Description
The commercial banking industry in India started in 1786 with the establishment of the Bankof Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe Bank of Madras (established in 1843).
BANKING MANAGEMENT STUDY
MATERIALS
3
rd
TRIMESTER
CONTENTS
CHAPTER 1: INTRODUCTION
Definition of banks
Evolution of Commercial Banks in India
Functions of Commercial Banks
CHAPTER 2: BANKING STRUCTURE IN INDIA
Banking Structure in India
Role of Reserve Bank of India
Classification of Banks
CHAPTER 3: PRODUCTS AND SERVICES OFFERED BY A BANK
Deposits
Strategies for Mobilizing Deposits
Advances
Investments
Foreign Exchange
Clearing Services
Remittances
CHAPTER 4: BANKER CUSTOMER RELATIONSHIP
General Relationship
Special Relationship
Rights and Obligations of a Banker
Rights and Obligations of a Customer
CHAPTER 5:TYPES OF CUSTOMERS
Individual Customer Accounts
Non-Individual Customer Accounts
CHAPTER 6: MODES OF ACCOUNT OPERATION
CHAPTER 7: BASIC BANKING CONCETS
KYC
AML
PRIME LENDING RATE
CIBIL
BASE RATE
DEPOSIT RATE
RETAIL BANKING
NON-PERFORMING ASSETS
WHOLESALE BANKING
CASE STUDIES AND SAMPLE NEWS FOR ANALYSIS
INTRODUCTION
Definition of banks
In India, the definition of the business of banking has been given in the Banking RegulationAct,
(BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a
companywhich transacts the business of banking in India.' Further, Section 5(b) of the BR Act
defines
banking as, 'accepting, for the purpose of lending or investment, of deposits of money fromthe
public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order
orotherwise.' This definition points to the three primary activities of a commercial bank
whichdistinguish it from the other financial institutions. These are: (i) maintaining deposit
accounts
including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the
bank'scustomers.
Evolution of Commercial Banks in India
The commercial banking industry in India started in 1786 with the establishment of the Bankof
Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz.,
the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe
Bank of Madras (established in 1843). In 1921, the three Presidency banks wereamalgamated to
form the Imperial Bank of India, which took up the role of a commercial bank,a bankers' bank
and a banker to the Government. The Imperial Bank of India was establishedwith mainly
European shareholders. It was only with the establishment of Reserve Bank ofIndia (RBI) as the
central bank of the country in 1935, that the quasi-central banking role ofthe Imperial Bank of
India came to an end.In 1860, the concept of limited liability was introduced in Indian banking,
resulting in theestablishment of joint-stock banks. In 1865, the Allahabad Bank was established
with purelyIndian shareholders. Punjab National Bank came into being in 1895. Between 1906
and 1913,other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank,
IndianBank, and Bank of Mysore were set up.After independence, the Government of India
started taking steps to encourage the spread ofbanking in India. In order to serve the economy in
general and the rural sector in particular, the All India Rural Credit Survey Committee
recommended the creation of a state-partneredand state-sponsored bank taking over the Imperial
Bank of India and integrating with it, theformer state-owned and state-associate banks.
Accordingly, State Bank of India (SBI) wasconstituted in 1955. Subsequently in 1959, the State
Bank of India (subsidiary bank) Act waspassed, enabling the SBI to take over eight former state-
associate banks as its subsidiaries.To better align the banking system to the needs of planning
and economic policy, it wasconsidered necessary to have social control over banks. In 1969, 14
of the major privatesector banks were nationalized. This was an important milestone in the
history of Indianbanking. This was followed by the nationalization of another six private banks
in 1980. Withthe nationalization of these banks, the major segment of the banking sector came
under thecontrol of the Government. The nationalization of banks imparted major impetus to
branchexpansion in un-banked rural and semi-urban areas, which in turn resulted in huge
depositmobilization, thereby giving boost to the overall savings rate of the economy. It also
resultedin scaling up of lending to agriculture and its allied sectors. However, this arrangement
alsosaw some weaknesses like reduced bank profitability, weak capital bases, and banks
gettingburdened with large non-performing assets.To create a strong and competitive banking
system, a number of reform measures were initiatedin early 1990s. The thrust of the reforms was
on increasing operational efficiency, strengtheningsupervision over banks, creating competitive
conditions and developing technological andinstitutional infrastructure. These measures led to
the improvement in the financial health,soundness and efficiency of the banking system.One
important feature of the reforms of the 1990s was that the entry of new private sectorbanks was
permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBIBank and
UTI Bank were set up.
Commercial banks in India have traditionally focused on meeting the short-term financialneeds
of industry, trade and agriculture. However, given the increasing sophistication
anddiversification of the Indian economy, the range of services extended by commercial
bankshas increased significantly, leading to an overlap with the functions performed by other
financial
institutions. Further, the share of long-term financing (in total bank financing) to meet capital
goods and project-financing needs of industry has also increased over the years.
Functions of Banks:
The main functions of a commercial bank can be segregated into three main areas: (i) Payment
System (ii) Financial Intermediation (iii) Financial Services.
(i) Payment System
Banks are at the core of the payments system in an economy. A payment refers to themeans by
which financial transactions are settled. A fundamental method by whichbanks help in settling
the financial transaction process is by issuing and paying chequesissued on behalf of customers.
Further, in modern banking, the payments system alsoinvolves electronic banking, wire transfers,
settlement of credit card transactions, etc.In all such transactions, banks play a critical role.
(ii) Financial Intermediation
The second principal function of a bank is to take different types of deposits fromcustomers and
then lend these funds to borrowers, in other words, financialintermediation. In financial terms,
bank deposits represent the banks' liabilities, whileloans disbursed, and investments made by
banks are their assets. Bank deposits servethe useful purpose of addressing the needs of
depositors, who want to ensure liquidity,safety as well as returns in the form of interest. On the
other hand, bank loans andinvestments made by banks play an important function in channeling
funds intoprofitable as well as socially productive uses.
(iii) Financial Services
In addition to acting as financial intermediaries, banks today are increasingly involvedwith
offering customers a wide variety of financial services including investment banking,insurance-
related services, government-related business, foreign exchange businesses,wealth management
services, etc. Income from providing such services improves abank's profitability.
SUMMARY
Section 5(b) of the BR Act definesbanking as, 'accepting, for the purpose of lending or
investment, of deposits of money fromthe public, repayable on demand or otherwise, and
withdrawable, by cheque, draft, order orotherwise.'
The commercial banking industry in India started in 1786 with the establishment of the Bankof
Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz.,
the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe
Bank of Madras (established in 1843). In 1921, the three Presidency banks wereamalgamated to
form the Imperial Bank of India, which took up the role of a commercial bank.
The main functions of a commercial bank can be segregated into three main areas: (i) Payment
System (ii) Financial Intermediation (iii) Financial Services.
It was only with the establishment of Reserve Bank ofIndia (RBI) as the central bank of the
country in 1935, that the quasi-central banking role ofthe Imperial Bank of India came to an end.
State Bank of India (SBI) wasconstituted in 1955. Subsequently in 1959, the State Bank of India
(subsidiary bank) Act waspassed, enabling the SBI to take over eight former state-associate
banks as its subsidiaries.To better align the banking system to the needs of planning and
economic policy, it wasconsidered necessary to have social control over banks. In 1969, 14 of
the major privatesector banks were nationalized. This was an important milestone in the history
of Indianbanking. This was followed by the nationalization of another six private banks in 1980.
To create a strong and competitive banking system, a number of reform measures were
initiatedin early 1990s. The thrust of the reforms was on increasing operational efficiency,
strengtheningsupervision over banks, creating competitive conditions and developing
technological andinstitutional infrastructure. These measures led to the improvement in the
financial health,soundness and efficiency of the banking system.
KEYWORDS
Payment System- Banks are at the core of the payments system in an economy. A payment refers
to the means by which financial transactions are settled. Further, in modern banking, the
payments system also involves electronic banking, wire transfers, settlement of credit card
transactions, etc.Financial I ntermediation - A bank takes different types of deposits from
customers and then lends these funds to borrowers, in other words, it is known as financial
intermediation. Financial Services - In addition to acting as financial intermediaries, banks
today are increasingly involved with offering customers a wide variety of financial services
including investment banking, insurance-related services, government-related business, foreign
exchange businesses, wealth management services, etc. Income from providing such services
improves a bank's profitability.
QUESTIONS
SHORT QUESTIONS:
1. Define banking.
2. When was Reserve Bank of India established?
3. State two functions of a bank.
4. When was Imperial Bank of India established?
5. When did the first phase of nationalization take place?
DESCRIPTIVE QUESTIONS:
1. Explain the main functions of a commercial bank.
2. Describe the evolution of commercial banks in India.
BANKING STRUCTURE IN INDIA
Banking Regulator
The Reserve Bank of India (RBI) is the central banking and monetary authority of India, andalso
acts as the regulator and supervisor of commercial banks.
Objective
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."
RESERVE BANK OF INDIA
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young
Commission. The share capital was divided into shares of Rs. 100 each fully paid which was
entirely owned by private shareholders in the beginning. The Government held shares of nominal
value of Rs. 2,20,000.
Reserve Bank of India was nationalized in the year 1949. The general superintendence
anddirection of the Bank is entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central Government appointed for a term of
four years to represent territorial and economic interests and the interests of co-operative and
indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of
1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
? To regulate the issue of banknotes
? To maintain reserves with a view to securing monetary stability and
? To operate the credit and currency system of the country to its advantage.
Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the
Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank
notes of all denominations. The distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank
has a separate Issue Department which is entrusted with the issue of currency notes. The assets
and liabilities of the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold
coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40
crores in value. The remaining three-fifths of the assets might be held in rupee coins,
Government of India rupee securities, eligible bills of exchange and promissory notes payable in
India. Due to the exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold
and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in
gold. The system as it exists today is known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the
obligation to transact Government business, via. to keep the cash balances as deposits free of
interest, to receive and to make payments on behalf of the Government and to carry out their
exchange remittances and other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans and to manage public debt. The
Bank makes ways and means advances to the Governments for 90 days. It makes loans and
advances to the States and local authorities. It acts as adviser to the Government on all monetary
and banking matters.
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a
cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in
India. By an amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting bills of
exchange. Since commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the
lender of the last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India
can ask any particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a license from the Reserve Bank of India to do banking business
within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank
showing, in detail, its assets and liabilities. This power of the Bank to call for information is also
intended to give it effective control of the credit system. The Reserve Bank has also the power to
inspect the accounts of any commercial bank.
As supreme banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitative
controls.
(c) It controls the banking system through the system of licensing, inspection and
calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was
required to buy and sell at fixed rates any amount of sterling in lots of not less than
Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was
able to maintain the exchange rate fixed at lsh.6d. though there were periods of
extreme pressure in favour of or againstthe rupee. After India became a member of
the International Monetary Fund in 1946, the Reserve Bank has the responsibility of
maintaining fixed exchange rates with all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as
the custodian of India's reserve of international currencies. The vast sterling balances
were acquired and managed by the Bank. Further, the RBI has the responsibility of
administering the exchange controls of the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and co-operative banks, relating to
licensing and establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to
carry out periodical inspections of the banks and to call for returns and necessary information
from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed
new responsibilities on the RBI for directing the growth of banking and credit policies towards
more rapid development of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.
Promotional functions
With economic growth assuming a new urgency since Independence, the range of the Reserve
Bank's functions has steadily widened. The Bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as outside the normal scope of central
banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to
rural and semi-urban areas, and establish and promote new specialized financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in
1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set
up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings,
and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve
Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank's role in this field has become extremely important. The Bank has
developed the co-operative credit movement to encourage saving, to eliminate moneylenders
from the villages and to route its short term credit to agriculture. The RBI has set up the
Agricultural Refinance and Development Corporation to provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are related to
control and regulation of money and credit, i.e., issue of currency, control of bank credit, control
of foreign exchange operations, banker to the Government and to the money market. Monetary
functions of the RBI are significant as they control and regulate the volume of money and credit
in the country.
Equally important, however, are the non-monetary functions of the RBI in the context of India's
economic backwardness. The supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary function). The promotion of sound
banking in India is an important goal of the RBI, the RBI has been given wide and drastic
powers, under the Banking Regulation Act of 1949 - these powers relate to licensing of banks,
branch expansion, liquidity of their assets, management and methods of working, inspection,
amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the
working of banks has greatly improved. Commercial banks have developed into financially and
operationally sound and viable units. The RBI's powers of supervision have now been extended
to non-banking financial intermediaries. Since independence, particularly after its nationalization
1949, the RBI has followed the promotional functions vigorously and has been responsible for
strong financial support to industrial and agricultural development in the country.
Tools Used by RBI for Controlling Banks
Bank Rate -Bank Rate is the rate at which central bank of the country (in India it is RBI) allows
finance to commercial banks. Any upward revision in Bank Rate by central bank is an indication
that banks should also increase interest rates. Thus any revision in the Bank rate indicates that it
is likely that interest rates on your deposits are likely to either go up or go down, and it can also
indicate an increase or decrease in your EMI.
This is the rate at which central bank (RBI) lends money to other banks or financial institutions.
If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it
can be said that in case bank rate is hiked, banks will hike their own lending rates to ensure that
they continue to make profit.
Current Bank Rate – 9%
Repo (Repurchase) rate - is the rate at which the RBI lends short-term money to the
banks against securities. When the repo rate increases borrowing from RBI becomes
more expensive. Therefore, we can say that in case, RBI wants to make it more
expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants
to make it cheaper for banks to borrow money, it reduces the repo rate. A reduction in the
repo rate will help banks to get money at a cheaper rate. When the repo rate increases,
borrowing from RBI becomes more expensive
Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet
short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to
repurchase the same at a predetermined rate and date. Reserve bank charges some interest rate on
the cash borrowed by banks. This interest rate is called ?repo rate‘.
Repo Rate – 8%
Reverse Repo Rate -It is the rate at which banks park their short-term excess liquidity with the
RBI. The banks use this tool when they feel that they are stuck with excess funds and are not
able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that
the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks
would prefer to keep more and more surplus funds with RBI.
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks
are always happy to lend money to the RBI since their money is in safe hands with a good
interest.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn
higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money
out of the banking system.
Reverse Repo Rate – 7%
Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the
banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank
absorbs liquidity from the banks.
Net Demand and Time Liabilities
Liabilities payable by the bank are in the form of demand or time deposits. Demand liabilities
include all liabilities which are payable on demand, mainly the balances in savings and current
account come under these categories. Time liabilities are those which are payable otherwise on
demand. Mainly deposits of different maturity duration come under this category.
Inflation - The overall general upward price movement of goods and services in an economy
(often caused by an increase in the supply of money). Inflation is nothing but a rise in the level of
prices of goods and/or services in an economy over a certain period of time.
Cash Reserve Ratio – It refers to the liquid cash that banks have to maintain with the RBI as a
certain percentage of their net demand and time liabilities.
Whenever money is in excess in the market / monetary systems in the country it may increase the
inflation. So the excess money needs to be squeezed from the systems. At such time RBI
prescribes higher rate of CRR and money is taken out from circulation in the market. In reverse
case when the markets need the money the CRR rate is lowered and money is allowed to come
and circulate in the market.
For example, if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for
lending or investment purpose. They have to maintain a certain percentage of their deposits in
the form of cash and can use only the remaining amount for lending/investment. This minimum
percentage which is determined by the central bank is known as Cash Reserve Ratio.
Thus, when a bank's deposits increase by Rs 100, and if the cash reserve ratio is 9%, the banks
will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for
investments and lending or credit purpose. Higher the CRR ratio, lower will be the amount
available with the banks for lending and investment purpose and vice versa.
RBI uses this tool to curb inflation and to control excessive liquidity in the market.
CRR – 4.25%
Statutory Liquidity Ratio – It refers to the amount that the commercial banks are required to
maintain in the form of cash, gold or Government approved securities.
• The SLR is the amount a commercial bank needs to maintain in the form of cash, or gold
or govt. approved securities (Bonds) before providing credit to its customers.
• SLR rate is determined and maintained by the RBI in order to control the expansion of
bank credit.
• By changing the SLR rates, RBI can increase or decrease bank credit expansion.
• Also through SLR, RBI compels the commercial banks to invest in government securities
like Government bonds.
• If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it
becomes liable to pay a penalty to the RBI.
• With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial
bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR
rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI
compels the commercial banks to invest in government securities like government bonds.
SLR – 23%
SLR and Cash reserve ratio is maintained for bank solvency and higher ratio of SLR and
CRR makes bank relatively safe as higher ratio means they have more of their funds
deposited in liquid securities and can fulfill the demand on redemption of deposit from
the Bank. Let us take an example :suppose a Bank has taken a deposit of 100 from public
and CRR is 9 and SLR is 25 then available funds to lend from deposits with the bank will
be 100-9-25=66 so there is direct relation between CRR ,SLR and Funds available with
bank to lend to public out of deposit received from public.
So RBI is controlling the supply side of the Funds and by changes in CRR and SLR,
Bank control the supply side of the money. so when RBI increase these ratios then
available funds with the banks will go down and as demand remain the same then people
will have to pay more as interest and interest rate will go up. On the reverse if RBI
reduces these rates, then amount available with bank for lending will be increased and
they have to reduce rates to lend more. In these situation banks also reduce the rate of
short term deposit from public as they have surplus money already to lend.
CLASSIFICATION OF BANKS
COMMERCIAL BANKS
Meaning
A banking company is one which transacts the business of banking which means accepting for
the purpose of lending all investments, of deposits of money from the public, repayable on
demand or otherwise and withdraw able by cheque, draft or otherwise. There are two essential
functions that a financial institution must perform to become a commercial bank. These are
a) Accepting deposit form the public
b) Lending money to the needy
Commercial banks include public sector banks, private banks and foreign banks.
Main features:
a. It accepts deposits from the public, which can be withdrawn by cheque and are repayable
on demand.
b. A commercial bank uses the deposited money for lending and for investment in
securities.
c. It is a commercial institution , whose aim is to earn profit
Functions of commercial Banks
Various functions of commercial banks can be divided into three main groups;
A. Primary functions
B. Secondary functions
C. General utility functions
Primary functions
There are two main primary functions of the commercial banks which are discussed below:
1. Accepting deposits – The primary function of commercial bank is to accept deposits form
every class and from every source. To attract savings the bank accepts mainly three types of
deposits. They are namely demand deposits, time deposit and hybrid deposit.
2.Advancing of loans - Commercial banks give loans and advances to businessmen, farmers,
consumers and employers against approved securities. Approved securities refer to gold, silver,
bullion, govt. securities, easily savable stock and shares and marketable goods.
Secondary functions
Besides the primary functions of accepting deposits and lending money, banks perform a number
of other functions which are called secondary functions. These are as follows –
1. Issuing letters of credit, traveler‘s cheques, circular notes etc.
2. Undertaking safe custody of valuables, important documents and securities by providing
safe deposit vaults or lockers;
3. Providing customers with facilities of foreign exchange.
4. Transferring money from one place to another; and from one branch to another branch of
the bank.
5. Standing guarantee on behalf of its customers, for making payments for purchase of
goods, machinery, vehicles etc.
6. Collecting and supplying business information;
7. Issuing demand drafts and pay orders; and,
8. Providing reports on the credit worthiness of customers.
General Utility functions
The modern Commercial Banks in India cater to the financial needs of different sectors
1. The banks act as trustees. On account of the knowledge of the financial market of India
the financial companies are attracted towards them to act as trustees to take the
responsibility of the security for the financial instrument like a debenture.
2. The Government also hires the commercial banks for various purposes like tax collection
and refunds, payment of pensions etc.
3. Cash management and Treasury Services
4. Merchant banking and private equity financing
5. sale, distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a ?financial supermarket?
Categorization of Commercial Banks
The commercial banking structure in India consists of:
A. Scheduled Commercial Banks- The Scheduled Commercial Banks are the banks,
which are listed under the Second Schedule of the Reserve Bank of India Act, 1934.
? With listing in second schedule banks are conferred with some benefits in terms of access
to accommodation by RBI during the times of liquidity constraints.
? The scheduled status also subjects the bank certain conditions and obligation towards the
reserve regulations of RBI.
B. Unscheduled Banks:The banks other than the scheduled banks are Unscheduled Banks.
Criteria for inclusion in the list of scheduled banks
? Minimum paid up capital and total reserve Rs 5 lakhs
? It must be a company under Section 3 of the companies Act
? Its affairs are not detrimental to the interest of the depositors
? It must have earned profit for last three years
Difference between the Central bank and Commercial bank
The basic difference between the Commercial bank and Central bank are briefly explained in
detail as follows:-
1. The Central Bank of a country was established under a special statue and in India RBI
was established under the RBI Act of 1934; whereas a Commercial Bank was established
under Banking Regulation Act, 1949.
2. The central bank occupies a dominating position as it is the apex bank among all the
banks in the country; whereas commercial bank occupies a subordinate position in the
banking structure of a country.
3. There can be only one central bank for the entire economy and there is a large number or
network of different commercial banks in a country.
4. Central bank is a non-profit making financial institution, whereas commercial banks are a
profit oriented financial institution.
5. The central bank has the monopoly power to issue currency notes from Rs.2 and above;
whereas commercial bank cannot print currency notes.
6. The central bank is owned by the central government; whereas commercial banks can be
owned by the government or may be privately owned.
PRIVATE BANKS
Categorization of Private Banks
The private banks those got established after 1993 i.e. after banking sector reform bracketed as
New Generation Private Sector Banks and they are well distinguished from old generation
private sector banks.
Features of new generation Private sector banks
a. Technology-The private banks have used technology to provide quality service through
lower cost delivery mechanisms.
b. Convergence-The new private banks are able to provide a range of financial services
under one roof, thus increasing their fee based revenues.
c. High-end Customers- The new generation private sector banks mainly concentrate on
high-end and high middle income segments.
d. Priority sector targets - The new generation private sector banks which rely on indirect
financing to accomplish the priority sector targets.
e. Lucrative Business Areas -They made a strong presence in the most lucrative business
areas in the country because of technology up gradation.
f. Operating Expenses - their operating expenses is low as compared to the PSU banks and
their efficiency ratios (employee‘s productivity and profitability ratios) is also high.
g. Value added services to customers and they undertake all most all the modern method of
banking such as the internet banking, mobile banking, etc.
Advantage over public sector banks
They took advantage of the following problems concerning the nationalized / state sector banks
1. Large number of unprofitable branches
2. Excess staffing
3. Mounting Non Performing Assets on account of intervention of Govt.
4. Laggard in technology
5. Development of innovative consumer oriented products
6. Lesser focus on marketing
They have made banking more efficient and customer friendly. In the process they have jolted
public sector banks out of complacency and forced them to become more competitive.
Disadvantages of Private Banks
? Private Banks runs like a business. Even though, there are lots of advantages to this, the
major disappointment comes on the service charges, which is very much higher.
? Unorganized HR System
? The minimum balance for deposit accounts is much higher than the public sector banks.
? Low focus on priority sector lending and financial inclusion.
COOPERATIVE BANKS
Meaning
A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. They are often created by persons belonging to the
same local or professional community or sharing a common interest.
Features
1. Principle of self-help - Co-operative Banks are basically organized and managed on the
principle of co-operation, self-help, and mutual help and they function with the rule of
?one member, one vote?.
2. Customer-owned entities: The needs of the customers meet the needs of the owners, as
the members are at both the ends. Hence, the first aim of a co-operative bank is not to
maximize profit but to provide the best possible products and services to its members.
Some co-operative banks only operate with their members but most of them also admit
non-member clients to benefit from their banking and financial services.
3. Democratic control: Since they are owned and controlled by the members, the board of
directors get elected democratically by the members , usually having equal voting rights,
in tune with the co-operative principle of ?one member , one vote?.
4. Principle of no profit, no loss - They function with the principle of ?no profit, no loss?
and generally do not pursue the goal of profit maximization.
5. Profit allocation : Here a significant part of the annual profit, benefits or surplus is
usually allocated to constitute reserves and a part of this profit are also distributed to the
members, through a patronage dividend,( the use of the co-operatives products and
services by each member, or the interest / dividend, related to the number of shares
subscribed by each member)
6. Localized set up- They are deeply rooted inside local areas and communities and are
involved in local development as well as contribute to the sustainable development of
their communities.
7. Regulatory prescriptions Co-operative Banks are subject to regulatory requirements of
RBI/ NABARD. However, they are allowed with preferential treatments in comparison to
commercial banks..
Classifications of Co-operative Banks
1. Statutory Classifications- Some co-operative bank are scheduled banks,while others are
non-scheduled banks. Forinstance, State co-operative banks and some Urban co-
operative banks are scheduledbanks but other co-operative bank are non-scheduled
banks
2. According to Terms of Lending- From Terms of lending point of view, they are of two
categories :
a. Short term lending oriented co-operative Banks – within this category there are
three sub categories of banks viz state co-operative banks, District co-operative
banks and Primary Agricultural co-operative societies.
b. Long term lending oriented co-operative Banks – within the second category there
are land development banks at three levels state level, district level and village
level.
STRUCTURE OF COOPERATVE BANKING
The cooperative banking structure in India is divided into 4 components:
a) Primary cooperative credit society
b) Central cooperative banks
c) State cooperative banks
d) Land development banks
a) Primary Agricultural Credit Societies (PACSs)- A Primary agricultural credit society
can be started with 10 or more persons normally belonging to a village or a group of
villages. The value of each share is generally nominal so as to enable even the poorest
farmer to become a member. It gives loans and advances to needy members mainly out of
these deposits.
The Urban Co-operative Banks (UCBs) refers to primary cooperative banks located in
urban and semi-urban areas.
b) Central Co-operative Banks (CCBs)-The central co-operative banks are located at the
district headquarters or some prominent town of the district. Their main function is to
lend to primary credit society and now a days they have been undertaking normal
commercial banking business like - attracting deposits from the general public and
lending to the needy against proper securities.
c) State Co-operative Banks (SCBs)-The state Co-operative Banks, finance, co-ordinate
and control the working of the central Co-operative Banks in each state. They serve as the
link between the Reserve bank and the general money market on the one side and the
central co-operative and primary societies on the other. They obtain their funds mainly
from the general public by way of deposits, loans and advances from the Reserve Bank
and their own share capital and reserves.
d) Land development Banks- The land development banks are organized in 3 tiers namely,
state, central and primary level and they meet the long term credit requirements of the
farmers for developmental purposes. The state land development bank overseas the
primary land development banks situated in the districts and tehsils in the state. They are
governed both by the state government and Reserve Bank of India. Recently, the
supervision of land development banks has been assumed by National Bank for
Agriculture and Rural Development (NABARD). The sources of funds for these banks
are the debentures subscribed by both central and state government. These banks do not
accept deposits from the general public.
