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Module 1
Banking system and structure in India
Evolution of Indian Banks
• Banking in India originated in the last decades of the 18th century.
• The first bank was The General Bank of India, which started in 1786.
• Bank of Hindustan was the 2nd bank, which started in 1790; both are now defunct.
• The oldest bank in existence in India is the State Bank of India, which originated in
the Bank of Calcutta in June 1806, which almost immediately became the Bank of
Bengal.
• The period between 1906 and 1911, saw the establishment of banks inspired by
the Swadeshi movement. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
Bank and Central Bank of India.
• During the First World War (1914–1918) through the end of the Second World
War (1939–1945), and two years thereafter until the independence of India were
challenging for Indian banking.
From Bank of Hindustan in 1770, the evolution of banking in India can be divided into three
different periods as follows:
Phase I: Early phase of primitive Indian banks to Nationalization of Banks in 1969
Phase II: From Nationalization of India banks in 1969 up to advent of liberalization and
banking
reforms in 1991
Phase III: From Indian Financial and Banking Sector Reforms 1991 onward
Post Independence
• India observed the emergence of large number of institutions for providing finance to
different sectors of the economy.
• The entry activities of private sector and foreign banks were restricted through branch
licensing and regulation norms.
• Steps taken by Indian Govt. to regulate banking are:
Reserve bank of India was nationalized on January 1, 1949 under the terms of Reserve bank
of India.
• In 1949, the Banking Regulation Act was in acted.
• The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI.
• No two banks could have common directors.

Nationalization
• The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi. It
nationalized 14 banks. Before the steps of nationalization of Indian banks, only State
Bank of India (SBI) was nationalized.
• Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th
July, 1960.
• The second phase of nationalization of Indian banks took place in the year 1980. Seven
more banks were nationalized with deposits over 200 crores.
• The stated reason for the nationalization was to give the government more control of
credit delivery.

Adoption of banking technology

The IT revolution had a great impact in the Indian banking system:
• Introduction of online banking in India.
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• Formation of committee on Mechanization in the banking Industry in 1984, providing use

of standardized cheque forms and encoders.
• Formation of committee on Computerization in Banks (1988) which emphasized that
settlement operation must be computerized in the clearing houses of RBI.
• Focused on computerization of branches and increasing connectivity among branches
through computers.
• Formation of Committee on Technology Issues relating to Payments System, Cheque
Clearing and Securities Settlement in the Banking Industry (1994) emphasized on
Electronic Funds Transfer (EFT) system, with the BANKNET communications network
as its carrier.
• ATMs installed in India by various banks as on end March 2005 is 17,642.

Types of Banks
1. The public sector banks are owned and operated by the government, who has a
major share in them. The major focus of these banks is to serve the people rather
earn profits. Some examples of these banks include State Bank of India, Punjab
National Bank, Bank of Maharashtra, etc.
2. The regional rural banks were brought into operation with the objective of
providing credit to the rural and agricultural regions and were brought into effect
in 1975 by RRB Act. These banks are restricted to operate only in the areas
specified by government of India. These banks are owned by State Government
and a sponsor bank. This sponsorship was to be done by a nationalized bank and
a State Cooperative bank. Prathama Bank is one such example, which is located
in Moradabad in U.P.
3. The private sector banks are owned and operated by private institutes. They are
free to operate and are controlled by market forces. A greater share is held by private players
and not the government. For example, Axis Bank, Kotak
Mahindra Bank etc.

