to default. Diversification means spreading exposure across borrowers, sectors and regions.

In practice appraisal is expressed as the five Cs, character, capacity, capital, collateral and conditions, and the ordering matters: a bank that lends on collateral without appraising capacity discovers on default that the security realises a fraction of the debt.

Priority sector norms require a stated proportion of adjusted net bank credit to go to agriculture, micro, small and medium enterprises, education, housing, social infrastructure, renewable energy and weaker sections, with sub targets for small and marginal farmers and for weaker sections, and shortfalls are placed with development institutions. Related measures include the basic savings bank deposit account with simplified know your customer requirements, the accounts opened under the Pradhan Mantri Jan Dhan Yojana from 2014, the licensing of small finance banks and payments banks from 2015 as differentiated institutions under section 22, and the regulation of microfinance lending, where the Reserve Bank's directions of 2022 replaced institution specific caps with a common indebtedness based limit on repayment obligations as a proportion of household income.

A credit card creates a tripartite arrangement and a line of credit. The issuer contracts with the cardholder to pay merchants on his instruction and to be reimbursed; it contracts separately with the merchant establishment to accept the card and pay the merchant less a discount. The cardholder is the issuer's debtor from the moment the issuer pays, so the relationship is loan and not payment out of the customer's own funds. The consequences are that the interest and default charges are the issuer's, that recovery is a debt recovery governed by the Reserve Bank's Fair Practices Code and by its directions on recovery agents, and that a dispute with the merchant does not by itself discharge the cardholder unless the scheme rules provide a chargeback.

(c) Multifunctional banks: growth and legal issues

A multifunctional or universal bank is one that combines commercial banking with investment banking, insurance, mutual funds, custodial services and merchant banking, usually through subsidiaries. The Indian model is the financial conglomerate: the bank itself is licensed under section 22 of the Banking Regulation Act, and the other businesses are carried on by subsidiaries or associates regulated by other regulators.

The statutory foundation and its limits should be given precisely. Section 6(1) lists the forms of business a banking company may engage in, and it is generous, covering the discounting of bills, the issue of letters of credit, dealing in foreign exchange, the provision of safe deposit vaults, acting as agent, underwriting and much else, with section 6(1)(o) allowing the Central Government to notify further forms as lawful. But section 6(2) forbids a banking company to engage in any form of business other than those referred to, and section 8 prohibits trading in goods except in connection with the realisation of security. Section 19 restricts the nature of subsidiary companies and limits the holding of shares in any company, whether as pledgee, mortgagee or absolute owner, to a stated proportion.

The fourth is "too big to fail", the concern that a conglomerate whose failure would be systemic enjoys an implicit guarantee and therefore takes more risk. The Reserve Bank's answer is the framework for domestic systemically important banks, under which such banks carry an additional capital surcharge.

A closing observation earns the last mark. The direction of travel in India has been towards more functional variety within a licensed bank, not less, but the statutory boundary is still the 1949 list in section 6, which is why every genuinely new activity has needed either a notification under section 6(1)(o) or a subsidiary.

(d) Automated teller machines and the use of the internet

An automated teller machine is a delivery channel, not a new legal relationship. A withdrawal at one is a demand under the Joachimson mandate made through a machine and authenticated by a personal identification number, and the debit is authorised by that use. The card is not a negotiable instrument.

Internet and mobile banking add two things. Authentication is regulated, the Reserve Bank having required additional factor authentication for card not present transactions, which is why an Indian online card payment carries a second step that many foreign systems do not. And jurisdiction becomes live, since customer, server and beneficiary may be in different places; section 75 of the Information Technology Act, 2000, asserts extraterritorial application where the contravention involves a computer resource located in India.

The remedy has been simplified. The Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, merged the Banking Ombudsman Scheme, 2006, the Ombudsman Scheme for Non Banking Financial Companies, 2018, and the Ombudsman Scheme for Digital Transactions, 2019, into one jurisdiction neutral scheme on a "one nation one ombudsman" basis, with a Centralised Receipt and Processing Centre at Chandigarh and a single online portal. A customer no longer has to work out which scheme and which territorial ombudsman covers a digital complaint.

