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JAIIB AFM: Legal & Regulatory Aspects of Banking

JAIIB AFM · Work through your exam, one topic at a time.

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Legal & Regulatory Aspects of Banking

What this paper tests

Legal & Regulatory Aspects examines the statutes a banker applies daily: the RBI Act, 1934, the Banking Regulation Act, 1949, the Negotiable Instruments Act, 1881, the Indian Contract Act, 1872, SARFAESI, 2002, the RDDBFI Act, 1993, the IBC, 2016, the Limitation Act, 1963 and the PMLA, 2002.

Core rules

  • Banking definition. Section 5(b), BR Act: accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
  • Security types. In a pledge, possession passes to the bank; in hypothecation possession stays with the borrower but the bank holds a charge; a mortgage transfers an interest in immovable property.
  • SARFAESI. Section 13(2) gives a 60-day demand notice; Section 13(4) enables taking possession and sale; the borrower's right of redemption under Section 13(8) survives until sale or transfer is completed.
  • Limitation. A suit on a loan is time-barred after three years; Section 18 of the Limitation Act renews the period only on a written acknowledgement signed before expiry.
  • Section 138, NI Act. Dishonour for insufficiency of funds is an offence if notice is issued within 30 days of the bank memo and the drawer fails to pay within 15 days of receipt.

Worked example

A cheque is returned unpaid on 10 January. The payee's demand notice must issue by 9 February (30 days). The drawer then has 15 days, i.e. until 24 February, to pay. The cause of action arises on 25 February, and the complaint must be filed within one month - by 25 March. Miss the notice date and the Section 138 remedy lapses, though a civil suit on the debt may still lie.

Traps

Confusing the 60-day SARFAESI notice with the 30/15-day Section 138 timeline; treating a guarantee as an indemnity (a surety has secondary liability and, unlike an indemnifier, can proceed against the principal debtor); ignoring that an IBC moratorium halts SARFAESI action; and assuming an oral acknowledgement restarts limitation.