ROBO B OOK S M ONO G RA P H DATABASE A DM INIS TRAT ION R AM PANT T ECH P RESS E B OO K PAGE II Oracle DBA Made. JAIIB MADE SIMPLE. LEGAL & REGULATORY. ASPECTS OF BANKING. (JAIIB PAPER -3). Version (A Very useful book for Day to Day Banking and all. 1. LEGAL ASPECTS OF BANKING. (Compiled by Shri S. Kothandaraman, Canara Bank (Retd), Guest Faculty, IIBF). Module A: Unit 1 LEGAL FRAMEWORK OF.

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LEGAL AND REGULATORY ASPECTS OF BANKING - Diploma in Banking - JAIIB DOWNLOAD PDF - MB. Share Embed Donate. Legal & Regulatory Aspects of Banking - Download as PDF File .pdf), Text File . txt) or read online. of the World Bank to provide insights into aspects of law and justice that are rel- .. ( .

The Act has been amended from time to time to meet the demands of changing times.

Legal and Regulatory Aspects of Banking - JAIIB

The Act deals with the constitution, powers and functions of the Reserve Bank. It does not directly deal with regulation of the banking system except for Section 42, which provides for cash reserves of scheduled banks to be kept with the Reserve Bank, with a view to regulating the credit system and ensuring monetary stability.

Further, Section 18 of the Act provides for direct discount of bills of exchange and promissory notes when a special occasion arises, making it necessary or expedient for the purpose of regulating credit in the interests of trade, industry and agriculture.

The Act, in short, deals with: i incorporation, capital, management and business of the bank; ii the central banking functions like issue of bank notes, monetary control, acting as banker to government and banks, lender of last resort; iii collection and furnishing of credit information; iv acceptance of deposits by non-banking financial institutions; v general provisions regarding reserve fund, credit funds, publication of bank rate, audit and accounts; and vi penalties for violation of the provisions of the Act or the directions issued thereunder.

The Banking Regulation Act, was enacted to consolidate and amend the law relating to banking and to provide for a suitable framework for regulating the banking companies. Initially, the Act provided for regulation of banking companies only, but in the Act was amended to cover co-operative banks as well with certain modifications See, Section However, the Act, as provided in Section 3, does not apply to primary agricultural credit societies and co-operative land mortgage banks.

The provisions of the Act are applicable to banking companies in addition to other laws which are applicable to such companies, unless otherwise specifically provided in the Act. Thus, Companies Act, which deals with the incorporation and working of companies is applicable to banking companies except where special provisions are made in the Banking Regulation Act in that regard. The Act regulates entry into banking business by licensing as provided in Section 22 thereof.

The Act also puts restrictions on the shareholding, directorship, voting rights and other aspects of banking companies. There are several provisions in the Act regulating the business of banking such as restriction on loans and advances, rates of interest to be charged, requirement as to cash reserve and maintenance of percentage of assets, etc.

There are provisions regarding audit and inspection and submission of balance sheets and accounts. The Act provides for control over the management of banking companies and also deals with the procedure for winding up of the business of the banks and penalties for violation of its provisions. In short, the Act deals with: a b c d regulation business of banking companies; control over the management of banking companies; suspension and winding up of banking business; and penalties for violation of the provisions of the Act.

The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act, for taking over the management of currency from the Central Government and carrying on the business of banking in accordance with the provisions of the Act. Originally, under the RBI Act, the Bank had the responsibility of: a regulating the issue of bank notes; b keeping of reserves for ensuring monetary stability; and c generally to operate the currency and credit system of the country to its advantage.

The Reserve Bank is a body corporate having perpetual succession and common seal and shall sue and be sued in its name. The whole capital of the bank is held by the Central Government. The Bank has its central office in Mumbai and offices in Mumbai, Kolkata, Delhi and Chennai, and branches at most of the state capitals and some other cities. The bank functions under the general superintendence and directions of the Central Board of 9 Directors.

The bank has to abide by the directions given by the Central Government in public interest after consultation with the Governor of the bank. The board shall consist of a Governor and not more than four Deputy Governors to be appointed by Central Government and other directors nominated by the Central Government. Apart from the Central Board, the bank has also local boards situated at Mumbai, Kolkata, Delhi and Chennai, which perform any duty delegated to them by the Central Board.