In Syndicate Bank v. Vijay Kumar, (1992) 2 SCC 330, the Supreme Court characterised the banker's general lien as an implied pledge, holding that fixed deposit receipts deposited with a letter of authority could be realised and appropriated. The characterisation is the point of the case: a pledgee may sell after reasonable notice under section 176 of the Contract Act, whereas a bare lien confers only a right to retain, and a right to retain is worth little against a borrower who has nothing else.

Set off. The right to combine two or more accounts of the same customer, held in the same right, and to strike a single balance. It requires mutuality and debts that are due and certain. It does not operate between a personal account and a trust or executorship account, nor against a contingent liability, nor ordinarily against a fixed deposit before maturity unless taken as security, and notice is generally required before the bank combines accounts and returns cheques.

The authorities these notes turn on

On good lending, the case that governs what a bank may actually charge is Central Bank of India v. Ravindra, (2002) 1 SCC 367, decided on 18 October 2001 by a Constitution Bench. The loan carried interest at eleven per cent with quarterly rests on 31 March, 30 June, 30 September and 31 December, and the question was whether the compounded interest became part of the principal for section 34 of the Code of Civil Procedure, 1908.

The Court held that a contract for interest with rests capitalises the interest, so principal and accrued interest together form the principal sum adjudged at the date of suit; but that interest on interest cannot be capitalised, being against public policy, and that penal interest may be charged only once for a period of default and cannot be capitalised at all. It also recorded that section 21A of the Banking Regulation Act, 1949, removes the court's power to reopen a bank transaction as charging excessive interest. Good lending practice is therefore constrained by law and not merely by prudence.

Conclusion. The five notes divide into the law of the bank's own position and the law of the channels through which it now does business. On the first, the canons of lending and the banker's lien, set off and appropriation are the oldest material in the syllabus, and both have been overtaken by statute: section 21 of the Banking Regulation Act converts lending policy into binding direction, and the Act of 2002 converts the right to retain into a right to sell without a court.

On the second, cards, automated teller machines and internet banking show a subject whose operative rules are made by the regulator. The Negotiable Instruments Act does not apply to a card at all; the customer's protection against an unauthorised electronic debit comes from directions of 6 July 2017; compensation for a failed transaction comes from directions of September 2019; and the forum comes from the Integrated Ombudsman Scheme of 2021. The multifunctional bank sits between the two, because it is the point at which the 1949 list of permitted businesses in section 6, and the restriction on subsidiaries in section 19, meet a market that expects a bank to sell insurance, mutual funds and securities services. That collision, between an enumerated powers statute of 1949 and a conglomerate financial market, is the single best subject for a critical paragraph anywhere in this syllabus.

For full marks, cover: organise the three heads as the Reserve Bank's three relationships, with the public, with the Government and with the banks, because that arrangement explains why the same institution does all three and why its independence is contested; give the sections throughout; and on the third head make the point that decides the mark, namely that the bank rate has ceased to be an instrument and survives as a legal benchmark, its policy work having passed to a statutory committee under Chapter III F.

(The wider version of this question, which adds exchange control and the monopoly of currency notes, is set on the other paper in this scan and is answered there through the Bank's three statutory monopolies.)

(a) Regulation of currency: the relationship with the public

Section 22 confers the sole right to issue bank notes in India. Section 23 requires the issue to be conducted through a separate Issue Department whose assets are kept apart from the Banking Department, so the note liability always has identifiable cover. Section 24 fixes the denominations, up to a ceiling of ten thousand rupees. Section 25 requires the design, form and material to be approved by the Central Government on the recommendation of the Central Board.

One rupee notes and all coins are outside the monopoly, being issued by the Central Government under the Coinage Act, 2011, and put into circulation only through the Bank under section 38. The monopoly is of bank notes, not of legal tender.

Section 33 fixes the cover under the minimum reserve system introduced in 1957: the assets of the Issue Department must include gold coin, gold bullion and foreign securities of not less than two hundred crore rupees in aggregate, of which gold is not less than one hundred and fifteen crore rupees. The proportional reserve system it replaced required forty per cent cover in gold and sterling, so the size of the note issue ceased to depend on a metallic proportion.

(b) Banker to the Government and bankers' bank

The relationship with the Government is expressed as a duty in section 20 and a right in section 21, and the pairing is the point. Section 20 obliges the Bank to accept money for the account of the Central Government, to make payments up to the credit balance, and to carry out its exchange, remittance and other banking operations, including the management of the public debt. Section 21 entitles the Bank to that business, requiring the Government to entrust it with all its money, remittance, exchange and banking transactions in India and to deposit its cash balances with the Bank free of interest. Section 21A extends the arrangement to the States by agreement.

