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MA0037 — Banking Related Laws and Practices

MA0037 — Banking Related Laws and Practices


Summer 2013

Master of Business Administration- MBA Semester 3

MA0037 — Banking Related Laws and Practices — 4 Credits

(Book ID: B1618)

Assignment- 60 marks

Note: Answer all questions. Kindly note that answers for 10 marks questions should not exceed 400 words. Each question is followed by evaluation scheme.


Q1. Define the term banking. What are the permitted businesses for a banking company as per BR Act 1949?

( explanation of term Banking – 4 marks; features of business of banking — 6 marks) 10 marks


Answer : Banking :

In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit.

A company’s financial dealings with an institution that provides business loans, credit, savings and checking accounts specifically for companies and not for individuals. Business banking is also known as commercial banking and occurs when a bank, or division of a bank, only deals with businesses.


Main features of banking :

(i) Dealing in money:

The banks accept deposits from the public and advancing them as loans to the needy people. The deposits may be of different types current, fixed, sav­ings, etc. accounts. The deposits are accepted on various terms and conditions.


Q2. When is a negotiable instrument considered as dishonored? What steps should be taken by the holder?

( explanation of Negotiable Instrument-2 marks; features of dishonoring a negotiable instrument-5 marks; action to be taken by the holder- 3 marks) 10 marks

Answer : Negotiable instrument :

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, without conditions in addition to payment imposed on the payer. Cheque or promissory notes are common examples.

Features of dishonoring a negotiable instrument :

1. Introduction:

If negotiable instrument is presented for acceptance, sight or payment before the acceptor, maker, drawer or other party liable thereon by or on behalf of the holder but such persons refused to accept it or to make payment upon it.


Q3. Certain goods of A were bailed with B. B omitted to lock up the goods bailed while he has taken care to lock up similar goods of his own. Who is liable to whom?

(bailee meaning- 3 marks; duties of bailee -7marks) 10 marks

Answer : It is the duty of bailee to take care the goods . He is liable to bailer.

Bailee  :

A person with whom some article is left, usually pursuant to a contract (called a “contract of bailment”), who is responsible for the safe return of the article to the owner when the contract is fulfilled. These can include banks holding bonds, storage companies where furniture or files are deposited, a parking garage, or a kennel or horse ranch where an animal is boarded. Leaving goods in a sealed rented box like a safe deposit box, is not a bailment, and the holder is not a bailee since he cannot handle or control the goods. His duties are to act in good faith he is bound to use extraordinary diligence in those contracts or bailments, where he alone receives the benefit, as in loans; he must observe ordinary diligence of those bailments, which are beneficial to both parties, as hiring; and he will be responsible for gross negligence in those bailments which are only for the benefit of the bailor, is deposit and mandate.


Duties of bailee :

1. To take reasonable care of the goods bailed:

It is the duty of the bailee to take reasonable care of the goods bailed as a man of ordinary prudence would, under similar circumstance, take care of his own goods of the same bulk, quality and value as the goods bailed.


Q4. Clayton’s case is considered to be one of the most essential legal decisions in banking laws that established the principle of the order of application of credits against debits, in running accounts like overdraft. Explain Clayton’s case. ( explanation of Clayton’s case- 7 marks; usage -3 marks) 10 marks

Answer : Explanation of Clayton’s case :

Definition :

UK’s 1816 case (Devaynes v. Noble) which set the precedent that funds withdrawn from an account are presumed to be debits from the funds deposited first-the first-in, first-out (FIFO) principle. This ruling, however, is not applicable to trustees who are presumed to draw their own money from mixed bank-accounts and not the trust money, no matter when it was deposited.

Rules :

“This is the case of a banking account where all the sums paid in form one blended fund, the parts of which have no longer any distinctive existence. Neither banker nor customer ever thinks of saying, this draft is to be placed to the account of the £500 paid in on Monday, and this other to the account of the £500 paid in on Tuesday. There is a fund of £1 ,000 tc draw upon, and that is enough.


Q5. Write about constitutional validity of the DRT Act.

( explain the DRT act-3 marks; explanation of constitutional validity DRT Act- 7 marks) 10 marks

Answer : DRT Act :

The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. For this the Debts Recovery Tribunal (Procedure) Rules 1993 were also drafted.

Constitutional validity of the DRT Act :

1. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the Act) is almost a decade old. As with any legislation breaking new floor, the Act may be challenged in numerous forum such as the High Courts for its summary nature, the ousting of the jurisdiction from the Civil Courts, the provisions which enable borrowers to move forward versus the financial institution or financial institution within the Debt Recovery Tribunals (DRT) and not surprisingly the latest problem towards the constitutional validity from the Act. Whatever may perhaps be, the Act of 1993 was a welcome phase taken through the legislature in ensuring speedy recovery of financial institution dues.


Q6. “Cooperative principles” means the cooperative principles specified in the First Schedule of the Multi-State Co-operatives Act, 2002. Explain cooperative principles.

( explanation of cooperatives- 4 marks; cooperative principles- 6 marks)

Answer :  Explanation of cooperatives :

A cooperative (“coop”), co-operative (“co-op”), or cooperative  is an autonomous association of persons who voluntarily cooperate for their mutual, social, economic, and cultural benefit. Cooperatives include non-profit community organizations and businesses that are owned and managed by the people who use its services (a consumer cooperative) or by the people who work there (a worker cooperative) or by the people who live there (a housing cooperative),


Cooperative as legal entity :

A cooperative is a legal entity owned and democratically controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employees.

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