The Governor has the power of general superintendence and direction of the affairs of the bank and exercise all powers of the bank unless otherwise provided in the regulations made by the Central Board.

Legal and Regulatory Aspects of Banking

The Deputy Governors, Executive Directors and other officers in different grades assist the Governor in the discharge of the Bank s functions. The bank may issue notes of different denominations from Rs. Such notes shall be legal tender at any place in India.

The bank is the banker to the Central Government under Section 20 of the Act, and accordingly it is obligatory to undertake banking business for the Central Government. In the case of state governments, their banking business is undertaken by the bank based on agreements as provided in Section 21 A.

Bank provides ways and means of advances to the Central and state governments. These are temporary advances to meet immediate needs when there is interval between expenditure and flow of revenue. The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation Act, In exercise of the powers under that Act the bank regulates the entry into banking business by licensing, exercises control over shareholding and voting rights of shareholders, exercises controls over the managerial persons, and regulates the business of banks.

The bank also inspects banks and exercises supervisory powers, and may issue directions from time to time in public interest and in the interest of the banking system with respect to interest rates, lending limits, investments and various other matters. The Reserve Bank is the primary regulator of banks. The government holds the entire capital of the Reserve Bank and appoints the Governor and the members of the Central Board and has the power to remove them.

The government has also the power to issue directions to the Reserve Bank under Section 7 I of the RBI Act whenever considered 10 necessary in public interest after consultation with the Governor. Thus, the government can exercise control over banks by influencing decision-making by the Reserve Bank and has also got appellate authority in respect of several matters in which the Reserve Bank has been conferred the power to decide at the first instance. Similarly, there are also provisions for appeal in respect of cancellation of banking licence under Section 22 and refusal of certificate regarding floating charge on assets Section 14A.

The government has also the power to notify other forms of business which a bank may undertake under Section 6 1 o of the Act. Rule-making powers under Sections 52 and 45Y are vested in the Central Government.

There are also other provisions under which the Central Government exercises powers as under: a b c d e f Approval for formation of subsidiary for certain business under Section 19; Notification with reference to accounts and balance sheet under Section 29; Issue of direction for inspection of banks under Section 35; Power to acquire undertakings of banks Section 36AE ; Appointment of court liquidator; Suspension of business and amalgamation of banks under Section The above provisions confer wide powers on the Central Government to regulate banks.

These are in addition to the powers conferred on the government as majority shareholder or full owner of public sector banks under the statutes constituting them. A co-operative bank is a co-operative society engaged in the business of banking and may be a primary Co-operative bank, a district central co-operative bank or a state co-operative bank.

Cooperative banks operating in one state only are registered under the State co-operative Societies Act concerned.

The formation of such banks as well as their management and control over personnel is regulated by the co-operative law of the state. The Registrar of co-operative societies under the Co-operative Societies Act exercises a wide range of powers on co-operative societies from registration to winding up. In the case of co-operative banks operating in more than one state, the Multi-State Co-operative Societies Act, is applicable. In that case, the Registrar appointed by the Central Government takes the place of the Registrar appointed by the State Government in other cases.

With the introduction of Section 56 in the Banking Regulation Act, with effect from , cooperative banks have come under the regulatory purview of the Reserve Bank. While the formation and management of co-operative societies operating in one state only including those conducting banking business are under the control of the State Government, licensing and regulation of banking business rests with the Reserve Bank.

Thus, there is dual control of State Governments and the Reserve Bank over these banks. In the case of co-operative banks which are registered under the Deposit Insurance and Credit Guarantee Corporation Act, the Reserve Bank has the power to order their winding up. The circumstances in which Reserve Bank may require winding up are mentioned in Section 13D of the Act.

Banks may be subject to the control of other regulatory agencies in the conduct of their business. For instance, a banking company will be subject to the control of the authorities under the Companies Act in respect of company matters. Similarly, a bank is answerable to labour authorities in respect of the terms and conditions of service of its workmen, opening and closing of its premises, engagement of contract labour, etc.

Banks are also liable to pay income tax like cash transaction tax, service tax, etc. As provided in Section 6 of the Banking Regulation Act, banks may undertake certain non-banking business in addition to the business of banking.