Functions
Co-operative Banks belong to the money market as well as to the capital market and are financial
intermediaries only partially, in view of limited financial products. Now days they are
performing all the main banking functions of deposit mobilization, supply of credit and provision
of remittance facilities.
1. Primary agricultural credit societies provide short term and medium term loans.
2. Land Development Banks (LDBs) provide long-term loans.
3. SCBs and CCBs also provide both short term and term loans.
4. The co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small
scale industries and self-employment driven activities
5. The co-operative banks in urban areas mainly finance various categories of people for
self-employment, industries, small scale units, home finance, consumer finance, personal
finance, etc.
6. Co-operative banks are playing a more proactive role than scheduled commercial banks
(SCBs) in achieving financial inclusion
7. They are also playing a pivotal role in micro finance
The exponential growth of Co-operative Banks is attributed mainly to their much better local
reach, personal interaction with customers, and their ability to catch the nerve of the local
clientele.
REGIONAL RURAL BANKS
The Narasimham committee on rural credit recommended the establishment of Regional Rural
Banks (RRBs) on the ground that they would be much better suited than the commercial banks or
co-operative banks in meeting the needs of rural areas.
Objectives of Regional Rural Banks
Regional Rural Banks were established with the following objectives in mind:
1. Taking the banking services to the doorstep of rural masses, particularly in hitherto
unbanked rural areas
2. Bridging the credit gap in rural areas
3. Check the outflow of rural deposits to urban areas
4. Reduce regional imbalances and increase rural employment generation
5. Making available institutional credit to the weaker sections of the society who had by far
little or no access to cheaper loans and are forced to depend on the private money lenders.
6. Mobilize rural savings and channelize them for supporting productive activities in rural
areas.
7. Generating employment opportunities in rural areas and bringing down the cost of
providing credit to rural areas.
With these objectives in mind, knowledge of the local language by the staff is an
important qualification to make the bank accessible to the people
Nature
? Status of scheduled commercial banks
? Combines basic features of the commercial banks and cooperative societies
Amalgamation of Regional Rural Banks
The total number of Regional Rural Banks (RRBs) were 196 and now stands at 86 following the
process of their amalgamation initiated by the government in 2005, so as to strengthen and
consolidate RRBs. There were 196 Regional Rural Banks operating in the country as on March
31, 2004. Most of the sponsor banks were operating more than one RRB in one state
and in order to give a further boost to profitability of these banks and to strengthen them
further a need was felt to amalgamate more than one RRB of same sponsor bank operating in
the same state.
FOREIGN BANKS
Features
1. They are operating in Urban and Metropolitan cities only with limited number of
branches; catering to elite clientele
2. The foreign banks having considerable international exposure are able to launch new
products besides providing better services.
3. Foreign banks tend to follow ?exclusive banking? by offering services to a small number
of clients, instead of ?inclusive banking?.
4. Foreign banks charge higher fees from customers for providing banking services and
maintaining a bank account requires substantial financial resources.
5. These banks have been complying with the 32% requirement under Priority Sector
Lending but mostly concentrate on Retail Banking.
6. The low Credit Deposit ratio indicates that more than lending to business and industry,
they resort to investment operations.
Role of foreign banks
? Foreign banks play a relatively minor role in the Indian economy,
? The role of foreign banks is vital and tends to elevate the efficiency and working system
of the local banking system by introducing sophisticated financial services. Acquiring
reports, SMS alerts, tele-banking, internet banking, and many more are some of the
catchy services that plays a crucial role in satisfying the customers
? They cover 65% of the foreign exchange transactions in India.
? They have limited number of branches.
? They are not lending money to small and medium-sized enterprises (SMEs), small
traders, informal sector and farmers.
SUMMARY
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton
Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which
was entirely owned by private shareholders in the beginning. The Government held shares of
nominal value of Rs. 2,20,000.The Bank was constituted to regulate the issue of banknotes, to
maintain reserves with a view to securing monetary stability and to operate the credit and
currency system of the country to its advantage.
Different tools that are used by RBI to control the economy are Bank rate, Repo rate, Reverse
Repo rate, Cash reserve ratio and Statutory liquidity ratio.
There are two essential functions that a financial institution must perform to become a
commercial bank. These area) Accepting deposit form the public b) Lending money to the needy.
Commercial banks include public sector banks, private banks and foreign banks. Other types of
banks are Cooperative Banks and Regional Rural Banks. Co-operative Banks are basically
organized and managed on the principle of co-operation, self-help, and mutual help and they
function with the rule of ?one member, one vote?.Regional Rural Banks were established to take
the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas.
KEYWORDS
Bank Rate -Bank Rate is the rate at which central bank of the country (in India it is RBI) allows
finance to commercial banks. Repo (Repurchase) rate - is the rate at which the RBI lends short-
term money to the banks against securities. When the repo rate increases borrowing from RBI
becomes more expensive. Reverse Repo Rate -It is the rate at which banks park their short-term
excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with
excess funds and are not able to invest anywhere for reasonable returns. Cash Reserve Ratio –It
refers to the liquid cash that banks have to maintain with the RBI as a certain percentage of their
net demand and time liabilities. Statutory Liquidity Ratio - It is the amount a commercial bank
needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before
providing credit to its customers.
QUESTIONS
SHORT QUESTIONS:
1. When was the Reserve Bank of India established?
2. Give two secondary functions of a commercial bank.
3. What is meant by a scheduled commercial bank?
4. State two disadvantages of a Private Bank?
5. What is meant by a Cooperative Bank?
6. The Regional Rural Banks were established under the recommendation of which
committee?
7. Give two objectives of RRBs.
8. State two features of a Foreign Bank.
9. What is the current Reverse repo rate, Repo rate, Base Rate, CRR and SLR?
DESCRIPTIVE QUESTIONS:
1. Elaborate the functions rendered by a Commercial Bank.
2. Describe the functions of the Central Bank.
3. Differentiate between Central Bank and Commercial bank.
4. Explain the tools used by RBI for controlling banks.
5. Describe the features of a Cooperative Bank.
SHORT NOTES:
1. Regional Rural Banks
2. Private Banks
3. Commercial Banks
4. Foreign Banks
5. Cash Reserve Ratio
6. Bank Rate
7. Statutory Liquidity Ratio
8. Repo Rate
9. Reverse Repo Rate
10. Cooperative Bank
PRODUCTS AND SERVICES OFFERED BY A BANK
BANK DEPOSIT ACCOUNTS
As stated earlier, financial intermediation by commercial banks has played a key role in India
in supporting the economic growth process. An efficient financial intermediation process, as is
well known, has two components: effective mobilization of savings and their allocation to the
most productive uses.. When banks mobilize savings, they do it in the form ofdeposits, which are
the money accepted by banks from customers to be held under stipulatedterms and conditions.
Deposits are thus an instrument of savings.
Since the first episode of bank nationalization in 1969, banks have been at the core of the
financial intermediation process in India. They have mobilized a sizeable share of savings of
the household sector, the major surplus sector of the economy. This in turn has raised the
financial savings of the household sector and hence the overall savings rate. Notwithstanding
the liberalization of the financial sector and increased competition from various other saving
instruments, bank deposits continue to be the dominant instrument of savings in India.
Introduction to Bank Deposits
One of the most important functions of any commercial bank is to accept deposits from
thepublic, basically for the purpose of lending. Deposits from the public are the principal sources
of funds for banks. The public sector banks continue to dominate the Indian bankingindustry.
However, the share of the new private sector banks has been rising at the expense ofthe public
sector banks, particularly in the last few years.
Safety of deposits
At the time of depositing money with the bank, a depositor would want to be certain that his/
her money is safe with the bank and at the same time, wants to earn a reasonable return.
The safety of depositors' funds, therefore, forms a key area of the regulatory framework
forbanking. In India, this aspect is taken care of in the Banking Regulation Act, 1949 (BR
Act).The RBI is empowered to issue directives/advices on several aspects regarding the conduct
ofdeposit accounts from time to time. Further, the establishment of the Deposit
InsuranceCorporation in 1962 (against the backdrop of failure of banks) offered protection to
bankdepositors, particularly small-account holders.
Deregulation of interest rates
The process of deregulation of interest rates started in April 1992. Until then, all interest
rateswere regulated; that is, they were fixed by the RBI. In other words, banks had no freedom
tofix interest rates on their deposits. With liberalization in the financial system, nearly all
theinterest rates have now been deregulated. Now, banks have the freedom to fix their
owndeposit rates with only a very few exceptions. The RBI prescribes interest rates only in
respectof savings deposits and NRI deposits, leaving others for individual banks to determine.
Deposit policy
The Board of Directors of a bank, along with its top management, formulates policies relatingto
the types of deposit the bank should have, rates of interest payable on each type, specialdeposit
schemes to be introduced, types of customers to be targeted by the bank, etc. Ofcourse,
depending on the changing economic environment, the policy of a bank towards
depositmobilization, undergoes changes.
Types of Deposit Accounts
The bank deposits can also be classified into (i) demand deposits and (ii) time deposits.
(i) Demand deposits are defined as deposits payable on demand through cheque orotherwise.
Demand deposits serve as a medium of exchange, for their ownership canbe transferred from one
person to another through cheques and clearing arrangementsprovided by banks. They have no
fixed term to maturity.
(ii) Time deposits are defined as those deposits which are not payable on demand andon which
cheques cannot be drawn. They have a fixed term to maturity. A certificateof deposit (CD), for
example, is a time deposit.
Note that these are onlycategories of deposits; there are no deposit accounts available in the
banks by the names'demand deposits' or 'time deposits'. Different deposit accounts offered by a
bank, dependingon their characteristics, fall into one of these two categories. There are several
deposit accountsoffered by banks in India; but they can be classified into three main categories:
(a)Current account
(b)Savings bank account
(c)Term deposit account
DEMAND DEPOSITS
Current account deposits fall entirely under the demand-deposit category and term
depositaccount falls entirely under time deposit. Savings bank accounts have both
demand-depositand time-deposit components. In other words, some parts of savings
deposits are considereddemand deposits and the rest as time deposits. We provide below
the broad terms and conditionsgoverning the conduct of current, savings and term-deposit
accounts.
Current Deposits
A current account is a form of demand-deposit, as the banker is obliged to repay these
liabilitieson demand from the customer. Withdrawals from current accounts are allowed any
number oftimes depending upon the balance in the account or up to a particular agreed amount.
Currentdeposits are non-interest bearing. Among the three broad categories of deposits-
currentaccount deposit, savings accounts deposit and term deposits--current account deposits
accountfor the smallest fraction.
A current account is basically a running and actively operated account with very little restriction
on the number and amount of drawings. The primary objective of a current account is toprovide
convenient operation facility to the customer, via continuous liquidity.
On account of the high cost of maintaining such accounts, banks do not pay any interest onsuch
deposits. In addition, many banks insist on customers maintaining minimum balances tooffset the
transaction costs involved. If minimum balances are not maintained, these bankscharge the
customers a certain amount.
Current accounts can be opened by rich individuals/ partnership firms/ private and limited
companies/ Hindu Undivided Families (HUFs)/ societies/ trusts, etc.
Savings Bank Deposits
Savings deposits are a form of demand deposits, which is subject to restrictions on the number
of withdrawals as well as on the amounts of withdrawals during any specified period. Further,
minimum balances may be prescribed in order to offset the cost of maintaining and servicing
such deposits. Savings deposits are deposits that accrue interest.Savings bank accounts are used
by a large segment of small depositors as they can put theirregular incomes into these accounts,
withdraw the money on demand and also earn intereston the balance left in the account.The
flexibility provided by such a product means that savings bank accounts cannot be openedby big
trading or business firms. Similarly, institutions such as government departments andbodies,
local authorities, etc. cannot open savings bank accounts.Savings account deposits together with
current account deposits are called CASA deposits.
CASA Deposits
From a bank's viewpoint, CASA deposits (Current Account and Savings Account deposits)are
low-cost deposits, as compared to other types of deposits. Current account is noninterestbearing,
while interest payable on savings accounts is very low. To be competitive, it is important for
banks to garner as much low-cost deposits as possible,because by doing so banks can control the
cost of raising deposits and hence can lend atmore competitive rates. The methods used by banks
to mobilize CASA deposits includeoffering salary accounts to companies, and encouraging
merchants to open current accounts,and use their cash-management facilities.Banks with low
CASA ratios (CASA deposits as % of total deposits) are more dependent onterm deposits for
their funding, and are vulnerable to interest rate shocks in the economy,besides the lower spread
they earn. (As discussed above, banks earn profit on the spreadbetween their deposit and loans
rates.)
TIME DEPOSITS
A "Time deposit" or Term deposit is a deposit received by the Bank for a fixed period, after
which it can bewithdrawn. Term deposits include deposits such as Fixed Deposits / Reinvestment
deposits/Recurring Deposits etc. The term deposits account for the largest share and have
remainedwithin the range of 61% to 67 % of total deposits in the recent years.Interest is paid on
term-deposits, either on maturity or at stipulated intervals depending uponthe deposit scheme
under which the money is placed. Also, a customer can earn interest on aterm-deposit for a
minimum period of 7 days. Interest rates on term-deposits are usuallyhigher than on savings
deposits. Term deposits include:
(a) Fixed deposits on which a fixed rate of interest is paid at fixed, regular intervals;
(b) Re-investment deposits, under which the interest is compounded quarterly and paidon
maturity, along with the principal amount of the deposit. Some banks have introduced"flexi"
deposits under which, the amount in savings deposit accounts beyond a fixedlimit
isautomatically converted into term-deposits; and
(c) Recurring deposits, under which a fixed amount is deposited at regular intervals for afixed
term and the repayment of principal and accumulated interest is made at the endof the term.
These deposits are usually targeted at persons who are salaried or receiveother regular income. A
Recurring Deposit can usually be opened for any period from6 months to 120 months.
Strategies of Mobilizing Deposits
To maximize their profits, commercial banks always attempt to mobilize savings at the
lowestcost possible. While mobilizing deposits, banks have to comply with various directives
issued
by the RBI, the Indian Bank Association (IBA), Government of India and other
statutoryauthorities/agencies. At the same time, since banks operate in a very competitive
environment,they have to reach out to a wide spectrum of customers and also offer deposit
products thatlead to higher customer satisfaction.
Banks devise various strategies to expand the customer base and reducing the cost of
raisingdeposits. This is done by identifying target markets, designing the products as per
therequirements for customers, taking measures for marketing and promoting the deposit
products.
It is essential not only to expand the customer base but also to retain it. This is done byproviding
counseling, after-sales information and also through prompt handling of customercomplaints.
While the strategies for mobilizing bank deposits vary from bank to bank, one common feature
is to maximize the share of CASA deposits. The other common features generallyobserved are as
follows:
(a) Staff members posted at branches are adequately trained to offer efficient and courteous
service to the customers and to educate them about their rights and obligations.
(b) A bank often offers personalized banking relationship for its high-value customers by
appointing Customer Relationship Managers (CRMs).
(c) Senior citizens/pensioners have become an important category of customers to betargeted
by a bank. Products are developed by banks to meet the specific requirementsof this
group.
(d) While banks endeavour to provide services to the satisfaction of customers, they putin
place an expeditious mechanism to redress the complaints of the customers.
TYPES OF ADVANCES
Advances
? Personal Loan
? Business Loan
? Auto Loan
? Two-wheeler Loan
? Housing Loan
? Gold Loan
? Educational Loan
? Cash Credit/ Working Capital Loans
? Credit Card
? Loan Against Property/ Security
? Commercial Vehicle Loan
? Project Finance
? Construction Equipment Loan
Business Loan :Availed by businessmen for personal expenses.
Project Finance : To provide long term finance for the establishment of new industrial,
infrastructure, agri-horticulture, fishery and animal husbandry projects as well as
expansion, diversification and modernization of existing ones.
Commercial Vehicle Loans :Loans for commercial vehicles like buses, trucks, tankers,
tempos etc.
Construction Equipment Loans : Any equipment working on construction/mining/civil
contracts like Backhoe loaders, Excavators, Wheel Loaders, Tata/AL Tippers,
Forklifts,Compactors, Transit Mixer etc.
Gold Loan : Loan against gold jewellery and ornaments.
Cash Credit :An account with a bank by which a person, having given security for
repayment, draws at pleasure upon the bank to the extent of an amount agreed upon.
Businessmen require money for their day today transaction.This type of loan can be
availed against collateral like land, building and even FD at times.
Investments
? Mutual Funds
? Shares
? Life Insurance
? General Insurance
Mutual Fund :It is a fund managed by an investment company with the financial
objective of generating high Rate of Returns. These asset management or investment
management companies collects money from the investors and invests those money in
different Stocks, Bonds and other financial securities in a diversified manner. Before
investing they carry out thorough research and detailed analysis on the market conditions
and market trends of stock and bond prices. These things help the fund managers to
speculate properly in the right direction.
Foreign Exchange
? Purchase/ Sell of Foreign Currency
? Foreign Currency Demand Drafts
? Traveller’sCheque
? Forex Cards
Traveller‘sCheque : It is a preprinted, fixed-amount chequedesigned to allow the person
signing it to make an unconditional payment to someone else as a result of having paid
the issuer for that privilege.They were generally used by people on vacation instead of
cash as many businesses used to accept traveller's cheques as currency. Their use has
been declining since the 1990s as better alternatives, such as credit cards and automated
teller machines became more widely accepted and available.
ForexCards :A forex card is a type of prepaid debit card issued by a bank. A forex card is
a convenient and cost effective method for obtaining local currency when traveling
abroad. Cards are accepted by a global network of merchant outlets that will issue
prepaid funds from the forex card in local currency.
Clearing
? Inward Clearing
? Outward Clearing
Clearing – Apart from cash and transfer transactions, there is another type of transaction called
clearing transaction. Clearing is a banking term related to cheque payment and the time required
to process the cheque amount collected from another bank. There are two types of clearing
Inward Clearing and Outward Clearing.
Inward clearing is a banking term.Each bank uses one common clearing house. For eg XYZ bank
customer wants to issue a cheque to ABC bank customer.So, ABC bank customer will deposit
that cheque into his bank. Then ABC bank will send that cheque to clearing house for clearing.
So, that check will be inward for XYZ and outward for ABC.
Example: A cheque drawn on "Bank of America" deposited in "Chase Manhattan Bank ", is an
outward cheque for Chase and is an inward cheque for Bank of America.
Outward cheques could be
? Local cheques (within the same geographical/ clearing zone),
? Outstation cheques (drawn on a bank outside the local clearing zone) or
? Foreign cheques (drawn on a bank/ location outside the country of the collecting bank).
Remmitances
? Inward Remmitance
? Outward Remmitance
SUMMARY
Different products and services that are offered by banks to customers are Deposits, Advances,
Investments, Foreign Exchange, Clearing services, Remittances et al. Deposits include Demand
deposits and Time Deposits. Different types of demand deposits are Current account deposits and
Saving account deposits. Time deposits are categorized into Fixed Deposits, Recurring deposit
and Re-investment deposits. Loans and advances are offered by banks to fulfill the monetary
requirements of the customers such as personal loan, business loan, working capital loan, project
finance, home loan, auto loan, two-wheeler loan, loan against property, education loan and etc.
KEYWORDS
Fixed deposits on which a fixed rate of interest is paid at fixed regular intervals;(b) Re-
investment deposits - under which the interest is compounded quarterly and paid on
maturity, along with the principal amount of the deposit, Recurring deposits - under
which a fixed amount is deposited at regular intervals for a fixed term and the repayment
of principal and accumulated interest is made at the end of the term ,Forex Cards - It is
a type of prepaid debit card issued by a bank. A forex card is a convenient and cost
effective method for obtaining local currency when traveling abroad .Remittance - It
means sending money; usually it refers to money sent ...Wire transfer through a bank
account.Mutual Fund :It is a fund managed by an investment company with the financial
objective of generating high Rate of Returns.
QUESTIONS
SHORT QUESTIONS:
1. What is meant by a Current Account?
2. Differentiate between Personal Loan and Business Loan.
3. What is a Recurring deposit?
4. What is a Saving account?
5. What do you understand by a recurring deposit?
DESCRIPTIVE QUESTIONS:
1. Explain the strategies adopted by a bank to mobilize deposits.
2. Elaborate the advances offered by a bank.
SHORT NOTES:
1. Forex Cards
2. Clearing
3. Demand Deposits
4. Deregulation of Interest rates
5. Time Deposits
6. CASA Deposits
BANKER CUSTOMER RELATIONSHIP
Who is a Banker?
A Banker Must:
• Collect cheques for his customers
• Make payment of cheques drawn on him
• Maintain a running account of his customers.
Who is a Customer?
A person/entity has to fulfill the following requirements to qualify as a customer:
• There should be an intention to get into a banking relationship
• An account(deposit/loan) account should be opened with the bank.
The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship. The general relationship is debtor and creditor and other
than this, the relationships construe special relationship.
1. CREDITOR-DEBTOR
The customer becomes a creditor and the banker becomes debtor when money is
deposited in the bank. The relationship becomes opposite i.e. a customer become debtor
and bank creditor when loan is advanced by the bank to the customer .
2. BENEFICIARY-TRUSTEE
If a customer keeps certain valuables or securities with the bank for safe-keeping or
deposits a certain amount of money for a specific purpose, the banker, acts as a trustee.
The banker cannot utilize those moneys or securities as he desires since the money does
not belong to him. A trustee is one who holds property for the benefit of a person or
beneficiary. The banker is a trustee when a customer deposits his valuables and securities
for safe custody.
3. BAILEE - BAILOR
When there is delivery of goods or securities from one person to the other which amounts
to the bailment. In such case, bank becomes bank becomes bailee and customer is the
bailor.
4. PRINCIPAL-AGENT
When a customer deposits draft, cheques, dividends, certificates etc., for collection, he
becomes the principal and bank acts as his agent. It includes performing agency services for
his customers, such as undertaking to pay the electricity bills, phone bills etc on regular basis.
5. LESSEE-LESSOR
The banks provide safe deposit lockers to the customers on lease basis. The bank leases out
the space for the use of clients on rent basis. The bank is not responsible for any loss that
arises to the lessee in this form of transaction except due to custodial negligence of that bank.
Here the banker is Lessor and customer is Lessee.
6. INDEMNIFIER- INDEMNIFIED
In the case of banking, this relationship happens in transactions of issue of duplicate demand
draft, fixed deposit receipt etc. The underlying point in these cases is that either party will
compensate the other of any loss arising from the wrong/excess payment.
BANKER’S RIGHT AND OBLIGATIONS
The Rights of the bank are those, through which they enjoy legal operation and derive functional
guarantee . Following are the major rights that a banker can exercise on his customer.
1. Right of Lien:
Lien is the right of the creditor to retain the goods and securities owned by the debtor until the
debt due from him is paid.
There are two types of lien viz.
1. Particular Lien
2. General Lien
(a) Particular Lien:
A 'particular lien' gives the right to retain possession only of those goods in respect of which the
dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security
for a particular debt, then the banker's right gets converted into a particular lien.
(b) Right of General Lien:
Banker has a right of general lien against his borrower. General lien confers banks right in
respect of all dues and not for a particular due. A 'general lien' gives the right to retain possession
of any goods in the legal possession of the creditor until the whole of the debt due from the
debtor is paid.
2. Right of set off – The banker has the right to set off the accounts of its customer. It is a
statutory right available toa bank, to set off a debt owed to him by a creditor from the credit
balances held in otheraccounts of the borrower.
Conditions while exercising right of Set - Off:
1. The account should be in the sole name of the customer.
2. The amount of debts must be certain and measurable.
3. Funds should not be held in trust accounts
4. The right cannot be exercised in respect of future or contingent debts.
3. Right of appropriation
The customers can direct his banker against which debt (when more than one debt is
outstanding) the payment made by him should be appropriated. In case no such direction is
given, the bank can exercise its right of appropriation and apply it in payment of any debt.
4. Right to charge interest
As a creditor the banker has right to charge interest on the funds he lends as per the norms and
as per the contract. Hence the banker has an implied right to charge interest on the advances
granted to its customer.
a. Bankers generally charge interest monthly, quarterly or semiannually or annually.
b. There must be an agreement between the banker and customer in this case the manner
agreed will decide how interest is to be charged.
c. Bank‘s responsibility is to explain these in writing; such as
? How is interest calculated?
? Fixed interest
? Floating rate
5. Right to charge service charges
Banker has an implied right to charge for services rendered and sold to a customer. Bank charges
interest on amount advanced, processing charges for the advance, charges for non-utilization of
credit facilities sanctioned, charges commission, exchange, incidental charges etc. depending on
the terms and conditions of advance Banks charge customers if the balance in deposit account
falls below the prescribed amount.
6. Right to close an account
The contractual relationship between banker and customer is terminated by closing the account.
There is no opportunity for the customer to operate the account once again. The banker can close
the account of the customer when he finds
ii. The account is not remunerative
iii. The customer is not a desirable one.
OBLIGATIONS
Generally it is the bank‘s primary obligation to take care of its customers and provide services
which are fundamental to the contractual relationship of the banker and the customer.
1. Obligation to honor cheques
It is the duty of the banker to honor his customer‘s cheques. If he refuses to honor these cheques,
he is liable to the customer in damages.
Banker‘s obligation to honourcheques is subject to certain conditions:
1. Sufficient funds must be available
2. The cheque is presented for payment on a working day and during the business hours of
the branch.
3. Endorsements on the cheque are regular and proper.
4. The cheque should be in order in all respects
2. Obligation to maintain secrecy of customer’s account or affairs
The banker must take utmost care not to disclose the state of account of his customer‘s affairs as
this may result in considerable harm to the credit and business of the customer. If he fails in this
duty, he is liable for the damages. The banker should not disclose his customer‘s financial
position and the details of his account. The principle behind this duty is that disclosure about the
dealings of the customer to any unauthorized person may harm the reputation of customer and
the bank may be held liable. This secrecy should be maintained even after the account is closed
and even after death of the customer.
3. Obligation to keep a proper record of transactions
The banker must keep a proper and accurate record of all the transactions of the customer.
4. Duty to provide proper accounts
Banks are under duty bound to provide proper accounts to the customer of all the transactions
done by him. Bank is required to submit a statement of accounts / passbook to the customer
containing all the credits and debits in the account.
5. Obligation to abide by the instructions given by the customer
The banker must abide by any express instructions of the customer provided these are within the
scope of the relationship between the banker and the customer. The relationship is subject to the
terms of the contract between the bankers and the customers and the rules laid down in the
Negotiable Instruments Act.
6. Bankers’ Fair Practice Code:
Indian Banks‘ Association has prepared a code, which sets standards of fair banking practices.