Performance of public sector bank

The financial system of any country consists of financial institutions, financial markets,
financial instruments, financial services and financial assets. An efficient and a smooth
financial system plays an important role in the nation's economic development. A well
developed country will have a well-organized financial Institutions. Financial
Institutions are an important part of the Indian Financial System. The institutions are
divided into two categories, banking and non-banking. Banks play a pivotal role in
India's economy. The year 1969 was a landmark in the history of commercial banking in
India. In July 1969, the government nationalized 14 major commercial banks of the
country. In 1980, 6 more banks were nationalized.
The first Five Year Plan held in the 1951 accorded the development of the rural areas as
the highest priority. The plan was for the time period between 1951‒1956. The All
India Rural Credit Survey Committee advised the government to create state partnered and
state owned banks. An act was passed in the par liament in May 1955 and the State Bank of
India was constituted. Later the State Bank of India Act was passed in 1959 to
take over the associate banks of SBI and its subsidiaries.
The pre-nationalization period saw a lion's share in the industrial sector to the bank's
credit. Large scale industries cornered a large portion of the credit and the share of
small scale industries was marginal. There were many reasons for the dominance of the
large scale industries in the banking sector. Many commercial banks we re under the
ownership and control of big industrial houses. A disturbing feature of the pre -
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nationalization banking policy was the negligence of agriculture sector to the bank's
credit. This share hovered around 2% of the total commercial bank credit. The privately
owned commercial banks were neither interested nor geared up to meet the risky and
small credit requirements of the farmers. Similarly, the share of other non-industrial
sectors was also very low. Since the commercial banks were under the control of big
industrialists, the loanable funds of the banks were sometimes used to finance socially
undesirable activities like hoarding of essential commodities.
The post-nationalization period witnessed certain drastic changes in the economy. All
the leading commercial banks of the country were nationalized in the year 1969 with
some objectives in mind. The objectives of nationalization were as follows:
To break the ownership and control of banks by a few business families.
To prevent concentration of wealth and economic power.
To mobilize savings of the masses from every nook and corner of the country.
To pay more attention to the priority sectors of the economy like agriculture and small
scale industries, the post-nationalization period saw a remarkable expansion in the
banking and financial system. The biggest achievement of nationalization was the
reallocation of sectoral credit in favor of agriculture, small scale industries and exports.
Within agriculture, credit for the procurement of food grains, i.e., food credit was a
major thing. Other agriculture activities included poultry farming, dairy and piggery.
Certain other sectors of the economy which also received attention for credit allocation were
professionals, self-employed individuals, artisans and other weaker sections of the
society. Conversely, there was a sharp fall in bank credit to large scale industries.
However, the share of small-scale industry registered an upward trend. Nationalization of
commercial banks had many pros and cons for the economy. The government paid
more attention to agriculture than industry. The country witnessed increasing numbers
of bank branches in the rural areas. Branch expansion program resulted in mobilization
of savings from all parts of the country.

Commercial Banking
A commercial bank is a type of bank that provides services such as accepting deposits,
making
business loans, and offering basic investment products.
Structure of commercial bank
The commercial banks can be broadly classified under two heads
1. Scheduled Banks:
Scheduled Banks refer to those banks which have been included in the Second Schedule of
Reserve Bank of India Act, 1934.
In India, scheduled commercial banks are of three types:
(i) Public Sector Banks:
These banks are owned and controlled by the government. The main objective of these banks
is
to provide service to the society, not to make profits. State Bank of India, Bank of India,
Punjab
National Bank, Canada Bank and Corporation Bank are some examples of public sector
banks.
Public sector banks are of two types:
(a) SBI and its subsidiaries;
(b) Other nationalized banks.
(ii) Private Sector Banks:
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These banks are owned and controlled by private businessmen. Their main objective is to
earn
profits. ICICI Bank, HDFC Bank, IDBI Bank is some examples of private sector banks.
(iii) Foreign Banks:
These banks are owned and controlled by foreign promoters. Their number has grown rapidly
since 1991, when the process of economic liberalization had started in India. Bank of
America,
American Express Bank, Standard Chartered Bank are examples of foreign banks.
2. Non-Scheduled Banks:
Non-Scheduled banks refer to those banks which are not included in the Second Schedule of
Reserve Bank of India Act, 1934.