Three consequences follow. The Bank manages the public debt, conducting the auctions of dated securities and treasury bills and maintaining the ownership records. It provides Ways and Means Advances, temporary accommodation repayable within three months to bridge mismatches between receipts and payments, limited in amount by agreement. And since the Fiscal Responsibility and Budget Management Act, 2003, it may not subscribe to primary issues of Central Government securities, which ended automatic monetisation of the deficit.

The companion requirement is the statutory liquidity ratio in section 24 of the Banking Regulation Act, 1949, requiring a percentage of demand and time liabilities to be held in cash, gold or unencumbered approved securities, subject to a ceiling of forty per cent. The two ratios do different work: the cash reserve ratio drains liquidity to the central bank, the statutory liquidity ratio compels the holding of safe assets. At the policy of August 2026 the cash reserve ratio stands at three per cent and the statutory liquidity ratio at eighteen per cent.

The Bank is also lender of last resort, under section 17(4) for advances to scheduled banks against eligible security and, in emergency, under section 18, which permits lending to any bank or person against security the Bank would not ordinarily accept where it considers it necessary in the interest of trade, commerce, industry or agriculture. Section 18 is the true last resort power because it operates outside the ordinary collateral rules. And it is the settlement agent for the banking system under the Payment and Settlement Systems Act, 2007, the section 42 accounts being where interbank obligations settle.

What replaced it is Chapter III F, inserted by the Finance Act, 2016, and this is the substance of the modern answer. Section 45ZA requires the Central Government, in consultation with the Bank, to determine the inflation target in terms of the consumer price index once every five years; it is four per cent with a band of two per cent either way.

Section 45ZB constitutes the six member Monetary Policy Committee, the Governor as ex officio chairperson with a casting vote, the Deputy Governor in charge of monetary policy, an officer of the Bank nominated by the Central Board, and three members appointed by the Central Government. The Committee must meet at least four times a year. Section 45ZN obliges the Bank to report to the Central Government, with reasons and remedial action, if the target is missed for three consecutive quarters. At the meeting of 5 August 2026 the Committee held the repo rate at 5.25 per cent with a neutral stance.

The instruments should be named: the repo rate as the policy rate; the standing deposit facility, introduced in April 2022, as the floor of the corridor, absorbing liquidity without the Bank giving collateral; the marginal standing facility as the ceiling; and open market operations with the two reserve ratios as the quantitative tools.

On the relationship with the banks, its severity was settled in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, decided on 7 March 1962. The Palai Central Bank Ltd., the largest bank in Kerala with twenty five branches, was wound up on the Reserve Bank's opinion that it could not pay its depositors in full. A director's Article 14 challenge to sections 38 and 39 of the Banking Companies Act, 1949, failed, the Court holding banks to be a class apart because they trade on money taken from the public.

The two cases together define the Bank's constitutional position. Towards the public it exercises a power so large that its outer edge had to be tested by a Constitution Bench and produced a dissent; towards the banks it holds a power the courts have declined to second guess since 1962. Neither power is constitutionally entrenched, because section 7 of the Reserve Bank of India Act, 1934, still allows the Central Government to direct the Bank in the public interest after consulting the Governor.

For full marks, cover: organise the whole answer around the licence, because the licence is what turns a company that lends into a bank, and both limbs of the question meet in it; take entry first, that is the definition in section 5(b) and the licence in section 22 with its conditions; then continuance, that is what a licensed bank may and may not do with deposits and advances; then exit, that is cancellation under section 22(4) and compulsory acquisition under sections 36AE to 36AJ; and end on the constitutional case that fixed the limits of acquisition.

(The same question is set on the 2015 paper in Q.P. Code 15881, where it is answered definition first. Here the licence is the spine.)

Section 22(1) then provides that no company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank. The licence is a condition precedent to the business, not an incident of incorporation, and a company with banking objects that has not obtained one cannot lawfully take a deposit.