This document is a broad framework under which the rights of common depositors are
recognized. It is a voluntary Code that promotes competition and encourages market forces to
achieve higher operating standards for the benefit of customers.
7.Redressal of Grievances
The Bank need to have a customer‘s Grievance Redressal mechanism with details, namely:
a. Where a complaint can be made
b. How a complaint should be made
c. When to expect a reply
d. Whom to approach for redressal of grievance etc.
CUSTOMER’S RIGHT & OBLIGATIONS
Rights :
1. Right to draw cheques
A customer has right to draw cheques against his credit balance and has right to receive pass
book from the bank..A customer can sue the bank for wrongful dishonour of cheque
2. Rights of Compensation
The customer can claim compensation from bank for the following reasons
a. Loss of reputation
b. Loss of market credibility
4. Rights for Claiming Damage
The customer can claim for damages from bank for the following reasons:
a. Wrongful dishonor of cheques
b. Failure to maintain secrecy
5. Right to close the Account
The customer has the right to close the account on following grounds
a. When he does not agree to the terms and conditions of the bank.
b. When he loses confidence on the Banking practices of the Bank
c. When facilities provided by bank is not market worthy
6. Right of Raising Grievance
The customers have the right to raise grievances for any deficiency in services or on violation of
any established law. There are different forums for this including banking ombudsman
OBLIGATIONS
Pertaining to Cheque Books
1. Ensure safe custody of cheque book and pass book.
2. Issue crossed/account payee cheques as far as possible.
3. Check the details of the cheque, name, date, amount in words and figures, crossing etc.,
before issuing it. As far as possible, issue cheques after rounding off the amount to
nearest rupee.
4. Not to issue cheque without adequate balance; maintain minimum balance as specified by
the Bank.
5. Bring pass book while withdrawing cash from savings bank account through withdrawal
slip. Get pass book updated from time to time.
Pertaining to deposit
1. Observe KYC norms
2. Use nomination facility.
3. Note down account numbers, details of FDR, locker numbers, etc., separately.
4. Inform change of address, telephone number, etc., to the Branch.
Loss of Instruments
Inform loss of demand draft, fixed deposit receipt, cheque leave (s)/book, key of locker, etc.,
immediately to the Branch.
SUMMARY
The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship. The general relationship is debtor and creditor and other
than this, the relationships construe special relationship. The other relationships are beneficiary -
trustee,bailee - bailor, principal - agent,lesse– lessor and indemnifier – indemnified. Rights and
obligations of a banker and a customer are also discussed in the chapter.
KEYWORDS
Banker is a person who Collect cheques for his customers, makes payment of cheques drawn on
him and maintains a running account of his customers.Customer is a person who has an
intention to get into a banking relationship.
QUESTIONS
SHORT QUESTIONS:
1. Who is a Customer?
2. Who is a Banker?
3. Give two rights of a Banker.
4. State two obligations of a customer.
5. Describe the debtor- creditor relationship between a banker and a customer.
LONG QUESTIONS:
1. Describe the relationships between a Banker and a Customer.
2. Explain the rights and obligations of a Banker.
3. Elaborate the rights and obligations of a Customer.
TYPES OF CUSTOMERS
Every commercial bank is anxious to increase its customers. However, every one cannot be
accepted as its customer. Only those persons who are competent in law to enter into a contract
can be considered as customers. The bank is and should be very cautious in the selection of
customers as it is to have a continued relationship with them. The customers of a bank can
mainly be divided into two categories (1) Ordinary Customers and (2) Special Customers.
Ordinary Customers are those who are competent to enter into contract under the laws of land.
An individual, a body corporate, a firm can open an account with the bank. The bank before
accepting one as a customer weighs the customer‘s financial position, his character, honesty,
social standing and good will in the society. The special customers are those who are dealt with
as special ones legally.The special types of individual customers are discussed below:
SPECIAL TYPES OF INDIVIDUAL CUSTOMERS
The special types of individual customers of the commercial banks are (i) Minor (ii) Lunatic (iii)
Drunkard (iv) Married Women (v) Purdah Observing Women and (vi) Illiterate persons. The
relationships between the bank and the special type of individual customers are governed by the
legal rules enforced in the country.
(2) Minor:
A person who has not attained the age of 18 years is a minor. A minor cannot
enter into a contract. Therefore, any contract with minor is void.
However, a bank can accept and open a minor‘s account if it is directed by the
Guardian Court. The Court appoints a guardian of a minor who obtains and signs
the prescribed opening form of the account himself. He gives his own specimen
signatures for the operation of the account. Each withdrawal from the minor‘s
account by the guardian is subject to the approval and sanction of the Guardian
Court. On attaining the, age of majority which is 21 years, the minor is allowed to
open and ?operate the account himself. The authority of legal guardian ceases to
exist.
If may here be noted that when a bank accepts a minor as its customer, he/she is
not allowed the overdraft facility. In addition to this, no term loan can ?be
advanced to him. Here minor is treated not as an ordinary customer. The
relationship between the minor and the bank is of special nature and is governed
from relevant section of the law enforced in the country.
(2) Lunatic:
A person who is incapable of understanding, is of unsound mind, cannot enter
into contract with the banker as customer.
If an account is already in existence of a sane person but his mental status is
disturbed, the bank on knowing the customer going insane will immediately stop
payment from his account and suspend all transactions till he receives either
satisfactory evidence of his recovery or an order is received from the Court.
(3) Drunkard:
If a person is in state of intoxication and is not in senses, he cannot open an
account with a bank. The main condition of valid contract with a bank is between
persons who are of sound mind. However it a person is drunk is of sound mind he
may open and operate an account with a bank.
(4) Married Woman:
Man and Woman are equal in the eyes of law for the purpose of making a
contract. A married woman has every right to enter into contract with a bank and
open an account enter into partnership be declared as insolvent by the Court just
like other ordinary persons. A married woman is as good as a male member of the
society as far as law is concerned she can open any type of account including
Foreign Currency Account in her name.
If may here be noted that a married women cannot make her husband responsible
for the debt incurred by her. It is the sole responsibility of the married woman to
repay the loans and advances made in her name by bank. In case the loans and
advances are raised for supplementing the income of her husband or for meeting
the expenses of life necessities or for domestic needs such as boarding lodging
and clothing then the husband is considered liable to pay to the debt incurred by
his wife by law.
(5) Purdah Observing Woman:
The bank has to be very cautious in opening an account of purdah observing lady.
She cannot be treated at par as with other women. Before accepting purdah
observing woman as customer the banker must carry out a thorough scrutiny
about the identity of woman. A very close referee or introducer, from the point of
view of both the parties, the customer and the banker, should confirm the identity
of the purdah observing lady and verify her signature beyond any doubt. The bank
has to be very cautious on this score.
(6) Illiterate person:
An illiterate person from the banker s point of view is the person who cannot put
his signatures. He uses his thumb impressions in place of signatures for
identification. The banker has therefore to be very cautious in honoring the
cheques of illiterate person. The banker usually takes the following precautions in
this regard.
(i) A Certified photograph of an illiterate person is pasted on the signature card
for identification.
(ii) At least two left hand thumb impressions are placed in place of specimen
signatures for identification.
TYPES OF NON-INDIVIDUAL ACCOUNTS
1. Accounts of Hindu Undivided Families (HUF):
The Hindu Succession Act 1956 governs HUF. The HUF carries out ancestral business
and possesses ancestral properties.
The right to manage HUF property vests in the 'Karta' of the family. Karta is either the
father or the senior most male member of the family. All other male members are called
coparceners.
In the interest of the family and family business, only the Karta can create a charge over
the ancestral property. However, he cannot make a contract, which binds the other
member personally. Other members are responsible to the extent of their share in the
ancestral property.
HUF is not dissolved In the event of death of one of the members of the joint Hindu
family. It differs from the partnership firm as on the death of one of the partners, the firm
is dissolved. On the death of karta the senior most co-parcener becomes karta.
A coparcener continues to be a member of HUF, even after his migration outside India
and acquiring status of NRI or taking citizenship of another country.
If the Karta himself migrates, an alternative Karta of the HUF is appointed by the HUF
with consent from all coparceners.
Opening of Account of HUF:
The account is opened in the name of the Karta and family business. The Karta and all
the adult members of the HUF are required to sign the account opening form. Banks do
not open Savings Bank account of HUF engaged in trading and business activities
Operations in account:
The operations in the account are normally restricted to Karta of the family. The Karta
can appoint any of the adult coparceners to operate the bank account as 'Manager' if HUF
carries out business at various places through its branches.
HUF accounts can also be operated by coparcener and /or other adult members of HUF
also, against a letter of authority and against a stamped letter of indemnity cum
undertaking given by the Karta. Since female members in an HUF are not coparceners,
they cannot be authorized to operate bank account. If there is no adult coparcener, a
mother is allowed to manage the property of HUF and operate the account.
2. Account of Sole Proprietary Concerns:
Banks do not open savings bank account in the name of a proprietorship firm but open
current account in the name of the sole proprietary concerns. Accounts in the name of a
sole proprietary concern are treated like individual accounts. The account can be operated
either by the proprietor himself or by a person duly authorized to operate the account on
his behalf. Banks exercise caution while accepting cheques drawn in favour of the sole
proprietary concern and deposited in personal account of the proprietor.
When the sole proprietor of the firm deposits cheque payable to the firm for credit of his
personal account,bank obtains a declaration from him to the effect that he is the sole
proprietor of the firm.
3. Accounts of registered societies, clubs and Associations:
A club or a society gets legal entity only when it is incorporation under Company‘s Act, 1956 or
under Cooperative Societies Act, 1860.Byelaws of the society, clubs, and association contain
rules, regulations or conduct and activities of the association. While opening account banks
obtain:
(a) Copy of the byelaws;
(b) Copy of resolution passed by the managing committee regarding opening and
conduct of account,
(c) Certificate of registration in original,
(d) A list of the Managing Committee members
(e) Copies of resolutions electing them as Committee members duly certified by
the Chairman.
Bank keeps a copy of the above-mentioned document for its record.
4.Account of Partnership Firms:
According to Section 4 of the Indian Partnership Act, a partnership is the relationship between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all.
The Supreme Court has held that the word "persons" in Section-4 contemplates only natural or
artificial persons i.e., legal persons. Since a firm is not a person, is not entitled to enter into
partnership with another firm or Hindu undivided family or individual. Therefore, banks do not
open account where a firm is a partner in another firm. As Joint stock companies and statutory
bodies constitute "artificial or legal persons" therefore, they can be partners in a partnership firm.
As per the Indian Partnership Act, minimum number of partners can be two and maximum
twenty. The number of partners is restricted to 10, if the partnership firm carries out business of
banking. Minors can be admitted as partner only to the benefits of the partnership.
Registration of partnership firm:
A partnership firm can be registered with Registrar of Firms. However, as per law, it is not
compulsory to register a partnership firm. Non-registered partnership firm have certain
disabilities. Such firms cannot sue others to enforce a right arising out of a contract. A suit filed
by an unregistered partnership firm is not maintainable, even after its subsequent registration.
Even partners of an unregistered firm cannot sue other partners or his firm, for their rights.
Opening of Account:
A partnership firm can open all types of accounts except savings bank account. Bank opens
account of a partnership firm in the name of the firm and not in the names of partners
individually or jointly. The account opening form is signed by all the partners in their individual
capacity as well as in the capacity of a partner to ensure joint and several liabilities. While
opening the account banks verify the partnership deed to examine whether any clause of the deed
is detrimental to the interest of bank. Since bank would not like to be bound by the terms of the
partnership deed, banks do not accept the partnership deed even if offered.
In case of registered firm, banks obtain registration certificate. The account is opened in the
name of the firm and all the partners are required to sign account opening form.
Operations in account:
Bank obtains operational instructions i.e. who will operate the account and how it is to be
operated. In case a minor is also a partner in the firm his birth certificate is obtained to ascertain
the date of birth, which is recorded in the account opening form.
Who can operate?
(a) All partners jointly
(b) One of the named partners
(c) Two / three of the named partners
(d) A third party under a mandate letter or a power of attorney signed by all
the partners.
A partner authorized to operate the firm's account cannot delegate his authority to another person
unless all other partners agree. The authority given to operate the account can be withdrawn by
any of the other partners including dormant or sleeping partner by giving notice to the bank.
Each partner, whether he/she is operating the account or not, has powers to countermand
payment of the cheques drawn by another partner or by an attorney on behalf of the firm.
Partnership firms with illiterate partners:
Current accounts of partnership firms, where a partner is illiterate and affixes thumb impression,
can be opened provided a Magistrate attests the thumb impression affixed on the account
opening form.
Implied authority:
A partner acts as an agent of the firm for the purpose of the business of the firm. He binds the
firm and also other partners by his acts. An authority to bind the firm by his acts is called the
implied authority of a partner.
Operations in the accounts:
Without proper inquiry with the other partners, bank does not accept cheque drawn in favour of
the firm for credit to the personal account of a partner. Failure to make proper inquiries would
deprive the bank of the protection afforded under Section-131 of the Negotiable Instruments Act
on grounds of negligence. Cheques payable to a partner are not be credited to the firm‘s account
without proper inquiry being made with the other partners.
Retirement of a partner:
On notice of retirement of a partner, the bank closes the existing account and opens a new
account of the firm with the remaining partners or along with the new partner if admitted to the
new firm.
Death of a partner:
(a) Death of a partner dissolves the partnership. However, for the purpose of winding up of the
firm, the bank may allow the surviving partner(s) to operate the firm's account, if the account is
in credit.
(b)Cheques drawn by a partner before his death and presented for payment are honoured after
obtaining confirmation of the surviving partners.
Dissolution of a partnership firm:
Dissolution of a firm amounts to the breaking up of relation of partnership between all the
partners. In the event of dissolution banks do not permit operations in the account. A partnership
firm may be dissolved by any of the following modes
(a) By mutual agreement between all the partners.
(b) By notice of dissolution in case of partnership at will.
(c) By operation of law or compulsory dissolution of the firm.
(d) By happening of certain contingencies such as death or insolvency of a partner.
(e) Dissolution by Court of Law in cases like insanity, permanent incapacity,
misconduct of a partner affecting business etc.
5.Accounts of Joint Stock Companies:
A joint stock company is constituted under company Act 1956. Company is an artificial person‘
with perpetual succession. It is a voluntary association of persons formed for some common
purpose with capital divisible into parts known as share. It has separate legal entity and corporate
personality. It is separate from the shareholders constituting it.The company can own assets;
contract debts and can sue and be sued in its own name. The property of the company is not the
personal property of its shareholders nor is the company‘s liability the liability of its
shareholders/directors, unless they consent to be personally liable for the company's debts.
Company can be classified into three categories:
(a)Public Ltd. Co.:
It can issue shares to public. Minimum number of shareholders required is 7. There is no
restriction in the maximum number of shareholders. Shares can be freely transferred. Minimum
number of directors required is 3
(b)Private Ltd.Co.:
It cannot issues shares to public.Shares are not freely transferable. Minimum number of
shareholder required 2 and maximum number of share holders can be 50.Minimum number of
directors required 2.It does not require certificate of commencement of business.
(c).Government Co.:
A company where not less 51% of the share capital is held by the government.Depending upon
the liability of shareholders the Company it may be limited or
unlimited.
Documents required for opening an account:
(a) Account opening form
(b) Certified copies of memo of association and articles of association
(c) Copy of certificate of incorporation
(d) Certificate of commencement of Business
(e) Up-to-date list of directors with name and address
(f) Certificated copy of a resolution of the Board of directors for opening and
conducting the account.
Documents obtained by bank:
For opening an account of a joint stock company bank obtains following documents:
(i) Certificate of incorporation:
The Registrar of Joint Stock Companies issue this certificate. It is a
conclusive proof that all the requirements under the Companies Act have been
complied with.
(ii) Certificate of commencement of business:
This certificate is essential in the case of public limited companies. A
public limited company cannot borrow until this certificate is obtained.
(iii) Memorandum and Articles of Association:
The bank obtains a certified copy of the Memorandum and Articles of Association
of the company to satisfy that the conduct of the account is in conformity with
the provisions. Certificates signed by the Chairman or one of the authorized
directors of the company stating that the Memorandum and Articles of Association
are true and up-to date.
(iv) Board Resolution:
A copy of the resolution of the Board of Directors of the company, certified as
true by the Chairman of the meeting, requesting the Bank to open an account in
its name and specifying the instructions regarding the conduct thereof, is
obtained. Instructions in the resolution regarding conduct of the account have to
be in strict conformity with the provisions of company‘s Articles of Association.
The resolution is to be countersigned either by the company's secretary or any of
the other directors.
(v) List of the present directors:
A list of the present directors of the company is obtained under the signature of
the Chairman, accompanied by a certified copy of the resolution of the general
body of the shareholders appointing them as directors.
(vi) Reference to the company's previous bankers:
Banks also ascertain the names and addresses of the company‘s previous bankers,
if any, and get a report on the company and its directors and keep it along with
the account opening form.
Memorandum of Association:
The memorandum of association contains name and address of the registered office of the
company, name and addresses of the directors, objectives and powers of the company.
Any act done or contract entered into by the company, which is outside the scope of these
objectives becomes ultra vires (i.e. beyond the powers of the company) and, therefore, is
not binding on it.
The Memorandum and Articles of Association of the company is studied to find out the
extent of the powers of its directors, its powers to borrow and mortgage property or to
give guarantees and the provisions relating to the conduct of its bank accounts
Articles of Association:
The Articles of Association contain the rules regulations regarding company's internal affairs.
Conversion of cheques payable to companies:Cheques payable to or endorsed by limited
companies should not be collected for the personal accounts of their directors, managers and
other employees. Ordinarily, cheques payable to limited companies are to be credited to
company‘s account.
Insolvency of a director:In case one of the directors becomes insolvent or an un-discharged
bankrupt, he cannot act as a director of a limited company. The bank does not permit operations
in the account by the insolvent director.
Winding up of a company:Winding up of a joint stock company is deemed to have commenced
from the date on which petition for such winding up is presented, or in the case of voluntary
winding up from the date on which an extra ordinary resolution to this effect is passed. With
commencement of winding up of a joint stock company, the Directors cease to have powers to
operate on the account and the authority stands vested with the liquidator appointed for the
purpose. Therefore banks do not pay cheques signed by the directors after the commencement of
the winding up proceedings. Liquidator should furnish evidence of his appointment by sending a
certified copy of the Court Order, or a certified copy of the resolution of the general body in case
of a voluntary winding up. If required, he may be furnished with details of the company's
accounts, securities etc., and should be allowed to operate upon the accounts of the company
only for the purpose of winding up of its affairs.
7.Accounts of Private Companies:A private limited company is a company, which have a
minimum 2 and maximum 50 shareholders. Shares of these companies are not sold in the public
and cannot be transferred. Banks are cautious while opening accounts of Pvt. Ltd.Co. Bank
obtains all documents as required while opening accounts of a joint stock company.
8. Accounts of Trusts:As per Sec.3 of Indian Contract Act, 1882 ?A trust is an obligation
annexed to the ownership of property, and arising out of a confidence in and accepted by the
owner, or declared and accepted by him, for the benefit of another, or of another and the owner.?
Bank opens trust accounts for good parties. A trust can be public or private. All public trusts are
required to be registered with the Charity Commissioner under Public Trust Act of the respective
state.
Before registering a public trust, the office of the Charity Commissioner makes necessary
enquiries regarding the trust, its trustees, the mode of succession of trusteeship etc., and after
proper enquiries makes entries in the register, which are final, conclusive and are binding on all
concerned. Banks open trust accounts after taking all precautions.
While opening account of a trust bank obtains :
(a) Copy of constitution of the trust
(b) Trust deed if available,
(c) Certificate of registration and/or a certified copy of the entry of the public trusts register
(d) Public Trust Register No
(e) A list of the current trustees and the authority appointing them as trustees.
(f) The necessary resolution passed by the trustees for opening the account with the bank.
(g) Certified copy of the resolution signed by all the trustees in regard to
the conduct of the account.
Trusts which have no constitution, instruments of trust or scheme:
While opening accounts of such trusts bank obtains following documents:
• A certificate of registration issued by the office of the Deputy/Assistant Charity Commissioner
(Where it is so possible, under the relative law).
• A certified copy of the latest entry in the public trusts register (Public Trust Registration),
which shows the name of the trust, the Public Trust register No of the Trust, at which it is
registered and name/s of the trustee/s.
• A declaration and an indemnity from are obtained all the trustees.
• A resolution passed by the trustees relating to the opening of the account
Operations:
Trust accounts must be opened and conducted strictly in accordance with the terms of the trust
deed. All the trustees are required to act jointly by the persons so authorized by the registered
trust deed. Trustees have no powers to delegate their authority to one or more unless the power
of delegation is authorized by the trust deed or is in accordance with the directions of the court
on an application made by the trustees.Trustees have no implied authority to borrow or pledge
trust property, unless so provided for in the trust deed.
Death of a trustee:
On the death of one of the trustees, the trust property passes to the other trustees as per the
provisions of the trust deed. If the deceased is the sole trustee, his executor has no right to
recover the trust money. The executor, however, has the right to appoint a new trustee, provided
the deceased trustee has in his will specifically authorized such an appointment.
9. Accounts of Religious and Charitable Trusts:
To regulate public religious and charitable trusts some States have passed Acts. These charitable
trusts are registered with the Charity Commissioner or the Assistant Charity Commissioner of
the region concerned. A Certificate of registration is issued to these trust by the authorities.
Mostly these trusts do not have a properly written trust deed. Bank opens account of religious
and charitable trusts on merits and on being satisfied as to the integrity of the trustees and their
status.
Opening and operations of account:
While opening account bank obtains following documents in addition to account opening form
duly signed by the trustees.
• A resolution specifying the name of the bank passed in a proper meeting heldby all the trustees.
• Indemnity signed by all the trustees, indemnifying the bank for having allowed operations on
the trust account.
• Banks do not permit operations in the account by one person.
• Reasonable number of members is required for opening and operating the account.
• If the number of trustees is larger, then the number of person operating the account has to be
large.
• Bank periodically obtains confirmation of balance in the account, signed by all the trustees.
• Wherever possible, order or direction from the Charity Commissioner is obtained, permitting
the bank to allow operations on the trust account in the manner approved by the trustees.
12.Accounts of Liquidators:
A company can go into liquidation either voluntary or by the orders of court. Incase a company
goes in to liquidation by the orders of court, it appoints a liquidator Under Section 552 of the
Companies Act, 1956. The liquidator so appointed by courts is known as official liquidator.
When a company goes into voluntary liquidation, it appoints liquidators at its extraordinary
general meeting convened for the purpose. Official liquidators have to deposit the moneys only
into the public account of the Government of India with the Reserve Bank of India. Official
liquidator cannot open accounts with scheduled banks. In case of voluntary winding up, authority
to operate account by the liquidator is passed in the general meeting.
Opening of account:
While opening account of liquidators bank requires:
(a)True copy of the resolution passed in the extraordinary general meeting.
(b) The resolution has to be certified by the Chairman of the extraordinary general meeting
(c) Signature of the liquidator is required to be verified by one of the authorized officials of the
company concerned.
(d) Liquidators cannot delegate their powers to third parties
(e) The account is styled as "The Liquidation Account of ........"(Name of the company).
13. Accounts of local bodies:
Banks open accounts of local bodies include Municipal Corporation, Panchayat, Board etc.,
created by special act of the parliament or legislative Assembly.
a) Accounts of Village Panchayats:
Banks open accounts of village panchayats/district/taluka after getting a copy of the resolution
passed by the Panchayat of the Village or Taluka of the District concerned. In various states the
village panchayat are governed by the Panchayat Raj Acts passed by the respective state
governments.While opening such accounts banks refer to the Act for ascertaining the nature of
transactions permitted by the Act. The accounts of village panchayats are operated only bythe
President or Sarpanch. The Vice-President (Vice Sarpanch) of thePanchayat can operate the
account only in the absence of the President (Sarpanch) only after the written authority of the
sarpanch.Accounts of village panchayats/district/taluka are opened and styled as
"President (or Sarpanch).........Gram/Panchayat".
b) Accounts of Local Authorities/bodies:
Banks open accounts of local authorities like municipalities, district boards, port trust, state
financial corporations and such bodies created by statute. These are considered as local bodies or
quasi- government institutions. While opening accounts of such authorities banks go through the
municipal enactments and regulations. Transactions in account are permitted strictly in
accordance with the statutory provision.
Accounts with Similar Names:
Where there are two accounts either in the same name/s or with great similarity in their titles,
caution should be noted on both the ledger headings with the word "CARE" : Similar account in
the name ........ Page... " Giving cross-references. If it comes to the notice of the branch that the
client is maintaining an account with another branch of the Bank, the fact should be noted in the
ledger heading with a view to enable the branch or branches to exchange any useful information,
which may come to its notice about the client.
SUMMARY
The bank is and should be very cautious in the selection of customers as it is to have a continued
relationship with them. The customers of a bank can mainly be divided into two categories (1)
Ordinary Customers and (2) Special Customers. An individual, a body corporate, a firm can open
an account with the bank. The bank before accepting one as a customer weighs the customer‘s
financial position, his character, honesty, social standing and good will in the society. The
special customers are those who are dealt with as special ones legally like a minor, married
woman, lunatic, woman observing purdah etc. The different types of non-individual accounts are
partnership firms, joint stock companies, societies, trust accounts etc.
KEYWORDS
Ordinary Customers are those who are competent to enter into contract under the laws of
land.Special Customers are governed by the legal rules enforced in the country.
QUESTIONS
SHORT QUESTIONS:
1. Who is a Minor?
2. What are the types of Special Customers?
3. Who is an Ordinary customer?
4. Name two types of non-individual account.
5. Who is a lunatic?
LONG QUESTIONS:
1. What are the steps involved in opening a bank account for the partnership firms?
2. What are the steps involved in opening a bank account for Religious charities and trusts?
3. Elaborate the steps involved in opening a bank account for two special individual
customers.
MODE OF ACCOUNT OPERATION
In the case of joint accounts (Current, Savings or Deposits) in the names of two or more persons,
the terms relating to which do not provide for payment of the amount due under the account to
the Survivor(s) in the event of death of one of them, for the banks to obtain a valid discharge
payment should be made jointly to Survivor(s) and the legal heirs of the deceased joint account
holder. In such a case, in view of the difficulty in ascertaining with certainty as to who the legal
heirs of the deceased are, it is the practice of the banks to insist on the production of legal
representation (to the estate of the deceased) before settling the claim. As obtaining a grant of
legal representation would entail delay and expenses, banks should encourage the opening of
joint accounts on terms such as, payable to (a) Either or Survivor, (b) Former/Latter or Survivor,
(c) Anyone or Survivors, or Survivor, etc.