In that regard also, banks may be subject to the regulatory control of other agencies. For instance, in the case of dealings in securities like shares and debentures, banks are subject to regulation by the Securities Exchange Board of India under the Securities Contract Regulation Act, read with the Securities and Exchange Board of India Act, Banking means acceptance of deposits of money from the public for lending or investment.

Such deposits may be repayable on demand or may be for a period of time as agreed to, by the banker and the customer, and may be repayable by cheque, draft or otherwise. Apart from banking, banks are authorised to carry on other business as specified in Section 6 of the Banking Regulation Act.

Banks are, however, prohibited from undertaking any trading activities. Banks are constituted as companies registered under the Companies Act, , statutory corporations constituted under Special Statutes or Co-operative societies registered under the Central or State Co-operative Societies Acts. The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution of the bank.

Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. The government has direct and indirect control over banks. It can exercise indirect control through thx: Reserve Bank and also act directly in appeals arising from decisions of the Reserve Bank under the various provisions of the Banking Regulation Act.

Central Government has substantial control over the management of these banks. Only certain provisions of the BR Act are applicable to these banks as indicated in that Act. Co-operative banks operating in one state only are registered under the State Co-operative Societies Act and are subject to the control of the State Government as also the Reserve Bank.

In the case of non-banking business of the banks, they are subject to control by other regulatory agencies. State i ii iii whether the following statements are True or False. A public sector bank is a body corporate created under a special statute. A banking company is registered under the Banking Regulation Act. Fill in the gaps choosing the answers from the brackets. State i ii iii iv v whether the following statements are True or False.

Central Government can give direction to the Reserve Bank. All kinds of business of banks is regulated only by the Reserve Bank. Central Government is the primary regulator of banks. State governments have no control over co-operative banks.

On cancellation of licence of any bank, an appeal lies with Central Government. True; ii False; iii False; iv False; v True. One of the essential characteristics of banking is lending to traders; investment in securities; acceptance of deposits from the public 2.

Banking companies operating in India are constituted in the form of body corporate constituted under a special statute; company registered under the Companies Act, or a foreign company; society registered under the Societies Registration Act 3. Companies Act applies to banking companies notwithstanding the provisions of the Banking Regulation Act; insofar as its provisions are not inconsistent with the provisions of the Banking Regulation Act; only in relation to registration and winding up 4.

Under the Reserve Bank of India Act, Reserve Bank regulates acceptance of deposits by all companies; non-banking financial companies; non-banking non-financial companies 5. BR Act is applicable to co-operative banks to the extent as provided in the state laws on co-operative societies; in a modified form as provided in Section 56 thereof; at par with commercial banks 6. Central Government may give directions to the Reserve Bank when considered necessary in public interest only after consulting the Governor of Reserve Bank; the Central Board of the Reserve Bank; the Finance Commission 8.

A co-operative society registered under the Multi-State Co-operative Societies Act is prohibited from undertaking banking business; can be declared as a state co-operative bank; can undertake banking business as a primary co-operative bank 9. A multi-state co-operative bank means a multi-state co-operative society which is a primary co-operative bank; central co-operative bank; state co-operative bank To start with, there are restrictions at the entry point, by way of licensing and then the requirement of permission for opening or shifting of branches.

There are further regulations over the paid-up capital and reserves, shareholder's rights, constitution of the board of directors, appointment of chairman and formation of subsidiaries. Apart from the above, there arc also controls over the managerial and other personnel, including the power to remove unsuitable persons and to appoint suitable persons.

In this unit, we study various provisions of the Banking Regulation Act, providing for controls over the organisation and management of banking companies. Commencing or carrying on a banking business without a licence is prohibited.

When the Act came into force, the banking companies, which were then in existence were required to apply for licence within six months from the commencement of the Act.

But, such banking companies were permitted to continue business, unless and until their applications for licence were rejected by the Reserve Bank. The requirement of licence was meant to ensure the continuance of only those banks, which were established and operating on sound lines and to prevent indiscriminate formation of banking companies.

As held by the Gujarat High Court in Shivabhai vs RBI, Ahmedabad AIR Guj 19 , Reserve Bank has the discretion to grant or refuse the licence and when such decision based on relevant, material and germane considerations, the decision cannot be assailed. Only if the decision is based on extraneous considerations or is perverse, the court will intervene.

