Banking Law: Complete Notes

About this subject

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Banking Law (the law and practice of banking in India) runs from why banks exist and why the law watches them so closely, to newer questions such as card frauds, online banking and FinTech. Behind every deposit, cheque, loan and online transfer lies a legal relationship governed by statutes, Reserve Bank of India directions and court decisions.

Banking Law answers three questions:

1. Who may carry on the business of banking, and under whose control?
2. What rights and duties arise between a bank and the people who deal with it?
3. How does money move, and how is it recovered when a borrower does not pay?

Why a special legal framework? A bank takes the savings of the public and lends them to others. If a shop fails, its owner suffers; if a bank fails, thousands of ordinary depositors suffer and panic can spread to other banks. Hence special licensing, supervision and rules for banks. The subject runs through everyday practice, from cheque bounce cases to loan recovery, and is regularly tested in judiciary examinations, UGC NET, CLAT PG and university papers.

Evolution of Banking in India

Indigenous bankers and the hundi

Long before modern banks, India had indigenous bankers: sahukars, mahajans, sarrafs and chettiars. They accepted deposits, lent money and sent funds between towns through the hundi. They worked on personal trust and family reputation and were not regulated by any special law.

Modern banks

• Modern banking came with the European trading houses. The Bank of Hindostan (1770, Kolkata) is generally counted among the earliest banks of the modern type in India.
• The Presidency banks (Bank of Bengal, Bank of Bombay, Bank of Madras) were amalgamated in 1921 into the Imperial Bank of India, which after independence became the State Bank of India.
• Oudh Commercial Bank (1881): often described as one of the earliest commercial banks of limited liability managed entirely by Indians. Punjab National Bank followed in the 1890s at Lahore.
• The swadeshi movement of the early twentieth century produced Bank of India, Canara Bank, Indian Bank, Bank of Baroda and the Central Bank of India.

Many early banks were small and weak. Between 1913 and 1918, and again later, many failed and ordinary people lost their savings. The lesson: banking cannot be left to private freedom alone; it needs a central bank to watch over it and a special law to control it.

The central bank and the special law

• 1926: a Royal Commission, popularly the Hilton Young Commission, recommended a central bank.
• 1934: the Reserve Bank of India Act was passed; the Reserve Bank began working on 1 April 1935. It began as a privately owned shareholders' bank and was nationalised from 1 January 1949.
• March 1949: the Banking Companies Act, 1949 came into force. In 1966 it was renamed the Banking Regulation Act, 1949 and extended, with modifications, to co-operative banks. It is still the main code for regulating banks in India.

Social control and nationalisation

After independence the State wanted banking to serve national goals: banks had mostly lent to big industry and trade, and farmers, small businesses and villages received very little credit.

• 1968: social control of banks.
• July 1969: fourteen major commercial banks, each with deposits of at least ₹50 crore, nationalised.
• From 1975: Regional Rural Banks set up to carry credit to rural areas.
• April 1980: six more banks nationalised.

Aftermath: a fresh Ordinance and then the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 nationalised the same fourteen banks again, fixing in the Act itself the amount payable to each. The Twenty-fifth Amendment replaced "compensation" with "amount"; the Forty-fourth Amendment removed the right to property from the fundamental rights and placed it in Article 300A. The case now matters less for the right to property than for the effect test and for the history of the nationalised banks, which still exist under the 1970 Act.

Liberalisation and the system today

• 1991: liberalisation; the Narasimham Committee recommended a stronger, more competitive banking system.
• From 1993: new private sector banks licensed; prudential norms on capital, income recognition and bad loans introduced.
• Later: specialised banks with limited functions, small finance banks and payments banks.
• From 2017: many public sector banks merged; India today has 12 public sector banks.

The system today: public sector, private sector and foreign banks, small finance banks, payments banks, Regional Rural Banks and co-operative banks.

Why Banks Need Special Control

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The bank uses short-term deposits to make long-term loans: the heart of banking and the source of its danger. If all depositors demand their money on the same day, no bank can pay them all. A rumour of trouble can cause a run on the bank, which can destroy even a healthy bank and spread panic to others. Depositors cannot inspect a bank's books; they simply trust it, so the law protects that trust.

Further reasons:

• banks run the payment system (salaries, cheques, online transfers);
• banks pass the Reserve Bank's interest rate changes to borrowers and depositors;
• banks decide who gets credit, shaping agriculture, industry and small business.

Structure of regulation:

1. Entry is controlled by licensing.
2. Working is controlled by rules on capital, reserves, liquidity, lending and management, and by inspection and supervision.
3. Banks in trouble: the Reserve Bank and the Central Government have special powers to step in before depositors lose their money.

Deposits are insured up to ₹5 lakh per depositor in each bank under the Deposit Insurance and Credit Guarantee Corporation Act, 1961.

Main statutes: the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949; around them the State Bank of India Act, 1955, the bank nationalisation Acts of 1970 and 1980 and the Regional Rural Banks Act, 1976; then the Negotiable Instruments Act, 1881, the recovery laws and the Payment and Settlement Systems Act, 2007.

The Reserve Bank of India: Status and Functions

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Legal position

It is not a government department but a statutory body wholly owned by the Central Government, with its own legal personality and statutory powers. Created by statute and controlled by the State, it is "the State" under Article 12: its actions can be challenged in a writ petition, and it must act fairly, reasonably and within its powers.

Management

• Section 7: general superintendence and direction of its affairs vests in a Central Board of Directors.
• Section 8: the Board consists of the Governor, up to four Deputy Governors and other directors, all appointed or nominated by the Central Government.
• Section 7 also lets the Central Government give the Reserve Bank directions necessary in the public interest, but only after consultation with the Governor. This reflects the basic tension of central banking: independence to take unpopular decisions, yet answerability to an elected government.

Functions

1. Monetary policy

• The Preamble, amended in 2016: the primary objective of monetary policy is price stability, keeping in mind the objective of growth.
• Section 45ZA: the Central Government, in consultation with the Reserve Bank, fixes an inflation target once every five years. For April 2026 to March 2031 it is 4% consumer price inflation, with a band of 2% on either side.
• Section 45ZB: a six-member Monetary Policy Committee takes interest rate decisions such as the policy repo rate. The Governor chairs it and has a casting vote if votes are equal.

2. Issue of currency

Section 22: sole right to issue bank notes in India. Section 26: its notes are legal tender, so a creditor cannot refuse them in payment of a debt. Coins are issued by the Central Government; the Reserve Bank only puts them into circulation.

3. Banker to government

Sections 20 and 21: handles the Central Government's money and banking business and manages the public debt. Section 21A: may do the same for State Governments by agreement.

4. Banker's bank

Section 42: every scheduled bank keeps a minimum cash reserve with the Reserve Bank, the cash reserve ratio. The Reserve Bank lends to banks short of funds against eligible securities and, in a crisis, acts as lender of last resort, so that a solvent but temporarily illiquid bank does not collapse.

5. Regulation and supervision

• Banks: mostly under the Banking Regulation Act.
• Non-banking financial companies: under Chapter IIIB of the Reserve Bank of India Act. Under Section 45-IA, such a company cannot carry on the business of a non-banking financial institution without registration with the Reserve Bank.
• Payment systems: under the Payment and Settlement Systems Act, 2007.
• Foreign exchange: under the Foreign Exchange Management Act, 1999.
• Customer protection: through its Ombudsman Scheme.

The Banking Regulation Act, 1949

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Meaning of banking

Elements:

1. accepting deposits of money;
2. from the public, not merely from friends, relatives or members;
3. for lending or investment;
4. repayable on demand (savings account) or after a fixed time (fixed deposit);
5. withdrawable by cheque, draft, order or otherwise.

Section 5(c): a banking company is any company which transacts the business of banking in India.

Business, trading, property and name

• Section 6: other permitted business, such as dealing in bills of exchange, letters of credit, guarantees, acting as agent and safe deposit lockers.
• Section 8: a bank cannot buy, sell or barter goods as a trader, except in connection with realising a security given to it; trading risks could swallow depositors' money.
• Section 9: land or buildings acquired in enforcing a security cannot be held, if not needed for the bank's own use, for more than seven years from acquisition; the Reserve Bank may extend this by up to five more years.
• Section 7: a non-banking company cannot use the words bank, banker or banking in its name, and every company carrying on banking in India must use at least one of them. The public trusts the word "bank", so no one else may borrow that trust.

Capital, reserves and liquidity

• Section 11: minimum paid-up capital and reserves; the Act's figures are now very small, and real entry capital is fixed by the Reserve Bank's licensing rules.
• Section 12: capital structure and voting rights. One shareholder's voting rights are capped at 10%, which the Reserve Bank may raise in phases up to 26% (as it has done).
• Section 12B: prior Reserve Bank approval before any person acquires 5% or more of the shares or voting rights, to check that those who control a bank are fit and proper.
• Section 17: at least 20% of yearly profit goes to a reserve fund before any dividend.
• Section 24: a percentage of demand and time liabilities must be kept in liquid assets such as cash, gold and government securities, the statutory liquidity ratio, so that the bank can meet sudden withdrawals.