Section 22(3) lists what the Reserve Bank must be satisfied of, and every condition is expressed in terms of the depositor. That the company is or will be in a position to pay its present and future depositors in full as their claims accrue; that its affairs are not being and are not likely to be conducted in a manner detrimental to their interests; that the general character of its proposed management will not be prejudicial to the public interest or to depositors' interests; that it has adequate capital structure and earning prospects; that the public interest will be served by the grant; and that the grant would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth. Section 22(3A) adds conditions for a company incorporated outside India, including reciprocity.

Deposits are demand deposits, that is current and savings accounts, or time deposits, that is fixed and recurring deposits, and the classification determines the net demand and time liabilities on which the cash reserve and statutory liquidity ratios are computed. The Banking Laws (Amendment) Act, 2025, changed one practical incident with effect from 1 November 2025: a depositor may now nominate up to four persons, simultaneously with stated shares totalling one hundred, or successively. The nominee still holds for those entitled under succession law.

On the advances side the relationship reverses and the bank becomes creditor, and the forms are the cash credit or overdraft against hypothecated stock and book debts, the term loan, the discounting of bills, which is a purchase and makes the bank a holder in due course, and non fund based facilities such as guarantees and letters of credit.

Exit, first route: cancellation

Section 22(4) provides for cancellation and its grounds mirror the grant. The Reserve Bank may cancel if the company ceases to carry on banking business in India; if it fails to comply with any condition imposed under section 22(1); or if at any time any of the conditions in sections 22(3) and 22(3A) is not fulfilled. Before cancelling for non compliance the Bank must give the company an opportunity of taking the necessary steps, unless it considers that delay would be prejudicial to depositors or the public interest. Section 22(5) gives an appeal to the Central Government, whose decision is final.

Section 36AE(1) sets the conditions. Where the Reserve Bank is satisfied that a banking company has failed to comply with directions given under section 21 or section 35A about its policy on advances, or is being managed in a manner detrimental to depositors' interests, and that an order of moratorium under section 45 would not be adequate, it may report to the Central Government. The Central Government may then, after consultation with the Bank and after giving the company a reasonable opportunity of showing cause, acquire the undertaking by notified order stating the grounds.

Section 36AF empowers the Central Government to make a scheme for the transfer, dealing with vesting, employees and the constitution of the transferee. Section 36AG provides for compensation to shareholders on the principles in the Fifth Schedule. Section 36AH constitutes a Tribunal, presided over by a person who is or has been a judge of a High Court or the Supreme Court, to determine disputes about the amount, and section 36AJ excludes the ordinary jurisdiction in matters the Tribunal is to decide.

The nationalisation was re-enacted in 1970 in a form that met those objections, and six more banks were taken over in 1980. Both statutes remain in force and both were amended by the Banking Laws (Amendment) Act, 2025, which allows the boards of public sector banks to fix the remuneration of their statutory auditors, a power previously exercised by the Reserve Bank in consultation with the Central Government, and requires unclaimed shares, interest and bond redemption money, and not only unclaimed dividends, to be transferred to the Investor Education and Protection Fund.

In practice the acquisition power has been displaced by section 45. Global Trust Bank in 2004, Yes Bank in March 2020, Lakshmi Vilas Bank in November 2020 and the Punjab and Maharashtra Co-operative Bank in January 2022 were all dealt with by reconstruction or amalgamation. The reason is economic: acquisition requires the State to pay compensation and then own a bank, whereas a scheme moves the burden to the banking system and to the incoming investor.

Exit: Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, must be worked out and its compensation reasoning given, because that is the half most answers omit. A shareholder and director challenged the nationalisation of fourteen banks. The Court struck the Act of 1969 down on two grounds. It barred the named banks from carrying on banking business while leaving every other bank, including foreign banks, entirely free, which was discrimination. And the compensation provisions specified the components to be valued in a way that excluded whole classes of asset, notably goodwill and unexpired long term leases, and adopted principles that could not produce true value, so what was offered was not compensation at all.

The decision also gave Indian law the effect test, that State action is judged by its direct operation on fundamental rights and not by the object the legislature declared, displacing the compartmentalised reading of the freedoms in A.K. Gopalan v. State of Madras, AIR 1950 SC 27. The nationalisation was re-enacted in 1970 in a form that met both objections. The practical lesson is that the acquisition power in sections 36AE to 36AJ is real but expensive, which is why section 45 has displaced it.