It is open to the RBI to consider the defects or improvements revealed in an inspection held under Section 35 of the BR Act while disposing of an application for licence. See, Sajjan Bank Pvt.

The refusal of licence to a company would make it ineligible to undertake banking business, but it would still be open to the company to carry on other business like money lending.

Although Section 11 of BR Act specifies the minimum capital and reserves requirements of a banking company, the Reserve Bank can stipulate a higher requirement of capital for licensing a banking company as under Section 22 the Reserve Bank has to be satisfied that the company has an adequate capital structure and earning prospects.

Foreign Banks: In the case of companies incorporated outside India applying for a licence, apart from the conditions specified in the case of domestic companies, three additional conditions have been stipulated for consideration by the Reserve Bank. These are: a Whether carrying on of banking business by the company in India will be in public interest; b Whether the government or the law of the country, in which the company is incorporated discriminates in any way against banking companies registered in India; c Whether the company complies with provisions of the BR Act, as applicable to foreign companies.

Local Area Banks: The Reserve Bank has recognised the concept of local area banks and licensed a few four such banks. These arc banking companies operating only in a limited geographical area. The licence issued to these banks would restrict their operations to the specified local area to ensure adequate banking services in that area.

The cancellation of licence may be on any one or more of the following grounds: a The company ceases to carry on banking business in India; b The company at any time fails to comply with any of the conditions imposed under the subSection l of Section 22 of Banking Regulation Act; c The company does not fulfil at any time, any of the conditions referred to in the sub-Section 3 or 3 A of Section 22 of Banking Regulation Act.

Before cancellation of a licence for non-compliance with any of the conditions as above, the company has to be given an opportunity for taking necessary steps for complying with or fulfilling the conditions. However, in cases where the Reserve Bank is of the opinion that delay will be prejudicial to the interests of depositors or the public, the requirement of opportunity can be dispensed with.

A banking company, whose licence is cancelled, can appeal to the Central Government within a period of 30 days from the date of the order rejecting licence. Apart from the requirement of licence for commencing or carrying on banking business, banks have to obtain the prior permission of Reserve Bank for opening a new place of business or changing location of the existing place of business.

Under Section 23 of the Banking Regulation Act, 'Place of business' for this purpose includes any sub-office, pay office, sub-pay office or any place at which deposits are received, cheques cashed or moneys lent.

However, changing the location of an existing place of business within the same city, town or village would not need such permission. These restrictions also apply to foreign branches of banking companies incorporated in India. Opening of a temporary place of business up to one month for purpose of affording banking facilities for any exhibition, mela, conference or like occasion is exempt.

However, the temporary branch has to be within the limits of the city, town or village where there is an existing branch or in the environs thereof. The present guidelines from RBI provide that Banks should submit their request for new branches, administrative offices, ATMs once in a year for consideration of RBI as against the earlier practice of making individual applications for each and every branch.

For granting permission under Section 23, the Reserve Bank may require to be satisfied of the following: a b c d Financial condition and history of the bank; General character of its management; Adequacy of capital structure and earning prospects; Public interest.

This may be done by an inspection of the bank under Section 35 or otherwise. While granting permission for opening or shifting a branch, the Reserve Bank may impose any conditions which it thinks fit necessary.

If any bank fails to comply with such conditions, the permission may be revoked after giving an opportunity to the bank to show cause. In the case of regional rural banks, the applications for permission have to be routed through the National Bank NABARD , and the national bank has to offer its comments on merits to the Reserve Bank.

Any company wanting to commence banking business has to comply with these requirements. The amounts stipulated have reference to the places of business. In the case of any dispute regarding computation of paid-up capital and reserves of any banking company, the decision of the Reserve Bank shall be final. Foreign Banks: Under the sub-Section 2 of Section 11 of the BR Act, a foreign bank banking company incorporated outside India operating in India, has to deposit and keep deposited with the Reserve Bank, an amount of Rs.

The amount has to be kept in cash, unencumbered approved securities or partly in both. Apart from this, an amount of twenty per cent of the profit for each year in respect of business transacted through the branches in India as disclosed in the profit and loss account has to be deposited with the Reserve Bank.

