Revolving Credit

Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations. They were first introduced by the Strawbridge and Clothier Department Store.

It is an arrangement which allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires. Credit card loans and overdrafts are revolving loans, also called evergreen loan.

 

In this case-

• The borrower may use or withdraw funds up to a pre-approved credit limit.
• The amount of available credit decreases and increases as funds are borrowed and then repaid.
• The credit may be used repeatedly.
• The borrower makes payments based only on the amount he or she has actually used or withdrawn, plus interest.
• The borrower may repay over time (subject to any minimum payment requirement), or in full at any time.
• In some cases, the borrower is required to pay a fee to the lender for any money that is undrawn; this is especially true of corporate bank revolving-credit loans.

A revolving loan provides a borrower with a maximum aggregate amount of capital, available over a specified period of time. Unlike a term loan, the revolving loan allows the borrower to draw down, repay and re-draw loans on the available funds during the term of the note. Each loan is borrowed for a set period of time, usually one, three or six months, after which time it is technically repayable. Repayment of a revolving loan is achieved either by scheduled reductions in the total amount of the loan over time, or by all outstanding loans being repaid on the date of termination. A revolving loan made to refinance another revolving loan which matures on the same date as the drawing of the second revolving loan is known as a "rollover loan", if made in the same currency and drawn by the same borrower as the first revolving loan. The conditions to be satisfied for drawing a rollover loan are typically less onerous than those for other loans.

A revolving loan is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit, a swingline (that is, a short-term borrowing that is funded on one day's notice), or an overdraft within the terms of a revolving credit loan. This is often achieved by creating a sublimit within the overall loan, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities.

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Dormant Account

A checking or money market account is considered Dormant/Inactive if the account has had no deposit or withdrawal activity (other than posting interest) for a period of one year.

 A Certificate of Deposit account is considered Dormant/Inactive if there is no account activity for a period of one year after the first date of renewal.

In other words, An account is declared dormant after a bank or building society has failed in attempts to contact the holder; if letters or statements are returned marked "not known at this address", and if it is unused for an extended period (accounts still being used regularly will generally remain open even if mail is returned).

It varies from bank to bank. Generally, current accounts are often marked "dormant" after a year, but savings accounts can go untouched for between three and five years.

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Merchant Banking

Merchant banking consisted initially of merchants who assisted in financing the transactions of other merchants in addition to their own trade. In France, during seventeenth and eighteenth centuries a merchant banker was not merely a trader but an entrepreneur par excellence. He invested his accumulated profits in all kinds of promising activities. He added banking business to his merchant activities and became a merchant banker.

The origin of merchant banking is to be traced to Italy in late medieval times and France during the seventeenth and eighteenth centuries. 

The Italian merchant bankers introduced into England not only the bill of exchange but also all the institutions and techniques connected with an organised money market.

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Holder in due course

The holder in due course (HDC) theory is a rule in commercial law that protects a purchaser of debt, where the purchaser is assigned the right to receive the debt payments. The theory insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.

A holder in due course must

1. Be a holder of a negotiable instrument

2. Take it for value

3. Take it in good faith

4. Take it without notice that it is overdue or dishonored, or that the instrument contains an un-authorized signature or an alteration, or that any person has any defense against or claim to it;

5. Take it without reason to question its authenticity due to apparent evidence of forgery, alteration, incompleteness, or other irregularity.

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Law Short Notes on Risk-Weighted Asset

Risk-weighted asset is a bank's assets weighted according to credit risk. Some assets, such as debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since different types of assets have different risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets.
This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution, and is regulated by the Local Central Banks or other National financial regulators. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.

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Law Short Notes on Treasury Bills

Treasury Bills issued by the government as an important tool of raising public finance and up to 1994, were of three types, although all of them were 90-day bills. Among these three types, bulk was represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A second type was the 3-months treasury bills on tap introduced in August 1972 and their purpose was to mop up the excess liquidity of banks. 

 
The third type was the 3-months treasury bills introduced for subscription exclusively by the non-bank financial institutions, non-financial enterprises and the public.Initially, a limit of Tk 250 million was set for the issue of such treasury bills. Later this limit was withdrawn and Bangladesh Bank was empowered to issue any amount of treasury bills for the non-bank public. Despite the withdrawal of the limit, the holdings of non-banking sectors remained small and commercial banks comprised the main market for the treasury bills. These bills continued to be reissued in every ninety days. In December 1994, however, treasury bills on tap and the treasury bills for nonbanks were abolished.