For full marks, cover: take the relationship through its life, opening, operation, dispute and closure, because the four limbs of this question are simply four moments in that life; at the opening, who is a customer and what character the relationship has; in operation, the duties on each side and the rights that answer them; at the point of dispute, section 131 and the paying banker's protections, which is where the litigation actually is; and at closure, the three ways the relationship ends.

(The same question is set on the other paper in this scan and is answered there through the duties. Here the life cycle is the plan, so that no two pages of this folder repeat one another.)

Opening is now also a regulatory act. The know your customer directions issued under section 35A of the Banking Regulation Act, 1949, and under the Prevention of Money Laundering Act, 2002, require identification and verification of the customer and of the beneficial owner. After Justice K.S. Puttaswamy (Retd.) v. Union of India, (2019) 1 SCC 1, which struck down section 57 of the Aadhaar Act, a private bank cannot compel Aadhaar authentication; the Aadhaar and Other Laws (Amendment) Act, 2019, permits it voluntarily with alternatives. Failure at this stage is the commonest head of negligence when a collecting bank later claims the protection of section 131.

Operation: duties, and the rights that answer them

The bank's primary duty is to honour the mandate. Section 31 of the Negotiable Instruments Act, 1881, requires the drawee of a cheque, having sufficient funds properly applicable, to pay when duly required and to compensate the drawer for any loss caused by default. The duty is owed to the drawer alone; the payee has no privity. Wrongful dishonour sounds in substantial damages for a trader without proof of special damage, on Marzetti v. Williams, (1830) 1 B & Ad 415, and Rolin v. Steward, (1854) 14 CB 595.

Other operating duties are to render accounts, to act on standing instructions and countermands, to exercise care as bailee of articles in safe custody, and to take care of a locker. On the last, Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, rejected the contention that a locker hirer is a mere licensee, held that the customer is entirely at the mercy of the bank because the locker cannot be opened without the bank's key, and directed the Reserve Bank to frame rules, which it did in August 2021 with a model agreement and a liability of one hundred times the annual rent for loss caused by the bank's negligence, fire, theft or employee fraud.

Statutory duties run alongside: nomination under sections 45ZA, 45ZC and 45ZE of the Banking Regulation Act, now permitting up to four nominees from 1 November 2025 under the Banking Laws (Amendment) Act, 2025; and the reporting of accounts unoperated for ten years under section 26, with transfer of the balance to the Depositor Education and Awareness Fund under section 26A, the depositor's right to claim from the bank being preserved.

The four conditions are good faith and absence of negligence; receipt for a customer; a crossing already on the instrument; and receipt as agent and not as holder for value. Negligence is what decides the cases, and the heads are opening the account without proper introduction or know your customer compliance; collecting into a personal account a cheque payable to the customer's employer or to a public body; ignoring an irregular or missing indorsement; and collecting an account payee cheque into another person's account.

Explanation I provides that a banker receives payment for a customer even though it credits the account before receiving payment, so the practice of giving immediate credit does not by itself turn the bank into a holder for value. Explanation II, added by the amendment of 2002 in force from 6 February 2003, adapts the section to truncation, imposing a duty to verify the prima facie genuineness of a truncated cheque and any fraud, forgery or tampering apparent on its face that can be verified visually.

By operation of law. Death ends the mandate, an agency being determined by the death of the principal under section 201 of the Contract Act, and the balance passes to the legal representatives subject to any nomination. Insanity on notice and insolvency have the same effect. Winding up of a corporate customer ends the mandate on the appointment of a liquidator. A change in the constitution of a firm closes the account as constituted and Clayton's case then runs from that date, which is why a bank rules off when a partner dies or a surety withdraws.

By act of a third party. A garnishee order under Order XXI Rule 46 of the Code of Civil Procedure, 1908, a notice under section 226(3) of the Income Tax Act, 1961, or an attachment under the Prevention of Money Laundering Act each freezes the balance; a notice of assignment obliges the bank to pay the assignee; and notice of a trust or an adverse claim puts it on inquiry.

Dormancy is not closure. The debt survives the transfer to the Depositor Education and Awareness Fund, which is Foley v. Hill applied at the end of the relationship exactly as at the beginning: the custodian changes and the debt does not.