Functions of commercial banks

1. Primary or Principle functions
2. Secondary or Subsidiary function
1. Primary or Principle functions
Receiving deposits
Accepting various types of deposits is an important function of the commercial
banks. Deposits constitute the main sources of the funds for commercial banks. Deposits
are of various types like demand deposits, savings deposits and fixed deposits.
a) Demand deposits
Demand deposits also known as current deposits are those which can be
withdrawn by the depositor at any time by means of cheques. The bank does not pay
any interest on demand deposits. In fact, a bank makes a small charge on the
customers with a current account. It is convenient for businessmen to pay creditors by
drawing cheques and also get the cheques received by them collected.
b) Savings deposits
Savings deposits are those deposits on which a bank pays a certain percentage of
interest to the depositors but the bank places certain restrictions on their withdrawals. For
instance, today in India only 150 withdrawals in a year are allowed by the banks.
Further the total amount withdrawals that can be made is restricted to Rs.20, 000. Or
10% of the credit balance in the customer’s accounts whichever is greater. A proper
and satisfactory introduction is necessary to open savings bank account. These
accounts are meant for encouraging thrift and a habit of savings among the people.
c) Fixed deposits
There are deposits which can be withdrawn after the expiry of a specified fixed
period these are also called time deposits. The rate of interest is higher than that
allowed on savings deposit. The fixed deposits are withdrawn by surrendering the
fixed deposit receipts, obtained from the bank at the time of depositing the money.
Lending of funds
The bank lends fund by means of loans, overdrafts, cash credits and discounting
of bills.
a) Loan
Loan is financial accommodation under which bank grants an advance on a
separate account called loan account. Interest is charged on the entire amount of loan
sanctioned. Loans are given to all types of persons against the personal security of the
borrower or against the personal movable or immovable properties.
b) Overdraft
An overdraft is a financial accommodation under which a current account holder
is permitted to overdraw his account upto an agreed limit. Interest is charged on the
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exact amount overdrawn by the customer. It is granted against the security of the
borrower. It is advantageous to the borrower because interest is charged only on the
amount actually overdrawn by him.
c) Cash credit
A cash credit is a financial accommodation under which an advance is granted on
a separate account called cash credit account upto a specified limit. Interest is charged
on the amount made use of by the borrower. It is granted against the security of goods
or personal security of one or more persons other than the borrower. Traders prefer
cash credit to direct loans as they need not pay interest on the entire amount.
d) Discounting of bills
Discounting of bills is a financial arrangement under which a customer holding a
bill of exchange can get a loan equivalent to the value of the bill, less discount. The
discount represents interest on the money lent for the unexpired period of the bill. On
maturity, the banker collects the proceeds of the bill from its acceptor.
Investment of funds on securities
Investment of funds in securities is one of the important functions of commercial banks;
they invest a considerable amount of their funds in Government and industrial securities.
2. Secondary or subsidiary Functions
The secondary or subsidiary functions of a bank can be divided into two classes, viz
a) Agency service
Agency services are those services which are rendered by the bank as an agent of
their customer. They are:
Collection of cheques, drafts, etc. on behalf of the customer.
Payment of bills of exchange, life insurance premium etc., on behalf of the
customer.
Purchase and sale of securities on behalf of the customer.
Arranging for transfer of money from one place to another on behalf of the
customer.
Arranging for transfer of money from one place to another on behalf of the
customer.
Acting as a trustee, executors, administrators and attorney.
Acting as correspondents of other banks and financial institutions.
Banks also issue credit cards to their customers.
b) General utility services
These are the services rendered not only to the customers but also to the general public as
well.
Accepting valuables and securities for safe custody
Providing foreign exchange to the importers and exporters.
Issuing of travelers cheques, circular notes, etc
Underwriting shares, debentures and Govt securities.
Acting as referees and providing information relating to the credit worthiness
of their customer.
Collection of information useful to the customers or to the general public and
their publication
Banker may institute scholarship endowment establish book banks for the
benefit of the students, arrange exhibitions and undertake any such other
activities beneficial to the community in general.
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Role of commercial banks in socio economic development

1. Accelerating the Rate of Capital Formation:
Commercial banks encourage the habit of thrift and mobilise the savings of people. These
savings are effectively allocated among the ultimate users of funds, i.e., investors for
productive
investment. So, savings of people result in capital formation which forms the basis of
economic
development.
2. Provision of Finance and Credit:
Commercial banks are a very important source of finance and credit for trade and industry.
The
activities of commercial banks are not only confined to domestic trade and commerce, but
extend
to foreign trade also.
3. Developing Entrepreneurship:
Banks promote entrepreneurship by underwriting the shares of new and existing companies
and
granting assistance in promoting new ventures or financing promotional activities. Banks
finance
sick (loss-making) industries for making them viable units.
4. Promoting Balanced Regional Development:
Commercial banks provide credit facilities to rural people by opening branches in the
backward
areas. The funds collected in developed regions may be channelised for investments in the
under
developed regions of the country. In this way, they bring about more balanced regional
development.
5. Help to Consumers:
Commercial banks advance credit for purchase of durable consumer items like Vehicles,
T.V.,
refrigerator etc., which are out of reach for some consumers due to their limited paying
capacity.
In this way, banks help in creating demand for such consumer goods.

