Bankers’ Special Relationship: Jaiib

Bankers’ Special Relationship

Dear bankers,

As we all know that  is Bankers’ Special Relationship for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Bankers’ Special Relationship (Unit-3), FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

◊Mandate

  • A mandate contract is an agreement between the parties whereby the mandatary shall have the obligation to perform a task on behalf of the mandator, and the mandator shall only have to pay remuneration, if so agreed upon or provided for by law.
  • The customer informing the bank that he has authorized a person (mandate) to operate the account on his behalf.
  • The signatures of the mandate are obtained in the mandate letter and are verified by the customer.
  • The mandate is normally issued for a short and temporary period.
  • A mandate is not acceptable from institutions. Institutions can issue a power of attorney.

◊Power of attorney

  • Power of attorney (authorization) is a document in which individuals, representatives at law of legal entities authorize other persons to represent or act on his (her) behalf in establishment and/or performance of civil transactions.

Two types of POA are generally granted:

  • General or Universal
  • Special or Limited
  • Note: The mandate and power attorney are the rights cast upon a third person to act on behalf of the principal person/s. The rights of mandate and power of attorney holders are very similar in the operation of bank accounts but they are issued for different reasons and purposes. A mandate is a simple letter of authority, signed by a constituent authorizing the bank to permit a certain named person to operate the account on his/her behalf.

◊Letter of authority

  • A letter of authority is to either divulge sensitive material or to delegate a specific task. Whereas a power of attorney gives someone else complete power to act and make decision on their behalf; here the power could be regarding a specific task, such as purchase of a property, a business deal, etc., or the power could be absolute, i.e. complete power to make all decisions on their behalf.

Comparison between Power of Attorney and Letter of Authority

Power of Attorney Letter of Authority
Type Legal document Legal document
Function Delegates power to another person or entity to act and make decisions on their behalf Delegate sensitive legal, health or financial obligation to another person or entity
Purpose To act as you and make decisions on your behalf. To be present on your behalf and carry out a task.
Authority Complete Authority – Can do everything on their behalf Partial Authority – Can only do something on their behalf
Contents Must specify full particulars of the concerned parties and provide precise, in-depth details for clarity and communication purposes. Must specify full particulars of the concerned parties and provide precise, in-depth details for clarity and communication purposes.
Power More Powerful Less Powerful
Task used for Should be used for more complicated or specialized tasks Should be used for less complicated tasks
Details More detailed Less detailed
Directions Sets out the directions in which the tasks should be complete May or may not specify the directions in which the tasks should be completed
Notarized Notarized Certificate Simple letter. No notary requires.
Uses Business Deal, Property Purchase, Make medical decisions on your behalf, etc. Pick up government documents on your behalf, gain access to your private information or files, collect information on your behalf, pay bills or collect revenue on your behalf, etc.

◊Garnishee order

What is a garnishee order

  • A garnishee order is typically issued when a creditor you owe money to has obtained a default judgement from a court or other authority against you. The judgement then allows the creditor to issue a court order that instructs a third party such as your employer, bank or financial institution to redirect your wages or holdings to the creditor you owe money to. Once a garnishee order has been issued, your employer, bank or financial institution is legally obligated to comply with it.
  • It is a process of law in favour of judgement- creditor for a debt due from the judgement- debtor (bank customer) upon a third party for attachment. The order is issued the Indian Civil Procedure Code, Order 21 Rule 46, of the Act.

How a garnishee order works

  • A default judgement is usually obtained by a creditor either when a debt has gone unpaid, you haven’t been able to come to any agreement with the creditor about repaying the debt, or other alternative debt collection avenues have been exhausted.
  • If a garnishee order is made against you, then your bank, financial institution, or employer will likely be notified rather than you. Garnishee orders can be served to anyone that owes you money, such as tenants or contractors.

A garnishee order made to your employer

  • If your employer receives a garnishee order, they are required to pay the ordered amount to your creditor out of your wage or salary. The payments will be taken regularly until your debt is paid in full, the court orders the payments to stop or you deploy a formal remedy that will cease the order – such as filing for bankruptcy.

