Principles and Practices of Banking
Core concepts
Banking questions here revolve around what a bank legally does, how the banker–customer relationship shifts with the product, and how deposits create credit. Start from the statutory idea of banking: accepting money from the public, repayable on demand, for lending or investment. Primary functions (deposits, advances) build the balance sheet; secondary functions (collection, remittance, safe custody, letters of credit, guarantees) earn fee income without the bank acting as principal risk-taker.
The relationship is not one thing. In a current account the banker is a debtor; while collecting a cheque the banker is an agent; for a locker or sealed parcel the banker is a bailee; when advising on investments the banker may be a fiduciary. Know the banker's rights - general lien over securities held for a general balance (but not over safe-custody items), set-off confined to mutual, matured, ascertained debts in the same capacity, and appropriation of payments on the Clayton's case first-in-first-out rule - and the duty of secrecy with its recognised exceptions.
Special customers: a minor may operate a savings account but cannot be granted an overdraft; a partnership is bound by the mandate in the partnership deed; a company needs a board resolution within its memorandum powers; a trustee is bound by the trust deed.
Traps
Questions blur general lien with particular lien and make set-off apply to a deposit standing in another person's name. Paying a stopped cheque, or lending to a minor, creates liability.
Rule of thumb
Credit multiplier = 1 / reserve ratio. A ₹1,000 deposit under a 10% reserve ratio supports ₹10,000 of deposits and ₹9,000 of derivative credit.