Control over lending

• Section 20: restricts loans to the bank's own directors and to firms or companies in which they are interested; insiders should not use depositors' money for themselves.
• Section 21: the Reserve Bank may control advances in the interest of depositors or the public, laying down the purposes of advances, margins on secured advances and rates of interest.
• Section 21A (inserted 1984): no court can reopen a transaction between a bank and its debtor on the ground that the rate of interest charged is excessive.

Point	Krishna Reddy; Karnam Ranga Rao	Jameela Beevi
Loan	Agricultural advances	Export packing credit at a concessional rate
Circulars	No quarterly rests; no compounding on current dues	Concession only if export within 180 days
Result	Interest in breach void; bank must recompute	Bank's agreed normal higher rate upheld

Control over management

• Section 10A: a majority of directors must have special knowledge or practical experience in fields such as accountancy, agriculture and rural economy, banking, economics, finance, law and small-scale industry.
• Section 36AA: the Reserve Bank can remove a chairman, director, chief executive officer or other officer where necessary in the public interest, to protect depositors or to secure proper management.
• Section 36AB: it can appoint additional directors.
• Section 36ACA: in consultation with the Central Government, it can supersede the entire board for up to six months at first and twelve months in all, and appoint an administrator.

Supervision, directions and penalties

• Section 35: inspection of any bank and its books at any time.
• Section 35A: directions to banks generally or to a particular bank, in the public interest, in the interest of banking policy, to prevent a bank's affairs being conducted against the interests of depositors or of the bank itself, or to secure proper management.
• Section 35AA (added 2017): the Central Government may authorise the Reserve Bank to direct banks to start insolvency proceedings against defaulting borrowers.
• Section 47A: monetary penalties on banks that break the law or the Reserve Bank's directions.

Banks in Trouble: Moratorium and Winding Up

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Moratorium: Section 45

On the Reserve Bank's application, the Central Government may order a moratorium on a weak bank. During it, the bank cannot make payments except as permitted, and suits and proceedings against it cannot be started or continued. Meanwhile the Reserve Bank can prepare a scheme of reconstruction or amalgamation with another bank, which the Central Government sanctions.

Winding up

If rescue fails, the bank is wound up: closed down, its assets sold and its creditors paid.

• Section 38: the High Court orders winding up if the bank is unable to pay its debts or if the Reserve Bank applies.
• On the Reserve Bank's application, the Reserve Bank, the State Bank of India, another notified bank or an individual can be appointed official liquidator.
• The Deposit Insurance and Credit Guarantee Corporation pays insured depositors up to ₹5 lakh each. Above that, depositors share the remaining assets proportionately with other ordinary creditors, after preferential claims are paid.
• Since 2021, even when a bank is only under a moratorium or similar restrictions, insured depositors must generally be paid within 90 days, extendable by up to 90 more days while a rescue scheme is finalised.

Point	Chotanagpur Banking Association	Kartik Chandra Pal
Proceeding	Debtors' insolvency petitions before the District Judge	Execution transferred by the winding up court itself
Result	No jurisdiction; only the High Court could decide	Transferee court decides all questions, including third-party claims

Co-operative Banks

• The Banking Regulation Act applies to co-operative banks through Section 56, with modifications.
• For many years there was dual control: the State Registrar of Co-operative Societies controlled management; the Reserve Bank controlled banking functions.
• The Banking Regulation (Amendment) Act, 2020 gave the Reserve Bank much wider powers over them, including over management and capital, to protect depositors.
• The Banking Laws (Amendment) Act, 2025 allows a depositor to appoint up to four nominees for a bank account and raises the threshold for substantial interest in a company from ₹5 lakh to ₹2 crore.

Licensing of Banks and Branch Authorisation

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Licence: Section 22

Before granting a licence, the Reserve Bank may inspect the company's books or otherwise satisfy itself that:

1. the company can pay its present and future depositors in full as their claims arise;
2. its affairs will not be conducted in a way that harms depositors;
3. the general character of its proposed management will not harm the public interest or depositors;
4. it has an adequate capital structure and good earning prospects;
5. the public interest will be served by the licence;
6. the licence fits the operation and consolidation of the banking system, consistent with monetary stability and economic growth.

The Reserve Bank may add any other condition necessary to protect the public interest or depositors, and foreign banks must satisfy further conditions. Almost every condition protects the depositor or the stability of the system.

Cancellation, Section 22(4): the Reserve Bank may cancel a licence if the bank stops carrying on banking business in India, fails to comply with the licence conditions, or no longer fulfils any licensing condition. The Reserve Bank must normally first give the bank an opportunity to take the necessary steps, unless delay would harm depositors or the public. An aggrieved bank may appeal to the Central Government within 30 days; its decision is final.

Licensing in practice

Since 2016 the Reserve Bank follows an on tap approach for private sector universal banks: eligible applicants may apply at any time instead of waiting for a rare licensing window. It also licenses differentiated banks.

Bank	Current requirements
Universal bank	Minimum paid-up voting equity capital ₹1,000 crore; promoters hold at least 40%, locked in for five years, reduced to 26% within fifteen years so that one family or group does not control a bank forever
Small finance bank	Minimum capital ₹300 crore; serves small borrowers and unserved areas
Payments bank	Accepts small deposits and provides payment services, but cannot lend

Why not individuals or firms? The Banking Regulation Act licenses only companies and, through Section 56, co-operative banks. The Reserve Bank of India Act restricts unincorporated bodies such as individuals and firms from accepting deposits, and the Banning of Unregulated Deposit Schemes Act, 2019 prohibits unregulated deposit schemes altogether.

Opening of branches: Section 23

A bank cannot open a new place of business, or shift one to a different city, town or village, without the prior permission of the Reserve Bank. The Reserve Bank considers the bank's financial condition, history, general character of management, adequacy of capital and earning prospects, and the public interest.

This power was long used to push banks into rural India: rural branches were often required in return for city branches. Today, under the branch authorisation directions, scheduled commercial banks have a general permission to open banking outlets, subject to conditions:

• a banking outlet is a fixed point, run by bank staff or a business correspondent, offering basic banking services for at least four hours a day, five days a week;
• at least 25% of the outlets opened in a year must be in unbanked rural centres.

Powers of the Central Government

Banking regulation is shared between the Reserve Bank and the Central Government.

Reserve Bank	Central Government
Grants and cancels licences	Hears appeals against cancellation; decision final
Applies for a moratorium; prepares the scheme of reconstruction or amalgamation	Orders the moratorium; sanctions the scheme
Run by a Central Board	Appoints the Governor and the Board; may direct the Reserve Bank in the public interest after consulting the Governor
Recommends exemptions	May exempt banks from certain provisions of the Act

The Government also owns the public sector banks. Under the 1970 nationalisation Act, a nationalised bank must follow the Central Government's directions on matters of policy involving public interest, given after consultation with the Governor. After consulting the Reserve Bank, the Government may make schemes for the management and even the amalgamation of nationalised banks; the large public sector bank mergers of 2019 and 2020 were carried out under these powers.

Who Is a Banker and Who Is a Customer

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Banker

A banker is a person or institution carrying on the business of banking: accepting deposits from the public for lending or investment, withdrawable by cheque or otherwise. Under Section 3 of the Negotiable Instruments Act, a banker includes any person acting as a banker and any post office savings bank.

Customer

Customer is not defined in the Banking Regulation Act or the Negotiable Instruments Act, yet many protections (such as that of a collecting banker) and duties (such as secrecy) apply only to a customer. A person becomes a customer when he opens an account and the bank agrees to act as his banker. One who merely walks in to cash a cheque or buy a draft, without any account, is generally not a customer.

The Reserve Bank's Know Your Customer (KYC) directions, which carry out the scheme of the Prevention of Money-laundering Act, 2002, use a wide meaning for compliance: any person engaged in a financial transaction or activity with a bank, including the person on whose behalf someone else is acting. Before opening an account, the bank must verify the customer's identity and address and, in many cases, the beneficial owner behind a company or trust: this is customer due diligence.

The Basic Relationship: Debtor and Creditor

When Prince deposits ₹50,000 in his savings account, is the bank keeping it (like a friend keeping his watch) or borrowing it?

Bank as mere keeper	Bank as borrower
Must keep the same notes aside; cannot use them.	The money becomes the bank's own; it owes Prince only an equal amount.

A creditor is the person to whom money is payable; a debtor is the person who must pay it. On a deposit, the bank is the debtor and the customer the creditor. When Prince takes a loan or overdraft, the bank becomes the creditor and Prince the debtor.

A special kind of debt

Ordinary loan	Bank deposit payable on demand
The debtor must go to the creditor and repay on the due date.	The bank need not seek out the depositor; the duty to repay arises only when the customer actually demands payment at the branch where the account is kept, or through a cheque or other recognised mode.