The holdings of treasury bills by the deposit money banks generally did not exceed the amount needed to meet the liquidity requirement. A substantial part of the treasury bills issued, therefore, needed to be held by Bangladesh Bank. Of the total Treasury bill holdings, the amount of holdings by the deposit money banks was 57% at the end of 1973 and amidst fluctuation, they came down to 27% at the end of June 1982. Later, the share started to rise and stood at 68% at the end of 1992. Thereafter, it fell sharply and came down to a lowest minimum of 4% at the end of June 1995.

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Law Short Notes on mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals). The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. It is registered in Securities and Exchange Commission.
Mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities.

For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.

Benefits of mutual funds include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment.

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Law Short Notes on credit card

A credit card is a small plastic card measuring about 85 mm by 54 mm bearing the name, date, computer number and specimen signature of the holder and the validity with raised letters to facilitate machine readability issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services. 

The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. Usage of the term "credit card" to imply a credit card account is a metonym.

As per instruction given in the application form or later on in writing, the credit card issuing authority will dispatch the periodic bill to the card holder and realize the bill amount from his account as instructed earlier. In other way, the card holder may pay the periodic bill in cash or by cheque within specific period. If not paid within the grace free specific period, profit or interest or service charge on the bill amount will be charged before full payment of the bill amount.

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Mentionf The Rights and Privileges of the Holder in due course

1. A holder in due course gets a perfectly good title to the instrument. He is not affected by any defects in the title of the transferor or the previous parties. Just as in the case of a devout Hindu and dip in the Ganges frees him from all the sins, a negotiable instrument in the hands of a holder in due course is relived of all is previous defects. What is more important is that all the holders subsequent to him are also protected. They obtained the same rights and privileges as that of the holder in due course.

The implication of this right is that the acceptor of the instruments or maker of a note cannot plead against the holder in due course any right of set-off or a counter claim which he might have had against the transferor of the instrument.

2. He can recover the amount from  al the previous parties. All of them will continue to be liable until the instrument is duly satisfied.

3. Sometimes instruments might have been delivered conditionally or for a special purpose. When such an instrument comes into the hands of a holder in due course, the other parties cannot escape liability on the ground that the condition or special purpose not be fulfilled.

4. In the case of inchoate instruments, he can recover the full amount covered by the stamp.

5. His title is not affected even if the instrument was the result of fraud or any other offence as between immediate parties. Holder in due course cannot, by very definition, be one of such parties.

There are, however, some exceptions. The signature on the instrument must not be the result of forgery. The instrument must not be vitiated due to lack of consent (absence of consensus ad idem) right from the beginning. In these cases, the holder in due course is affected by the defects of the instrument like any other holder.

6. Every holder is presumed to be a holder in due course unless proved otherwise.

7. The person liable to pay cannot set up defences against the holder in due course that the instrument has been lost or obtained from him by means of a fraud or unlawful consideration.

8. Acceptor is precluded from denying against the holder the existence of the drawer, genuineness of his signature, his capacity to draw, or to endorse or existence of the payee and his capacity to endorse.

9. The drawer is precluded from denying the existence of payee and his capacity to endorse.

10. So also the endorser is estopped form denying the genuineness of drawer’s signature or of the genuineness of previous endorsements.

11. Acceptor cannot raise the plea against the holder in due course that the drawer is a fictitious person

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Mention the Right of a Holder

    The holder of a negotiable instrument enjoys the following rights:

    i) An endorsement in blank may be converted by him into an endorsements in full.

    ii) He is entitled to cross a cheque either generally or specially and also with the words “Not Negotiable”.

    iii) He can negotiate a cheque to a third person, if such negotiation is not prohibited by the direction given in the cheque.

   

iv) He can claim payment of the instrument and can sue in his own name on the instrument.

    v) A duplicate copy of a lost cheque may be obtained by a holder.
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Difference between Holder and Holder in Due Course

We may derive the following points of difference between ‘holder’ and ‘holder in due course’:

1. Consideration: The existence of consideration is not essential in case of a holder, but a holder in due course obtains the instrument after paying its full value. For example, if a cheque is used to provide a gift or donation to a Charitable Trust, the Trust does not become its holder in due course. On the other hand, tuition fee paid to a school or college is for a valuable consideration.  Hence the school or the college acquire the status of holder in due course.