Benefits of Survivorship
If the benefit of survivorship is provided, the survivor can give a valid discharge to the bank.
Even though payment to the survivor will confer a valid discharge to the bank, the survivor will,
however, hold the money only as trustee for the legal heirs (who may include the survivor as
well) unless he is the sole beneficial owner of the balance in the account or the sole legal heir of
the deceased. Thus, the survivor‘s right unless he is the sole owner of the balance in the
account/sole legal heir of the deceased, is only in the nature of a mere right to collect the money
from the bank. If the legal heirs of the deceased lay a claim to the amount in the bank, they
should be advised that in terms of the contract applicable to the account, the survivor is the
person entitled to payment by the bank and that, unless the bank is restrained by an order of a
competent court, the bank would be within its rights to make the payment to the survivors)
named in the account. The position, briefly, is that a payment to survivor can be made if there
are no orders from a competent court restraining the bank from making such payments.
Joint Savings Bank Account – Either or Survivor/Any one or Survivors or Survivor
The survivor can give a valid discharge to the bank. If the legal heirs claim the amount, the
bank can inform them that unless they obtain and have served on the bank an order of competent
court restraining the bank from effecting payment to the survivor, the bank will be within its
rights to do so.
Joint Term Deposit Account - ‘Either or Survivor or ‘Anyone or Survivors or Survivor’
In a joint term deposit account which has been opened in the style of either or survivor/any one
or survivors or survivor, the bank often receives a request, on the death of one of the joint
account holders, from the surviving depositors) to allow premature encashment or the grant of a
loan against the term deposit receipt. It would be in order to accede to the request of the
surviving depositors) for premature payment if (i) there is an option included in the contract of
deposit to repay before maturity and (ii) ?either/any one or survivorship? mandate has been
obtained from original depositors. Requests for loans from surviving depositor(s) could also be
considered in special cases, though in the case of such loans, the bank may face a possible risk if
the legal representatives of the deceased depositor lay an effective claim to the deposit before it
is paid on maturity. In such an event, the bank will have to look to the borrower(s) for
repayment. This position for premature payment or grant of loan is applicable also in respect of a
joint account (in the style of either or survivor/any one or survivors or survivor), where all the
account holders are alive.
As a measure of operational prudence, a clause to the effect that loan/premature payment can be
permitted to either/any one of the depositors any time during the deposit period can, however, be
included in the term deposit contract.
Joint Term Deposit - Former or Survivor/Latter or Survivor etc.
In the case of these term deposits, the intention of the owner depositor (former/latter) is to
facilitate repayment of the term deposit to the survivor only in the event of his death. He (the
owner depositor) is in a position to retain with him at all times, the right to dispose of the monies
until his death or maturity of the deposit receipt, whichever is earlier. There should, therefore, be
no objection to the bank permitting premature payment of such deposits or granting advances
against them at the request of the former/latter without insisting on the production of a consent
letter from the other party/parties to the term deposit receipt. Here also it is preferable to make
this position explicit to the joint depositors, by incorporating suitable clause in the term deposit
account opening or application form.
BASIC BANKING CONCEPTS
KYC Norms - In order to prevent identity theft, identity fraud, money laundering, terrorist
financing, etc, the RBI had directed all banks and financial institutions to put in place a policy
framework to know their customers before opening any account.
This involves verifying customers' identity and address by asking them to submit documents that
are accepted as relevant proof.
Mandatory details required under KYC norms are proof of identity and proof of address.
Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof
of residence can be a ration card, an electricity or telephone bill or a letter from the employer or
any recognized public authority certifying the address.
Some banks may even ask for verification by an existing account holder. Though the standard
documents which are accepted as proof of identity and residence remain the same across various
banks, some deviations are permitted, which differ from bank to bank.
So, all documents shall be checked against banks requirements to ascertain if those match or not
before initiating an account opening process with any bank. Thus opening a new bank account is
no longer a cake walk.
Those are the basic requirements of KYC to identify a customer at the account opening stage.
Anti Money Laundering - The word money laundering refers to the use of the financial system
to hide the source of funds gained from illegal activity such as drug trafficking, bribery,
extortion, embezzlement, theft or other criminal activity, as the criminals try to make their ill
gotten gains appear genuine.
Anti Money Laundering is the term used by banks and other financial institutions to describe
the variety of measures they take to fight against this illegal activity and to prevent criminals
from using individual banks and the financial system to keep their Proceeds of Crime. In all
major jurisdictions around the world, criminal legislation and regulation make it mandatory for
banks and financial institutions to have arrangements to combat Money Laundering, with harsh
criminal penalties for non-compliance.
The vast majority of criminal dealings are done in cash. Criminals need ways to dispose of the
cash and have it reappear as part of their wealth with as little chance as possible of it being
tracked back to the cash element. Criminals have to use the financial system and banks in
particular to do this.
Money laundering is traditionally done in three stages, called Placement, Layering and
Integration. Placement is the physical depositing of the cash. Layering describes the process of
transactions, some very simple, some more complicated and often involving transactions within
and between banks and across borders, which seek to confuse the trail back to the original cash.
Integration is the process by which the money is brought back into use by the criminal in the
normal economy, often by the purchase of assets (houses, cars, works of art) but which make it
appear legitimate.
Anti Money Laundering processes and controls help banks and financial institutions protect
themselves and their reputation from the criminals. Key elements of a sound Anti Money
Laundering programme, many of them required by law, include :
? Minimum Standards and Policies, approved by Senior Management, which clearly set
out your philosophy on crime prevention and business requirements.
? Strong "Know Your Customer" checks at customer take-on to identify and exclude
known criminals but also to be sure you know the real identity of the customers you do take on.
? Robust training programmes for all staff.
? Processes (very often automated) to monitor the activities on customer accounts to
identify suspicious activity and to check incoming and outgoing payments for unauthorised
transactions and to enable reports to be made to relevant authorities.
CIBIL - CIBIL is Credit Information Bureau (India) limited is India s first credit bureau. It is a
collection of information which has been pooled by all major Banks and financial institutions of
India. The aim to create such an organization is that there are lesser defaults on loans as the
credit history can be checked before the loans are booked. It has over 170 million consumer
database. Cibil reports helps Banks to differentiate between customers who have paid there
previous loans in time v/s those who either have defaulted etc. Cibil database is not a list of
customers who cant be given a loan where as it collect information of all your loan and credit
card payments.
The biggest change it has brought is that it gives the lender ie the bank the credit history of the
customer who wants to apply for the loan or credit card.
It is a month and month record of a customer‘s emi or credit card payments. All loans like
Personal loan, Home loan, Car loan and credit card payments record come under this.
It also contains personal information like Name, Mobile number, DOB, Address, Pan Number
and Passport number.
It has information on the number of times a person may have applied for a loan or a credit card in
the last one year.
Non-Performing Assets - Non-performing assets, also called non-performing loans, are loans,
made by a bank or finance company, on which repayments or interest payments are not being
made on time.
A loan is an asset for a bank as the interest payments and the repayment of the principal create a
stream of cash flows. It is from the interest payments than a bank makes its profits.
Banks usually treat assets as non-performing if they are not serviced for some time. If payments
are late for a short time a loan is classified as past due. Once a payment becomes really late
(usually 90 days) the loan classified as non-performing.
Prime Lending Rate - In banking parlance, the BPLR means the Benchmark Prime Lending
Rate. BPLR is the interest rate that commercial banks normally charge (or we can say they are
expected to charge) their most credit-worthy customers. Although as per Reserve Bank of India
rules, Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2
lakh with the approval of their respective Boards yet BPLR has to be declared and made
uniformly applicable at all the branches.. However, with the introduction of Base Rate concept,
BPLR is slowly losing its importance and is made applicable normally only on the loans which
have been sanctioned before the Base Rate has been made compulsory.
Base Rate - The Base Rate is the minimum interest rate of a Bank below which it cannot lend,
except for loans to bank's own employees and loan to banks' depositors against their own
deposits. (i.e. cases allowed by RBI)
What is the difference between BPLR and Base Rate?
The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending rate
(BPLR) recommended that the BPLR nomenclature be scrapped and a new benchmark rate —
known as Base Rate — should replace it. Base Rate is much more transparent and banks are not
allowed to lend below the base rate (except for cases specified by RBI). Base Rate is to be
reviewed by the respective banks at least on quarterly basis and the same is to be disclosed
publicly. On the other, the calculations of BPLR were mostly not transparent and banks were
frequently lending below the BPLR to their prime borrowers and also under pressure due to
various reasons.
When was the Base Rate Made Applicable for Banks in India?
RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010.
Do all banks have common Base Rate ?
No, each bank will arrive at its own base rate
Deposit Rate - A term Deposit Rate refers to the amount of money paid out in interest by a bank
or financial institution on cash deposits. Banks pay deposit rates on savings and other investment
accounts.
Wholesale Banking
Wholesale banking is the provision of services by banks to the likes of large corporate clients,
mid-sized companies, real estate developers and investors, international trade finance businesses,
institutional customers (such as pension funds and government entities/agencies), and services
offered to other banks or other financial institutions. In essence, wholesale banking services
usually involve high value transactions.
Wholesale banking contrasts with retail banking, which is the provision of banking services to
individuals.
Retail Banking
Retail banking is banking in which banking institutions execute transactions directly with
consumers, rather than corporations or other banks. Services offered include: savings and
transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.
19. How many Public and Private Sector banks are there in India?
Short notes:
1. KYC
2. AML
3. CIBIL
4. Retail Banking
5. Wholesale Banking
6. Prime lending Rate
7. Non-performing Assets
8. Deposit Rate
Case Study 1:
Mr. Arun Kumar, the Branch Manager of a Bank located in a semi-urban area.
It was a small town in a mineral belt where mining and transportation were the main
activities. There were many Banks operating in the town. There was stiff competition
amongst the Banks to garner deposits and increase the existing banking business. Mr.
Kumar came from a good family, was an MBA from a reputed Institution, and had about
10 years of experience in the Banking industry.
The financial year was coming to close and the branch was very busy in
annual closing activities and also achieving targets in deposits and advances given to the
branch by their Regional Office. Mr. Arun Kumar was approaching various customers,
institutions and was trying very hard to mobilize deposits in order to achieve the branch
target.
The annual closing was supposed to be on the last working day of March and that day
branch would be closed for public transaction.
On the closing day one Mr. PrakashAgrawal, about 35 years of age
came to the branch and approached Mr. Arun Kumar for making a Fixed Deposit of
Rs.25 lacs against a Demand Draft issued from another Bank in a different location about
25 kms away from this town. Mr. Agrawal was neither known to anybody nor had any
account in the branch.
On enquiry, Mr. Agrawal informed that he was a big contractor for a Coal Company and
the particular draft he had received from the Company against his work. He also
requested that he would take loan against the Fixed Deposit to meet labour payment and
other emergent payment before the year ending.
If Mr. Arun Kumar accedes to the request of Mr. Agrawal , the deposit
and advance figure of the branch would exceed the target and this would help him get
appreciation from his Regional Manager and promotion in near future.
Question:
If you had been in Mr.Arun Kumar‘s place what would have been your decision? Justify
your answer.
Case Study 2:
Mr. Prakash Mishra was working as an officer in a Nationalized Bank located in
rural area. He joined this branch few months ago after being promoted from clerical
cadre. He was allotted the duty in Savings department.
One day a lady came to the branch and opened a savings account in her
name. Mr. Mishra opened the account after observing the formalities. After few days
the lady deposited a Demand Draft for Rs.20 lacs issued by another nationalized bank in
her account. The said draft was duly collected by the bank. The lady (customer) withdrew
Rs.10 lacs in cash from her account. Few days later the draft issuing Bank informed the
collecting bank that the draft in question was stolen from their bank and demanded the
refund of entire money. The matter was brought to the notice of the Manager of the
branch who on enquiry found that Mr. Mishra was negligent in his duty in opening and
allowing operation in the account for which the bank would incur loss of money and
reputation.
Question:
Now, please analyze the case and give your views as to what was wrong on the part of
Mr.Mishra in handling this account and what action you would have taken had you been
in his place?
Case Study 3:
Mr. Shah had taken four insurance policies, of Rs 25,000 each from the Life Insurance
Corporation (LIC) of India. All of them came with double accident benefits and were
taken on March 6, 1986 through an agent. The premium was payable on a half yearly
basis.
The half yearly premium due on March 6, 1987 was not paid in time.
Later, the agent met Shah and obtained from him a bearer cheque for Rs 2730 dated June
4, 1987 towards the premium on all four policies. The cheque was encashed by the
agent‘s son the following day, but the premium was deposited with LIC much later, on
August 10. Meanwhile, Shah met with an accident on August 9 and died the same day.
Shah‘s widow, who was the nominee in all four policies, claimed the
amount payable under the policies. LIC repudiated the claim saying the policies in
question, had lapsed on account of non-payment of premium in time or even thereafter,
within the grace period. But Mrs. Shah counter claimed that premium were paid to the
agent on behalf of LIC, much before Mr. Shah met with an accident and died. So, the
claim must be paid. LIC did not agree to Mrs. Shah‘s contention and refused the claim.
(Note: Double accident benefit under a life insurance policy refers to the double payment of the
sum assured under the policy. This benefit pays double the sum only in case of death due to an
accident, which means if the death is due to natural causes, there is no double benefit.)
Question:
State whether LIC is justified in refusing to pay the claim and on what ground?
Case Study: 4
The Internet Banking Boom
In 2001, the Reserve Bank of India survey revealed that out of 46 major banks operating in India,
around 50% were either offering Internet banking services at various levels or planned to in the
near future. According to a research report in 2001, India's Internet user base was an estimated 9
lakh; it was expected to reach 90 lakh by 2003. Also, while only 1% of these Internet users
utilized the Internet banking services in 1998, the Internet banking user base increased to 16.7%
by mid- 2000.
Many of the major banks like ICICI, HDFC, IndusInd, IDBI, Citibank, Global Trust Bank
(GTB), Bank of Punjab and UTI were offering Internet banking services. Based on the above
statistics and the analysts' comments that India had a high growth potential for Internet banking,
the players focused on increasing and improving their Internet banking services.
As a part of this, the banks began to collaborate with various utility companies to enable the
customers to perform various functions online. ICICI's 'Infinity,' which was already a leader in
the Indian Internet banking arena, began to allow its customers to pay their online real time
shopping bills. HDFC, through its 'payment gateway' feature, allowed its Internet banking
customers to make online and real time payments for their purchases.
HDFC also entered into tie-ups with various portals to provide these business-to-customer (B2C)
e-commerce transactions. As more banks entered Internet banking arena, the competition
between the banks also increased. This compelled the banks to focus on capturing new markets
and customers and adopting advanced technology on the Internet. In the light of these
developments, industry watchers remarked that Internet banking had arrived in a big way.
Though it had a long way to go compared to the global standards, it was beginning to be seen as
a replacement for the traditional banking set up in the future.
About I nternet Banking
Globally, the banking business has always been in the forefront of harnessing technology to
improve its services and efficiency. Banks have been quick to adopt rapidly evolving electronic
and telecommunication technologies to deliver an extensive line of value added products and
services to their customers. By the early 1990s, direct dial-up connections, personal computers,
tele banking and automated teller machines (ATMs) became common in most developed nations.
Internet banking evolved in the mid-1990s when Internet and the World Wide Web began to
catch on. Soon, many major banks in the US and Europe began to use the Internet to provide
banking services.
Internet banking is a web-based service that enables the bank's authorized customers to access
their account information. It allows the customers to log on to the bank's website with the help of
a bank-issued identification and a personal identification number (PIN).
The banking system verifies the user and provides access to the requested services. The range of
products and services offered by each bank on the Internet differs widely in their content. Most
banks offer Internet banking as a value-added service. Internet banking has also led to the
emergence of new banks, which operate only through the Internet and do not exist physically.
Such banks are called 'Virtual' banks or 'Internet only' banks.
The products and services offered by the banks on the Internet can be divided into three types:
• Information Kiosks: It includes providing information regarding various products and services
offered by the bank to its customers and others in general. The bank's site receives and answers
queries of customers through e-mails.
• Basic Internet Banking: It includes enabling customers to open new accounts, check account
balance and pay utility bills.
• E-commerce Banking: Banks function as electronic market places (e-market place) enabling
customers to use their accounts for money transfers, bills payment, purchase and sale of
securities and online real time purchases and payments.
In a typical Internet banking transaction, customers' requests for online banking information are
passed on from Web server to the bank's Internet banking server through the WWW interface.
These requests pass through a firewall before they reach the Internet banking server. Due to the
use of SSL technology, only authenticated requests reach the Internet banking server. The
customer information database is stored on a bank's server, which is protected by the use of
various security tools in addition to the firewall technology.
The WWW interface is the only media of communication with the Internet banking server and
Internet banking server is the only media of communication with the customer database, thus
ensuring the safety of operation and customer data. When the customer requests reach the
Internet banking server it passes the requests to the bank server hoarding customer database. The
database provides the required information to the Internet banking server, which is in turn passed
on to the web server, through the firewall, from where the customer is able to access it. This sort
of architecture, known as the 'three-tiered architecture' (comprising of a web server, Internet
banking server and customer database protected by firewalls) creates a controlled environment,
which allows quick incorporation of Internet security technologies.
A security analyzer constantly monitors login attempts and recognizes failures that could indicate
a possible unauthorized attempt to log into an account.
When such trends are observed, steps are automatically taken to prevent that account from being
used. The most significant benefit of Internet banking is the ready accessibility of bank accounts
at all times. The inconvenience of visiting and waiting at the banks is also eliminated.
This resulted in, enhanced customer satisfaction, reduced customer attrition and increased
customer base. Internet banking considerably reduces transaction costs for the banks. According
to a study conducted by consultants Booz-Allen & Hamilton, the cost of an average transaction
on the Internet is as low as 13 cents, compared to $ 1.07 through the branch, 54 cents through the
telephone and 27 cents through the ATM. The study also stated that Internet banking helped
banks reduce the branch load and attract future customers. In India, the cost of one banking
transaction through the Internet amounted to 10 paise to the bank, as compared to Re.1 through a
branch, 45 paise through an ATM, 35 paise through phone banking and 20 paise through debit
cards.
The low transaction costs and the promising picture painted by analysts induced many banks in
India to introduce Internet banking services during the late 1990s.
Questions:
i. Is Internet Banking a customer-centric approach? Explain.
ii. Discuss the merits and demerits of Internet Banking.
News Analysis: 1
SAVINGS A/C PORTABILITY: IS IT WORTH THE TROUBLE?
It is difficult for most of us to remember a bank savings account number. In light of this, it is
surely worth-while considering the viability and implementation of a system that would enable
this most vital information to be portable. After all, the number of our mobile telephone is
portable. Indeed, if a user is unsatisfied with his service provider, he can simply switch the
provider but still retain the number. Although in place only recently, the concept of portability of
telephone numbers is very well understood. On the other hand, the process of changing the 10
digit number can be at best tedious, while informing acquaintances, friends and family of the
change can be nothing less than a Herculean task. Nowadays, one's mobile number is tantamount
to one's individual identity.
At first glance, it may be challenging for the man in the street to come to terms with the concept
of a portable savings account number - after all, the level of confidentiality necessary to protect
one's savings far exceeds that required for a telephone, which is, per se, designed to be shared. A
bank account, whether current, savings, term deposit, or no frills, represents a conduit between
the customer and the bank and is governed by the Contract Act. Each bank has its own
technology and CBS (Core Banking System) to assign an account number.
Even though a savings account number is assigned in a serial order, in some cases, it carries
extra meaning. Banks issue account numbers in 10, 12, 14 or 18 digit formats according to their
individual internal technical requirements. It would be foolish to underestimate both the
difficulty of synchronizing numbers across the banking system and the enormity of the IT cost
that would entail.
The RBI has issued general guidelines on KYC (Know Your Client) and AML (Anti Money
Laundering), which require each bank to frame KYC/AML policy and procedures and record
documentation requirements. At present, documentation requirements and the scope and scale of
due diligence and risk categorization varies markedly from bank to bank.
But, of course, individual banks are responsible for performing due diligence on new accounts as
well as for monitoring and reporting suspicious transactions. Notwithstanding the prospective
establishment of a central registry for KYC documents, individual banks would remain the final
arbiter of whether to open an account or not.
The most straightforward route might be to link savings account numbers to the unique number
issued by the Unique Identification Authority of India (UIDAI). Implementation could take place
once account holders have been allocated a number by the UIDAI.
However, the slow pace of the project to date is indicative of the complexity of consolidating
information on this scale. Savings account portability has far reaching implications for the
banking system. Any meaningful change to the CBS system is likely to stretch resources, not
only financial but also in terms of man power and technology. At the same time, the extent of the
cost-benefit ratio is by no means certain. Indian banks have had limited success in penetrating
remote areas, and large parts of the population continue to have scant access to basic banking
facilities.
Nonetheless, the RBI is seeking to stimulate the expansion of bank branch networks into remote
areas by waiving licensing requirements. It is more prudent to use these scarce resources to
expand basic banking facilities in remote areas. In October last year, the Reserve Bank relaxed
controls on interest rates on savings account deposits, which prompted some private sector
lenders to increase rates to as much as 7%.
On the face of it, encouraging investors to switch savings account with the same number
portability and pursuing the most attractive interest rate offers little obvious benefit to the
banking sector as a whole, especially when enhanced returns are already widely available via
term deposits. Clearly, the cost-benefit ratio and its implementation are not yet fully understood
by the banks. So when it comes, the debate can be expected to be lively.
(Source: Economic Times January 11
th
2012)
Analyze the news piece and state whether banks should go in for savings account
portability or not? Support your answer with valid reasons.
News Analysis: 2
Customer service in banking: Long way to go in
resolving inadequacies
Customer service is the most cliched phrase at banks and the proof lies in the recent report
released by the central bank which lays bare the inadequacies. And the firebrand Reserve Bank
of India deputy governor KC Chakrabarty, a former career banker himself, is throwing his
weight behind addressing many of those. The global banking industry, with possibly the best of
the brains, has been at the receiving end for putting its interests ahead of customers. In India,
issues like one-sided loan agreements and hefty fees one has to pay to close a bank account are
precisely the reasons why a regulator should play a significant role in the way lenders price their
product.
Many recommendations of the Damodaran Committee on improving customer service have been
implemented, but there's a long way to go if one goes by the annual report of the Banking
Ombudsman.Chakrabarty at least wants to ensure "that poor do not subsidize the provision of
banking services to the rich." Next time when your bank reports a steep jump in profits driven by
fee income, you may have to question the charges you pay. In the age of internet and computers,
customers still prefer to lodge their complaints to the banking ombudsman by post and fax. 73
per cent of the complaints are sent either by post or fax. Under the scheme, a customer can lodge
a complaint either by post, fax, e-mail or online through the complaint form uploaded on the RBI
website. The electronic and online mode is yet to catch up, especially with rural and semi-urban
population groups, the Reserve Bank said. Even in urban centers, from where maximum
complaints are registered, technology awareness is still low. As regards number of complaints
per branch, foreign banks lead the pack with 18.43 complaints per branch, followed by new
private banks and SBI and associates with 1.33 complaints per branch. Though per branch
complaints for foreign banks are high, there is a perceptible decline in the number of complaints
per branch over the past two years. The reason why foreign banks received highest number of
complaints is, the customer group of these banks is predominantly high-net-worth individuals
and corporates, who are well-aware of their rights as bank customers and are well-versed with
the grievance redressal mechanism, the RBI said. Banks mostly had to deal with card-related
complaints, which accounted for 21 per cent of total complaints received. This is, however, 3 per
cent lower than the previous year due to an increase in general awareness about usage of cards.
In the cards segment, maximum complaints were pertaining to ATM or debit cards .Other
complaints were related to issues like unsolicited cards, unsolicited insurance policies and
recovery of premium, charging of annual fee for a 'free' card, wrong billing, nonsettlement of
insurance claims after the demise of the card holder, excessive charges, wrong debits to account,
non - dispensation of money from ATM, skimming of cards, among others. Apart from cards,
other complaints were mostly related to deposit accounts and remittances.
Question:
Critically analyze the news piece and suggest measures to improve customer service in the
banking industry.
News Analysis: 3
Mobile banking: A technology gradually permeating into the system
The question for mobile banking in India is not whether, but when. A string of parallel
developments - greater bank innovation, broadband spread and user inclination - is providing
new charge to mobile banking. There is still a long way to go before m-banking achieves mass
acceptance, but it's on its way, reports ET.
Last month, HDFC bank, India's second-largest private-sector bank, launched two services on its
mobile banking platform. The first was a Hindi banking service, which made accessible its 30-
odd m-banking services-like transferring funds, stop-cheque requests and opening a fixed
deposit-to account holders who prefer Hindi as a medium of communication.
The second was a feature called 'net safe light', which limits damages from credit-card misuse.
An account holder with a credit-card limit of, say, Rs 5 lakh might hesitate to make a purchase of
Rs 2,000 via mbanking. This new feature lets the account holder create a virtual credit card on
the mobile for the transaction value-in this case, Rs 2,000.
This is a fair leap from where m-banking was when it started in India about five years ago-text
alerts for cheque deposited or ATM withdrawals. The way the m-banking ecosystem is evolving,
and the numbers they are adding, indicate banks in India are going mobile at a speed never seen
before.
Sure, the small base exaggerates the change, but it is significant in that it shows a technology
gradually permeating into the system. "There's an opportunity to leapfrog: take banking to the
masses via mobile banking," says AP Hota, managing director & CEO, National Payments
Corporation of India (NPCI), which, among other things, sews up back-end connections to
enable m-banking.
Of its total customer base of 200 million, State Bank of India (SBI), the country's largest bank,
has 5.2 million registered users for its mbanking services. "Two lakh new users are registering
every month," says Thandapani G, deputy general manager, SBI. The bank's account holders do
90,000 transactions per day on mobile phones and did m-transfers of Rs 180 crore in November.
The same is true of leading private banks. Adds Rajiv Sabharwal, executive director, ICICI
Bank, the country's largest private-sector bank: "We have seen a 100% growth in the number of
people using mobile banking in past year. Transactions are up 300%." Out of HDFC Bank's 26
million account holders, 1.2 million use mobile banking, and this is increasing by 30% every
quarter. And Sridhar Iyer of Citibank India says 63% of its customers are on m-banking.
"It is picking up, but we are still at least five years away from largescale mobile banking," says
Murali Balaraman, partner, financial services, Ernst & Young.
"Today, mobile banking is a surrogate to busy schedules." What Balaraman means is that it is the
preserve of the urban user with a smartphone, who is comfortable with Internet banking, and is
graduating to m-banking. The real adoption would be when the masses, urban and rural, take to
it.
doc_972868966.pdf
The commercial banking industry in India started in 1786 with the establishment of the Bankof Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe Bank of Madras (established in 1843).