Other Capacities in Which a Bank May Act

Capacity	When	Consequence
Agent	Collecting a cheque (agent for collection); paying a bill or loan instalment under a standing instruction.	Must follow the customer's mandate carefully.
Trustee	Money given for a specific purpose, e.g. buying particular securities.	Cannot treat it as its general funds; holds it for that purpose.
Bailee	Articles for safe custody, e.g. a sealed packet of documents or ornaments.	Under the Indian Contract Act, must take the care a person of ordinary prudence takes of his own goods of the same kind, and return the same articles.

Safe deposit lockers

The bank usually does not know the contents and the customer holds a key, so the legal nature is not fully settled. Banks often treated it as hiring of space (lessor and lessee), not bailment, since bailment requires goods to be entrusted to the bank's possession, and long used this to deny all responsibility for losses. Under the Reserve Bank's revised locker instructions, applicable from 1 January 2022, the bank must take reasonable care of the premises.

Bank not liable	Bank liable: 100 times the annual rent
Acts of God (earthquake, flood) it could not have prevented.	Loss through fire, theft, burglary, dacoity or robbery; building collapse due to the bank's own shortcomings; fraud by its employees.

Rights of the Banker

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A bank lends public money, so it needs simple and quick ways to protect itself when customers owe it money.

1. Banker's general lien

A lien is a right to keep possession of another's property until a debt is paid. Under Section 171 of the Indian Contract Act, bankers (with a few others) may retain, as security for a general balance of account, any goods bailed to them, unless there is a contract to the contrary.

Ordinary lien	Banker's general lien
Covers only the debt connected with the particular goods.	Covers the whole balance the customer owes the bank.

The Supreme Court has described a banker's lien on securities as an implied pledge, so the bank, like any pledgee, may sell them after reasonable notice. The lien does not extend to:

• money in the customer's own account (it already belongs to the bank);
• articles left only for safe custody, or locker contents;
• money and securities given for a specific purpose;
• generally, property the bank knows belongs to someone else.

2. Right of set-off (combining accounts)

• The debts must be due and certain, not future or contingent.
• The accounts must be held in the same right: a trust account cannot be set off against the customer's personal loan, nor a joint account against the personal debt of one joint holder.

Appropriation of Payments and Clayton's Case

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The third right: when a customer owes two separate debts and pays too little to clear both, which is discharged first? This matters when one debt is guaranteed by a surety or one is becoming time-barred.

Indian Contract Act	Who appropriates	Rule
Section 59	Debtor (first choice)	If he expressly says, or circumstances clearly show, which debt the payment is for, the creditor must apply it to that debt.
Section 60	Creditor	Absent any indication, the creditor may apply it to any lawful debt actually due and payable, even a time-barred one.
Section 61	Law	If neither appropriates: debts in order of time; debts of equal standing proportionately.

Running current accounts

Interest before principal

Duties of the Banker

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1. Duty to honour cheques

The bank must pay a cheque when the customer has sufficient funds (or an agreed overdraft limit) and the cheque is properly drawn and presented within its validity period. Section 31 of the Negotiable Instruments Act: the drawee of a cheque, having sufficient funds of the drawer in his hands properly applicable to the payment, must pay it when duly required; on default it must compensate the drawer for any loss or damage. For a trader, wrongful dishonour can seriously injure credit and reputation, so damages can be substantial.

The bank must not pay on:

• a stop-payment instruction;
• notice of the customer's death, insanity or insolvency (operations stop);
• a court attachment or injunction;
• a stale, post-dated, materially altered or irregular cheque;
• a forged signature.

Garnishee orders: when a creditor obtains a decree against a customer, the court may attach the money the bank owes that customer by a prohibitory order under Order 21, Rule 46 of the Code of Civil Procedure, and under the following rules call on the bank to pay it into court. The bank, as the person owing money to the judgment debtor, is the garnishee, and such orders are commonly called garnishee orders. Once it receives the order, it must not let the customer withdraw the attached amount.

2. Duty of secrecy

A bank knows a customer's income, spending and debts; free disclosure would destroy trust. So it must keep its customers' affairs confidential.

Position in India

The duty rests on contract, banking practice and statute. Section 13 of the bank nationalisation Act of 1970 requires every nationalised bank to observe customary banking practices and usages and, in particular, not to divulge information about its constituents except as law, practice or usage permits; the State Bank of India Act is similar. Statutes requiring disclosure include:

• Prevention of Money-laundering Act: reporting suspicious and certain cash transactions;
• Credit Information Companies Regulation Act, 2005: sharing credit information with credit information companies;
• tax and investigating agencies' own statutes;
• Bankers' Books Evidence Act, 1891: certified copies of entries in bankers' books are admissible, so original books need not leave the bank.

Other duties of the banker

To follow the customer's mandate exactly; to take reasonable care in collecting and paying cheques; to provide statements of account; and to give reasonable notice before closing an account in credit, so that cheques are not suddenly dishonoured.

Duties of the Customer

1. Draw cheques carefully, leaving no blank spaces in which a forger can add digits.
2. Promptly inform the bank on learning of forgeries on his account; if he keeps silent and the bank pays further forged cheques, he may not recover that loss.

Modern form: keep the PIN, password and one time password secret, and report a lost card or unauthorised transaction immediately. How the loss is divided depends on whether he does so.

Types of Bank Accounts

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Demand deposits can be withdrawn at any time; time deposits are repayable after a fixed period.

Account	Features
Savings bank	For individuals to keep savings and earn some interest.
Current	Mainly for businesses; any number of transactions; no interest.
Fixed (term) deposit	Fixed period and rate; on premature withdrawal the bank may reduce interest.
Recurring deposit	Fixed amount every month for a fixed period.
Basic savings bank deposit account	Financial inclusion; no minimum balance; basic facilities free. Under the Pradhan Mantri Jan Dhan Yojana (2014), crores were opened for people who never had a bank account.
Overdraft / cash credit	Drawing beyond the balance up to an agreed limit; the bank is creditor whenever the account is in debit.

Inoperative accounts and unclaimed deposits

Inoperative account	Unclaimed deposit
Savings or current account with no transactions for over two years (bank-credited interest or bank-debited charges do not count).	Unclaimed for ten years or more.
Money remains the customer's; he revives the account by completing KYC.	Transferred to the Depositor Education and Awareness Fund, maintained by the Reserve Bank under Section 26A of the Banking Regulation Act. The depositor or legal heirs can still claim; the bank repays and seeks reimbursement from the Fund.

Nomination

• Sections 45ZA to 45ZG of the Banking Regulation Act: a depositor can nominate a person to receive the deposit on his death.
• Payment to the nominee is a valid discharge: the bank is free from further liability.
• The nominee is not automatically the owner; he receives it on behalf of the legal heirs, who take under the law of succession.
• Banking Laws Amendment Act, 2025: up to four nominees.

Simultaneous	Successive
Each nominee gets a fixed share; deposits only.	The next nominee takes only if the earlier one is not alive; allowed for deposits and the only option for safe custody articles and lockers.

Special Classes of Customers

Some customers need special care, because the general law treats them specially.

1. Minor

• Age: a person below 18. Since 1999 the age of majority is 18 for everyone, including a minor whose guardian was appointed by a court.
• A minor's agreement is void (Indian Contract Act): no enforceable loan, and never an overdraft on a minor's account.
• Reserve Bank instructions of 2025: a minor of any age may open a savings or term deposit account through a natural or legally appointed guardian; above a bank-fixed age (not lower than 10) he may open and operate one independently, within bank limits.
• On majority: fresh operating instructions and specimen signature.
• Section 26 of the Negotiable Instruments Act: a minor may draw, endorse and deliver a negotiable instrument so as to bind all parties except himself.

2. Joint account

Opened by two or more persons. The most important document is the mandate, which tells the bank who can operate the account.

Mandate	Operation
Jointly	All must sign.
Either or survivor	Any one operates; the survivor gets the balance.
Former or survivor	Only the first holder operates while alive.

On a joint holder's death, payment to the survivor under the mandate is a valid discharge, but the survivor takes as trustee for the deceased's legal heirs; ownership is finally decided by the law of succession.

3. Partnership firm

Not a separate legal person: the account is in the firm's name on a mandate signed by all partners. Under Section 19 of the Indian Partnership Act, 1932, a partner's implied authority does not extend to opening a bank account for the firm in his own name. On a partner's death, retirement or insolvency, the bank should stop the old account and open a new one.

4. Company

A separate legal person. The bank examines the certificate of incorporation, memorandum and articles, and the board resolution authorising the account and naming its operators, and identifies the beneficial owners.

5. Hindu Undivided Family

Operated by the Karta, the senior member managing family affairs; banks usually take a declaration signed by the Karta and adult members.

6. Trust

Trustees hold the money for others. Under the Indian Trusts Act, 1882, a trustee cannot delegate his duties except in limited cases, so several trustees normally act jointly. Trust money cannot be set off against a trustee's personal debts.