2. Possession: The person entitled to be called holder in due course must become the possessor of the instrument before it became payable. For example, if a bill of exchange is payable on March 20, 1984, a person who possesses it before this date is entitled to be its holder inc due course. If it is obtained after this date, the possessor will not be called its holder in due course. In case of a holder neither actual possession nor any time limit within which it must be acquired is required.

3. Defect in the transferor’s title: The most important point of difference is that a holder in due course acquires an instrument without having sufficient cause to believe that any defect existed in the title of the transferor. This condition is not essential in case of a holder. This condition casts a heavy responsibility on a person who claims to be a holder in due course-he should not only have the knowledge of the defective title of the transferor but in the circumstances of each case, there should be no cause to believe that any defect exists in the title of the transferor. It means that the holder in due course must obtain an instrument after taking all possible care about the transferor’s good title.

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Define holder in due course with its condition

According to Section 9, “holder in due course means any person who, for consideration, became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or endorsee thereof if payable to order, before the amount mentioned in it become payable, and without having sufficient cause to believe that defect existed in the title of the person from whom he derived his title”.
 

A person becomes a holder in due course of  negotiable instrument is the following conditions are satisfied:
 

i) The negotiable instrument must be in the possession of the holder in due course. In case of an order instrument, he must be its payee or endorsee, i.e., his name must appear on the instrument.
 

ii) The negotiable instrument must be regular and complete in all aspects. Alterations, if any, must be confirmed by the drawer through his signature. Holder of in incomplete document cannot be its holder in due course. The instrument must have been properly delivered to the holder in due course. In case of an order cheque endorsement in favour of the holder is essential.
 

iii) The instrument must have been obtained for valuable consideration, i.e., by paying its full value. A person who receives a cheque as a gift will not be called its holder in due course for want of consideration.  The consideration must be legal and adequate. For example, if a cheque is given in respect of a debt incurred in gambling, the consideration for the cheque is unlawful. If the value of the consideration falls short of he amount of  the instrument, the person will be deemed as holder in due course to the extent of the value of consideration.

iv) The instrument must have been obtained before the amount mentioned therein becomes payable. This condition is applicable to documents payable otherwise than on demand and does not apply to a cheque which is always payable on demand.
 

v) The holder in due course must obtain the instrument without having sufficient cause to believe that any defect existed in the title of the transfer. This is the most important condition to be satisfied. The title of a person to the negotiable instrument is deemed to be defective if he acquires it by unfair means, e.g., by fraud, coercion, undue influence or by any other illegal method or for an illegal consideration. If he does not possess any title thereto, his title is also deemed to be defective.
 

Section 9 lays heavy responsibility on the person accepting a negotiable instrument in this regard. He should not only have no notice of any defect in the transfero’ stitle thereto, but he should have no cause to believe that the title was defective. In means that the circumstances of the case should not give rise to any doubt or suspicion about the defective title or the transferor. The holder in due course should, therefore, exercise great care and take all necessary precautions in finding out if the transferor’s title was defective. If he shows negligence or does not take due care in this regard, he shall not be called the holder in due course.

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Define 'Holder`

According to Section 8 the “holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto”. A person is called the holder of a negotiable instrument if the following condition are satisfied.

a. He must be entitled to the possession of the instrument in his own name and under a legal title. Actual possession of the instrument is not essential; the holder must have the legal right to possess the instrument in his own name. It means that the title to the instrument is acquired lawfully and in a proper manner. For example, if a person acquired a cheque or bill by theft fraud, or forged endorsement of finds it lying some where, he does not acquire in his name legal title thereto and hence he cannot be called its holder.

b. He must be entitled to receive or recover the amount from the parties concerned in his own name. For this purpose it is essential that the name of the holder appears on the document as its payee or endorsee, if it is an order instrument. In case of  bearer instrument, the bearer may claim the money without having his name mentioned on the cheque. The holder is competent to receive payment or recover the amount by filing a suit in his own name against other parties, to negotiate the instrument and to give a valid discharge.

In case a bill, note or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction (Section 8). In other words, the person who was entitled to receive payment at the time the instrument was lost, will continue to be regarded as its holder; the finder does not become its holder.

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Steps to be taken in Opening an Account

1) The Banker should ensure that the company is incorporated by looking into the certificate of incorporation granted by the register of Joint Stock Companies.

2) The banker should obtain copies of Memorandum and Articles of Association and inspect them carefully before he established the relation with the company. The banker should also get it duly certified by the Secretary that the copies are upto-date, since both the clauses in the Memorandum and the Articles can be altered from time to time. Where the Banker gets any doubt he can inspect these documents in the office of the Register of Joint Stock Companies.  He must not the borrowing powers, powers to give guarantees and other securities and the restriction if any on director’s powers to borrow.