The securities deposited can be replaced by other unencumbered 19 approved securities or cash deposited can be similarly replaced by securities. The Central Government can exempt any foreign bank from this requirement on the recommendation of the Reserve Bank for a specified period if the amounts deposited already by it are considered adequate.

On the cessation of business by any foreign bank for any reason, these deposits shall form the assets of the company on which the creditors in India shall have the first charge. Indian Banks: In case of banking companies incorporated in India, the requirements of minimum paid-up capital and reserves under Section 11 3 are as follows: a If it has a place of business in more than one state, Rs.

That means be sure you have enough money in your account to cover the checks that you write. The second consequence of Check 21 Act is that it is now possible for anybody—you at home or the merchant from whom you are downloading something—to scan a check and deposit it instantly.

The user clicks to send the deposit to the desired existing bank account. Not surprisingly, a desire for uniformity was the principal reason for the adoption of UCC Article 4.

Article 4 absorbed many of the rules of the American Bankers Association Code and of the principles of the Deferred Posting statutes, as well as court decisions and common customs not previously codified.

Banks Covered Article 4 covers three types of banks: depository banks, payor banks, and collecting banks.

These terms—already mentioned earlier—are defined in UCC Section A depositary bank is the first bank to which an item is transferred for collection.

A collecting bank is any bank except the payor bank that handles the item for collection. Technical Rules Detailed coverage of Parts 2 and 3 of Article 4, the substantive provisions, is beyond the scope of this book. However, Article 4 answers several specific questions that bank customers most frequently ask. The moment these words are indorsed on a check, only a bank may acquire the rights of a holder. This restriction can be lifted whenever a the check has been returned to the customer initiating collection or b the bank specially indorses the check to a person who is not a bank May a depositary bank supply a missing indorsement?

Section 1. Are any warranties given in the collection process? They are identical to those provided in Article 3, except that they apply only to customers and collecting banks a. The customer or collecting bank that transfers an item and receives a settlement or other consideration warrants 1 he is entitled to enforce the item; 2 all signatures are authorized authentic; 3 the item has not been altered; 4 the item is not subject to a defense or claim in recoupment; 5 he has no knowledge of insolvency proceedings regarding the maker or acceptor or in the case of an unaccepted draft, the drawer.

These warranties cannot be disclaimed as to checks. The answer turns on whether the settlement was provisional or final. A settlement is the proper crediting of the amount ordered to be paid by the instrument.

However, if settlement was final, the bank cannot claim a refund. What determines whether settlement is provisional or final? All clearinghouses have rules permitting revocation of settlement within certain time periods. For example an item cleared before 10 a. From this section it should be apparent that a bank generally can prevent a settlement from becoming final if it chooses to do so. However, Section 1 permits the bank to vary its terms, except that no bank can disclaim responsibility for failing to act in good faith or to exercise ordinary care.

Most disputes between bank and customer arise when the bank either pays or refuses to pay a check. Common Issues Arising between Banks and Their Customers Payment of Overdrafts Suppose a customer writes a check for a sum greater than the amount in her account. Under Section 1 , it may. Payment of Stale Checks Section permits a bank to refuse to pay a check that was drawn more than six months before being presented. A corporate dividend check, for example, will be presumed to be good more than six months later.

May the bank honor her checks? Section permits banks to accept, pay, and collect an item as long as it has no notice of the death or declaration of incompetence, and has no reasonable opportunity to act on it. Even after notice of death, a bank has ten days to payor certify checks drawn on or prior to the date of death unless someone claiming an interest in the account orders it to refrain from doing so.

An oral stop order is effective for fourteen days; a follow-up written confirmation within that time is effective for six months and can be renewed in writing. But if a stop order is not renewed, the bank will not be liable for paying the check, even one that is quite stale e. Hempstead Bank, N. See Section National Bank of Adams County.

Primarily, the customer must act promptly in examining her statement of account and must notify the bank if any check has been altered or her signature has been forged. Recovery may also be denied when there has been a series of forgeries and the customer did not notify the bank within two weeks after receiving the first forged item. Rogers case. These rules apply to a payment made with ordinary care by the bank. If the customer can show that the bank negligently paid the item, then the customer may recover from the bank, regardless of how dilatory the customer was in notifying the bank—with two exceptions: 1 from the time she first sees the statement and item, the customer has one year to tell the bank that her signature was unauthorized or that a term was altered, and 2 she has three years to report an unauthorized indorsement.