BANKING MANAGEMENT STUDY
MATERIALS
3
rd
TRIMESTER
CONTENTS
CHAPTER 1: INTRODUCTION
Definition of banks
Evolution of Commercial Banks in India
Functions of Commercial Banks
CHAPTER 2: BANKING STRUCTURE IN INDIA
Banking Structure in India
Role of Reserve Bank of India
Classification of Banks
CHAPTER 3: PRODUCTS AND SERVICES OFFERED BY A BANK
Deposits
Strategies for Mobilizing Deposits
Advances
Investments
Foreign Exchange
Clearing Services
Remittances
CHAPTER 4: BANKER CUSTOMER RELATIONSHIP
General Relationship
Special Relationship
Rights and Obligations of a Banker
Rights and Obligations of a Customer
CHAPTER 5:TYPES OF CUSTOMERS
Individual Customer Accounts
Non-Individual Customer Accounts
CHAPTER 6: MODES OF ACCOUNT OPERATION
CHAPTER 7: BASIC BANKING CONCETS
KYC
AML
PRIME LENDING RATE
CIBIL
BASE RATE
DEPOSIT RATE
RETAIL BANKING
NON-PERFORMING ASSETS
WHOLESALE BANKING
CASE STUDIES AND SAMPLE NEWS FOR ANALYSIS
INTRODUCTION
Definition of banks
In India, the definition of the business of banking has been given in the Banking RegulationAct,
(BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a
companywhich transacts the business of banking in India.' Further, Section 5(b) of the BR Act
defines
banking as, 'accepting, for the purpose of lending or investment, of deposits of money fromthe
public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order
orotherwise.' This definition points to the three primary activities of a commercial bank
whichdistinguish it from the other financial institutions. These are: (i) maintaining deposit
accounts
including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the
bank'scustomers.
Evolution of Commercial Banks in India
The commercial banking industry in India started in 1786 with the establishment of the Bankof
Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz.,
the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe
Bank of Madras (established in 1843). In 1921, the three Presidency banks wereamalgamated to
form the Imperial Bank of India, which took up the role of a commercial bank,a bankers' bank
and a banker to the Government. The Imperial Bank of India was establishedwith mainly
European shareholders. It was only with the establishment of Reserve Bank ofIndia (RBI) as the
central bank of the country in 1935, that the quasi-central banking role ofthe Imperial Bank of
India came to an end.In 1860, the concept of limited liability was introduced in Indian banking,
resulting in theestablishment of joint-stock banks. In 1865, the Allahabad Bank was established
with purelyIndian shareholders. Punjab National Bank came into being in 1895. Between 1906
and 1913,other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank,
IndianBank, and Bank of Mysore were set up.After independence, the Government of India
started taking steps to encourage the spread ofbanking in India. In order to serve the economy in
general and the rural sector in particular, the All India Rural Credit Survey Committee
recommended the creation of a state-partneredand state-sponsored bank taking over the Imperial
Bank of India and integrating with it, theformer state-owned and state-associate banks.
Accordingly, State Bank of India (SBI) wasconstituted in 1955. Subsequently in 1959, the State
Bank of India (subsidiary bank) Act waspassed, enabling the SBI to take over eight former state-
associate banks as its subsidiaries.To better align the banking system to the needs of planning
and economic policy, it wasconsidered necessary to have social control over banks. In 1969, 14
of the major privatesector banks were nationalized. This was an important milestone in the
history of Indianbanking. This was followed by the nationalization of another six private banks
in 1980. Withthe nationalization of these banks, the major segment of the banking sector came
under thecontrol of the Government. The nationalization of banks imparted major impetus to
branchexpansion in un-banked rural and semi-urban areas, which in turn resulted in huge
depositmobilization, thereby giving boost to the overall savings rate of the economy. It also
resultedin scaling up of lending to agriculture and its allied sectors. However, this arrangement
alsosaw some weaknesses like reduced bank profitability, weak capital bases, and banks
gettingburdened with large non-performing assets.To create a strong and competitive banking
system, a number of reform measures were initiatedin early 1990s. The thrust of the reforms was
on increasing operational efficiency, strengtheningsupervision over banks, creating competitive
conditions and developing technological andinstitutional infrastructure. These measures led to
the improvement in the financial health,soundness and efficiency of the banking system.One
important feature of the reforms of the 1990s was that the entry of new private sectorbanks was
permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBIBank and
UTI Bank were set up.
Commercial banks in India have traditionally focused on meeting the short-term financialneeds
of industry, trade and agriculture. However, given the increasing sophistication
anddiversification of the Indian economy, the range of services extended by commercial
bankshas increased significantly, leading to an overlap with the functions performed by other
financial
institutions. Further, the share of long-term financing (in total bank financing) to meet capital
goods and project-financing needs of industry has also increased over the years.
Functions of Banks:
The main functions of a commercial bank can be segregated into three main areas: (i) Payment
System (ii) Financial Intermediation (iii) Financial Services.
(i) Payment System
Banks are at the core of the payments system in an economy. A payment refers to themeans by
which financial transactions are settled. A fundamental method by whichbanks help in settling
the financial transaction process is by issuing and paying chequesissued on behalf of customers.
Further, in modern banking, the payments system alsoinvolves electronic banking, wire transfers,
settlement of credit card transactions, etc.In all such transactions, banks play a critical role.
(ii) Financial Intermediation
The second principal function of a bank is to take different types of deposits fromcustomers and
then lend these funds to borrowers, in other words, financialintermediation. In financial terms,
bank deposits represent the banks' liabilities, whileloans disbursed, and investments made by
banks are their assets. Bank deposits servethe useful purpose of addressing the needs of
depositors, who want to ensure liquidity,safety as well as returns in the form of interest. On the
other hand, bank loans andinvestments made by banks play an important function in channeling
funds intoprofitable as well as socially productive uses.
(iii) Financial Services
In addition to acting as financial intermediaries, banks today are increasingly involvedwith
offering customers a wide variety of financial services including investment banking,insurance-
related services, government-related business, foreign exchange businesses,wealth management
services, etc. Income from providing such services improves abank's profitability.
SUMMARY
Section 5(b) of the BR Act definesbanking as, 'accepting, for the purpose of lending or
investment, of deposits of money fromthe public, repayable on demand or otherwise, and
withdrawable, by cheque, draft, order orotherwise.'
The commercial banking industry in India started in 1786 with the establishment of the Bankof
Bengal in Calcutta. The Indian Government at the time established three Presidency banks,viz.,
the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) andthe
Bank of Madras (established in 1843). In 1921, the three Presidency banks wereamalgamated to
form the Imperial Bank of India, which took up the role of a commercial bank.
The main functions of a commercial bank can be segregated into three main areas: (i) Payment
System (ii) Financial Intermediation (iii) Financial Services.
It was only with the establishment of Reserve Bank ofIndia (RBI) as the central bank of the
country in 1935, that the quasi-central banking role ofthe Imperial Bank of India came to an end.
State Bank of India (SBI) wasconstituted in 1955. Subsequently in 1959, the State Bank of India
(subsidiary bank) Act waspassed, enabling the SBI to take over eight former state-associate
banks as its subsidiaries.To better align the banking system to the needs of planning and
economic policy, it wasconsidered necessary to have social control over banks. In 1969, 14 of
the major privatesector banks were nationalized. This was an important milestone in the history
of Indianbanking. This was followed by the nationalization of another six private banks in 1980.
To create a strong and competitive banking system, a number of reform measures were
initiatedin early 1990s. The thrust of the reforms was on increasing operational efficiency,
strengtheningsupervision over banks, creating competitive conditions and developing
technological andinstitutional infrastructure. These measures led to the improvement in the
financial health,soundness and efficiency of the banking system.
KEYWORDS
Payment System- Banks are at the core of the payments system in an economy. A payment refers
to the means by which financial transactions are settled. Further, in modern banking, the
payments system also involves electronic banking, wire transfers, settlement of credit card
transactions, etc.Financial I ntermediation - A bank takes different types of deposits from
customers and then lends these funds to borrowers, in other words, it is known as financial
intermediation. Financial Services - In addition to acting as financial intermediaries, banks
today are increasingly involved with offering customers a wide variety of financial services
including investment banking, insurance-related services, government-related business, foreign
exchange businesses, wealth management services, etc. Income from providing such services
improves a bank's profitability.
QUESTIONS
SHORT QUESTIONS:
1. Define banking.
2. When was Reserve Bank of India established?
3. State two functions of a bank.
4. When was Imperial Bank of India established?
5. When did the first phase of nationalization take place?
DESCRIPTIVE QUESTIONS:
1. Explain the main functions of a commercial bank.
2. Describe the evolution of commercial banks in India.
BANKING STRUCTURE IN INDIA
Banking Regulator
The Reserve Bank of India (RBI) is the central banking and monetary authority of India, andalso
acts as the regulator and supervisor of commercial banks.
Objective
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."
RESERVE BANK OF INDIA
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young
Commission. The share capital was divided into shares of Rs. 100 each fully paid which was
entirely owned by private shareholders in the beginning. The Government held shares of nominal
value of Rs. 2,20,000.
Reserve Bank of India was nationalized in the year 1949. The general superintendence
anddirection of the Bank is entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central Government appointed for a term of
four years to represent territorial and economic interests and the interests of co-operative and
indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of
1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
? To regulate the issue of banknotes
? To maintain reserves with a view to securing monetary stability and
? To operate the credit and currency system of the country to its advantage.
Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the
Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank
notes of all denominations. The distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank
has a separate Issue Department which is entrusted with the issue of currency notes. The assets
and liabilities of the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold
coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40
crores in value. The remaining three-fifths of the assets might be held in rupee coins,
Government of India rupee securities, eligible bills of exchange and promissory notes payable in
India. Due to the exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold
and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in
gold. The system as it exists today is known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the
obligation to transact Government business, via. to keep the cash balances as deposits free of
interest, to receive and to make payments on behalf of the Government and to carry out their
exchange remittances and other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans and to manage public debt. The
Bank makes ways and means advances to the Governments for 90 days. It makes loans and
advances to the States and local authorities. It acts as adviser to the Government on all monetary
and banking matters.
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a
cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in
India. By an amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting bills of
exchange. Since commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the
lender of the last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India
can ask any particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a license from the Reserve Bank of India to do banking business
within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank
showing, in detail, its assets and liabilities. This power of the Bank to call for information is also
intended to give it effective control of the credit system. The Reserve Bank has also the power to
inspect the accounts of any commercial bank.
As supreme banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitative
controls.
(c) It controls the banking system through the system of licensing, inspection and
calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was
required to buy and sell at fixed rates any amount of sterling in lots of not less than
Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was
able to maintain the exchange rate fixed at lsh.6d. though there were periods of
extreme pressure in favour of or againstthe rupee. After India became a member of
the International Monetary Fund in 1946, the Reserve Bank has the responsibility of
maintaining fixed exchange rates with all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as
the custodian of India's reserve of international currencies. The vast sterling balances
were acquired and managed by the Bank. Further, the RBI has the responsibility of
administering the exchange controls of the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and co-operative banks, relating to
licensing and establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to
carry out periodical inspections of the banks and to call for returns and necessary information
from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed
new responsibilities on the RBI for directing the growth of banking and credit policies towards
more rapid development of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.
Promotional functions
With economic growth assuming a new urgency since Independence, the range of the Reserve
Bank's functions has steadily widened. The Bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as outside the normal scope of central
banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to
rural and semi-urban areas, and establish and promote new specialized financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in
1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set
up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings,
and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve
Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank's role in this field has become extremely important. The Bank has
developed the co-operative credit movement to encourage saving, to eliminate moneylenders
from the villages and to route its short term credit to agriculture. The RBI has set up the
Agricultural Refinance and Development Corporation to provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are related to
control and regulation of money and credit, i.e., issue of currency, control of bank credit, control
of foreign exchange operations, banker to the Government and to the money market. Monetary
functions of the RBI are significant as they control and regulate the volume of money and credit
in the country.
Equally important, however, are the non-monetary functions of the RBI in the context of India's
economic backwardness. The supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary function). The promotion of sound
banking in India is an important goal of the RBI, the RBI has been given wide and drastic
powers, under the Banking Regulation Act of 1949 - these powers relate to licensing of banks,
branch expansion, liquidity of their assets, management and methods of working, inspection,
amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the
working of banks has greatly improved. Commercial banks have developed into financially and
operationally sound and viable units. The RBI's powers of supervision have now been extended
to non-banking financial intermediaries. Since independence, particularly after its nationalization
1949, the RBI has followed the promotional functions vigorously and has been responsible for
strong financial support to industrial and agricultural development in the country.
Tools Used by RBI for Controlling Banks
Bank Rate -Bank Rate is the rate at which central bank of the country (in India it is RBI) allows
finance to commercial banks. Any upward revision in Bank Rate by central bank is an indication
that banks should also increase interest rates. Thus any revision in the Bank rate indicates that it
is likely that interest rates on your deposits are likely to either go up or go down, and it can also
indicate an increase or decrease in your EMI.
This is the rate at which central bank (RBI) lends money to other banks or financial institutions.
If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it
can be said that in case bank rate is hiked, banks will hike their own lending rates to ensure that
they continue to make profit.
Current Bank Rate – 9%
Repo (Repurchase) rate - is the rate at which the RBI lends short-term money to the
banks against securities. When the repo rate increases borrowing from RBI becomes
more expensive. Therefore, we can say that in case, RBI wants to make it more
expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants
to make it cheaper for banks to borrow money, it reduces the repo rate. A reduction in the
repo rate will help banks to get money at a cheaper rate. When the repo rate increases,
borrowing from RBI becomes more expensive
Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet
short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to
repurchase the same at a predetermined rate and date. Reserve bank charges some interest rate on
the cash borrowed by banks. This interest rate is called ?repo rate‘.
Repo Rate – 8%
Reverse Repo Rate -It is the rate at which banks park their short-term excess liquidity with the
RBI. The banks use this tool when they feel that they are stuck with excess funds and are not
able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that
the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks
would prefer to keep more and more surplus funds with RBI.
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks
are always happy to lend money to the RBI since their money is in safe hands with a good
interest.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn
higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money
out of the banking system.
Reverse Repo Rate – 7%
Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the
banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank
absorbs liquidity from the banks.
Net Demand and Time Liabilities
Liabilities payable by the bank are in the form of demand or time deposits. Demand liabilities
include all liabilities which are payable on demand, mainly the balances in savings and current
account come under these categories. Time liabilities are those which are payable otherwise on
demand. Mainly deposits of different maturity duration come under this category.
Inflation - The overall general upward price movement of goods and services in an economy
(often caused by an increase in the supply of money). Inflation is nothing but a rise in the level of
prices of goods and/or services in an economy over a certain period of time.
Cash Reserve Ratio – It refers to the liquid cash that banks have to maintain with the RBI as a
certain percentage of their net demand and time liabilities.
Whenever money is in excess in the market / monetary systems in the country it may increase the
inflation. So the excess money needs to be squeezed from the systems. At such time RBI
prescribes higher rate of CRR and money is taken out from circulation in the market. In reverse
case when the markets need the money the CRR rate is lowered and money is allowed to come
and circulate in the market.
For example, if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for
lending or investment purpose. They have to maintain a certain percentage of their deposits in
the form of cash and can use only the remaining amount for lending/investment. This minimum
percentage which is determined by the central bank is known as Cash Reserve Ratio.
Thus, when a bank's deposits increase by Rs 100, and if the cash reserve ratio is 9%, the banks
will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for
investments and lending or credit purpose. Higher the CRR ratio, lower will be the amount
available with the banks for lending and investment purpose and vice versa.
RBI uses this tool to curb inflation and to control excessive liquidity in the market.
CRR – 4.25%
Statutory Liquidity Ratio – It refers to the amount that the commercial banks are required to
maintain in the form of cash, gold or Government approved securities.
• The SLR is the amount a commercial bank needs to maintain in the form of cash, or gold
or govt. approved securities (Bonds) before providing credit to its customers.
• SLR rate is determined and maintained by the RBI in order to control the expansion of
bank credit.
• By changing the SLR rates, RBI can increase or decrease bank credit expansion.
• Also through SLR, RBI compels the commercial banks to invest in government securities
like Government bonds.
• If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it
becomes liable to pay a penalty to the RBI.
• With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial
bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR
rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI
compels the commercial banks to invest in government securities like government bonds.
SLR – 23%
SLR and Cash reserve ratio is maintained for bank solvency and higher ratio of SLR and
CRR makes bank relatively safe as higher ratio means they have more of their funds
deposited in liquid securities and can fulfill the demand on redemption of deposit from
the Bank. Let us take an example :suppose a Bank has taken a deposit of 100 from public
and CRR is 9 and SLR is 25 then available funds to lend from deposits with the bank will
be 100-9-25=66 so there is direct relation between CRR ,SLR and Funds available with
bank to lend to public out of deposit received from public.
So RBI is controlling the supply side of the Funds and by changes in CRR and SLR,
Bank control the supply side of the money. so when RBI increase these ratios then
available funds with the banks will go down and as demand remain the same then people
will have to pay more as interest and interest rate will go up. On the reverse if RBI
reduces these rates, then amount available with bank for lending will be increased and
they have to reduce rates to lend more. In these situation banks also reduce the rate of
short term deposit from public as they have surplus money already to lend.
CLASSIFICATION OF BANKS
COMMERCIAL BANKS
Meaning
A banking company is one which transacts the business of banking which means accepting for
the purpose of lending all investments, of deposits of money from the public, repayable on
demand or otherwise and withdraw able by cheque, draft or otherwise. There are two essential
functions that a financial institution must perform to become a commercial bank. These are
a) Accepting deposit form the public
b) Lending money to the needy
Commercial banks include public sector banks, private banks and foreign banks.
Main features:
a. It accepts deposits from the public, which can be withdrawn by cheque and are repayable
on demand.
b. A commercial bank uses the deposited money for lending and for investment in
securities.
c. It is a commercial institution , whose aim is to earn profit
Functions of commercial Banks
Various functions of commercial banks can be divided into three main groups;
A. Primary functions
B. Secondary functions
C. General utility functions
Primary functions
There are two main primary functions of the commercial banks which are discussed below:
1. Accepting deposits – The primary function of commercial bank is to accept deposits form
every class and from every source. To attract savings the bank accepts mainly three types of
deposits. They are namely demand deposits, time deposit and hybrid deposit.
2.Advancing of loans - Commercial banks give loans and advances to businessmen, farmers,
consumers and employers against approved securities. Approved securities refer to gold, silver,
bullion, govt. securities, easily savable stock and shares and marketable goods.
Secondary functions
Besides the primary functions of accepting deposits and lending money, banks perform a number
of other functions which are called secondary functions. These are as follows –
1. Issuing letters of credit, traveler‘s cheques, circular notes etc.
2. Undertaking safe custody of valuables, important documents and securities by providing
safe deposit vaults or lockers;
3. Providing customers with facilities of foreign exchange.
4. Transferring money from one place to another; and from one branch to another branch of
the bank.
5. Standing guarantee on behalf of its customers, for making payments for purchase of
goods, machinery, vehicles etc.
6. Collecting and supplying business information;
7. Issuing demand drafts and pay orders; and,
8. Providing reports on the credit worthiness of customers.
General Utility functions
The modern Commercial Banks in India cater to the financial needs of different sectors
1. The banks act as trustees. On account of the knowledge of the financial market of India
the financial companies are attracted towards them to act as trustees to take the
responsibility of the security for the financial instrument like a debenture.
2. The Government also hires the commercial banks for various purposes like tax collection
and refunds, payment of pensions etc.
3. Cash management and Treasury Services
4. Merchant banking and private equity financing
5. sale, distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a ?financial supermarket?
Categorization of Commercial Banks
The commercial banking structure in India consists of:
A. Scheduled Commercial Banks- The Scheduled Commercial Banks are the banks,
which are listed under the Second Schedule of the Reserve Bank of India Act, 1934.
? With listing in second schedule banks are conferred with some benefits in terms of access
to accommodation by RBI during the times of liquidity constraints.
? The scheduled status also subjects the bank certain conditions and obligation towards the
reserve regulations of RBI.
B. Unscheduled Banks:The banks other than the scheduled banks are Unscheduled Banks.
Criteria for inclusion in the list of scheduled banks
? Minimum paid up capital and total reserve Rs 5 lakhs
? It must be a company under Section 3 of the companies Act
? Its affairs are not detrimental to the interest of the depositors
? It must have earned profit for last three years
Difference between the Central bank and Commercial bank
The basic difference between the Commercial bank and Central bank are briefly explained in
detail as follows:-
1. The Central Bank of a country was established under a special statue and in India RBI
was established under the RBI Act of 1934; whereas a Commercial Bank was established
under Banking Regulation Act, 1949.
2. The central bank occupies a dominating position as it is the apex bank among all the
banks in the country; whereas commercial bank occupies a subordinate position in the
banking structure of a country.
3. There can be only one central bank for the entire economy and there is a large number or
network of different commercial banks in a country.
4. Central bank is a non-profit making financial institution, whereas commercial banks are a
profit oriented financial institution.
5. The central bank has the monopoly power to issue currency notes from Rs.2 and above;
whereas commercial bank cannot print currency notes.
6. The central bank is owned by the central government; whereas commercial banks can be
owned by the government or may be privately owned.
PRIVATE BANKS
Categorization of Private Banks
The private banks those got established after 1993 i.e. after banking sector reform bracketed as
New Generation Private Sector Banks and they are well distinguished from old generation
private sector banks.
Features of new generation Private sector banks
a. Technology-The private banks have used technology to provide quality service through
lower cost delivery mechanisms.
b. Convergence-The new private banks are able to provide a range of financial services
under one roof, thus increasing their fee based revenues.
c. High-end Customers- The new generation private sector banks mainly concentrate on
high-end and high middle income segments.
d. Priority sector targets - The new generation private sector banks which rely on indirect
financing to accomplish the priority sector targets.
e. Lucrative Business Areas -They made a strong presence in the most lucrative business
areas in the country because of technology up gradation.
f. Operating Expenses - their operating expenses is low as compared to the PSU banks and
their efficiency ratios (employee‘s productivity and profitability ratios) is also high.
g. Value added services to customers and they undertake all most all the modern method of
banking such as the internet banking, mobile banking, etc.
Advantage over public sector banks
They took advantage of the following problems concerning the nationalized / state sector banks
1. Large number of unprofitable branches
2. Excess staffing
3. Mounting Non Performing Assets on account of intervention of Govt.
4. Laggard in technology
5. Development of innovative consumer oriented products
6. Lesser focus on marketing
They have made banking more efficient and customer friendly. In the process they have jolted
public sector banks out of complacency and forced them to become more competitive.
Disadvantages of Private Banks
? Private Banks runs like a business. Even though, there are lots of advantages to this, the
major disappointment comes on the service charges, which is very much higher.
? Unorganized HR System
? The minimum balance for deposit accounts is much higher than the public sector banks.
? Low focus on priority sector lending and financial inclusion.
COOPERATIVE BANKS
Meaning
A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. They are often created by persons belonging to the
same local or professional community or sharing a common interest.
Features
1. Principle of self-help - Co-operative Banks are basically organized and managed on the
principle of co-operation, self-help, and mutual help and they function with the rule of
?one member, one vote?.
2. Customer-owned entities: The needs of the customers meet the needs of the owners, as
the members are at both the ends. Hence, the first aim of a co-operative bank is not to
maximize profit but to provide the best possible products and services to its members.
Some co-operative banks only operate with their members but most of them also admit
non-member clients to benefit from their banking and financial services.
3. Democratic control: Since they are owned and controlled by the members, the board of
directors get elected democratically by the members , usually having equal voting rights,
in tune with the co-operative principle of ?one member , one vote?.
4. Principle of no profit, no loss - They function with the principle of ?no profit, no loss?
and generally do not pursue the goal of profit maximization.
5. Profit allocation : Here a significant part of the annual profit, benefits or surplus is
usually allocated to constitute reserves and a part of this profit are also distributed to the
members, through a patronage dividend,( the use of the co-operatives products and
services by each member, or the interest / dividend, related to the number of shares
subscribed by each member)
6. Localized set up- They are deeply rooted inside local areas and communities and are
involved in local development as well as contribute to the sustainable development of
their communities.
7. Regulatory prescriptions Co-operative Banks are subject to regulatory requirements of
RBI/ NABARD. However, they are allowed with preferential treatments in comparison to
commercial banks..
Classifications of Co-operative Banks
1. Statutory Classifications- Some co-operative bank are scheduled banks,while others are
non-scheduled banks. Forinstance, State co-operative banks and some Urban co-
operative banks are scheduledbanks but other co-operative bank are non-scheduled
banks
2. According to Terms of Lending- From Terms of lending point of view, they are of two
categories :
a. Short term lending oriented co-operative Banks – within this category there are
three sub categories of banks viz state co-operative banks, District co-operative
banks and Primary Agricultural co-operative societies.
b. Long term lending oriented co-operative Banks – within the second category there
are land development banks at three levels state level, district level and village
level.
STRUCTURE OF COOPERATVE BANKING
The cooperative banking structure in India is divided into 4 components:
a) Primary cooperative credit society
b) Central cooperative banks
c) State cooperative banks
d) Land development banks
a) Primary Agricultural Credit Societies (PACSs)- A Primary agricultural credit society
can be started with 10 or more persons normally belonging to a village or a group of
villages. The value of each share is generally nominal so as to enable even the poorest
farmer to become a member. It gives loans and advances to needy members mainly out of
these deposits.
The Urban Co-operative Banks (UCBs) refers to primary cooperative banks located in
urban and semi-urban areas.
b) Central Co-operative Banks (CCBs)-The central co-operative banks are located at the
district headquarters or some prominent town of the district. Their main function is to
lend to primary credit society and now a days they have been undertaking normal
commercial banking business like - attracting deposits from the general public and
lending to the needy against proper securities.
c) State Co-operative Banks (SCBs)-The state Co-operative Banks, finance, co-ordinate
and control the working of the central Co-operative Banks in each state. They serve as the
link between the Reserve bank and the general money market on the one side and the
central co-operative and primary societies on the other. They obtain their funds mainly
from the general public by way of deposits, loans and advances from the Reserve Bank
and their own share capital and reserves.
d) Land development Banks- The land development banks are organized in 3 tiers namely,
state, central and primary level and they meet the long term credit requirements of the
farmers for developmental purposes. The state land development bank overseas the
primary land development banks situated in the districts and tehsils in the state. They are
governed both by the state government and Reserve Bank of India. Recently, the
supervision of land development banks has been assumed by National Bank for
Agriculture and Rural Development (NABARD). The sources of funds for these banks
are the debentures subscribed by both central and state government. These banks do not
accept deposits from the general public.