3. The banker should also obtain the certificate to commerce business and return the same after recording the particulars. This is the certificate granted by the Registrar certificate that all formalities have been completed by the company and the company is entitled to commerce the business.   

4. The banker should also obtain copies of recent balance Sheet and Profit and Loss Account in the case of an existing company r in the case of a newly formed company  a copy of the Prospectus or a Statement in lieu thereof. If the company is not willing to give the Balance Sheet, adequate details regarding capital, liabilities, assets and statement of business must be sought.

5. In the case of a new Company the banker should scrutinize the Articles to see if the first director and Bankers of the Company are named therein. However it is not common to find these in the articles.

6. The banker should obtain a certified copy of the resolution of the Board appointing him as a banker of the company and usually such resolution embodies explicit instructions as to who shall draw cheque, draw, accept and endorse bills and deal with securities and safe custodies. The bankers should also obtain the specimen signatures of the officers who are authorized by the resolution to operate the account. Such a copy should be signed by the Chairman of the meeting and the Secretary of the Company.

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Define Right to Set-off

The right of set-of is a statutory right which enables a debtor to take into account a debt owed to him by a creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual claims of debtor and creditor are adjusted totether and only the remainder amount is payable by the debtor. 

A banker, like other debtors, possesses this right of set-off which enables him to combine two accounts in the name of the same customer and to adjust the debit balance in one account with the credit balance in the other. For example, A ha taken an overdraft from his banker to the extent of Rs. 5,000 and he has a credit balance to the extent of Rs. 2,000 in his savings bank account, the banker can combine both of these accounts and claim the remainder amount of Rs. 3,000 only. 

This right of set-off can be exercised by the banker if there is no agreement-express or implied-contrary to his right and after a notice is served on the customer intimating the latter about the former’s intention exercise the right of set-off. To be on the safer side, the banker takes a letter of set-off from the customer authorizing the banker to exercise the right of set-off without giving him any notice.

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Discuss the Cases where the Banker cannot Exercise His Right of Lien

1. In the case of securities deposited with the banker for safe custody only, the banker is acting merely as a bailee, and has no lien over such articles.

    2. In the case of funds and securities specifically appropriated, the banker cannot exercise his right of lien because there is an express contract inconsistent with the lien.

   

3. A general lien cannot arises in respect of property of a customer pledged as security for a particular debt.

    4. The banker cannot exercise his right of lien in respect of property coming into his hands by mistake or which is placed in his hands to cover an advances that is not granted (Lucas V. Dorren).

    5. No lien arises until the due date in respect of an advance of a specific amount made for a definite period.

    6. No lien arises in case the credit and liability do not exist in the same right. Thus, the banker cannot exercise his right of lien over the securities or funds of a parner in respect of a debt due from the firm.

    7. The banker cannot exercise his right of lien in respect of a separate account maintained by a customer which is known to the banker as a Trust Account.

    8. No lien arises over properties on which the customer has no title.

    9. Right of General Lien becomes that of Particular Lien.

    Banker’s right of general lien is displaced by circumstances which show an implied agreement inconsistent with the rights of general lien. In Vijay Kumar Vs. M/s Jullundur Body Builders Delhi, and Others (A.I.R. 1981, Delhi 126), the Syndicate Bank furnished a bank guarantee for Rs. 90,000 on behalf of its customer. The customer deposited with it as security two fixed deposit receipts, duly discharged, with a covering latter stating that the said deposits would remain with the bank discharged, with a covering letter stating that the said deposit would remain with the bank so long as any amount was due to the Bank from the customer.
   
    Bank made an entry on the reserve of the Receipt as “Lien to BG 11/80”. When the bank guarantee was discharged, the bank claimed is right of general lien on the fixed deposit receipt, which was opposed on the ground that the entry on the reverse of the letter resulted in the right of a particular lien, i.e., only in respect of bank guarantee.