For full marks, cover: answer this one by comparing the bank code with the general law of corporate insolvency, because the comparison explains every feature of Part III and is the kind of analysis an LLM paper rewards; show that the Insolvency and Bankruptcy Code, 2016, deliberately excludes banks and what follows from that; then take the four points on which the bank code differs from the general law, who initiates, whether the court has discretion, who liquidates, and who is preferred; then the alternatives in sections 44A and 45; and read prevention as the reason the code is hardly used.

(This question is set in nearly identical terms on eight of the eleven papers in this folder, and each page here takes it on a different plan. The other three plans are the statutory machinery in sequence, the choice between the resolution tools, and the depositor's journey through a failure.)

None of those premises holds for a bank, and the Code says so. Part II applies to corporate persons but a financial service provider is excluded by the definitions in section 3. Section 227 permits the Central Government, in consultation with the financial sector regulators, to notify categories of financial service providers for insolvency and liquidation proceedings; the power has been used for non banking financial companies and housing finance companies under rules of 2019, first applied to Dewan Housing Finance Corporation, and never for banks. The Financial Resolution and Deposit Insurance Bill, 2017, which would have created a Resolution Corporation with power to resolve banks, was withdrawn in August 2018 after public objection to its bail in provisions.

So the resolution of a failing Indian bank rests on Part III of the Banking Regulation Act, 1949, a chapter drafted before the general law of insolvency was reformed twice over. That is the fact from which the rest of the answer follows.

Section 38(1) of the Banking Regulation Act says the opposite: the High Court shall order winding up if the bank is unable to pay its debts or if the Reserve Bank applies. There is no just and equitable discretion and no room to give the company time. The reason is that a bank which cannot pay must be stopped from taking more deposits at once, and a discretion is a delay.

Thirdly, who liquidates. Under the Code a licensed insolvency professional is appointed. Under section 39 the Reserve Bank, the State Bank of India or another notified bank is the official liquidator. Putting the regulator in charge is unusual and is justified by the specialised nature of banking assets and by the regulator's existing knowledge of the institution.

Fourthly, who is preferred. The Code's waterfall in section 53 puts insolvency costs and workmen's dues first and secured creditors who have relinquished security next, with unsecured financial creditors below them. Section 43A of the Banking Regulation Act prefers depositors, requiring the liquidator to pay within three months, first to each savings bank depositor and then to each other depositor, two hundred and fifty rupees or the balance at his credit, whichever is less, in priority to all other debts, before any pro rata distribution.

Section 38(3) lists the grounds on which the Reserve Bank may apply: failure of the minimum capital requirement in section 11, disentitlement under section 22, prohibition from receiving fresh deposits after an inspection under section 35(4)(a), and continued failure or contravention after notice. Sections 41 and 41A require a preliminary report and a notice calling for claims, and section 42 empowers the High Court to decide all claims. Section 44 permits voluntary winding up only on the Reserve Bank's certificate that the bank can pay in full.

The alternatives, which are what is actually used

Section 44A governs voluntary amalgamation: a scheme approved by a majority in number representing two thirds in value of the shareholders of each bank, dissentients paid the value of their shares, and sanction by the Reserve Bank.

Prevention, and why the code is a dead letter

The measures that prevent winding up are the ones that make section 45 usable in time, and they should be presented in that light.

Entry and governance. Licensing under section 22, whose conditions are all about the ability to pay depositors in full; the composition of the board under section 10A and whole time management under section 10B; and section 20, which prohibits lending to directors and to concerns in which they are interested, since connected lending has been the proximate cause of most Indian bank failures. The Banking Laws (Amendment) Act, 2025, raised the "substantial interest" threshold in section 5 from five lakh rupees to two crore rupees and extended co-operative bank directors' tenure from eight to ten years.

Prudential floors. Minimum capital and reserves under sections 11 and 12, the reserve fund under section 17, the restriction on dividends under section 15, the statutory liquidity ratio under section 24, the cash reserve ratio under section 42 of the Reserve Bank of India Act, 1934, and the Basel III capital, leverage and liquidity requirements.

Why the general insolvency law was kept away, and what happens instead

The proposition that banks may be treated differently from other companies is not an assumption; it was decided in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, on 7 March 1962. The Palai Central Bank Ltd., the largest bank in Kerala with twenty five branches and about fifteenth in India, was wound up on the Reserve Bank's opinion that it could not pay its depositors in full.