Functions
Co-operative Banks belong to the money market as well as to the capital market and are financial
intermediaries only partially, in view of limited financial products. Now days they are
performing all the main banking functions of deposit mobilization, supply of credit and provision
of remittance facilities.
1. Primary agricultural credit societies provide short term and medium term loans.
2. Land Development Banks (LDBs) provide long-term loans.
3. SCBs and CCBs also provide both short term and term loans.
4. The co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small
scale industries and self-employment driven activities
5. The co-operative banks in urban areas mainly finance various categories of people for
self-employment, industries, small scale units, home finance, consumer finance, personal
finance, etc.
6. Co-operative banks are playing a more proactive role than scheduled commercial banks
(SCBs) in achieving financial inclusion
7. They are also playing a pivotal role in micro finance
The exponential growth of Co-operative Banks is attributed mainly to their much better local
reach, personal interaction with customers, and their ability to catch the nerve of the local
clientele.
REGIONAL RURAL BANKS
The Narasimham committee on rural credit recommended the establishment of Regional Rural
Banks (RRBs) on the ground that they would be much better suited than the commercial banks or
co-operative banks in meeting the needs of rural areas.
Objectives of Regional Rural Banks
Regional Rural Banks were established with the following objectives in mind:
1. Taking the banking services to the doorstep of rural masses, particularly in hitherto
unbanked rural areas
2. Bridging the credit gap in rural areas
3. Check the outflow of rural deposits to urban areas
4. Reduce regional imbalances and increase rural employment generation
5. Making available institutional credit to the weaker sections of the society who had by far
little or no access to cheaper loans and are forced to depend on the private money lenders.
6. Mobilize rural savings and channelize them for supporting productive activities in rural
areas.
7. Generating employment opportunities in rural areas and bringing down the cost of
providing credit to rural areas.
With these objectives in mind, knowledge of the local language by the staff is an
important qualification to make the bank accessible to the people
Nature
? Status of scheduled commercial banks
? Combines basic features of the commercial banks and cooperative societies
Amalgamation of Regional Rural Banks
The total number of Regional Rural Banks (RRBs) were 196 and now stands at 86 following the
process of their amalgamation initiated by the government in 2005, so as to strengthen and
consolidate RRBs. There were 196 Regional Rural Banks operating in the country as on March
31, 2004. Most of the sponsor banks were operating more than one RRB in one state
and in order to give a further boost to profitability of these banks and to strengthen them
further a need was felt to amalgamate more than one RRB of same sponsor bank operating in
the same state.
FOREIGN BANKS
Features
1. They are operating in Urban and Metropolitan cities only with limited number of
branches; catering to elite clientele
2. The foreign banks having considerable international exposure are able to launch new
products besides providing better services.
3. Foreign banks tend to follow ?exclusive banking? by offering services to a small number
of clients, instead of ?inclusive banking?.
4. Foreign banks charge higher fees from customers for providing banking services and
maintaining a bank account requires substantial financial resources.
5. These banks have been complying with the 32% requirement under Priority Sector
Lending but mostly concentrate on Retail Banking.
6. The low Credit Deposit ratio indicates that more than lending to business and industry,
they resort to investment operations.
Role of foreign banks
? Foreign banks play a relatively minor role in the Indian economy,
? The role of foreign banks is vital and tends to elevate the efficiency and working system
of the local banking system by introducing sophisticated financial services. Acquiring
reports, SMS alerts, tele-banking, internet banking, and many more are some of the
catchy services that plays a crucial role in satisfying the customers
? They cover 65% of the foreign exchange transactions in India.
? They have limited number of branches.
? They are not lending money to small and medium-sized enterprises (SMEs), small
traders, informal sector and farmers.
SUMMARY
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton
Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which
was entirely owned by private shareholders in the beginning. The Government held shares of
nominal value of Rs. 2,20,000.The Bank was constituted to regulate the issue of banknotes, to
maintain reserves with a view to securing monetary stability and to operate the credit and
currency system of the country to its advantage.
Different tools that are used by RBI to control the economy are Bank rate, Repo rate, Reverse
Repo rate, Cash reserve ratio and Statutory liquidity ratio.
There are two essential functions that a financial institution must perform to become a
commercial bank. These area) Accepting deposit form the public b) Lending money to the needy.
Commercial banks include public sector banks, private banks and foreign banks. Other types of
banks are Cooperative Banks and Regional Rural Banks. Co-operative Banks are basically
organized and managed on the principle of co-operation, self-help, and mutual help and they
function with the rule of ?one member, one vote?.Regional Rural Banks were established to take
the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas.
KEYWORDS
Bank Rate -Bank Rate is the rate at which central bank of the country (in India it is RBI) allows
finance to commercial banks. Repo (Repurchase) rate - is the rate at which the RBI lends short-
term money to the banks against securities. When the repo rate increases borrowing from RBI
becomes more expensive. Reverse Repo Rate -It is the rate at which banks park their short-term
excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with
excess funds and are not able to invest anywhere for reasonable returns. Cash Reserve Ratio –It
refers to the liquid cash that banks have to maintain with the RBI as a certain percentage of their
net demand and time liabilities. Statutory Liquidity Ratio - It is the amount a commercial bank
needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before
providing credit to its customers.
QUESTIONS
SHORT QUESTIONS:
1. When was the Reserve Bank of India established?
2. Give two secondary functions of a commercial bank.
3. What is meant by a scheduled commercial bank?
4. State two disadvantages of a Private Bank?
5. What is meant by a Cooperative Bank?
6. The Regional Rural Banks were established under the recommendation of which
committee?
7. Give two objectives of RRBs.
8. State two features of a Foreign Bank.
9. What is the current Reverse repo rate, Repo rate, Base Rate, CRR and SLR?
DESCRIPTIVE QUESTIONS:
1. Elaborate the functions rendered by a Commercial Bank.
2. Describe the functions of the Central Bank.
3. Differentiate between Central Bank and Commercial bank.
4. Explain the tools used by RBI for controlling banks.
5. Describe the features of a Cooperative Bank.
SHORT NOTES:
1. Regional Rural Banks
2. Private Banks
3. Commercial Banks
4. Foreign Banks
5. Cash Reserve Ratio
6. Bank Rate
7. Statutory Liquidity Ratio
8. Repo Rate
9. Reverse Repo Rate
10. Cooperative Bank
PRODUCTS AND SERVICES OFFERED BY A BANK
BANK DEPOSIT ACCOUNTS
As stated earlier, financial intermediation by commercial banks has played a key role in India
in supporting the economic growth process. An efficient financial intermediation process, as is
well known, has two components: effective mobilization of savings and their allocation to the
most productive uses.. When banks mobilize savings, they do it in the form ofdeposits, which are
the money accepted by banks from customers to be held under stipulatedterms and conditions.
Deposits are thus an instrument of savings.
Since the first episode of bank nationalization in 1969, banks have been at the core of the
financial intermediation process in India. They have mobilized a sizeable share of savings of
the household sector, the major surplus sector of the economy. This in turn has raised the
financial savings of the household sector and hence the overall savings rate. Notwithstanding
the liberalization of the financial sector and increased competition from various other saving
instruments, bank deposits continue to be the dominant instrument of savings in India.
Introduction to Bank Deposits
One of the most important functions of any commercial bank is to accept deposits from
thepublic, basically for the purpose of lending. Deposits from the public are the principal sources
of funds for banks. The public sector banks continue to dominate the Indian bankingindustry.
However, the share of the new private sector banks has been rising at the expense ofthe public
sector banks, particularly in the last few years.
Safety of deposits
At the time of depositing money with the bank, a depositor would want to be certain that his/
her money is safe with the bank and at the same time, wants to earn a reasonable return.
The safety of depositors' funds, therefore, forms a key area of the regulatory framework
forbanking. In India, this aspect is taken care of in the Banking Regulation Act, 1949 (BR
Act).The RBI is empowered to issue directives/advices on several aspects regarding the conduct
ofdeposit accounts from time to time. Further, the establishment of the Deposit
InsuranceCorporation in 1962 (against the backdrop of failure of banks) offered protection to
bankdepositors, particularly small-account holders.
Deregulation of interest rates
The process of deregulation of interest rates started in April 1992. Until then, all interest
rateswere regulated; that is, they were fixed by the RBI. In other words, banks had no freedom
tofix interest rates on their deposits. With liberalization in the financial system, nearly all
theinterest rates have now been deregulated. Now, banks have the freedom to fix their
owndeposit rates with only a very few exceptions. The RBI prescribes interest rates only in
respectof savings deposits and NRI deposits, leaving others for individual banks to determine.
Deposit policy
The Board of Directors of a bank, along with its top management, formulates policies relatingto
the types of deposit the bank should have, rates of interest payable on each type, specialdeposit
schemes to be introduced, types of customers to be targeted by the bank, etc. Ofcourse,
depending on the changing economic environment, the policy of a bank towards
depositmobilization, undergoes changes.
Types of Deposit Accounts
The bank deposits can also be classified into (i) demand deposits and (ii) time deposits.
(i) Demand deposits are defined as deposits payable on demand through cheque orotherwise.
Demand deposits serve as a medium of exchange, for their ownership canbe transferred from one
person to another through cheques and clearing arrangementsprovided by banks. They have no
fixed term to maturity.
(ii) Time deposits are defined as those deposits which are not payable on demand andon which
cheques cannot be drawn. They have a fixed term to maturity. A certificateof deposit (CD), for
example, is a time deposit.
Note that these are onlycategories of deposits; there are no deposit accounts available in the
banks by the names'demand deposits' or 'time deposits'. Different deposit accounts offered by a
bank, dependingon their characteristics, fall into one of these two categories. There are several
deposit accountsoffered by banks in India; but they can be classified into three main categories:
(a)Current account
(b)Savings bank account
(c)Term deposit account
DEMAND DEPOSITS
Current account deposits fall entirely under the demand-deposit category and term
depositaccount falls entirely under time deposit. Savings bank accounts have both
demand-depositand time-deposit components. In other words, some parts of savings
deposits are considereddemand deposits and the rest as time deposits. We provide below
the broad terms and conditionsgoverning the conduct of current, savings and term-deposit
accounts.
Current Deposits
A current account is a form of demand-deposit, as the banker is obliged to repay these
liabilitieson demand from the customer. Withdrawals from current accounts are allowed any
number oftimes depending upon the balance in the account or up to a particular agreed amount.
Currentdeposits are non-interest bearing. Among the three broad categories of deposits-
currentaccount deposit, savings accounts deposit and term deposits--current account deposits
accountfor the smallest fraction.
A current account is basically a running and actively operated account with very little restriction
on the number and amount of drawings. The primary objective of a current account is toprovide
convenient operation facility to the customer, via continuous liquidity.
On account of the high cost of maintaining such accounts, banks do not pay any interest onsuch
deposits. In addition, many banks insist on customers maintaining minimum balances tooffset the
transaction costs involved. If minimum balances are not maintained, these bankscharge the
customers a certain amount.
Current accounts can be opened by rich individuals/ partnership firms/ private and limited
companies/ Hindu Undivided Families (HUFs)/ societies/ trusts, etc.
Savings Bank Deposits
Savings deposits are a form of demand deposits, which is subject to restrictions on the number
of withdrawals as well as on the amounts of withdrawals during any specified period. Further,
minimum balances may be prescribed in order to offset the cost of maintaining and servicing
such deposits. Savings deposits are deposits that accrue interest.Savings bank accounts are used
by a large segment of small depositors as they can put theirregular incomes into these accounts,
withdraw the money on demand and also earn intereston the balance left in the account.The
flexibility provided by such a product means that savings bank accounts cannot be openedby big
trading or business firms. Similarly, institutions such as government departments andbodies,
local authorities, etc. cannot open savings bank accounts.Savings account deposits together with
current account deposits are called CASA deposits.
CASA Deposits
From a bank's viewpoint, CASA deposits (Current Account and Savings Account deposits)are
low-cost deposits, as compared to other types of deposits. Current account is noninterestbearing,
while interest payable on savings accounts is very low. To be competitive, it is important for
banks to garner as much low-cost deposits as possible,because by doing so banks can control the
cost of raising deposits and hence can lend atmore competitive rates. The methods used by banks
to mobilize CASA deposits includeoffering salary accounts to companies, and encouraging
merchants to open current accounts,and use their cash-management facilities.Banks with low
CASA ratios (CASA deposits as % of total deposits) are more dependent onterm deposits for
their funding, and are vulnerable to interest rate shocks in the economy,besides the lower spread
they earn. (As discussed above, banks earn profit on the spreadbetween their deposit and loans
rates.)
TIME DEPOSITS
A "Time deposit" or Term deposit is a deposit received by the Bank for a fixed period, after
which it can bewithdrawn. Term deposits include deposits such as Fixed Deposits / Reinvestment
deposits/Recurring Deposits etc. The term deposits account for the largest share and have
remainedwithin the range of 61% to 67 % of total deposits in the recent years.Interest is paid on
term-deposits, either on maturity or at stipulated intervals depending uponthe deposit scheme
under which the money is placed. Also, a customer can earn interest on aterm-deposit for a
minimum period of 7 days. Interest rates on term-deposits are usuallyhigher than on savings
deposits. Term deposits include:
(a) Fixed deposits on which a fixed rate of interest is paid at fixed, regular intervals;
(b) Re-investment deposits, under which the interest is compounded quarterly and paidon
maturity, along with the principal amount of the deposit. Some banks have introduced"flexi"
deposits under which, the amount in savings deposit accounts beyond a fixedlimit
isautomatically converted into term-deposits; and
(c) Recurring deposits, under which a fixed amount is deposited at regular intervals for afixed
term and the repayment of principal and accumulated interest is made at the endof the term.
These deposits are usually targeted at persons who are salaried or receiveother regular income. A
Recurring Deposit can usually be opened for any period from6 months to 120 months.
Strategies of Mobilizing Deposits
To maximize their profits, commercial banks always attempt to mobilize savings at the
lowestcost possible. While mobilizing deposits, banks have to comply with various directives
issued
by the RBI, the Indian Bank Association (IBA), Government of India and other
statutoryauthorities/agencies. At the same time, since banks operate in a very competitive
environment,they have to reach out to a wide spectrum of customers and also offer deposit
products thatlead to higher customer satisfaction.
Banks devise various strategies to expand the customer base and reducing the cost of
raisingdeposits. This is done by identifying target markets, designing the products as per
therequirements for customers, taking measures for marketing and promoting the deposit
products.
It is essential not only to expand the customer base but also to retain it. This is done byproviding
counseling, after-sales information and also through prompt handling of customercomplaints.
While the strategies for mobilizing bank deposits vary from bank to bank, one common feature
is to maximize the share of CASA deposits. The other common features generallyobserved are as
follows:
(a) Staff members posted at branches are adequately trained to offer efficient and courteous
service to the customers and to educate them about their rights and obligations.
(b) A bank often offers personalized banking relationship for its high-value customers by
appointing Customer Relationship Managers (CRMs).
(c) Senior citizens/pensioners have become an important category of customers to betargeted
by a bank. Products are developed by banks to meet the specific requirementsof this
group.
(d) While banks endeavour to provide services to the satisfaction of customers, they putin
place an expeditious mechanism to redress the complaints of the customers.
TYPES OF ADVANCES
Advances
? Personal Loan
? Business Loan
? Auto Loan
? Two-wheeler Loan
? Housing Loan
? Gold Loan
? Educational Loan
? Cash Credit/ Working Capital Loans
? Credit Card
? Loan Against Property/ Security
? Commercial Vehicle Loan
? Project Finance
? Construction Equipment Loan
Business Loan :Availed by businessmen for personal expenses.
Project Finance : To provide long term finance for the establishment of new industrial,
infrastructure, agri-horticulture, fishery and animal husbandry projects as well as
expansion, diversification and modernization of existing ones.
Commercial Vehicle Loans :Loans for commercial vehicles like buses, trucks, tankers,
tempos etc.
Construction Equipment Loans : Any equipment working on construction/mining/civil
contracts like Backhoe loaders, Excavators, Wheel Loaders, Tata/AL Tippers,
Forklifts,Compactors, Transit Mixer etc.
Gold Loan : Loan against gold jewellery and ornaments.
Cash Credit :An account with a bank by which a person, having given security for
repayment, draws at pleasure upon the bank to the extent of an amount agreed upon.
Businessmen require money for their day today transaction.This type of loan can be
availed against collateral like land, building and even FD at times.
Investments
? Mutual Funds
? Shares
? Life Insurance
? General Insurance
Mutual Fund :It is a fund managed by an investment company with the financial
objective of generating high Rate of Returns. These asset management or investment
management companies collects money from the investors and invests those money in
different Stocks, Bonds and other financial securities in a diversified manner. Before
investing they carry out thorough research and detailed analysis on the market conditions
and market trends of stock and bond prices. These things help the fund managers to
speculate properly in the right direction.
Foreign Exchange
? Purchase/ Sell of Foreign Currency
? Foreign Currency Demand Drafts
? Traveller’sCheque
? Forex Cards
Traveller‘sCheque : It is a preprinted, fixed-amount chequedesigned to allow the person
signing it to make an unconditional payment to someone else as a result of having paid
the issuer for that privilege.They were generally used by people on vacation instead of
cash as many businesses used to accept traveller's cheques as currency. Their use has
been declining since the 1990s as better alternatives, such as credit cards and automated
teller machines became more widely accepted and available.
ForexCards :A forex card is a type of prepaid debit card issued by a bank. A forex card is
a convenient and cost effective method for obtaining local currency when traveling
abroad. Cards are accepted by a global network of merchant outlets that will issue
prepaid funds from the forex card in local currency.
Clearing
? Inward Clearing
? Outward Clearing
Clearing – Apart from cash and transfer transactions, there is another type of transaction called
clearing transaction. Clearing is a banking term related to cheque payment and the time required
to process the cheque amount collected from another bank. There are two types of clearing
Inward Clearing and Outward Clearing.
Inward clearing is a banking term.Each bank uses one common clearing house. For eg XYZ bank
customer wants to issue a cheque to ABC bank customer.So, ABC bank customer will deposit
that cheque into his bank. Then ABC bank will send that cheque to clearing house for clearing.
So, that check will be inward for XYZ and outward for ABC.
Example: A cheque drawn on "Bank of America" deposited in "Chase Manhattan Bank ", is an
outward cheque for Chase and is an inward cheque for Bank of America.
Outward cheques could be
? Local cheques (within the same geographical/ clearing zone),
? Outstation cheques (drawn on a bank outside the local clearing zone) or
? Foreign cheques (drawn on a bank/ location outside the country of the collecting bank).
Remmitances
? Inward Remmitance
? Outward Remmitance
SUMMARY
Different products and services that are offered by banks to customers are Deposits, Advances,
Investments, Foreign Exchange, Clearing services, Remittances et al. Deposits include Demand
deposits and Time Deposits. Different types of demand deposits are Current account deposits and
Saving account deposits. Time deposits are categorized into Fixed Deposits, Recurring deposit
and Re-investment deposits. Loans and advances are offered by banks to fulfill the monetary
requirements of the customers such as personal loan, business loan, working capital loan, project
finance, home loan, auto loan, two-wheeler loan, loan against property, education loan and etc.
KEYWORDS
Fixed deposits on which a fixed rate of interest is paid at fixed regular intervals;(b) Re-
investment deposits - under which the interest is compounded quarterly and paid on
maturity, along with the principal amount of the deposit, Recurring deposits - under
which a fixed amount is deposited at regular intervals for a fixed term and the repayment
of principal and accumulated interest is made at the end of the term ,Forex Cards - It is
a type of prepaid debit card issued by a bank. A forex card is a convenient and cost
effective method for obtaining local currency when traveling abroad .Remittance - It
means sending money; usually it refers to money sent ...Wire transfer through a bank
account.Mutual Fund :It is a fund managed by an investment company with the financial
objective of generating high Rate of Returns.
QUESTIONS
SHORT QUESTIONS:
1. What is meant by a Current Account?
2. Differentiate between Personal Loan and Business Loan.
3. What is a Recurring deposit?
4. What is a Saving account?
5. What do you understand by a recurring deposit?
DESCRIPTIVE QUESTIONS:
1. Explain the strategies adopted by a bank to mobilize deposits.
2. Elaborate the advances offered by a bank.
SHORT NOTES:
1. Forex Cards
2. Clearing
3. Demand Deposits
4. Deregulation of Interest rates
5. Time Deposits
6. CASA Deposits
BANKER CUSTOMER RELATIONSHIP
Who is a Banker?
A Banker Must:
• Collect cheques for his customers
• Make payment of cheques drawn on him
• Maintain a running account of his customers.
Who is a Customer?
A person/entity has to fulfill the following requirements to qualify as a customer:
• There should be an intention to get into a banking relationship
• An account(deposit/loan) account should be opened with the bank.
The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship. The general relationship is debtor and creditor and other
than this, the relationships construe special relationship.
1. CREDITOR-DEBTOR
The customer becomes a creditor and the banker becomes debtor when money is
deposited in the bank. The relationship becomes opposite i.e. a customer become debtor
and bank creditor when loan is advanced by the bank to the customer .
2. BENEFICIARY-TRUSTEE
If a customer keeps certain valuables or securities with the bank for safe-keeping or
deposits a certain amount of money for a specific purpose, the banker, acts as a trustee.
The banker cannot utilize those moneys or securities as he desires since the money does
not belong to him. A trustee is one who holds property for the benefit of a person or
beneficiary. The banker is a trustee when a customer deposits his valuables and securities
for safe custody.
3. BAILEE - BAILOR
When there is delivery of goods or securities from one person to the other which amounts
to the bailment. In such case, bank becomes bank becomes bailee and customer is the
bailor.
4. PRINCIPAL-AGENT
When a customer deposits draft, cheques, dividends, certificates etc., for collection, he
becomes the principal and bank acts as his agent. It includes performing agency services for
his customers, such as undertaking to pay the electricity bills, phone bills etc on regular basis.
5. LESSEE-LESSOR
The banks provide safe deposit lockers to the customers on lease basis. The bank leases out
the space for the use of clients on rent basis. The bank is not responsible for any loss that
arises to the lessee in this form of transaction except due to custodial negligence of that bank.
Here the banker is Lessor and customer is Lessee.
6. INDEMNIFIER- INDEMNIFIED
In the case of banking, this relationship happens in transactions of issue of duplicate demand
draft, fixed deposit receipt etc. The underlying point in these cases is that either party will
compensate the other of any loss arising from the wrong/excess payment.
BANKER’S RIGHT AND OBLIGATIONS
The Rights of the bank are those, through which they enjoy legal operation and derive functional
guarantee . Following are the major rights that a banker can exercise on his customer.
1. Right of Lien:
Lien is the right of the creditor to retain the goods and securities owned by the debtor until the
debt due from him is paid.
There are two types of lien viz.
1. Particular Lien
2. General Lien
(a) Particular Lien:
A 'particular lien' gives the right to retain possession only of those goods in respect of which the
dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security
for a particular debt, then the banker's right gets converted into a particular lien.
(b) Right of General Lien:
Banker has a right of general lien against his borrower. General lien confers banks right in
respect of all dues and not for a particular due. A 'general lien' gives the right to retain possession
of any goods in the legal possession of the creditor until the whole of the debt due from the
debtor is paid.
2. Right of set off – The banker has the right to set off the accounts of its customer. It is a
statutory right available toa bank, to set off a debt owed to him by a creditor from the credit
balances held in otheraccounts of the borrower.
Conditions while exercising right of Set - Off:
1. The account should be in the sole name of the customer.
2. The amount of debts must be certain and measurable.
3. Funds should not be held in trust accounts
4. The right cannot be exercised in respect of future or contingent debts.
3. Right of appropriation
The customers can direct his banker against which debt (when more than one debt is
outstanding) the payment made by him should be appropriated. In case no such direction is
given, the bank can exercise its right of appropriation and apply it in payment of any debt.
4. Right to charge interest
As a creditor the banker has right to charge interest on the funds he lends as per the norms and
as per the contract. Hence the banker has an implied right to charge interest on the advances
granted to its customer.
a. Bankers generally charge interest monthly, quarterly or semiannually or annually.
b. There must be an agreement between the banker and customer in this case the manner
agreed will decide how interest is to be charged.
c. Bank‘s responsibility is to explain these in writing; such as
? How is interest calculated?
? Fixed interest
? Floating rate
5. Right to charge service charges
Banker has an implied right to charge for services rendered and sold to a customer. Bank charges
interest on amount advanced, processing charges for the advance, charges for non-utilization of
credit facilities sanctioned, charges commission, exchange, incidental charges etc. depending on
the terms and conditions of advance Banks charge customers if the balance in deposit account
falls below the prescribed amount.
6. Right to close an account
The contractual relationship between banker and customer is terminated by closing the account.
There is no opportunity for the customer to operate the account once again. The banker can close
the account of the customer when he finds
ii. The account is not remunerative
iii. The customer is not a desirable one.
OBLIGATIONS
Generally it is the bank‘s primary obligation to take care of its customers and provide services
which are fundamental to the contractual relationship of the banker and the customer.
1. Obligation to honor cheques
It is the duty of the banker to honor his customer‘s cheques. If he refuses to honor these cheques,
he is liable to the customer in damages.
Banker‘s obligation to honourcheques is subject to certain conditions:
1. Sufficient funds must be available
2. The cheque is presented for payment on a working day and during the business hours of
the branch.
3. Endorsements on the cheque are regular and proper.
4. The cheque should be in order in all respects
2. Obligation to maintain secrecy of customer’s account or affairs
The banker must take utmost care not to disclose the state of account of his customer‘s affairs as
this may result in considerable harm to the credit and business of the customer. If he fails in this
duty, he is liable for the damages. The banker should not disclose his customer‘s financial
position and the details of his account. The principle behind this duty is that disclosure about the
dealings of the customer to any unauthorized person may harm the reputation of customer and
the bank may be held liable. This secrecy should be maintained even after the account is closed
and even after death of the customer.
3. Obligation to keep a proper record of transactions
The banker must keep a proper and accurate record of all the transactions of the customer.
4. Duty to provide proper accounts
Banks are under duty bound to provide proper accounts to the customer of all the transactions
done by him. Bank is required to submit a statement of accounts / passbook to the customer
containing all the credits and debits in the account.
5. Obligation to abide by the instructions given by the customer
The banker must abide by any express instructions of the customer provided these are within the
scope of the relationship between the banker and the customer. The relationship is subject to the
terms of the contract between the bankers and the customers and the rules laid down in the
Negotiable Instruments Act.
6. Bankers’ Fair Practice Code:
Indian Banks‘ Association has prepared a code, which sets standards of fair banking practices.