7. Executors and administrators

They manage a dead person's estate: an executor is named in a will, an administrator appointed by a court. Payment is made on probate or letters of administration or, for small amounts, under the bank's simplified claim settlement procedure.

8. Customers needing extra caution

• Illiterate: thumb impression identified by witnesses, including a bank officer; extra care in operation.
• Unsound mind: operations stop on notice, as he cannot contract; the bank then deals only with a guardian or manager appointed by the competent authority.
• Insolvent: operations stop once he is adjudged insolvent, as his property vests in the court or a receiver.

Why Negotiable Instruments Exist

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Weaknesses of an ordinary assignment of debt

1. The assignee usually has to give notice to the debtor.
2. More important, the assignee takes the debt subject to all the defences the debtor had against the original creditor.

Trade cannot run on such uncertainty. Merchants needed a document that could pass from hand to hand like money, free from hidden disputes between earlier parties. Negotiable instruments meet this need.

Three key features

1. The right to the money passes simply by delivery, or by endorsement and delivery.
2. The holder can sue in his own name.
3. A holder in due course (one who takes in good faith and for value) gets a good title free from the defects in the title of earlier holders.

Source of negotiability

On the last point, later English courts took a different view: a general mercantile usage, once proved in court, can make even a fairly new kind of instrument negotiable.

In India the law is codified in the Negotiable Instruments Act, 1881, which came into force in 1882 and still governs promissory notes, bills of exchange and cheques.

The Three Instruments

Section 13: a negotiable instrument means a promissory note, bill of exchange or cheque, payable either to order or to bearer.

Promissory note (Section 4)

An instrument in writing (not a bank note or currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Simply, a written promise to pay.

Essentials: in writing; unconditional promise; certain amount; certain payee; signed by the maker.

Bill of exchange (Section 5)

An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. Parties: the drawer makes the order; the drawee is ordered to pay; the payee receives the money. A drawee who signs his acceptance on the bill becomes the acceptor.

Cheque (Section 6)

A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Since the amendment of 2002, a cheque also includes the electronic image of a truncated cheque and a cheque in electronic form.

Point	Promissory note	Bill of exchange	Cheque
Section	4	5	6
Contains	A promise	An order	An order on a specified banker
Parties	Maker, payee	Drawer, drawee (acceptor), payee	Drawer, drawee banker, payee
Special feature	Not a bank or currency note	Drawee becomes acceptor on signing acceptance	Drawee always a banker; always payable on demand

Holder, Holder in Due Course and Payment in Due Course

▶ Watch this part of the lecture (1:18:11)

Holder (Section 8): the person entitled in his own name to possess the instrument and to receive or recover the amount due on it. A thief who steals a bearer cheque possesses it but is not a holder, because he is not entitled to it.

Holder in due course (Section 9): a holder who

1. took the instrument for consideration (gave value);
2. became its possessor, payee or endorsee before the amount became payable; and
3. took it without sufficient cause to believe that there was any defect in the title of the person from whom he got it.

Privileges of a holder in due course

• Every prior party remains liable to him until the instrument is paid.
• Section 58: if an instrument was lost, or obtained by an offence or fraud, or for an unlawful consideration, a later possessor cannot recover unless he, or someone through whom he claims, was a holder in due course. A holder in due course can therefore recover even then.
• Section 120: against a holder in due course, the maker of a note and the drawer of a bill or cheque cannot deny the original validity of the instrument as originally made or drawn.
• Section 53: a person who takes from a holder in due course gets that holder's rights.

These rules make negotiable instruments safe to accept.

Payment in due course (Section 10)

Payment according to the apparent tenor of the instrument, in good faith and without negligence, to the person in possession of it, where the circumstances give no reasonable ground to believe he is not entitled to payment. It protects the person who pays, and underlies the protection of bankers.

Negotiation and Endorsement

Negotiation (Section 14): transfer of an instrument to a person so as to make him its holder. An instrument payable to bearer is negotiated by delivery; one payable to order, by endorsement and delivery.

Endorsement (Section 15): the holder signs on the instrument, usually on its back, for the purpose of negotiation. The signer is the endorser; the transferee is the endorsee.

• Endorsement in blank: only the endorser's name; the instrument becomes payable to bearer.
• Endorsement in full (special endorsement): "Pay Farhan or order", with signature.
• By appropriate words, an endorser may restrict further negotiation or exclude his own liability.

No consideration (Section 43): an instrument made or endorsed without consideration creates no obligation between the parties to that transaction. But if the recipient passes it to a holder for consideration, that holder can recover from the transferor and from every prior party.

Liability and discharge

• Primary parties: the maker of a note and the acceptor of a bill must pay according to the apparent tenor.
• Drawer and endorsers: must compensate the holder on dishonour, provided due notice of dishonour is given where the Act requires it.
• Discharge: for example, by payment in due course, or when the holder cancels a party's name or otherwise releases him, intending to discharge him.
• Section 84 (cheques): if the holder does not present a cheque within a reasonable time and the drawer suffers actual damage from the delay (for example, the bank fails meanwhile), the drawer is discharged to the extent of that damage.

The Statutory Presumptions (Section 118)

A presumption is a rule that the court shall take a fact as proved until the other side disproves it. Commercial documents would lose their value if every holder had to prove the entire history of the transaction.

Until the contrary is proved, the court presumes that every negotiable instrument was made, drawn, accepted, endorsed, negotiated or transferred for consideration; that it bears the right date; that it was transferred before maturity; that endorsements were made in the order in which they appear; and that the holder is a holder in due course. Each presumption is rebuttable; the real question is how strongly the defendant must prove the contrary.

Cheques in Banking Practice

▶ Watch this part of the lecture (1:26:35)

• Bearer cheque: payable to whoever presents it at the counter, so risky if lost. Order cheque: payable to the named payee or to whoever he endorses it to.
• Validity: since 1 April 2012, under Reserve Bank directions, banks pay a cheque only if presented within three months from its date; after that it is stale and the drawer must issue a fresh one.
• Post-dated cheque: bears a future date and cannot be paid before it.
• Under the Cheque Truncation System, banks accept no change or correction on a cheque other than a change in the date authenticated by the drawer.

Crossing of Cheques

Crossing protects against theft and fraud. A crossed cheque cannot be paid in cash across the counter; it is paid only to a banker, so the money reaches a bank account and leaves a trail.

Point	General crossing (Section 123)	Special crossing (Section 124)
Form	Two parallel transverse lines across the face, with or without "and company" or "not negotiable"	Name of a particular banker, with or without "not negotiable"
Payment (Section 126)	Only to a banker	Only to the named banker or his agent for collection

• Section 125: the holder, not only the drawer, may cross an uncrossed cheque or add to a crossing.
• Section 130 ("not negotiable"): does not stop transfer, but a taker does not get, and cannot give, a better title than his transferor. The cheque loses the protection of negotiability: if stolen, even an innocent transferee cannot keep it against the true owner.
• "Account payee only": not expressly defined in the Act, but recognised by banking practice and Reserve Bank instructions. It directs the collecting banker to credit the proceeds only to the named payee's account; a bank collecting it for anyone else does so at its own risk.

Protection of the Paying Banker and the Collecting Banker

Banks handle millions of cheques and cannot investigate each one, so the Act protects them when they act honestly and carefully.

Point	Paying banker	Collecting banker
Who	Drawee bank on which the cheque is drawn	Bank collecting the cheque for its customer
Provision	Section 85: an order cheque purporting to be endorsed by or for the payee; the drawee is discharged by payment in due course, even if an endorsement is forged. Section 128: paying a crossed cheque in good faith, without negligence and according to the crossing places the banker in the same position as if he had paid the true owner.	Section 131: receiving payment, in good faith and without negligence, for a customer, of a cheque crossed generally or specially to himself; no liability to the true owner merely for receiving payment if the customer's title proves defective.
Drafts	Section 85A	Section 131A

The collecting banker's protection applies only when it collects for a customer, which is why the meaning of "customer" matters. Negligence usually means failure to follow sound banking practice, for example opening an account without proper Know Your Customer checks, or collecting a cheque payable to a company into an employee's personal account without asking questions.

Sections 85A and 131A extend similar protection to bank drafts, drawn by one branch of a bank on another branch of the same bank. The protections are strictly applied.

Material Alteration (Section 87)

▶ Watch this part of the lecture (1:31:58)

• A material alteration renders the instrument void against anyone who was a party at the time of the alteration and did not consent to it.
• Exception: an alteration made to carry out the common intention of the original parties.
• Material means changing the legal effect, such as the amount, date, payee or place of payment.
• Permitted by the Act: a holder may convert a blank endorsement into a special one, and may cross an uncrossed cheque.

The Cheque Truncation System

Earlier, a physical cheque travelled from the bank of deposit to a clearing house and then to the drawee bank. This took days, cost money, and risked loss in transit. Truncation means stopping the physical movement of the cheque at an early stage.