    The Delhi High Court rejected the claim of the bank and held that the letter of the customer was on the usual printed form while “the words written by the officer of the bank on the reverse of the deposit receipt were specific and explicit. They are the controlling words, which unambiguously tell us what was in the minds of the parties at the time. Thus the written word will prevail over the printed word.” The right of the banker was deemed that of particular lien rather than of general lien.
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Discuss the special Features of a Banker’s Right of General Lien

    i) The banker possesses the right of general lien on all the goods and securities entrusted to him capacity as a banker and in the absence of a contract inconsistent with the right of line. Thus he cannot exercise his right of general lien if -

    a) the goods and securities have been entrusted to the banker as a trustee or an agent of the customer, and

    b) a contract-express or implied-exists between the customer and the banker which is inconsistent with the banker’s right of general lien. In other words, if the goods or securities are entrusted for some specific purpose, the banker cannot have a lien over them. These exceptional cases are discussed later on.

 

   ii) A banker’s lien is tantamount ot an implied pledge: As noted aboe the right of lien does not confer on the creditor the right of sale but only the right to retain the goods till the loan is repaid. In case of pledge the creditor enjoys the right of sale. A banker’s right of lien is more than a general lien. It confers upon him the power to sell the goods and securities in case of default by the customer. Such right of lien thus resembles a pledge and is usually called an “implied pledge”. The banker thus enjoys the privileges of a pledge and can dispose of the securities after giving proper notice to the customer.

    iii) The right of lien is conferred upon the banker by the Indian Contract Act. No separate agreement of contract is, therefore, necessary for this purpose. However, to be on the safe side, the banker takes a letter of lien from the customer mentioning that the goods are entrusted to the banker as security for a loan-existing or future-taken from the banker and that the latter can exercise his right of lien over them. The banker is also authorized to sell the goods in case of default on the part of the customer. The latter thus spells out the object of entrusting the goods to the banker so that the same may not be denied by the customer later on.

    iv) The tight of lien can be exercised on goods or other securities standing in the name of the burrower only and not jointly with others. For example, in case the securities are held in the joint names of two or more persons the banker cannot exercise his right of general lien in respect of a debt due from a single person.

    v) The banker can exercise his right of lien on the securities remaining in his possession after the loan, for which they were lodged, is repaid by the customer, if no contract to the contrary exists. In such cases it is an implied presumption that the customer has re-offered the same securities as a cover for any other advance outstanding on that date or taken subsequently. The banker is also entitled to exercise the right of general lien in respect of the customer’s obligation as a surety and to retain the security offered by him for a loan obtained by him for his personal use and which has been repaid.

    In Stephen, Manager North Malabar Gramin Bank V. Chandra Mohan and State of  Kerala, the loan agreement authorized the bank to treat the ornaments not only as a security for that loan transaction, but also for any other transactions or liability existing or to be incurred in future. As the liability of he surety is joint and several with that of the principal debtor, such liability also came within the ambit of the above provision of the agreement.
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Popularity/ Advantages of Savings Accounts

Savings bank accounts are very popular among the general public because of the following advantages:

(a) A savings account can be opened with as little as Rs. 500 only. It helps the people of small means to save for their future.

(b) The balance lying in the savings bank earns some interest. The customer is benefited as his money grows with the bank.

(c) The money lying with the bank is quite safe. There is no fear of theft.

(d) The money can be withdrawn conveniently from the savings account.

(e) The customer gets the cheque book facility if his account is duly introduced by another account-holder and he keeps a minimum balance of $. 1000. It is quite easy to make payment to third parties by issuing cheques.

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What's the Bank’s Remarks on Dishonoured Cheques

When a cheque is returned unpaid, the banker should attach a slip containing brief remarks, to convey the reason for dishonouring the cheque. The following remarks are generally made:

(a) R.D. (Refer to Drawer): This remark is used only when there is reasonable ground to suspect the veracity of the cheque.

(b) N.S. (Not sufficient), N.E. (No. Effects): These are used where the drawer’s balance is inadequate to meet the cheque.

(c) E.I. (Endorsement Irregular)

(d) E.N.C. (Effect is not cleared): This is used when cheques deposited are not yet collected and not available for withdrawal.

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Define paying banker

The banker who is liable to pay the value of a cheque of a customer as per the contract, when the amount is due from him to the customer is called “Paying Banker” or “Drawee Bank.”

The payment to be made by him has arisen due to the contractual obligation. He is also called drawee bank as the cheque is drawn on him.

The payment has to be made by the banker as per the legal obligation also. Section 31 of Negotiable Instrument Act 1881, says that “the drawee of a cheque, having sufficient funds of the drawer in his hands properly applicable to the payment of such a cheque, must pay the cheque, when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default.” According to this provision, the drawee of a cheque, i.e., paying banker has a legal obligations to honour the demand of the drawer or customer. If he fails to pay the money held, he is liable for damages. Thus paying banker has certain obligations to discharge.

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