This document is a broad framework under which the rights of common depositors are
recognized. It is a voluntary Code that promotes competition and encourages market forces to
achieve higher operating standards for the benefit of customers.
7.Redressal of Grievances
The Bank need to have a customer‘s Grievance Redressal mechanism with details, namely:
a. Where a complaint can be made
b. How a complaint should be made
c. When to expect a reply
d. Whom to approach for redressal of grievance etc.
CUSTOMER’S RIGHT & OBLIGATIONS
Rights :
1. Right to draw cheques
A customer has right to draw cheques against his credit balance and has right to receive pass
book from the bank..A customer can sue the bank for wrongful dishonour of cheque
2. Rights of Compensation
The customer can claim compensation from bank for the following reasons
a. Loss of reputation
b. Loss of market credibility
4. Rights for Claiming Damage
The customer can claim for damages from bank for the following reasons:
a. Wrongful dishonor of cheques
b. Failure to maintain secrecy
5. Right to close the Account
The customer has the right to close the account on following grounds
a. When he does not agree to the terms and conditions of the bank.
b. When he loses confidence on the Banking practices of the Bank
c. When facilities provided by bank is not market worthy
6. Right of Raising Grievance
The customers have the right to raise grievances for any deficiency in services or on violation of
any established law. There are different forums for this including banking ombudsman
OBLIGATIONS
Pertaining to Cheque Books
1. Ensure safe custody of cheque book and pass book.
2. Issue crossed/account payee cheques as far as possible.
3. Check the details of the cheque, name, date, amount in words and figures, crossing etc.,
before issuing it. As far as possible, issue cheques after rounding off the amount to
nearest rupee.
4. Not to issue cheque without adequate balance; maintain minimum balance as specified by
the Bank.
5. Bring pass book while withdrawing cash from savings bank account through withdrawal
slip. Get pass book updated from time to time.
Pertaining to deposit
1. Observe KYC norms
2. Use nomination facility.
3. Note down account numbers, details of FDR, locker numbers, etc., separately.
4. Inform change of address, telephone number, etc., to the Branch.
Loss of Instruments
Inform loss of demand draft, fixed deposit receipt, cheque leave (s)/book, key of locker, etc.,
immediately to the Branch.
SUMMARY
The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship. The general relationship is debtor and creditor and other
than this, the relationships construe special relationship. The other relationships are beneficiary -
trustee,bailee - bailor, principal - agent,lesse– lessor and indemnifier – indemnified. Rights and
obligations of a banker and a customer are also discussed in the chapter.
KEYWORDS
Banker is a person who Collect cheques for his customers, makes payment of cheques drawn on
him and maintains a running account of his customers.Customer is a person who has an
intention to get into a banking relationship.
QUESTIONS
SHORT QUESTIONS:
1. Who is a Customer?
2. Who is a Banker?
3. Give two rights of a Banker.
4. State two obligations of a customer.
5. Describe the debtor- creditor relationship between a banker and a customer.
LONG QUESTIONS:
1. Describe the relationships between a Banker and a Customer.
2. Explain the rights and obligations of a Banker.
3. Elaborate the rights and obligations of a Customer.
TYPES OF CUSTOMERS
Every commercial bank is anxious to increase its customers. However, every one cannot be
accepted as its customer. Only those persons who are competent in law to enter into a contract
can be considered as customers. The bank is and should be very cautious in the selection of
customers as it is to have a continued relationship with them. The customers of a bank can
mainly be divided into two categories (1) Ordinary Customers and (2) Special Customers.
Ordinary Customers are those who are competent to enter into contract under the laws of land.
An individual, a body corporate, a firm can open an account with the bank. The bank before
accepting one as a customer weighs the customer‘s financial position, his character, honesty,
social standing and good will in the society. The special customers are those who are dealt with
as special ones legally.The special types of individual customers are discussed below:
SPECIAL TYPES OF INDIVIDUAL CUSTOMERS
The special types of individual customers of the commercial banks are (i) Minor (ii) Lunatic (iii)
Drunkard (iv) Married Women (v) Purdah Observing Women and (vi) Illiterate persons. The
relationships between the bank and the special type of individual customers are governed by the
legal rules enforced in the country.
(2) Minor:
A person who has not attained the age of 18 years is a minor. A minor cannot
enter into a contract. Therefore, any contract with minor is void.
However, a bank can accept and open a minor‘s account if it is directed by the
Guardian Court. The Court appoints a guardian of a minor who obtains and signs
the prescribed opening form of the account himself. He gives his own specimen
signatures for the operation of the account. Each withdrawal from the minor‘s
account by the guardian is subject to the approval and sanction of the Guardian
Court. On attaining the, age of majority which is 21 years, the minor is allowed to
open and ?operate the account himself. The authority of legal guardian ceases to
exist.
If may here be noted that when a bank accepts a minor as its customer, he/she is
not allowed the overdraft facility. In addition to this, no term loan can ?be
advanced to him. Here minor is treated not as an ordinary customer. The
relationship between the minor and the bank is of special nature and is governed
from relevant section of the law enforced in the country.
(2) Lunatic:
A person who is incapable of understanding, is of unsound mind, cannot enter
into contract with the banker as customer.
If an account is already in existence of a sane person but his mental status is
disturbed, the bank on knowing the customer going insane will immediately stop
payment from his account and suspend all transactions till he receives either
satisfactory evidence of his recovery or an order is received from the Court.
(3) Drunkard:
If a person is in state of intoxication and is not in senses, he cannot open an
account with a bank. The main condition of valid contract with a bank is between
persons who are of sound mind. However it a person is drunk is of sound mind he
may open and operate an account with a bank.
(4) Married Woman:
Man and Woman are equal in the eyes of law for the purpose of making a
contract. A married woman has every right to enter into contract with a bank and
open an account enter into partnership be declared as insolvent by the Court just
like other ordinary persons. A married woman is as good as a male member of the
society as far as law is concerned she can open any type of account including
Foreign Currency Account in her name.
If may here be noted that a married women cannot make her husband responsible
for the debt incurred by her. It is the sole responsibility of the married woman to
repay the loans and advances made in her name by bank. In case the loans and
advances are raised for supplementing the income of her husband or for meeting
the expenses of life necessities or for domestic needs such as boarding lodging
and clothing then the husband is considered liable to pay to the debt incurred by
his wife by law.
(5) Purdah Observing Woman:
The bank has to be very cautious in opening an account of purdah observing lady.
She cannot be treated at par as with other women. Before accepting purdah
observing woman as customer the banker must carry out a thorough scrutiny
about the identity of woman. A very close referee or introducer, from the point of
view of both the parties, the customer and the banker, should confirm the identity
of the purdah observing lady and verify her signature beyond any doubt. The bank
has to be very cautious on this score.
(6) Illiterate person:
An illiterate person from the banker s point of view is the person who cannot put
his signatures. He uses his thumb impressions in place of signatures for
identification. The banker has therefore to be very cautious in honoring the
cheques of illiterate person. The banker usually takes the following precautions in
this regard.
(i) A Certified photograph of an illiterate person is pasted on the signature card
for identification.
(ii) At least two left hand thumb impressions are placed in place of specimen
signatures for identification.
TYPES OF NON-INDIVIDUAL ACCOUNTS
1. Accounts of Hindu Undivided Families (HUF):
The Hindu Succession Act 1956 governs HUF. The HUF carries out ancestral business
and possesses ancestral properties.
The right to manage HUF property vests in the 'Karta' of the family. Karta is either the
father or the senior most male member of the family. All other male members are called
coparceners.
In the interest of the family and family business, only the Karta can create a charge over
the ancestral property. However, he cannot make a contract, which binds the other
member personally. Other members are responsible to the extent of their share in the
ancestral property.
HUF is not dissolved In the event of death of one of the members of the joint Hindu
family. It differs from the partnership firm as on the death of one of the partners, the firm
is dissolved. On the death of karta the senior most co-parcener becomes karta.
A coparcener continues to be a member of HUF, even after his migration outside India
and acquiring status of NRI or taking citizenship of another country.
If the Karta himself migrates, an alternative Karta of the HUF is appointed by the HUF
with consent from all coparceners.
Opening of Account of HUF:
The account is opened in the name of the Karta and family business. The Karta and all
the adult members of the HUF are required to sign the account opening form. Banks do
not open Savings Bank account of HUF engaged in trading and business activities
Operations in account:
The operations in the account are normally restricted to Karta of the family. The Karta
can appoint any of the adult coparceners to operate the bank account as 'Manager' if HUF
carries out business at various places through its branches.
HUF accounts can also be operated by coparcener and /or other adult members of HUF
also, against a letter of authority and against a stamped letter of indemnity cum
undertaking given by the Karta. Since female members in an HUF are not coparceners,
they cannot be authorized to operate bank account. If there is no adult coparcener, a
mother is allowed to manage the property of HUF and operate the account.
2. Account of Sole Proprietary Concerns:
Banks do not open savings bank account in the name of a proprietorship firm but open
current account in the name of the sole proprietary concerns. Accounts in the name of a
sole proprietary concern are treated like individual accounts. The account can be operated
either by the proprietor himself or by a person duly authorized to operate the account on
his behalf. Banks exercise caution while accepting cheques drawn in favour of the sole
proprietary concern and deposited in personal account of the proprietor.
When the sole proprietor of the firm deposits cheque payable to the firm for credit of his
personal account,bank obtains a declaration from him to the effect that he is the sole
proprietor of the firm.
3. Accounts of registered societies, clubs and Associations:
A club or a society gets legal entity only when it is incorporation under Company‘s Act, 1956 or
under Cooperative Societies Act, 1860.Byelaws of the society, clubs, and association contain
rules, regulations or conduct and activities of the association. While opening account banks
obtain:
(a) Copy of the byelaws;
(b) Copy of resolution passed by the managing committee regarding opening and
conduct of account,
(c) Certificate of registration in original,
(d) A list of the Managing Committee members
(e) Copies of resolutions electing them as Committee members duly certified by
the Chairman.
Bank keeps a copy of the above-mentioned document for its record.
4.Account of Partnership Firms:
According to Section 4 of the Indian Partnership Act, a partnership is the relationship between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all.
The Supreme Court has held that the word "persons" in Section-4 contemplates only natural or
artificial persons i.e., legal persons. Since a firm is not a person, is not entitled to enter into
partnership with another firm or Hindu undivided family or individual. Therefore, banks do not
open account where a firm is a partner in another firm. As Joint stock companies and statutory
bodies constitute "artificial or legal persons" therefore, they can be partners in a partnership firm.
As per the Indian Partnership Act, minimum number of partners can be two and maximum
twenty. The number of partners is restricted to 10, if the partnership firm carries out business of
banking. Minors can be admitted as partner only to the benefits of the partnership.
Registration of partnership firm:
A partnership firm can be registered with Registrar of Firms. However, as per law, it is not
compulsory to register a partnership firm. Non-registered partnership firm have certain
disabilities. Such firms cannot sue others to enforce a right arising out of a contract. A suit filed
by an unregistered partnership firm is not maintainable, even after its subsequent registration.
Even partners of an unregistered firm cannot sue other partners or his firm, for their rights.
Opening of Account:
A partnership firm can open all types of accounts except savings bank account. Bank opens
account of a partnership firm in the name of the firm and not in the names of partners
individually or jointly. The account opening form is signed by all the partners in their individual
capacity as well as in the capacity of a partner to ensure joint and several liabilities. While
opening the account banks verify the partnership deed to examine whether any clause of the deed
is detrimental to the interest of bank. Since bank would not like to be bound by the terms of the
partnership deed, banks do not accept the partnership deed even if offered.
In case of registered firm, banks obtain registration certificate. The account is opened in the
name of the firm and all the partners are required to sign account opening form.
Operations in account:
Bank obtains operational instructions i.e. who will operate the account and how it is to be
operated. In case a minor is also a partner in the firm his birth certificate is obtained to ascertain
the date of birth, which is recorded in the account opening form.
Who can operate?
(a) All partners jointly
(b) One of the named partners
(c) Two / three of the named partners
(d) A third party under a mandate letter or a power of attorney signed by all
the partners.
A partner authorized to operate the firm's account cannot delegate his authority to another person
unless all other partners agree. The authority given to operate the account can be withdrawn by
any of the other partners including dormant or sleeping partner by giving notice to the bank.
Each partner, whether he/she is operating the account or not, has powers to countermand
payment of the cheques drawn by another partner or by an attorney on behalf of the firm.
Partnership firms with illiterate partners:
Current accounts of partnership firms, where a partner is illiterate and affixes thumb impression,
can be opened provided a Magistrate attests the thumb impression affixed on the account
opening form.
Implied authority:
A partner acts as an agent of the firm for the purpose of the business of the firm. He binds the
firm and also other partners by his acts. An authority to bind the firm by his acts is called the
implied authority of a partner.
Operations in the accounts:
Without proper inquiry with the other partners, bank does not accept cheque drawn in favour of
the firm for credit to the personal account of a partner. Failure to make proper inquiries would
deprive the bank of the protection afforded under Section-131 of the Negotiable Instruments Act
on grounds of negligence. Cheques payable to a partner are not be credited to the firm‘s account
without proper inquiry being made with the other partners.
Retirement of a partner:
On notice of retirement of a partner, the bank closes the existing account and opens a new
account of the firm with the remaining partners or along with the new partner if admitted to the
new firm.
Death of a partner:
(a) Death of a partner dissolves the partnership. However, for the purpose of winding up of the
firm, the bank may allow the surviving partner(s) to operate the firm's account, if the account is
in credit.
(b)Cheques drawn by a partner before his death and presented for payment are honoured after
obtaining confirmation of the surviving partners.
Dissolution of a partnership firm:
Dissolution of a firm amounts to the breaking up of relation of partnership between all the
partners. In the event of dissolution banks do not permit operations in the account. A partnership
firm may be dissolved by any of the following modes
(a) By mutual agreement between all the partners.
(b) By notice of dissolution in case of partnership at will.
(c) By operation of law or compulsory dissolution of the firm.
(d) By happening of certain contingencies such as death or insolvency of a partner.
(e) Dissolution by Court of Law in cases like insanity, permanent incapacity,
misconduct of a partner affecting business etc.
5.Accounts of Joint Stock Companies:
A joint stock company is constituted under company Act 1956. Company is an artificial person‘
with perpetual succession. It is a voluntary association of persons formed for some common
purpose with capital divisible into parts known as share. It has separate legal entity and corporate
personality. It is separate from the shareholders constituting it.The company can own assets;
contract debts and can sue and be sued in its own name. The property of the company is not the
personal property of its shareholders nor is the company‘s liability the liability of its
shareholders/directors, unless they consent to be personally liable for the company's debts.
Company can be classified into three categories:
(a)Public Ltd. Co.:
It can issue shares to public. Minimum number of shareholders required is 7. There is no
restriction in the maximum number of shareholders. Shares can be freely transferred. Minimum
number of directors required is 3
(b)Private Ltd.Co.:
It cannot issues shares to public.Shares are not freely transferable. Minimum number of
shareholder required 2 and maximum number of share holders can be 50.Minimum number of
directors required 2.It does not require certificate of commencement of business.
(c).Government Co.:
A company where not less 51% of the share capital is held by the government.Depending upon
the liability of shareholders the Company it may be limited or
unlimited.
Documents required for opening an account:
(a) Account opening form
(b) Certified copies of memo of association and articles of association
(c) Copy of certificate of incorporation
(d) Certificate of commencement of Business
(e) Up-to-date list of directors with name and address
(f) Certificated copy of a resolution of the Board of directors for opening and
conducting the account.
Documents obtained by bank:
For opening an account of a joint stock company bank obtains following documents:
(i) Certificate of incorporation:
The Registrar of Joint Stock Companies issue this certificate. It is a
conclusive proof that all the requirements under the Companies Act have been
complied with.
(ii) Certificate of commencement of business:
This certificate is essential in the case of public limited companies. A
public limited company cannot borrow until this certificate is obtained.
(iii) Memorandum and Articles of Association:
The bank obtains a certified copy of the Memorandum and Articles of Association
of the company to satisfy that the conduct of the account is in conformity with
the provisions. Certificates signed by the Chairman or one of the authorized
directors of the company stating that the Memorandum and Articles of Association
are true and up-to date.
(iv) Board Resolution:
A copy of the resolution of the Board of Directors of the company, certified as
true by the Chairman of the meeting, requesting the Bank to open an account in
its name and specifying the instructions regarding the conduct thereof, is
obtained. Instructions in the resolution regarding conduct of the account have to
be in strict conformity with the provisions of company‘s Articles of Association.
The resolution is to be countersigned either by the company's secretary or any of
the other directors.
(v) List of the present directors:
A list of the present directors of the company is obtained under the signature of
the Chairman, accompanied by a certified copy of the resolution of the general
body of the shareholders appointing them as directors.
(vi) Reference to the company's previous bankers:
Banks also ascertain the names and addresses of the company‘s previous bankers,
if any, and get a report on the company and its directors and keep it along with
the account opening form.
Memorandum of Association:
The memorandum of association contains name and address of the registered office of the
company, name and addresses of the directors, objectives and powers of the company.
Any act done or contract entered into by the company, which is outside the scope of these
objectives becomes ultra vires (i.e. beyond the powers of the company) and, therefore, is
not binding on it.
The Memorandum and Articles of Association of the company is studied to find out the
extent of the powers of its directors, its powers to borrow and mortgage property or to
give guarantees and the provisions relating to the conduct of its bank accounts
Articles of Association:
The Articles of Association contain the rules regulations regarding company's internal affairs.
Conversion of cheques payable to companies:Cheques payable to or endorsed by limited
companies should not be collected for the personal accounts of their directors, managers and
other employees. Ordinarily, cheques payable to limited companies are to be credited to
company‘s account.
Insolvency of a director:In case one of the directors becomes insolvent or an un-discharged
bankrupt, he cannot act as a director of a limited company. The bank does not permit operations
in the account by the insolvent director.
Winding up of a company:Winding up of a joint stock company is deemed to have commenced
from the date on which petition for such winding up is presented, or in the case of voluntary
winding up from the date on which an extra ordinary resolution to this effect is passed. With
commencement of winding up of a joint stock company, the Directors cease to have powers to
operate on the account and the authority stands vested with the liquidator appointed for the
purpose. Therefore banks do not pay cheques signed by the directors after the commencement of
the winding up proceedings. Liquidator should furnish evidence of his appointment by sending a
certified copy of the Court Order, or a certified copy of the resolution of the general body in case
of a voluntary winding up. If required, he may be furnished with details of the company's
accounts, securities etc., and should be allowed to operate upon the accounts of the company
only for the purpose of winding up of its affairs.
7.Accounts of Private Companies:A private limited company is a company, which have a
minimum 2 and maximum 50 shareholders. Shares of these companies are not sold in the public
and cannot be transferred. Banks are cautious while opening accounts of Pvt. Ltd.Co. Bank
obtains all documents as required while opening accounts of a joint stock company.
8. Accounts of Trusts:As per Sec.3 of Indian Contract Act, 1882 ?A trust is an obligation
annexed to the ownership of property, and arising out of a confidence in and accepted by the
owner, or declared and accepted by him, for the benefit of another, or of another and the owner.?
Bank opens trust accounts for good parties. A trust can be public or private. All public trusts are
required to be registered with the Charity Commissioner under Public Trust Act of the respective
state.
Before registering a public trust, the office of the Charity Commissioner makes necessary
enquiries regarding the trust, its trustees, the mode of succession of trusteeship etc., and after
proper enquiries makes entries in the register, which are final, conclusive and are binding on all
concerned. Banks open trust accounts after taking all precautions.
While opening account of a trust bank obtains :
(a) Copy of constitution of the trust
(b) Trust deed if available,
(c) Certificate of registration and/or a certified copy of the entry of the public trusts register
(d) Public Trust Register No
(e) A list of the current trustees and the authority appointing them as trustees.
(f) The necessary resolution passed by the trustees for opening the account with the bank.
(g) Certified copy of the resolution signed by all the trustees in regard to
the conduct of the account.
Trusts which have no constitution, instruments of trust or scheme:
While opening accounts of such trusts bank obtains following documents:
• A certificate of registration issued by the office of the Deputy/Assistant Charity Commissioner
(Where it is so possible, under the relative law).
• A certified copy of the latest entry in the public trusts register (Public Trust Registration),
which shows the name of the trust, the Public Trust register No of the Trust, at which it is
registered and name/s of the trustee/s.
• A declaration and an indemnity from are obtained all the trustees.
• A resolution passed by the trustees relating to the opening of the account
Operations:
Trust accounts must be opened and conducted strictly in accordance with the terms of the trust
deed. All the trustees are required to act jointly by the persons so authorized by the registered
trust deed. Trustees have no powers to delegate their authority to one or more unless the power
of delegation is authorized by the trust deed or is in accordance with the directions of the court
on an application made by the trustees.Trustees have no implied authority to borrow or pledge
trust property, unless so provided for in the trust deed.
Death of a trustee:
On the death of one of the trustees, the trust property passes to the other trustees as per the
provisions of the trust deed. If the deceased is the sole trustee, his executor has no right to
recover the trust money. The executor, however, has the right to appoint a new trustee, provided
the deceased trustee has in his will specifically authorized such an appointment.
9. Accounts of Religious and Charitable Trusts:
To regulate public religious and charitable trusts some States have passed Acts. These charitable
trusts are registered with the Charity Commissioner or the Assistant Charity Commissioner of
the region concerned. A Certificate of registration is issued to these trust by the authorities.
Mostly these trusts do not have a properly written trust deed. Bank opens account of religious
and charitable trusts on merits and on being satisfied as to the integrity of the trustees and their
status.
Opening and operations of account:
While opening account bank obtains following documents in addition to account opening form
duly signed by the trustees.
• A resolution specifying the name of the bank passed in a proper meeting heldby all the trustees.
• Indemnity signed by all the trustees, indemnifying the bank for having allowed operations on
the trust account.
• Banks do not permit operations in the account by one person.
• Reasonable number of members is required for opening and operating the account.
• If the number of trustees is larger, then the number of person operating the account has to be
large.
• Bank periodically obtains confirmation of balance in the account, signed by all the trustees.
• Wherever possible, order or direction from the Charity Commissioner is obtained, permitting
the bank to allow operations on the trust account in the manner approved by the trustees.
12.Accounts of Liquidators:
A company can go into liquidation either voluntary or by the orders of court. Incase a company
goes in to liquidation by the orders of court, it appoints a liquidator Under Section 552 of the
Companies Act, 1956. The liquidator so appointed by courts is known as official liquidator.
When a company goes into voluntary liquidation, it appoints liquidators at its extraordinary
general meeting convened for the purpose. Official liquidators have to deposit the moneys only
into the public account of the Government of India with the Reserve Bank of India. Official
liquidator cannot open accounts with scheduled banks. In case of voluntary winding up, authority
to operate account by the liquidator is passed in the general meeting.
Opening of account:
While opening account of liquidators bank requires:
(a)True copy of the resolution passed in the extraordinary general meeting.
(b) The resolution has to be certified by the Chairman of the extraordinary general meeting
(c) Signature of the liquidator is required to be verified by one of the authorized officials of the
company concerned.
(d) Liquidators cannot delegate their powers to third parties
(e) The account is styled as "The Liquidation Account of ........"(Name of the company).
13. Accounts of local bodies:
Banks open accounts of local bodies include Municipal Corporation, Panchayat, Board etc.,
created by special act of the parliament or legislative Assembly.
a) Accounts of Village Panchayats:
Banks open accounts of village panchayats/district/taluka after getting a copy of the resolution
passed by the Panchayat of the Village or Taluka of the District concerned. In various states the
village panchayat are governed by the Panchayat Raj Acts passed by the respective state
governments.While opening such accounts banks refer to the Act for ascertaining the nature of
transactions permitted by the Act. The accounts of village panchayats are operated only bythe
President or Sarpanch. The Vice-President (Vice Sarpanch) of thePanchayat can operate the
account only in the absence of the President (Sarpanch) only after the written authority of the
sarpanch.Accounts of village panchayats/district/taluka are opened and styled as
"President (or Sarpanch).........Gram/Panchayat".
b) Accounts of Local Authorities/bodies:
Banks open accounts of local authorities like municipalities, district boards, port trust, state
financial corporations and such bodies created by statute. These are considered as local bodies or
quasi- government institutions. While opening accounts of such authorities banks go through the
municipal enactments and regulations. Transactions in account are permitted strictly in
accordance with the statutory provision.
Accounts with Similar Names:
Where there are two accounts either in the same name/s or with great similarity in their titles,
caution should be noted on both the ledger headings with the word "CARE" : Similar account in
the name ........ Page... " Giving cross-references. If it comes to the notice of the branch that the
client is maintaining an account with another branch of the Bank, the fact should be noted in the
ledger heading with a view to enable the branch or branches to exchange any useful information,
which may come to its notice about the client.
SUMMARY
The bank is and should be very cautious in the selection of customers as it is to have a continued
relationship with them. The customers of a bank can mainly be divided into two categories (1)
Ordinary Customers and (2) Special Customers. An individual, a body corporate, a firm can open
an account with the bank. The bank before accepting one as a customer weighs the customer‘s
financial position, his character, honesty, social standing and good will in the society. The
special customers are those who are dealt with as special ones legally like a minor, married
woman, lunatic, woman observing purdah etc. The different types of non-individual accounts are
partnership firms, joint stock companies, societies, trust accounts etc.
KEYWORDS
Ordinary Customers are those who are competent to enter into contract under the laws of
land.Special Customers are governed by the legal rules enforced in the country.
QUESTIONS
SHORT QUESTIONS:
1. Who is a Minor?
2. What are the types of Special Customers?
3. Who is an Ordinary customer?
4. Name two types of non-individual account.
5. Who is a lunatic?
LONG QUESTIONS:
1. What are the steps involved in opening a bank account for the partnership firms?
2. What are the steps involved in opening a bank account for Religious charities and trusts?
3. Elaborate the steps involved in opening a bank account for two special individual
customers.
MODE OF ACCOUNT OPERATION
In the case of joint accounts (Current, Savings or Deposits) in the names of two or more persons,
the terms relating to which do not provide for payment of the amount due under the account to
the Survivor(s) in the event of death of one of them, for the banks to obtain a valid discharge
payment should be made jointly to Survivor(s) and the legal heirs of the deceased joint account
holder. In such a case, in view of the difficulty in ascertaining with certainty as to who the legal
heirs of the deceased are, it is the practice of the banks to insist on the production of legal
representation (to the estate of the deceased) before settling the claim. As obtaining a grant of
legal representation would entail delay and expenses, banks should encourage the opening of
joint accounts on terms such as, payable to (a) Either or Survivor, (b) Former/Latter or Survivor,
(c) Anyone or Survivors, or Survivor, etc.