A director challenged sections 38 and 39 of the Banking Companies Act, 1949, under Article 14, on the footing that banking companies were denied the procedural protections other companies enjoy and that the Reserve Bank had been given a broad and unchecked power. The Supreme Court upheld the sections. Banks are a class apart because they trade on deposits taken from the public, and differential treatment that protects depositors and financial stability is a permissible classification.

Conclusion. Compared with the general law, the winding up provisions of the Banking Regulation Act are the work of a legislature that did not trust creditors to protect themselves. The Reserve Bank, not a creditor, initiates; the High Court has no discretion once inability to pay is certified; the regulator itself liquidates; and depositors, not secured creditors, take the statutory preference. The Insolvency and Bankruptcy Code, 2016, which rests on precisely the opposite premise that the creditors' commercial wisdom should decide, excludes banks for that reason, and the attempt to build a modern resolution regime for them in the Bill of 2017 was abandoned.

The result is that Indian bank resolution runs on a chapter of 1949 with two important repairs: the amendment of 2020, which allows a scheme under section 45 without a prior moratorium, and the deposit insurance reforms of 2020 and 2021, which put five lakh rupees behind every depositor and made it payable in ninety days. Those two changes, and not the winding up code, are what protect a depositor today, and the two hundred and fifty rupee preference in section 43A, untouched since 1960, is the proof.

For full marks, cover: three of five are required, so each note is a page and worth a little over eight marks; all five are set out. On (a) treat the canons as a hierarchy and then show where the law compels a departure from them; on (b) the two acts, when each is required and what is lost by failing to make it, which is the examinable part; on (c) the statutory boundary in sections 6, 8 and 19 and the four legal problems a conglomerate creates; on (d) the liability rules; on (e) the three self help rights and their place in the modern ladder of remedies.

"Lending to poor masses" is where the law compels a departure from the hierarchy, and that is the legal content of the note. Section 21 of the Banking Regulation Act, 1949, empowers the Reserve Bank to determine the policy in relation to advances and to give directions binding on every banking company as to the purposes for which advances may be made, the margins to be maintained, the maximum amount and the rate of interest. Priority sector lending, differential rates of interest, the basic savings bank deposit account and the simplified know your customer regime for small accounts all rest on that section.

The priority sector framework requires a stated proportion of adjusted net bank credit to go to agriculture, micro, small and medium enterprises, education, housing, social infrastructure, renewable energy and weaker sections, with sub targets for small and marginal farmers and for weaker sections, shortfalls being placed with development institutions. Alongside it sit the accounts opened under the Pradhan Mantri Jan Dhan Yojana from 2014, the licensing of small finance banks and payments banks from 2015 under section 22, and the microfinance directions of 2022, which replaced institution specific interest caps with a common limit on a household's repayment obligations as a proportion of its income.

Section 61 requires presentment for acceptance where a bill is payable after sight, because time cannot begin to run until the bill has been seen, and where the bill expressly stipulates that it shall be presented for acceptance. In every other case the holder may simply present for payment at maturity. Section 62 applies the same rule to a promissory note payable at a certain period after sight, which must be presented to the maker for sight. Section 63 allows the drawee forty eight hours, exclusive of public holidays, to consider whether to accept.

Presentment for payment is governed by sections 64 onwards. Section 64 requires the instrument to be presented for payment to the maker, acceptor or drawee by or on behalf of the holder, in default of which the other parties are not liable to the holder. Section 65 requires presentment during the usual hours of business and, for a banker, within banking hours. Section 66 fixes maturity as the time of presentment for instruments payable after date or after sight. Section 68 requires presentment at the proper place where one is specified. Section 74 requires an instrument payable on demand to be presented within a reasonable time of its receipt by the holder.

The consequence of failing to present is the examinable point. The parties secondarily liable, that is the drawer of a bill and the indorsers, are discharged, while the party primarily liable, the maker of a note or the acceptor of a bill, remains bound. A holder who sits on an instrument therefore loses precisely the parties he took it for, since indorsers are usually taken as additional security. In the case of a cheque the rule has a further modern application: presentment within the period of validity is a condition of a prosecution under section 138, and the notice and limitation steps in section 138's proviso and in section 142 run from dishonour, so a holder who delays destroys the criminal remedy as well as the civil one.