It was enacted in in response to complaints by consumer groups about long delays before customers were allowed access to funds represented by checks they had deposited. It has nothing to do with electronic transfers, although the increasing use of electronic transfers does speed up the system and make it easier for banks to comply with Regulation CC.

Funds from other local checks drawn on institutions within the same Federal Reserve region must be available within two working days, while there is a maximum five-day wait for funds from out-of-town checks.

In order for these time limits to be effective, the customer must endorse the check in a designated space on the back side. Key Takeaway The bank collection process is the method by which checks written on one bank are transferred by the collecting bank to a clearing house. Traditionally this has been a process of physical transfer by air and ground transportation from the depository bank to various intermediary banks to the payor bank where the check is presented.

Exercises Describe the traditional check-collection process from the drawing of the check to its presentation for payment to the drawee payor bank Describe how the Check 21 Act has changed the check-collection process. Why was Article 4 developed, and what is its scope of coverage? Recognize some typical examples of EFTs. Know that the EFT Act of protects consumers, and recognize what some of those protections—and liabilities—are.

Understand when financial institutions will be liable for violating the act, and some of the circumstances when the institutions will not be liable. What has developed is electronic fund transfer EFT , a system that has changed how customers interact with banks, credit unions, and other financial institutions.

Paper checks have their advantages, but their use is decreasing in favor of EFT. In simplest terms, EFT is a method of paying by substituting an electronic signal for checks. Types of EFT You are of course familiar with some forms of EFT: The automated teller machine ATM permits you to electronically transfer funds between checking and savings accounts at your bank with a plastic ID card and a personal identification number PIN , and to obtain cash from the machine.

Preauthorized payment plans permit direct electronic deposit of paychecks, Social Security checks, and dividend checks. No checks change hands; no paper is written on. It is quiet, odorless, smudge proof.

Obviously some sort of law is necessary to regulate EFT systems. Electronic Fund Transfer Act of Purpose Because EFT is a technology consisting of several discrete types of machines with differing purposes, its growth has not been guided by any single law or even set of laws. The most important law governing consumer transactions is the Electronic Fund Transfer Act of Federal law that provides a basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund transfer systems.

The primary objective of [the statute], however, is the provision of individual consumer rights. The EFT Act of is primarily designed to disclose the terms and conditions of electronic funds transfers so the customer knows the rights, costs and liabilities associated with EFT, but it does not embrace every type of EFT system. E, Section Consumer Protections Afforded by the Act Four questions present themselves to the mildly wary consumer facing the advent of EFT systems: 1 What record will I have of my transaction?

Proof of transaction. The electronic terminal itself must be equipped to provide a receipt of transfer, showing date, amount, account number, and certain other information.

Perhaps more importantly, the bank or other financial institution must provide you with a monthly statement listing all electronic transfers to and from the account, including transactions made over the computer or telephone, and must show to whom payment has been made.

Correcting errors. You must call or write the financial institution whenever you believe an error has been made in your statement. You have sixty days to do so. If you call, the financial institution may require you to send in written information within ten days.

The financial institution has forty-five days to investigate and correct the error. If it takes longer than ten days, however, it must credit you with the amount in dispute so that you can use the funds while it is investigating.

The financial institution must either correct the error promptly or explain why it believes no error was made. You are entitled to copies of documents relied on in the investigation. Recourse for loss or theft. More daunting is the prospect of loss if you fail within sixty days to notify the financial institution of an unauthorized transfer noted on your statement: after sixty days of receipt, your liability is unlimited.

In other words, a thief thereafter could withdraw all your funds and use up your line of credit and you would have no recourse against the financial institution for funds withdrawn after the sixtieth day, if you failed to notify it of the unauthorized transfer.

Mandatory use of EFT. Your employer or a government agency can compel you to accept a salary payment or government benefit by electronic transfer.

But no creditor can insist that you repay outstanding loans or pay off other extensions of credit electronically. The act also requires the financial institution to provide you with specific information concerning your rights and responsibilities including how to report losses and thefts, resolve errors, and stop payment of preauthorized transfers.