Benefits of Survivorship
If the benefit of survivorship is provided, the survivor can give a valid discharge to the bank.
Even though payment to the survivor will confer a valid discharge to the bank, the survivor will,
however, hold the money only as trustee for the legal heirs (who may include the survivor as
well) unless he is the sole beneficial owner of the balance in the account or the sole legal heir of
the deceased. Thus, the survivor‘s right unless he is the sole owner of the balance in the
account/sole legal heir of the deceased, is only in the nature of a mere right to collect the money
from the bank. If the legal heirs of the deceased lay a claim to the amount in the bank, they
should be advised that in terms of the contract applicable to the account, the survivor is the
person entitled to payment by the bank and that, unless the bank is restrained by an order of a
competent court, the bank would be within its rights to make the payment to the survivors)
named in the account. The position, briefly, is that a payment to survivor can be made if there
are no orders from a competent court restraining the bank from making such payments.
Joint Savings Bank Account – Either or Survivor/Any one or Survivors or Survivor
The survivor can give a valid discharge to the bank. If the legal heirs claim the amount, the
bank can inform them that unless they obtain and have served on the bank an order of competent
court restraining the bank from effecting payment to the survivor, the bank will be within its
rights to do so.
Joint Term Deposit Account - ‘Either or Survivor or ‘Anyone or Survivors or Survivor’
In a joint term deposit account which has been opened in the style of either or survivor/any one
or survivors or survivor, the bank often receives a request, on the death of one of the joint
account holders, from the surviving depositors) to allow premature encashment or the grant of a
loan against the term deposit receipt. It would be in order to accede to the request of the
surviving depositors) for premature payment if (i) there is an option included in the contract of
deposit to repay before maturity and (ii) ?either/any one or survivorship? mandate has been
obtained from original depositors. Requests for loans from surviving depositor(s) could also be
considered in special cases, though in the case of such loans, the bank may face a possible risk if
the legal representatives of the deceased depositor lay an effective claim to the deposit before it
is paid on maturity. In such an event, the bank will have to look to the borrower(s) for
repayment. This position for premature payment or grant of loan is applicable also in respect of a
joint account (in the style of either or survivor/any one or survivors or survivor), where all the
account holders are alive.
As a measure of operational prudence, a clause to the effect that loan/premature payment can be
permitted to either/any one of the depositors any time during the deposit period can, however, be
included in the term deposit contract.
Joint Term Deposit - Former or Survivor/Latter or Survivor etc.
In the case of these term deposits, the intention of the owner depositor (former/latter) is to
facilitate repayment of the term deposit to the survivor only in the event of his death. He (the
owner depositor) is in a position to retain with him at all times, the right to dispose of the monies
until his death or maturity of the deposit receipt, whichever is earlier. There should, therefore, be
no objection to the bank permitting premature payment of such deposits or granting advances
against them at the request of the former/latter without insisting on the production of a consent
letter from the other party/parties to the term deposit receipt. Here also it is preferable to make
this position explicit to the joint depositors, by incorporating suitable clause in the term deposit
account opening or application form.
BASIC BANKING CONCEPTS
KYC Norms - In order to prevent identity theft, identity fraud, money laundering, terrorist
financing, etc, the RBI had directed all banks and financial institutions to put in place a policy
framework to know their customers before opening any account.
This involves verifying customers' identity and address by asking them to submit documents that
are accepted as relevant proof.
Mandatory details required under KYC norms are proof of identity and proof of address.
Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof
of residence can be a ration card, an electricity or telephone bill or a letter from the employer or
any recognized public authority certifying the address.
Some banks may even ask for verification by an existing account holder. Though the standard
documents which are accepted as proof of identity and residence remain the same across various
banks, some deviations are permitted, which differ from bank to bank.
So, all documents shall be checked against banks requirements to ascertain if those match or not
before initiating an account opening process with any bank. Thus opening a new bank account is
no longer a cake walk.
Those are the basic requirements of KYC to identify a customer at the account opening stage.
Anti Money Laundering - The word money laundering refers to the use of the financial system
to hide the source of funds gained from illegal activity such as drug trafficking, bribery,
extortion, embezzlement, theft or other criminal activity, as the criminals try to make their ill
gotten gains appear genuine.
Anti Money Laundering is the term used by banks and other financial institutions to describe
the variety of measures they take to fight against this illegal activity and to prevent criminals
from using individual banks and the financial system to keep their Proceeds of Crime. In all
major jurisdictions around the world, criminal legislation and regulation make it mandatory for
banks and financial institutions to have arrangements to combat Money Laundering, with harsh
criminal penalties for non-compliance.
The vast majority of criminal dealings are done in cash. Criminals need ways to dispose of the
cash and have it reappear as part of their wealth with as little chance as possible of it being
tracked back to the cash element. Criminals have to use the financial system and banks in
particular to do this.
Money laundering is traditionally done in three stages, called Placement, Layering and
Integration. Placement is the physical depositing of the cash. Layering describes the process of
transactions, some very simple, some more complicated and often involving transactions within
and between banks and across borders, which seek to confuse the trail back to the original cash.
Integration is the process by which the money is brought back into use by the criminal in the
normal economy, often by the purchase of assets (houses, cars, works of art) but which make it
appear legitimate.
Anti Money Laundering processes and controls help banks and financial institutions protect
themselves and their reputation from the criminals. Key elements of a sound Anti Money
Laundering programme, many of them required by law, include :
? Minimum Standards and Policies, approved by Senior Management, which clearly set
out your philosophy on crime prevention and business requirements.
? Strong "Know Your Customer" checks at customer take-on to identify and exclude
known criminals but also to be sure you know the real identity of the customers you do take on.
? Robust training programmes for all staff.
? Processes (very often automated) to monitor the activities on customer accounts to
identify suspicious activity and to check incoming and outgoing payments for unauthorised
transactions and to enable reports to be made to relevant authorities.
CIBIL - CIBIL is Credit Information Bureau (India) limited is India s first credit bureau. It is a
collection of information which has been pooled by all major Banks and financial institutions of
India. The aim to create such an organization is that there are lesser defaults on loans as the
credit history can be checked before the loans are booked. It has over 170 million consumer
database. Cibil reports helps Banks to differentiate between customers who have paid there
previous loans in time v/s those who either have defaulted etc. Cibil database is not a list of
customers who cant be given a loan where as it collect information of all your loan and credit
card payments.
The biggest change it has brought is that it gives the lender ie the bank the credit history of the
customer who wants to apply for the loan or credit card.
It is a month and month record of a customer‘s emi or credit card payments. All loans like
Personal loan, Home loan, Car loan and credit card payments record come under this.
It also contains personal information like Name, Mobile number, DOB, Address, Pan Number
and Passport number.
It has information on the number of times a person may have applied for a loan or a credit card in
the last one year.
Non-Performing Assets - Non-performing assets, also called non-performing loans, are loans,
made by a bank or finance company, on which repayments or interest payments are not being
made on time.
A loan is an asset for a bank as the interest payments and the repayment of the principal create a
stream of cash flows. It is from the interest payments than a bank makes its profits.
Banks usually treat assets as non-performing if they are not serviced for some time. If payments
are late for a short time a loan is classified as past due. Once a payment becomes really late
(usually 90 days) the loan classified as non-performing.
Prime Lending Rate - In banking parlance, the BPLR means the Benchmark Prime Lending
Rate. BPLR is the interest rate that commercial banks normally charge (or we can say they are
expected to charge) their most credit-worthy customers. Although as per Reserve Bank of India
rules, Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2
lakh with the approval of their respective Boards yet BPLR has to be declared and made
uniformly applicable at all the branches.. However, with the introduction of Base Rate concept,
BPLR is slowly losing its importance and is made applicable normally only on the loans which
have been sanctioned before the Base Rate has been made compulsory.
Base Rate - The Base Rate is the minimum interest rate of a Bank below which it cannot lend,
except for loans to bank's own employees and loan to banks' depositors against their own
deposits. (i.e. cases allowed by RBI)
What is the difference between BPLR and Base Rate?
The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending rate
(BPLR) recommended that the BPLR nomenclature be scrapped and a new benchmark rate —
known as Base Rate — should replace it. Base Rate is much more transparent and banks are not
allowed to lend below the base rate (except for cases specified by RBI). Base Rate is to be
reviewed by the respective banks at least on quarterly basis and the same is to be disclosed
publicly. On the other, the calculations of BPLR were mostly not transparent and banks were
frequently lending below the BPLR to their prime borrowers and also under pressure due to
various reasons.
When was the Base Rate Made Applicable for Banks in India?
RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010.
Do all banks have common Base Rate ?
No, each bank will arrive at its own base rate
Deposit Rate - A term Deposit Rate refers to the amount of money paid out in interest by a bank
or financial institution on cash deposits. Banks pay deposit rates on savings and other investment
accounts.
Wholesale Banking
Wholesale banking is the provision of services by banks to the likes of large corporate clients,
mid-sized companies, real estate developers and investors, international trade finance businesses,
institutional customers (such as pension funds and government entities/agencies), and services
offered to other banks or other financial institutions. In essence, wholesale banking services
usually involve high value transactions.
Wholesale banking contrasts with retail banking, which is the provision of banking services to
individuals.
Retail Banking
Retail banking is banking in which banking institutions execute transactions directly with
consumers, rather than corporations or other banks. Services offered include: savings and
transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.
19. How many Public and Private Sector banks are there in India?
Short notes:
1. KYC
2. AML
3. CIBIL
4. Retail Banking
5. Wholesale Banking
6. Prime lending Rate
7. Non-performing Assets
8. Deposit Rate
Case Study 1:
Mr. Arun Kumar, the Branch Manager of a Bank located in a semi-urban area.
It was a small town in a mineral belt where mining and transportation were the main
activities. There were many Banks operating in the town. There was stiff competition
amongst the Banks to garner deposits and increase the existing banking business. Mr.
Kumar came from a good family, was an MBA from a reputed Institution, and had about
10 years of experience in the Banking industry.
The financial year was coming to close and the branch was very busy in
annual closing activities and also achieving targets in deposits and advances given to the
branch by their Regional Office. Mr. Arun Kumar was approaching various customers,
institutions and was trying very hard to mobilize deposits in order to achieve the branch
target.
The annual closing was supposed to be on the last working day of March and that day
branch would be closed for public transaction.
On the closing day one Mr. PrakashAgrawal, about 35 years of age
came to the branch and approached Mr. Arun Kumar for making a Fixed Deposit of
Rs.25 lacs against a Demand Draft issued from another Bank in a different location about
25 kms away from this town. Mr. Agrawal was neither known to anybody nor had any
account in the branch.
On enquiry, Mr. Agrawal informed that he was a big contractor for a Coal Company and
the particular draft he had received from the Company against his work. He also
requested that he would take loan against the Fixed Deposit to meet labour payment and
other emergent payment before the year ending.
If Mr. Arun Kumar accedes to the request of Mr. Agrawal , the deposit
and advance figure of the branch would exceed the target and this would help him get
appreciation from his Regional Manager and promotion in near future.
Question:
If you had been in Mr.Arun Kumar‘s place what would have been your decision? Justify
your answer.
Case Study 2:
Mr. Prakash Mishra was working as an officer in a Nationalized Bank located in
rural area. He joined this branch few months ago after being promoted from clerical
cadre. He was allotted the duty in Savings department.
One day a lady came to the branch and opened a savings account in her
name. Mr. Mishra opened the account after observing the formalities. After few days
the lady deposited a Demand Draft for Rs.20 lacs issued by another nationalized bank in
her account. The said draft was duly collected by the bank. The lady (customer) withdrew
Rs.10 lacs in cash from her account. Few days later the draft issuing Bank informed the
collecting bank that the draft in question was stolen from their bank and demanded the
refund of entire money. The matter was brought to the notice of the Manager of the
branch who on enquiry found that Mr. Mishra was negligent in his duty in opening and
allowing operation in the account for which the bank would incur loss of money and
reputation.
Question:
Now, please analyze the case and give your views as to what was wrong on the part of
Mr.Mishra in handling this account and what action you would have taken had you been
in his place?
Case Study 3:
Mr. Shah had taken four insurance policies, of Rs 25,000 each from the Life Insurance
Corporation (LIC) of India. All of them came with double accident benefits and were
taken on March 6, 1986 through an agent. The premium was payable on a half yearly
basis.
The half yearly premium due on March 6, 1987 was not paid in time.
Later, the agent met Shah and obtained from him a bearer cheque for Rs 2730 dated June
4, 1987 towards the premium on all four policies. The cheque was encashed by the
agent‘s son the following day, but the premium was deposited with LIC much later, on
August 10. Meanwhile, Shah met with an accident on August 9 and died the same day.
Shah‘s widow, who was the nominee in all four policies, claimed the
amount payable under the policies. LIC repudiated the claim saying the policies in
question, had lapsed on account of non-payment of premium in time or even thereafter,
within the grace period. But Mrs. Shah counter claimed that premium were paid to the
agent on behalf of LIC, much before Mr. Shah met with an accident and died. So, the
claim must be paid. LIC did not agree to Mrs. Shah‘s contention and refused the claim.
(Note: Double accident benefit under a life insurance policy refers to the double payment of the
sum assured under the policy. This benefit pays double the sum only in case of death due to an
accident, which means if the death is due to natural causes, there is no double benefit.)
Question:
State whether LIC is justified in refusing to pay the claim and on what ground?
Case Study: 4
The Internet Banking Boom
In 2001, the Reserve Bank of India survey revealed that out of 46 major banks operating in India,
around 50% were either offering Internet banking services at various levels or planned to in the
near future. According to a research report in 2001, India's Internet user base was an estimated 9
lakh; it was expected to reach 90 lakh by 2003. Also, while only 1% of these Internet users
utilized the Internet banking services in 1998, the Internet banking user base increased to 16.7%
by mid- 2000.
Many of the major banks like ICICI, HDFC, IndusInd, IDBI, Citibank, Global Trust Bank
(GTB), Bank of Punjab and UTI were offering Internet banking services. Based on the above
statistics and the analysts' comments that India had a high growth potential for Internet banking,
the players focused on increasing and improving their Internet banking services.
As a part of this, the banks began to collaborate with various utility companies to enable the
customers to perform various functions online. ICICI's 'Infinity,' which was already a leader in
the Indian Internet banking arena, began to allow its customers to pay their online real time
shopping bills. HDFC, through its 'payment gateway' feature, allowed its Internet banking
customers to make online and real time payments for their purchases.
HDFC also entered into tie-ups with various portals to provide these business-to-customer (B2C)
e-commerce transactions. As more banks entered Internet banking arena, the competition
between the banks also increased. This compelled the banks to focus on capturing new markets
and customers and adopting advanced technology on the Internet. In the light of these
developments, industry watchers remarked that Internet banking had arrived in a big way.
Though it had a long way to go compared to the global standards, it was beginning to be seen as
a replacement for the traditional banking set up in the future.
About I nternet Banking
Globally, the banking business has always been in the forefront of harnessing technology to
improve its services and efficiency. Banks have been quick to adopt rapidly evolving electronic
and telecommunication technologies to deliver an extensive line of value added products and
services to their customers. By the early 1990s, direct dial-up connections, personal computers,
tele banking and automated teller machines (ATMs) became common in most developed nations.
Internet banking evolved in the mid-1990s when Internet and the World Wide Web began to
catch on. Soon, many major banks in the US and Europe began to use the Internet to provide
banking services.
Internet banking is a web-based service that enables the bank's authorized customers to access
their account information. It allows the customers to log on to the bank's website with the help of
a bank-issued identification and a personal identification number (PIN).
The banking system verifies the user and provides access to the requested services. The range of
products and services offered by each bank on the Internet differs widely in their content. Most
banks offer Internet banking as a value-added service. Internet banking has also led to the
emergence of new banks, which operate only through the Internet and do not exist physically.
Such banks are called 'Virtual' banks or 'Internet only' banks.
The products and services offered by the banks on the Internet can be divided into three types:
• Information Kiosks: It includes providing information regarding various products and services
offered by the bank to its customers and others in general. The bank's site receives and answers
queries of customers through e-mails.
• Basic Internet Banking: It includes enabling customers to open new accounts, check account
balance and pay utility bills.
• E-commerce Banking: Banks function as electronic market places (e-market place) enabling
customers to use their accounts for money transfers, bills payment, purchase and sale of
securities and online real time purchases and payments.
In a typical Internet banking transaction, customers' requests for online banking information are
passed on from Web server to the bank's Internet banking server through the WWW interface.
These requests pass through a firewall before they reach the Internet banking server. Due to the
use of SSL technology, only authenticated requests reach the Internet banking server. The
customer information database is stored on a bank's server, which is protected by the use of
various security tools in addition to the firewall technology.
The WWW interface is the only media of communication with the Internet banking server and
Internet banking server is the only media of communication with the customer database, thus
ensuring the safety of operation and customer data. When the customer requests reach the
Internet banking server it passes the requests to the bank server hoarding customer database. The
database provides the required information to the Internet banking server, which is in turn passed
on to the web server, through the firewall, from where the customer is able to access it. This sort
of architecture, known as the 'three-tiered architecture' (comprising of a web server, Internet
banking server and customer database protected by firewalls) creates a controlled environment,
which allows quick incorporation of Internet security technologies.
A security analyzer constantly monitors login attempts and recognizes failures that could indicate
a possible unauthorized attempt to log into an account.
When such trends are observed, steps are automatically taken to prevent that account from being
used. The most significant benefit of Internet banking is the ready accessibility of bank accounts
at all times. The inconvenience of visiting and waiting at the banks is also eliminated.
This resulted in, enhanced customer satisfaction, reduced customer attrition and increased
customer base. Internet banking considerably reduces transaction costs for the banks. According
to a study conducted by consultants Booz-Allen & Hamilton, the cost of an average transaction
on the Internet is as low as 13 cents, compared to $ 1.07 through the branch, 54 cents through the
telephone and 27 cents through the ATM. The study also stated that Internet banking helped
banks reduce the branch load and attract future customers. In India, the cost of one banking
transaction through the Internet amounted to 10 paise to the bank, as compared to Re.1 through a
branch, 45 paise through an ATM, 35 paise through phone banking and 20 paise through debit
cards.
The low transaction costs and the promising picture painted by analysts induced many banks in
India to introduce Internet banking services during the late 1990s.
Questions:
i. Is Internet Banking a customer-centric approach? Explain.
ii. Discuss the merits and demerits of Internet Banking.
News Analysis: 1
SAVINGS A/C PORTABILITY: IS IT WORTH THE TROUBLE?
It is difficult for most of us to remember a bank savings account number. In light of this, it is
surely worth-while considering the viability and implementation of a system that would enable
this most vital information to be portable. After all, the number of our mobile telephone is
portable. Indeed, if a user is unsatisfied with his service provider, he can simply switch the
provider but still retain the number. Although in place only recently, the concept of portability of
telephone numbers is very well understood. On the other hand, the process of changing the 10
digit number can be at best tedious, while informing acquaintances, friends and family of the
change can be nothing less than a Herculean task. Nowadays, one's mobile number is tantamount
to one's individual identity.
At first glance, it may be challenging for the man in the street to come to terms with the concept
of a portable savings account number - after all, the level of confidentiality necessary to protect
one's savings far exceeds that required for a telephone, which is, per se, designed to be shared. A
bank account, whether current, savings, term deposit, or no frills, represents a conduit between
the customer and the bank and is governed by the Contract Act. Each bank has its own
technology and CBS (Core Banking System) to assign an account number.
Even though a savings account number is assigned in a serial order, in some cases, it carries
extra meaning. Banks issue account numbers in 10, 12, 14 or 18 digit formats according to their
individual internal technical requirements. It would be foolish to underestimate both the
difficulty of synchronizing numbers across the banking system and the enormity of the IT cost
that would entail.
The RBI has issued general guidelines on KYC (Know Your Client) and AML (Anti Money
Laundering), which require each bank to frame KYC/AML policy and procedures and record
documentation requirements. At present, documentation requirements and the scope and scale of
due diligence and risk categorization varies markedly from bank to bank.
But, of course, individual banks are responsible for performing due diligence on new accounts as
well as for monitoring and reporting suspicious transactions. Notwithstanding the prospective
establishment of a central registry for KYC documents, individual banks would remain the final
arbiter of whether to open an account or not.
The most straightforward route might be to link savings account numbers to the unique number
issued by the Unique Identification Authority of India (UIDAI). Implementation could take place
once account holders have been allocated a number by the UIDAI.
However, the slow pace of the project to date is indicative of the complexity of consolidating
information on this scale. Savings account portability has far reaching implications for the
banking system. Any meaningful change to the CBS system is likely to stretch resources, not
only financial but also in terms of man power and technology. At the same time, the extent of the
cost-benefit ratio is by no means certain. Indian banks have had limited success in penetrating
remote areas, and large parts of the population continue to have scant access to basic banking
facilities.
Nonetheless, the RBI is seeking to stimulate the expansion of bank branch networks into remote
areas by waiving licensing requirements. It is more prudent to use these scarce resources to
expand basic banking facilities in remote areas. In October last year, the Reserve Bank relaxed
controls on interest rates on savings account deposits, which prompted some private sector
lenders to increase rates to as much as 7%.
On the face of it, encouraging investors to switch savings account with the same number
portability and pursuing the most attractive interest rate offers little obvious benefit to the
banking sector as a whole, especially when enhanced returns are already widely available via
term deposits. Clearly, the cost-benefit ratio and its implementation are not yet fully understood
by the banks. So when it comes, the debate can be expected to be lively.
(Source: Economic Times January 11
th
2012)
Analyze the news piece and state whether banks should go in for savings account
portability or not? Support your answer with valid reasons.
News Analysis: 2
Customer service in banking: Long way to go in
resolving inadequacies
Customer service is the most cliched phrase at banks and the proof lies in the recent report
released by the central bank which lays bare the inadequacies. And the firebrand Reserve Bank
of India deputy governor KC Chakrabarty, a former career banker himself, is throwing his
weight behind addressing many of those. The global banking industry, with possibly the best of
the brains, has been at the receiving end for putting its interests ahead of customers. In India,
issues like one-sided loan agreements and hefty fees one has to pay to close a bank account are
precisely the reasons why a regulator should play a significant role in the way lenders price their
product.
Many recommendations of the Damodaran Committee on improving customer service have been
implemented, but there's a long way to go if one goes by the annual report of the Banking
Ombudsman.Chakrabarty at least wants to ensure "that poor do not subsidize the provision of
banking services to the rich." Next time when your bank reports a steep jump in profits driven by
fee income, you may have to question the charges you pay. In the age of internet and computers,
customers still prefer to lodge their complaints to the banking ombudsman by post and fax. 73
per cent of the complaints are sent either by post or fax. Under the scheme, a customer can lodge
a complaint either by post, fax, e-mail or online through the complaint form uploaded on the RBI
website. The electronic and online mode is yet to catch up, especially with rural and semi-urban
population groups, the Reserve Bank said. Even in urban centers, from where maximum
complaints are registered, technology awareness is still low. As regards number of complaints
per branch, foreign banks lead the pack with 18.43 complaints per branch, followed by new
private banks and SBI and associates with 1.33 complaints per branch. Though per branch
complaints for foreign banks are high, there is a perceptible decline in the number of complaints
per branch over the past two years. The reason why foreign banks received highest number of
complaints is, the customer group of these banks is predominantly high-net-worth individuals
and corporates, who are well-aware of their rights as bank customers and are well-versed with
the grievance redressal mechanism, the RBI said. Banks mostly had to deal with card-related
complaints, which accounted for 21 per cent of total complaints received. This is, however, 3 per
cent lower than the previous year due to an increase in general awareness about usage of cards.
In the cards segment, maximum complaints were pertaining to ATM or debit cards .Other
complaints were related to issues like unsolicited cards, unsolicited insurance policies and
recovery of premium, charging of annual fee for a 'free' card, wrong billing, nonsettlement of
insurance claims after the demise of the card holder, excessive charges, wrong debits to account,
non - dispensation of money from ATM, skimming of cards, among others. Apart from cards,
other complaints were mostly related to deposit accounts and remittances.
Question:
Critically analyze the news piece and suggest measures to improve customer service in the
banking industry.
News Analysis: 3
Mobile banking: A technology gradually permeating into the system
The question for mobile banking in India is not whether, but when. A string of parallel
developments - greater bank innovation, broadband spread and user inclination - is providing
new charge to mobile banking. There is still a long way to go before m-banking achieves mass
acceptance, but it's on its way, reports ET.
Last month, HDFC bank, India's second-largest private-sector bank, launched two services on its
mobile banking platform. The first was a Hindi banking service, which made accessible its 30-
odd m-banking services-like transferring funds, stop-cheque requests and opening a fixed
deposit-to account holders who prefer Hindi as a medium of communication.
The second was a feature called 'net safe light', which limits damages from credit-card misuse.
An account holder with a credit-card limit of, say, Rs 5 lakh might hesitate to make a purchase of
Rs 2,000 via mbanking. This new feature lets the account holder create a virtual credit card on
the mobile for the transaction value-in this case, Rs 2,000.
This is a fair leap from where m-banking was when it started in India about five years ago-text
alerts for cheque deposited or ATM withdrawals. The way the m-banking ecosystem is evolving,
and the numbers they are adding, indicate banks in India are going mobile at a speed never seen
before.
Sure, the small base exaggerates the change, but it is significant in that it shows a technology
gradually permeating into the system. "There's an opportunity to leapfrog: take banking to the
masses via mobile banking," says AP Hota, managing director & CEO, National Payments
Corporation of India (NPCI), which, among other things, sews up back-end connections to
enable m-banking.
Of its total customer base of 200 million, State Bank of India (SBI), the country's largest bank,
has 5.2 million registered users for its mbanking services. "Two lakh new users are registering
every month," says Thandapani G, deputy general manager, SBI. The bank's account holders do
90,000 transactions per day on mobile phones and did m-transfers of Rs 180 crore in November.
The same is true of leading private banks. Adds Rajiv Sabharwal, executive director, ICICI
Bank, the country's largest private-sector bank: "We have seen a 100% growth in the number of
people using mobile banking in past year. Transactions are up 300%." Out of HDFC Bank's 26
million account holders, 1.2 million use mobile banking, and this is increasing by 30% every
quarter. And Sridhar Iyer of Citibank India says 63% of its customers are on m-banking.
"It is picking up, but we are still at least five years away from largescale mobile banking," says
Murali Balaraman, partner, financial services, Ernst & Young.
"Today, mobile banking is a surrogate to busy schedules." What Balaraman means is that it is the
preserve of the urban user with a smartphone, who is comfortable with Internet banking, and is
graduating to m-banking. The real adoption would be when the masses, urban and rural, take to
it.
doc_972868966.pdf