Principles & Practices of Banking
Principles & Practices of Banking
This domain tests the legal and practical framework of banker–customer relations, deposit accounts, KYC and AML, negotiable instruments and lending safeguards. Scenario questions commonly turn on mandates, cheque crossings, endorsements, liens and documentation.
Core rules and concepts
- The banker–customer relationship is contractual; for a deposit it is generally debtor–creditor, with a duty of confidentiality subject to law, consent and credit-reporting rules.
- KYC/CDD requires identification of the customer and beneficial owner, purpose of account, risk profiling, periodic updation and enhanced due diligence for high-risk customers and PEPs.
- Under the Negotiable Instruments Act 1881, a holder in due course takes a negotiable instrument free from defects if they acquired it bona fide for value before maturity without notice of defect.
- General crossing means two parallel lines; account payee crossing directs collection only to the named payee’s account; not negotiable crossing means the transferee gets no better title than the transferor.
- Negotiation requires endorsement and delivery. A forged endorsement gives no title, and a bank collecting on it may face liability.
- A banker’s general lien applies to goods and securities held for the general balance due, unless excluded by contract; set-off adjusts mutual debts.
- A garnishee order attaches a customer’s deposit in the bank’s hands, subject to the order’s terms.
Worked example
A cheque payable to Ravi is crossed account payee and is presented for collection into Suresh’s account. The bank should refuse to collect it for Suresh. The crossing is a direction that proceeds go only to the named payee’s account. If the bank ignores this and collects for another person, it may be liable for conversion or negligence. A stop-payment instruction, separately, does not cancel the underlying debt.
Traps
Do not treat account payee and general crossing as identical. General lien is not the same as particular lien. Stop payment is not cancellation of liability. KYC is ongoing, not a one-time account-opening formality.