Enforcement of the Act A host of federal regulatory agencies oversees enforcement of the act. Section Key Takeaway Eager to reduce paperwork for both themselves and for customers, and to speed up the check collection process, financial institutions have for thirty years been moving away from paper checks and toward electronic fund transfers.

These EFTs are ubiquitous, including ATMs, point-of-sale systems, direct deposits and withdrawals and online banking of various kinds. Responding to the need for consumer protection, Congress adopted the Electronic Fund Transfers Act, effective in The act addresses many common concerns consumers have about using electronic fund transfer systems, sets out liability for financial institutions and customers, and provides an enforcement mechanism.

Exercises Why have EFTs become very common? What major issues are addressed by the EFTA?

Frequently bought together

If you lose your credit card, what is your liability for unauthorized charges? Wholesale Funds Transfers Another way that money is transferred is by commercial fund transfers or wholesale funds transfers Transfers of large sums of money—tens of millions of dollars—between businesses or between businesses and financial institutions. It is trillions of dollars a day.

Wholesale transactions are the transfers of funds between businesses or financial institutions. The entire wholesale funds transfer system was not governed by a clear body of law until U. Article 4A was promulgated in and adopted by the states shortly thereafter.

The Article 4A drafting process resulted in many innovations, even though it drew heavily on the practices that had developed among banks and their customers during the 15 years before the drafting committee was established.

While a consensus was not easy to achieve, the community of interests shared by both the banks and their customers permitted the drafting process to find workable compromises on many thorny issues. All states and US territories have adopted Article 4A.

Consistent with other UCC provisions, the rights and obligations under Article 4A may be varied by agreement of the parties. Article 4A does not apply if any step of the transaction is governed by the Electronic Fund Transfer Act. Although the implication may be otherwise, the rules in Article 4A apply to any funds transfer, not just electronic ones i. In order to pay a supplier, Supplies Ltd. This transaction is depicted in Figure Responsibility for Unauthorized Payments First, who is responsible for unauthorized payment orders?

The usual practice is for banks and their customers to agree to security procedures for the verification of payment orders. If a bank establishes a commercially reasonable procedure, complies with that procedure, and acts in good faith and according to its agreement with the customer, the customer is bound by an unauthorized payment order. There is, however, an important exception to this rule. A customer will not be liable when the order is from a person unrelated to its business operations.

Error by Sender Second, who is responsible when the sender makes a mistake—for instance, in instructing payment greater than what was intended? The general rule is that the sender is bound by its own error. But in cases where the error would have been discovered had the bank complied with its security procedure, the receiving bank is liable for the excess over the amount intended by the sender, although the bank is allowed to recover this amount from the beneficiary.

Bank Mistake in Transferring Funds Third, what are the consequences when the bank makes a mistake in transferring funds? If First Bank had instructed payment to the wrong beneficiary, Widgets would have no liability and the bank would be responsible for recovering the entire payment.

Unless the parties agree otherwise, however, a bank that improperly executes a payment order is not liable for consequential damages. Here are discussed the definition of letters of credit, the source of law governing them, how they work as payments for exports and as payments for imports.

Definition A letter of credit A statement by a bank or other financial institution that it will pay a specified sum of money to specific persons if certain conditions are met. Or, to rephrase, it is a letter issued by a bank authorizing the bearer to draw a stated amount of money from the issuing bank or its branches, or other associated banks or agencies.Although the implication may be otherwise, the rules in Article 4A apply to any funds transfer, not just electronic ones i.

Chairperson 7. Such appointee shall not incur any obligation or liability for action taken in good faith in the execution of the duties of his office. Persons who are directors of any company other than a subsidiary of a banking company or company registered under Section 25 of the Companies Act are also prohibited from managing a banking company.

However, this prohibition shall not apply to a director for a temporary period of three months, or a further period not exceeding nine months, if allowed by the Reserve Bank. Banks in distress should be distinguished from banks that are merely weak. In the case of regional rural banks. Banking Companies: A banking company, as defined in Section 5 c of the Banking Regulation Act is a company which transacts the business of banking.

Unsecured loans or advances to any of its directors c.