• Introduced by the Reserve Bank in the National Capital Region in 2008, then extended in stages; in 2021 it directed that every branch be covered by September of that year.
• The presenting bank must preserve the paper cheque for ten years for production in disputes.

The 2002 amendment

The Act assumed that the paper cheque itself would be presented, so the amendment of 2002:

1. Expanded Section 6 to include the electronic image of a truncated cheque. A truncated cheque is one truncated during a clearing cycle, by the clearing house or a bank, immediately on generation of an electronic image for transmission, so that the paper no longer moves.
2. Allowed presentment of the image. A drawee bank with a reasonable doubt about the image's genuineness may ask for more information, and if it suspects fraud, forgery, tampering or destruction, may demand the physical cheque.
3. Imposed duties on banks. Any difference between the image and the paper cheque is a material alteration; the truncating bank or clearing house must ensure the image is exact, and the receiving bank must verify it is exactly what was sent. The collecting bank must verify the prima facie genuineness of the cheque it truncates and catch fraud, forgery or tampering apparent on its face that due diligence and ordinary care would reveal.

Further, the bank that received payment may keep the paper cheque even after payment, and the paying banker's certificate on a printout of the image is prima facie proof of payment.

Continuous clearing

Cheques were earlier cleared in batches, often taking a day or more. From 4 October 2025 the Reserve Bank moved to continuous clearing with settlement on realisation:

• Cheques go to the clearing house continuously through the day.
• The drawee bank must confirm honour or dishonour by 7 p.m. the same day; an unconfirmed cheque is treated as approved.
• Settlement is hourly, and the presenting bank must credit its customer within one hour of settlement.

A second phase (confirmation within about three hours) was planned for January 2026. In December 2025, the Reserve Bank postponed it until further notice.

Further safeguards

• Standard cheque forms with security features such as a watermark and special printing, making tampering harder to hide.
• Positive Pay System (from 1 January 2021): the drawer gives his bank the cheque's key details in advance (date, amount, payee); at clearing they are matched and any mismatch is flagged. Banks must offer it for cheques of ₹50,000 and above; it is optional for the customer, though a bank may make it compulsory for cheques of ₹5 lakh and above. It protects both customer and bank against altered and fraudulent cheques.

Dishonour of Cheques

▶ Watch this part of the lecture (1:37:24)

A cheque is dishonoured when the drawee bank refuses to pay it, for example for insufficient funds, signature mismatch, a stop-payment instruction, a closed account, or a stale date.

Civil remedy: the holder can sue the drawer and prior endorsers for the amount with interest, including by a summary suit under Order 37 of the Code of Civil Procedure, where the defendant must first obtain leave to defend, granted only if he shows a substantial defence.

Criminal remedy: civil suits proved too slow; dishonest drawers kept creditors waiting for years and faith in cheques declined. In 1988 Parliament inserted Chapter XVII (beginning with Section 138), in force from 1989, making dishonour in certain conditions a criminal offence, to increase the acceptability of cheques and the credibility of business transactions.

The Offence under Section 138

Ingredients

1. A cheque drawn on an account maintained by the accused with a banker. As a rule, a cheque on an account the accused does not maintain does not attract the section against him.
2. Issued for payment of money to another person for the discharge, wholly or partly, of a debt or other liability, which the Explanation defines as a legally enforceable debt or liability. A cheque given as a pure gift or for an illegal purpose cannot found the offence.
3. Returned unpaid because the funds are insufficient, or it exceeds the amount arranged to be paid by agreement with the bank.

Conditions in the proviso

Condition	Time limit
Presentment to the bank	Within 6 months from the date or within its validity, whichever is earlier (effectively 3 months, as fixed by the Reserve Bank)
Written demand notice by the payee or holder in due course	Within 30 days of receiving information of the return unpaid
Drawer fails to pay	Within 15 days of receiving the notice; only then is the offence complete

Punishment: imprisonment up to two years, or fine up to twice the cheque amount, or both. The amendment of 2002 raised the maximum from one year to two, and extended the notice period from 15 to 30 days.

"Insufficient funds" is read practically: a drawer cannot escape by closing his account before presentment, since a closed account has no funds to pay the cheque.

Stop-Payment Instructions and Section 138

▶ Watch this part of the lecture (1:41:22)

What if the drawer tells his bank to stop payment, so that the cheque is not returned for "insufficient funds"? This question produced a sharp change in the law.

Presumptions in Cheque Cases

• Section 139: unless the contrary is proved, the holder is presumed to have received the cheque for the discharge, wholly or partly, of a debt or other liability. The Supreme Court has held that this includes the existence of a legally enforceable debt.
• Once the accused admits his signature, the burden shifts to him. He need not prove his defence beyond reasonable doubt; a probable defence on a preponderance of probabilities suffices (as under Section 118), through his own evidence or by pointing to weaknesses in the complainant's case. A bare denial is not enough.
• Section 140: it is no defence that the drawer had no reason to believe the cheque would be dishonoured.
• Section 146: the bank's slip or memo of dishonour is prima facie evidence of dishonour.

Offences by Companies (Section 141)

▶ Watch this part of the lecture (1:46:31)

• Every person who, at the time of the offence, was in charge of and responsible to the company for the conduct of its business is deemed guilty along with the company.
• He is not liable if he proves the offence was committed without his knowledge, or that he exercised all due diligence to prevent it.
• A director nominated because of an office or employment in the Central Government, a State Government, or a financial corporation owned or controlled by either, is not liable to prosecution under Chapter XVII.
• Any director, manager, secretary or other officer is liable if the offence was committed with his consent or connivance, or is attributable to his neglect.

Taking Cognizance and Limitation (Section 142)

• Cognizance only on a written complaint by the payee or holder in due course.
• Complaint within one month of the cause of action, which arises after the 15 days for payment expire.
• Since 2002, a late complaint may be accepted on sufficient cause. The Supreme Court has recently clarified that the court must first be satisfied about the cause and condone the delay, and only then take cognizance.
• Only a Metropolitan Magistrate or a Judicial Magistrate of the first class can try the offence.

Territorial Jurisdiction

For many years a complaint could be filed wherever any act forming part of the offence occurred (drawing, presentation, return, or sending of notice). Payees, often large companies, sued in their own cities, forcing drawers to travel across the country.

This caused hardship to payees. Parliament responded by an Ordinance of June 2015 and the Negotiable Instruments (Amendment) Act, 2015, inserting Section 142(2), effective from 15 June 2015. Section 142A validated the transfer of pending cases to courts having jurisdiction under the new rule.

Stage	Court with jurisdiction
Dashrath Rupsingh Rathod (2014)	Only where the drawee bank branch is situated
Section 142(2): cheque delivered for collection through an account	Where the branch at which the payee or holder in due course maintains his account is situated (a deposit at any other branch of his bank is treated as delivered to his account branch)
Section 142(2): cheque presented otherwise than through an account (e.g., at the drawer's own branch)	Where the drawer's branch is situated

Procedure, Interim Compensation and Compounding

Speedy trial (amendment of 2002)

• Section 143: summary trial, following the summary-trial procedure of the Code of Criminal Procedure (now the B.N.S.S., 2023). The Magistrate may impose imprisonment up to one year and a fine exceeding ₹5,000; if a longer sentence may be needed, he may try it as a regular summons case. The trial should, as far as possible, end within six months of the complaint.
• Section 144: summons by speed post or approved courier.
• Section 145: the complainant's evidence may be given on affidavit.

Interim compensation and appellate deposit (in force 1 September 2018)

Point	Section 143A	Section 148
Stage	Trial: once the drawer pleads not guilty, or otherwise once the charge is framed	Appeal by a convicted drawer
Amount	Interim compensation to the complainant up to 20% of the cheque amount, payable within 60 days (extendable by up to 30 days); repayable with interest if the drawer is acquitted	Deposit of at least 20% of the fine or compensation awarded by the trial court
Nature of "may"	Discretionary: the court must consider the merits and the defence and give reasons; 20% is only the upper limit; applies only to offences committed after the section came into force	Deposit should normally be ordered; departure only for special reasons recorded in writing, e.g. where it would be unjust or defeat the right of appeal

Compounding (Section 147)

Every offence under the Act is compoundable: the parties settle and the case ends in acquittal. To encourage early settlement, the Supreme Court's current guidelines lay down graded costs:

When the cheque amount is paid	Additional cost
Before defence evidence is recorded	Nil
After that, before the trial court's judgment	5% of the cheque amount
Before the Sessions Court or High Court	7.5%
Before the Supreme Court	10%

The guidelines also ask courts to serve summons electronically, and to let the accused pay the cheque amount online at the very start. Compounding still needs the complainant's consent.

Mediation

Mediation has become an important route to settlement of cheque cases.