(c) Multifunctional banks: growth and legal issues

A multifunctional or universal bank combines commercial banking with investment banking, insurance, mutual funds, custodial and merchant banking services, and the Indian model is the conglomerate: the bank is licensed under section 22 of the Banking Regulation Act and the other businesses are conducted through subsidiaries or associates supervised by other regulators.

Four legal problems follow. Regulatory gaps: a group spanning banking, insurance and securities answers to the Reserve Bank, the Insurance Regulatory and Development Authority and the Securities and Exchange Board, and no one of them sees the whole; India's answers have been consolidated supervision of financial conglomerates and coordination through the Financial Stability and Development Council constituted in 2010. Conflict of interest, where a bank lends to a company whose issue it underwrites or sells its group's products to its depositors, controlled by sections 19 and 20 and by directions on the marketing of third party products. Contagion, addressed by the limits in section 19 and by the large exposures framework. And "too big to fail", addressed by the framework for domestic systemically important banks, which imposes an additional capital surcharge on them.

The critical observation is that the boundary is still the list drafted in 1949. Every genuinely new activity a bank has taken up has required either a notification under section 6(1)(o) or a subsidiary under section 19, which is a considerable weight to place on an enumerated powers provision written before any of these markets existed.

Internet and mobile banking add authentication and jurisdiction. The Reserve Bank has required additional factor authentication for card not present transactions, and section 75 of the Information Technology Act, 2000, asserts extraterritorial application where the contravention involves a computer resource located in India. The legality of the electronic instruction itself rests on sections 4 and 5 of that Act, which satisfy statutory requirements of writing and signature.

The forum is now single. The Reserve Bank Integrated Ombudsman Scheme, 2021, in force from 12 November 2021, merged the Banking Ombudsman Scheme, 2006, the Ombudsman Scheme for Non Banking Financial Companies, 2018, and the Ombudsman Scheme for Digital Transactions, 2019, into one jurisdiction neutral scheme on a "one nation one ombudsman" basis, with a Centralised Receipt and Processing Centre at Chandigarh.

The closing point is that this is regulator made law. Nothing in the Negotiable Instruments Act or the Contract Act, and no decision of the Supreme Court, gives a customer his protection against an unauthorised electronic debit. It comes from directions under section 35A of the Banking Regulation Act and under the Payment and Settlement Systems Act, 2007.

Set off is the right to combine two or more accounts of the same customer held in the same right and strike one balance. It requires mutuality and debts due and certain, does not operate between a personal account and a trust or executorship account, does not reach a contingent liability, and does not ordinarily reach a fixed deposit before maturity unless taken as security. Notice is generally required before combining accounts and returning cheques.

Appropriation is governed by sections 59 to 61 of the Contract Act, giving the choice first to the debtor at the time of payment, then to the creditor, and in default applying payments in order of time; in a running account the rule in Devaynes v. Noble, (1816) 35 ER 781, Clayton's case, applies, the first item on the debit side being discharged by the first on the credit side. Its practical importance is in guarantees, where failure to rule off an account on the retirement or death of a surety may discharge the guaranteed debt by later credits.

The case law these notes require

On good lending, Central Bank of India v. Ravindra, (2002) 1 SCC 367, decided on 18 October 2001 by a Constitution Bench, decides what a bank may charge. A loan carried eleven per cent interest with quarterly rests on 31 March, 30 June, 30 September and 31 December. The Court held that a contract for interest with rests capitalises the interest, so that principal and accrued interest form the principal sum adjudged under section 34 of the Code of Civil Procedure, 1908; but that interest on interest cannot be capitalised, being contrary to public policy, and that penal interest may be charged only once for one period of default. Section 21A of the Banking Regulation Act, 1949, meanwhile bars a court from reopening the transaction as excessive.

On the banker's right over securities, Syndicate Bank v. Vijay Kumar, (1992) 2 SCC 330, characterises the general lien as an implied pledge, so that fixed deposit receipts deposited with a letter of authority may be sold under section 176 of the Contract Act after reasonable notice rather than merely retained.

Conclusion. The five notes fall on either side of one line. The law of the instrument, which is presentment here, is old, precise and largely unchanged: sections 61 to 76 of the Negotiable Instruments Act allocate the risk of delay by discharging the parties secondarily liable, and the rule has acquired a modern application in the timetable of a prosecution under section 138.