A garnishee order made on your bank accounts

  • Garnishee orders can be made on banks and financial institutions, compelling them to put a freeze on your accounts. If this happens, your creditor can typically take the full amount owing from your account, if you have the funds available.

A garnishee order made against others who owe you money

  • A court can serve a garnishee order against anyone who owes you money, so tenants, contractors or anyone else with an outstanding debt to you can be garnished without your involvement. They will usually be ordered to pay a lump sum rather than make ongoing payments.

How you may be able to stop a garnishee order

Pay the debt in full

  • True, if you were in a position to pay your debt in full, you likely wouldn’t be in this situation to begin with; but if you can find a way to do so, your problem may be resolved and the order could be stopped.

Make alternative repayment arrangements

  • Here’s where you might have some wiggle room to negotiate. If you get in touch with your creditor you may be able to discuss other arrangements to pay back the debt in a way that works for both of you. Your creditor may be open to decreasing the repayment amount and giving you more time to repay.

Apply to pay by Instalment  through the court

  • If you’ve tried to negotiate with your creditor but they have declined your proposed alternative arrangements, you can also apply to the court to pay by Instalments. You can start this process by lodging a statement of your financial position to support your application and, if the court accepts your application, the garnishee order will be stopped.

Use the Bankruptcy Act

  • Generally, if you call on the Bankruptcy Act, it is likely your garnishee order will be stopped. If you have any other unsecured debts, this action will also likely resolve those as well.

◊Banker’s Lien

  • Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debt due from the latter is paid. The banker’s lien is an implied pledge. A banker acquires the right to sell the goods which came into his possession in the ordinary course of banking business, in case the debt is not paid. Section 171 of the Indian Contact Act 1872, gives to the banker an absolute right of general lien on all goods and securities received by the banker.

Where is right can apply?

  • To sell: A banker’s general lien gives the right to sell the debtor’s properties.
  • To a specific person: The right under section 171 is given not only to the banker but also to factors, wharfingers, attorneys of high courts and policy brokers. As such, no separate agreement is required.
  • Against the customer: The right is exercised on the goods and securities of the customer only. The right cannot be exercised when the debtor has a joint account.

Where is right cannot Apply?

  • Safe Custody Article: When a customer deposits securities, ornaments and other valuable for their safe custody with a banker, the letter acts as trustee/ bailee, therefore the bank cannot excreise the right of lien unless covered by a special agreement.
  • Documents/ Money deposited for specific purpose: Document/money deposited with a specific purpose cannot be taken under lien.
  • Immature Debts: Lien cannot be exercised when the debt has not yet matured. The bank discounts a 90 days bill for Rs 50000 maturity on 17-11-14 could not have a lien over it before its maturity date.

◊Right of Appropriation

  • Section 59, 60, 61 of Indian Contract Act, deal with appropriation of payments. If a customer maintains more than one account with a bank and he deposits some amount then he has the first right to indicate to which account the amount should be credited. If he does not exercise this right, then bank can credit the amount to any of his accounts including an account which is time barred by limitation. Clayton’s rule is related to appropriation of payments and is applicable in case of running borrowal accounts like cash credit or overdraft. This rule is applicable in case of death, insolvency, insanity of a joint borrower or partner or guarantor or retirement of a partner or revocation of guarantee by guarantor. As per Clayton’s rule, credit entry will set off debits in the chronological order of time. This means that first item on the debit side will be discharged first by a credit and so on. For example in a firm’s cash credit account, there was a debit balance of Rs 5 lac when one of the partners died. The bank continued operations in the account. Rs 4 lac were deposited and Rs 3 lac were withdrawn. The estate of deceased partner is liable only for one lac i.e 5 lac minus Rs 4 lac.

◊RIGHT OF SET OFF?

  • The contract between the banker and borrower is a contract between debtor and creditor. The contract implies that the borrower promised to repay the money borrowed by him. Right of set off is the right of the bank to combine the two accounts of the same person where one account which is in credit balance and the other account is in debit balance in order to cover a loan default. The banker can exercise the right of set-off only when the money owed to him is a sum certain, which is due and where there is no agreement, express or implied to the contrary.

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