Bank Lending

▶ Watch this part of the lecture (1:58:38)

Since banking means accepting deposits for lending or investment, lending is not a side business of a bank but the reason it collects deposits. Its main income is the difference between the higher interest charged to borrowers and the interest paid to depositors. Every loan is made out of depositors' money, so a bank must lend in a way that keeps that money safe.

Principles of sound lending

• Safety (comes first): the borrower must be able and willing to repay.
• Liquidity: the bank must not lock up all its funds in long-term loans.
• Purpose and profitability.
• Spreading of risk: the bank must not depend on a few borrowers or on one industry.

Before lending, a bank appraises the borrower: his income, his business, his past repayment record (checked with credit information companies) and the security he can offer.

Forms of lending

• Term loan: repaid in instalments over a fixed period, as in a home loan.
• Cash credit or overdraft: a running limit for a business.
• Non-fund facilities, such as a bank guarantee or a letter of credit: the bank does not pay money at once but promises to pay if a certain event happens.

The legal relationship in a loan

The relationship is again one of creditor and debtor, but now the bank is the creditor. The loan agreement fixes the amount, interest, repayment schedule, security and events of default. The Reserve Bank regulates the relationship in the borrower's interest too:

• Fair practices code: the lender must give the terms and conditions in writing, explain all charges, and give notice before changing them.
• Recovery agents engaged by banks cannot harass or intimidate borrowers, and must not call them before 8 in the morning or after 7 in the evening.
• Penal charges, not penal interest: since 2024, banks cannot add penal interest to the rate of interest for a default. They may only levy reasonable penal charges, which are not compounded and are disclosed upfront.
• Section 21A of the Banking Regulation Act: courts cannot reopen a bank's loan transaction merely on the ground that the interest charged is excessive.

Security for Loans

The whole law of recovery depends on security. A borrower's promise to repay is only as good as his future income and honesty; security gives the bank a second source of repayment to which it can turn if the borrower does not pay.

Point	Secured loan	Unsecured loan
Basis	Backed by a right over property	Backed only by the borrower's promise (for example, most personal loans and credit card dues)
On default	The bank has a right over specific property	The bank can only sue the borrower, like any other creditor
Position	Stronger: in most situations the right takes priority over the claims of unsecured creditors	Weaker

Forms of security

Pledge and hypothecation

Point	Pledge	Hypothecation
Meaning	Bailment of goods as security for a debt (Section 172, Indian Contract Act)	A charge on movable property without transfer of possession
Possession	The bank takes physical possession of the goods	Stays with the borrower, who keeps and uses the property
Example	Gold ornaments in a gold loan	A trader's stock or vehicle
Bank's position	On default, may sell the goods after giving the borrower reasonable notice of the sale	Depends more heavily on the borrower's honesty

Mortgage

A mortgage is the transfer of an interest in specific immovable property to secure a loan (Section 58, Transfer of Property Act, 1882). Banks mostly use the mortgage by deposit of title deeds, often called an equitable mortgage: in notified towns, the borrower simply deposits the documents of title to his property with the bank, with the intention of creating security, and no registered mortgage deed is needed.

Charge

A charge (Section 100 of the same Act) makes immovable property security for payment without transferring any interest in it.

Guarantee

Under Section 126 of the Indian Contract Act, in a contract of guarantee the surety promises to discharge the borrower's liability if he defaults. Under Section 128, the surety's liability is co-extensive with the borrower's, unless the contract provides otherwise. So the bank may proceed against the surety without first suing the borrower.

Default and Non-Performing Assets

▶ Watch this part of the lecture (2:03:43)

The point at which the law treats a loan as bad is fixed by the Reserve Bank's prudential norms on income recognition and asset classification. The basic test is 90 days:

• Term loan: becomes a non-performing asset (NPA) if interest or an instalment of principal remains overdue for more than 90 days.
• Overdraft or cash credit: becomes an NPA if it remains out of order for 90 days.
• Agricultural loans: the test is linked to crop seasons instead of days.

Early stress: special mention accounts

Category	Period overdue
Special mention account 0	Up to 30 days
Special mention account 1	31 to 60 days
Special mention account 2	61 to 90 days

Consequences and classes of NPA

Once a loan becomes an NPA, the bank cannot book interest on it as income until it is actually received, and it must set aside provisions from its profits.

Class	Meaning
Substandard	Bad for up to 12 months
Doubtful	Bad for longer than 12 months
Loss asset	Identified by the bank, its auditors or the Reserve Bank as uncollectible

An NPA is upgraded to a standard account only when the borrower pays all the arrears of interest and principal.

From 1 April 2027, new Reserve Bank directions will require banks to provide for expected credit losses, that is, losses they expect in future, and not only losses that have already occurred. The 90-day test for an NPA remains the same.

Why Special Recovery Laws Were Needed

Traditionally, a bank recovered its dues like any other creditor: civil suit, decree, then execution. To enforce a mortgage, it had to sue and obtain a decree for sale. This often took many years. Meanwhile the security lost value, the borrower's business collapsed, public money stayed locked up, and bad loans in Indian banks grew to alarming levels.

Section 29 of the State Financial Corporations Act, 1951

Recovery without a court decree was not entirely new. Under Section 29 of the State Financial Corporations Act, 1951, a State Financial Corporation could take over the management or possession of a defaulting industrial concern and sell it, without going to court.

Banks, however, generally needed a court decree to enforce a mortgage over land or buildings. The legislature responded with two special laws: the first created specialised tribunals for bank debts; the second allowed secured creditors to enforce their security without going to any court.

Debts Recovery Tribunals

▶ Watch this part of the lecture (2:08:04)

The first law was the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The Insolvency and Bankruptcy Code later renamed it the Recovery of Debts and Bankruptcy Act, 1993, the new name taking effect in December 2019. It set up Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs).

• Jurisdiction: a bank or financial institution can approach the DRT to recover a debt of ₹20 lakh or more; below that, it uses the ordinary courts or other methods. Once the DRT has jurisdiction, no civil court can entertain a suit for recovery of that debt.
• Procedure: simpler and faster than a civil suit. The DRT is not bound by the Code of Civil Procedure but follows the principles of natural justice. It should try to decide a recovery application within 180 days.
• Recovery: after hearing the parties, the DRT passes a final order and issues a recovery certificate. A Recovery Officer executes it, for example by attaching and selling the borrower's property, arresting him, or appointing a receiver to manage his property.
• Appeal: to the DRAT within 30 days (45 days before 2016). The borrower must first deposit 50 per cent of the debt determined by the DRT; the appellate tribunal may reduce this, but not below 25 per cent.
• Cumulative remedies: the Supreme Court has held that the two remedies are cumulative, so a bank may enforce its security under the SARFAESI Act even while its recovery application is pending before the DRT.
• Validity: the Supreme Court has upheld the Act as a law on banking within the power of Parliament.

The DRT route still required the bank to prove its claim before a tribunal, and recovery remained slow, which led to the second, more radical law.

The SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act) followed recommendations of expert committees that banks should be able to enforce their security without the intervention of courts. It has three main parts:

1. regulation of securitisation and asset reconstruction companies, which buy bad loans from banks and try to recover them;
2. enforcement of security interest (the focus in banking law); and
3. a central registry, where security interests are registered.

Basic vocabulary

• Secured creditor: includes a bank or financial institution, and certain other lenders, holding a security interest.
• Security interest: a right, title or interest of any kind upon property, created in favour of a secured creditor; includes a mortgage, charge, hypothecation and assignment.
• Secured asset: the property on which a security interest is created.
• Borrower: includes the person who took the loan, and also a guarantor and a person who has given security for the loan.

Who can use the Act: banks (including co-operative banks), financial institutions and asset reconstruction companies; and non-banking financial companies with assets of ₹100 crore or more, for secured debts of ₹20 lakh or more.

Enforcement step by step (Section 13)

The heart of the Act is Section 13. Section 13(1) declares that a security interest may be enforced by the secured creditor without the intervention of any court or tribunal. This is the revolution.

1. Demand notice, Section 13(2) and 13(3): the bank may send Prince a written notice to pay his entire dues within 60 days from the date of the notice. The notice must give details of the amount payable and of the secured assets the bank intends to enforce.
2. Representation, Section 13(3A): Prince may reply, disputing the amount or raising any objection. The bank must consider it and, if it does not accept it, communicate the reasons for non-acceptance within 15 days of receiving it. This communication does not by itself give Prince a right to approach the tribunal at that stage.
3. Measures, Section 13(4): if Prince does not pay within 60 days, the bank may take one or more measures:
   • take possession of the secured assets, including the right to transfer them by lease, assignment or sale;
   • take over the management of the borrower's business, in certain cases;
   • appoint a manager to manage the secured assets;
   • require any person who bought any secured asset from the borrower, and still owes him money, to pay that money directly to the bank.
4. Magistrate's help, Section 14: if Prince refuses to hand over the factory, the bank can apply to the Chief Metropolitan Magistrate or the District Magistrate, who shall take possession and hand it over to the bank. The bank must file an affidavit confirming compliance with the Act. The Magistrate is expected to pass an order within 30 days, extendable to a total of 60 days for reasons recorded in writing.
5. Sale: under the Security Interest (Enforcement) Rules, 2002, the bank must get the property valued, fix a reserve price, give the borrower 30 days' notice of the sale, and usually sell by public auction. If the proceeds fall short, the bank can recover the balance through the DRT.

Right of redemption, Section 13(8)

Under Section 13(8), as amended in 2016, if the borrower tenders the entire dues, with costs and charges, before the date of publication of the notice for public auction or for inviting quotations or tenders, the bank cannot transfer the asset. So after 2016, the right to redeem ends once the auction notice is published. Before 2016, as the Supreme Court read the old provision, it lasted until the sale was actually completed.

Exclusions

Section 31 keeps certain transactions outside the Act:

• a pledge of movables;
• a lien under the Indian Contract Act or the Sale of Goods Act;
• security on aircraft and ships.

The Act also does not apply to:

• a security interest in agricultural land;
• a financial asset not exceeding ₹1 lakh;
• any case where the amount due is less than 20 per cent of the principal amount and interest.

Remedies of the Borrower under the SARFAESI Act

▶ Watch this part of the lecture (2:15:30)

Application to the DRT: Section 17

• Who and when: any person, including the borrower, aggrieved by any measure under Section 13(4), within 45 days from the date the measure was taken.
• Scope and relief: the DRT examines whether the bank acted in accordance with the Act and the rules. If the action was wrongful, it may declare it invalid and restore possession or management to the borrower.
• Disposal: within 60 days, extendable for reasons recorded in writing, but not beyond 4 months in all.

Appeal to the DRAT: Section 18

An appeal lies within 30 days. The borrower must first deposit 50 per cent of the debt claimed by the bank or determined by the DRT, whichever is less; the appellate tribunal may reduce this to 25 per cent, for reasons recorded in writing.

Bar on civil courts and writs

• Section 34: no civil court can entertain any suit or proceeding about a matter which the DRT or DRAT is empowered to decide under the Act, and no court can grant an injunction against action taken under the Act.
• The Supreme Court has repeatedly told High Courts not to entertain writ petitions against SARFAESI action in the ordinary course, because the borrower has an effective remedy before the DRT. Writs are kept for exceptional cases, such as a total lack of jurisdiction or a breach of natural justice.

Constitutional validity

The 2004 amendment

Parliament responded within months; the present scheme is, in large part, the result of the Mardia Chemicals judgment. The 2004 amendment:

• inserted Section 13(3A), requiring the bank to give reasons for rejecting the borrower's objections;
• recast Section 17 as a simple application to the DRT, with power to restore possession; and
• moved the pre-deposit to the appeal before the appellate tribunal, at 50 per cent, reducible to 25 per cent.

The present balance

The bank can still enforce its security without a court, but it must classify the account properly, give a proper notice, consider the borrower's objections and give reasons, follow the valuation and sale rules, and allow redemption. The borrower gets a real hearing before the DRT, with a pre-deposit only at the appellate stage. Further rules:

• Limitation: the powers cannot be used for a claim already barred by limitation.
• Registration: since 2020, a secured creditor cannot enforce its security under the Act unless the security interest is registered with the Central Registry.
• Priority: once registered, the secured creditor's dues get priority over most other debts, even over taxes and other government dues, except where insolvency proceedings are pending. But the Supreme Court has held that some statutory first charges, such as the charge for provident fund dues, still rank ahead.
• Tenants: a tenant claiming a lease in the mortgaged property can have his claim examined by the DRT, which checks, among other things, whether the lease was validly created before the bank's notice.

Insolvency and Bankruptcy Code: A Brief Note

The Insolvency and Bankruptcy Code, 2016 is a separate law under which a creditor can start a collective resolution process against a corporate debtor. Once the insolvency process is admitted, a moratorium begins, and during it no creditor, not even a secured bank, can enforce its security under the SARFAESI Act. A bank must therefore choose its strategy carefully. The IBC is a subject of its own; for banking law, the key recovery tools remain the DRT and the SARFAESI Act.

Technology and Banking in India

▶ Watch this part of the lecture (2:22:59)

Banking moved from hand-written ledgers at the customer's own branch to anytime, anywhere banking in stages: computerisation of branches; then core banking, in which all branches of a bank are linked to one central database, so that a customer can bank anywhere; and on this foundation, ATMs, cards, internet banking, mobile banking and instant payment systems.

Technology has not changed the basic legal relationship: when money is deposited online, the bank still becomes the customer's debtor, exactly as Foley v. Hill decided. But it has changed how the relationship works:

• instructions are given through passwords, PINs and one-time passwords instead of signatures;
• the bank's duty of care now includes keeping its systems secure; and
• new risks such as hacking and phishing raise the hard question of who should bear the loss when money is stolen electronically, the bank or the customer.

Payment Systems and Real-Time Clearing

A payment system is the arrangement through which money moves from one person to another. Payment systems are governed by the Payment and Settlement Systems Act, 2007. The Reserve Bank is the designated authority; nobody can start or operate a payment system without its authorisation; and it can lay down standards for, and issue directions to, payment systems.

System	How it works	Availability
Real Time Gross Settlement (RTGS)	Settles each high-value transfer individually, at once, in the books of the Reserve Bank	Round the clock, all days of the year, since December 2020
National Electronic Funds Transfer (NEFT)	Settles transfers in batches at short intervals	Round the clock, all days of the year, since December 2019
Immediate Payment Service (IMPS)	Run by the National Payments Corporation of India; instant transfers through a mobile phone	Any hour
Unified Payments Interface (UPI)	Run by the National Payments Corporation of India; instant transfers through a mobile phone	Any hour; the most widely used payment system in the country

• Since May 2025, the Reserve Bank exercises its powers under the Act through a Payments Regulatory Board, chaired by the Governor.
• The Reserve Bank can require payment operators to keep customers' funds apart; those customers then have a first charge over the funds, even if the operator becomes insolvent.

Failed electronic transfers: Section 25

A provision parallel to cheque dishonour: under Section 25 of the Payment and Settlement Systems Act, if an electronic funds transfer started by a person from his own account, to discharge a debt or other liability, cannot be executed because the balance is insufficient, he commits an offence. The punishment is the same as for a bounced cheque: imprisonment up to 2 years, or fine up to twice the amount, or both. The conditions are similar:

• the transfer was started according to the rules of the payment system;
• the beneficiary sends a written notice within 30 days of learning of the failure; and
• the person fails to pay within 15 days of receiving it.

The section contains the same presumptions as cheque law and applies Chapter 17 of the Negotiable Instruments Act so far as the circumstances admit.

ATMs, Debit Cards and Credit Cards

An ATM lets a customer withdraw cash, check his balance and do other transactions without a bank officer. The legal relationship does not change.

Point	Debit card	Credit card
Nature	Linked directly to the customer's bank account	A line of credit given by the issuer; really a loan contract
Effect of payment	Every payment immediately reduces the balance	The issuer pays the merchant, and the cardholder (say, Prince) becomes the issuer's debtor; he must repay by the due date, failing which he pays interest and charges

Reserve Bank directions on cards

Issued in 2022 and carried into the consolidated directions of 2025, the main protections are:

• no card without the customer's explicit consent;
• if an unsolicited card is issued and activated without consent and the customer is billed, the issuer must reverse the charges and pay a penalty of twice the reversed charges;
• a request to close a credit card must be honoured within 7 working days once dues are cleared, failing which the issuer pays ₹500 per day of delay;
• if a credit card is not activated within 30 days of issue, the issuer must seek consent through a one-time password and, if consent is not given, close the card at no cost;
• the issuer cannot capitalise unpaid charges or taxes by charging interest on them;
• debit cards can be issued only by banks, only to holders of savings or current accounts, and a bank cannot force a customer to take one.

Failed transactions: turnaround time

The same framework covers other failed transactions: if a UPI or IMPS transfer debits the sender's account but the beneficiary is not credited, the money must be reversed by the next day.

Internet Banking and Security in a Paperless Environment

▶ Watch this part of the lecture (2:30:10)

Internet and mobile banking let customers do almost everything online: opening deposits, paying bills and transferring money. The legal foundation is the Information Technology Act, 2000:

• it gives legal recognition to electronic records and electronic signatures, so an electronic instruction can have the same legal effect as a signed paper;
• Section 66C punishes identity theft, such as fraudulently using another person's password or electronic signature;
• Section 66D punishes cheating by personation using a computer resource.

These provisions are commonly invoked against online banking fraudsters.

Authentication

The Reserve Bank has long required additional factors of authentication, so that a stolen card number alone is not enough. Under its directions on authentication mechanisms for digital payment transactions, applicable from 1 April 2026:

• every digital payment must be authenticated by at least two distinct factors, subject to a few exemptions such as small contactless card payments;
• a factor may be something the customer knows (PIN or password), something he has (registered phone or card), or something he is (fingerprint);
• for payments other than card-present ones, at least one factor must be dynamic, generated uniquely for that transaction, like a one-time password;
• banks may add risk-based checks for unusual transactions;
• if a customer suffers loss from a transaction made without following these rules, the issuing bank must compensate him in full.

Banks' own cyber security

Every bank must have a board-approved cyber security policy, a security operations centre watching for attacks round the clock, and a system to report cyber incidents to the Reserve Bank quickly.

Digital Personal Data Protection Act, 2023

Personal data held by banks will be governed by the Digital Personal Data Protection Act, 2023. A bank, as a data fiduciary, may process personal data only for lawful purposes, normally with the customer's consent, and must protect it with reasonable security safeguards. Most of the Act is not yet in force:

• the provisions creating the Data Protection Board came into force in November 2025;
• the main duties of data fiduciaries (notice, consent, security safeguards, reporting of data breaches) apply only from May 2027;
• until then, the older rules on protecting sensitive personal data under the Information Technology Act continue to apply.

Fraud and Its Management

Frauds may be committed by outsiders, by customers or by bank employees. In the paper world, common frauds were forged cheques, fake documents and fraudulent loans. In the digital world:

• Phishing: fake messages or websites trick a customer into revealing his credentials.
• Vishing: a caller pretends to be a bank officer.
• Card skimming at ATMs and SIM swap fraud.
• Mule accounts: accounts opened or rented out to receive and move stolen money.
• Digital arrest scam: fraudsters pose as police officers in video calls and terrorise victims into transferring money.

The legal response

Criminal side: frauds are punished under the B.N.S., 2023, for offences such as cheating, criminal breach of trust and forgery, and under the Information Technology Act.

Regulatory side: the Reserve Bank's directions on fraud risk management require every bank to have a board-approved fraud risk policy, watch for early warning signals in loan accounts, report frauds to the Reserve Bank and the police, and examine the accountability of its staff. To fight phishing, banks must move their websites to the bank.in domain, so customers can recognise genuine bank websites.

Effect of classifying an account as fraud: the borrower may be reported to investigating agencies, and he is barred from raising fresh finance from regulated lenders for 5 years after he repays the amount involved. This raised the question whether he must be heard first.

The Supreme Court has since refined the rule in two ways:

• even if a fraud classification is set aside for want of a hearing, the criminal case does not automatically fall, because an FIR merely sets the law in motion;
• the borrower is not entitled to a personal hearing, but the bank must give him the audit reports it relies on, including the forensic audit report, so that he can answer them.

The Reserve Bank's fraud risk management directions of July 2024, now carried into its consolidated directions of 2026, follow this approach: a detailed show cause notice, at least 21 days for the reply, and a reasoned order.

Customer Protection in Electronic Banking

▶ Watch this part of the lecture (2:37:11)

The answer lies in the Reserve Bank's framework on limiting the liability of customers in unauthorised electronic banking transactions, first issued in July 2017 and now part of its consolidated directions on responsible business conduct.

Customer's liability (transactions up to the end of 2026)

Situation	Customer's liability
Bank's own fault, negligence or deficiency (for example, a weakness in its security)	Zero, whether or not he reports quickly
Third-party breach (fault neither with the bank nor the customer but elsewhere in the system, such as card skimming), reported within 3 working days of receiving the bank's communication	Zero
Third-party breach reported after 4 to 7 working days	Transaction amount or a fixed ceiling, whichever is lower
Third-party breach reported beyond 7 working days	As per the bank's board-approved policy
Customer's own negligence (for example, sharing his OTP or PIN with a caller)	Entire loss until he reports to the bank; any loss after reporting falls on the bank

Account (for reporting after 4 to 7 working days)	Ceiling
Basic savings bank deposit account	₹5,000
Other savings accounts; credit cards with a limit of up to ₹5 lakh	₹10,000
Most other current accounts; credit cards with higher limits	₹25,000

Procedural protections: the bank must send transaction alerts and provide round-the-clock reporting channels. Once the customer reports, it must credit the disputed amount within 10 working days while it investigates, and resolve the complaint within 90 days. The burden of proving the customer's liability lies on the bank.

Revised directions from 1 January 2027

In June 2026, the Reserve Bank issued revised directions for electronic transactions made on or after 1 January 2027.

Point	Until the end of 2026	From 1 January 2027
Coverage	Unauthorised electronic banking transactions	Also transactions made with credentials obtained from the customer by fraud, and transactions the customer was coerced into approving
Zero liability for third-party breach	Reported within 3 working days	Reported within 5 calendar days
Deciding complaints	Within 90 days	Within 45 days, or 60 days for cross-border transactions

One-year scheme for frauds during 2027: individual victims of small frauds, even where they were careless, get 85 per cent of the net loss, up to ₹25,000, once in a lifetime, where the gross loss is up to ₹50,000 and the victim reports within 5 calendar days both to the bank and to the national cyber crime reporting portal or helpline.

Other avenues for the customer

The customer must first complain to his bank. If the bank does not reply within 30 days, rejects the complaint, or he is not satisfied, he can approach the Reserve Bank's Ombudsman.

• The Integrated Ombudsman Scheme of 2021 replaced the earlier separate schemes with one system: one nation, one ombudsman.
• Since 1 July 2026, the revised Reserve Bank Integrated Ombudsman Scheme of 2026 applies. It covers commercial banks, regional rural banks, most co-operative banks, deposit-taking non-banking financial companies and the bigger ones that deal with customers, non-bank prepaid instrument issuers, and credit information companies.
• The complaint must reach the Ombudsman within 90 days after the bank's reply or after the 30-day period ends. There is no fee, and complaints can be filed online.
• The Ombudsman can award up to ₹30 lakh for consequential loss, plus up to ₹3 lakh for the complainant's time, expenses, harassment and mental anguish.
• An appeal lies to an Executive Director of the Reserve Bank.

A customer may also approach a consumer commission under the Consumer Protection Act, 2019: banking is a service, and a failure to provide it properly is a deficiency in service. Consumer commissions have often directed banks to compensate customers for unauthorised debits, failed transactions and poor service.

FinTech and the New Challenges

▶ Watch this part of the lecture (2:42:29)

Some FinTech companies compete with banks; many are their partners. FinTech reaches people branches never reached, lowers costs and speeds up services, but creates new legal problems.

1. Digital lending

Some lending apps offering quick small loans charged hidden fees, misused borrowers' phone contacts and photographs, and used abusive recovery methods. The Reserve Bank issued digital lending guidelines in 2022 and consolidated its rules in 2025:

• loans must be disbursed directly into the borrower's bank account and repaid directly to the regulated lender, not through the app company's own account;
• the borrower must receive a key fact statement showing the annual percentage rate, the all-in cost of the loan;
• a cooling-off period lets him exit the loan by paying the principal and the proportionate cost, without penalty;
• the app may collect personal data only as needed and with explicit consent, and must not access his contact list, call logs or media files;
• the regulated bank or company remains responsible for the conduct of the lending service providers it engages.

The Reserve Bank also publishes a directory of digital lending apps used by regulated lenders, so a borrower can check whether an app is genuinely linked to one.

2. Data

The account aggregator system lets a customer share his financial information from one institution with another, for example to get a loan, but only through his explicit consent, given through a regulated intermediary. Data protection law will strengthen these consent rules.

3. Crypto assets

India has still not enacted a comprehensive law on crypto assets, although income from them is taxed.

India has introduced its own central bank digital currency, the digital rupee or e-rupee. The Reserve Bank of India Act was amended in 2022 so that a bank note can be issued in digital form, and pilots began in 2022.

4. Regulatory sandbox

To encourage innovation without exposing the public to untested risks, the Reserve Bank's regulatory sandbox allows new products to be tested live, with real customers, but on a limited scale, for a limited time and under close watch.

Artificial intelligence and deepfakes

If an AI system wrongly rejects a loan, or a deepfake voice tricks a bank officer, who is responsible? The law is still answering such questions. For now, the answer rests on settled principles: a bank owes its customer a duty of care, must follow its regulator's directions, and remains responsible for the systems and partners it chooses.

Quick revision

▶ Watch this part of the lecture (2:47:09)

• The law and practice of banking in India runs from the first bankers and their hundi to UPI and FinTech.
• Because banks hold public money, the law first controls who may become a bank and how it must be run, through the Reserve Bank and the Banking Regulation Act.
• When a customer opens an account, a contract arises, basically of debtor and creditor, with its own rights and duties.
• Money moves through instruments, the cheque and now the electronic transfer, protected by negotiability, presumptions and criminal sanctions for dishonour.
• A bank lends depositors' money and takes security; a loan becomes an NPA after 90 days of default; the bank recovers through the DRT or under the SARFAESI Act, subject to fair procedure and the borrower's remedies.
• Technology now carries all of this, with new risks that the law answers through authentication rules, liability rules and customer protection.