Services rendered by commercial banks

1. Accepting Deposit
Accepting deposit from savers or account holders is the primary function of bank. Banks
accept
deposit from those who can save money, but cannot utilize in profitable sectors.People prefer
to
deposit their savings in a bank because by doing so, they earn interest.
2. Advancing Of Loans
Banks are profit oriented business organizations. So they have to advance loan to public
and generate interest from them as profit. After keeping certain cash reserves, banks provide
short-term, medium-term and long-term loans to needy borrowers.
3. Discounting of bill of exchange
Bill of exchange is a negotiable instrument, which is accepted by the debtor, drawn upon
him/her
by the creditor and agrees to pay the amount mentioned on maturity. Discounting bill of
exchange is another function of modern commercial bank. Under this, banks purchase bill of
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exchange from holder in discount after making some marginal deduction in the form of
commission. The banks pay the deducted value to the holders when traders discount it into
bank.
4. Cheque Payment
Banks provide cheque pads to the account holders. Account holders can draw cheque upon
bank
to pay money. Banks pay for cheques of customers after formal verification
and official procedures. .
5. Remittance
Remittance is a system, through which cash fund is transferred from one place to another.
Banks
provide the facilities of remittance to the customers and earn some service charge.
6. Collection and Payment Of Credit Instruments
In modern business, different types of credit instruments such as bill of exchange, promissory
notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay
different types of credit instruments as the representative of the customers.
7. Foreign Currency Exchange
Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign
currencies with local currencies, which is essential to settle down the dues in the international
trade.
8. Consultancy
Modern commercial banks are large organizations. They can expand their function to
consultancy business. In this function, banks hire financial, legal and market experts, who
provide advices to customers in regarding investment, industry, trade, income, tax etc.
9. Bank Guarantee
Customers are provided the facility of bank guarantee by modern commercial banks. When
customers have to deposit certain fund in governmental offices or courts for specific purpose,
bank can present itself as the guarantee for the customer, instead of depositing fund by
customers.

Credit creation and deployment of funds

• An important function performed by the commercial banks is the creation of credit.
• The process of banking must be considered in terms of monetary flows, that is,
continuous depositing and withdrawal of cash from the bank.
• It is only this activity which has enabled the bank to manufacture money.
• Therefore the banks are not only the purveyors of money but manufacturers of money.
Basic of Credit Creation
The basis of credit money is the bank deposits. The bank deposits are of two kinds viz.,
(1) Primary deposits, and
(2) Derivative deposits.
Primary Deposits:
• Primary deposits arise or formed when cash or cheque is deposited by customers.
• When a person deposits money or cheque, the bank will credit his account.
• The customer is free to withdraw the amount whenever he wants by cheques.
• These deposits are called “primary deposits” or “cash deposits.”
• It is out of these primary deposits that the bank makes loans and advances to its
customers.
• The initiative is taken by the customers themselves. In this case, the role of the bank is
passive.
• So these deposits are also called “passive deposits.” These deposits merely convert
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currency money into deposit money. They do not create money.

• They do not make any net addition to the stock of money. In other words, there is no
increase in the supply of money.
Derivative Deposits:
• Bank deposits also arise when a loan is granted or when a bank discounts a bill or
purchase government securities.
• Deposits which arise on account of granting loan or purchase of assets by a bank are
called “derivative deposits.”
• Since the bank play an active role in the creation of such deposits, they are also known as
“active deposits.”
• Thus, credit creation implies multiplication of bank deposits. Credit creation may be
defined as “the expansion of bank deposits through the process of more loans and
advances and investments.”
Process of Credit Creation
• An important aspect of the credit creating function of the commercial banks is the process
of multiple-expansion of credit.
• The banking system as a whole can create credit which is several times more than the
original increase in the deposits of a bank.
• This process is called the multiple-expansion or multiple-creation of credit.
• Similarly, if there is withdrawal from any one bank, it leads to the process of multiple
contraction of credit.
The process of multiple credit-expansion can be illustrated by assuming:
a) The existence of a number of banks, SBI, BARODA, AXIS etc., each with different sets of
depositors.
b) Every bank has to keep 20% of cash reserves, according to law, and,
c) A new deposit of Rs. 1,000 has been made with SBI to start with.
Limitation on Credit Creation
The commercial banks do not have unlimited power of credit creation. Their power to create
credit is limited by the following factors:
1) Amount of Cash Cash
2) Reserve Ratio
3) Banking Habits of the People
4) Nature of Business Conditions in the Economy
5) Leakages in Credit-Creation
6) Sound Securities
7) Liquidity Preference
8) Monetary Policy of the Central Bank

Role of RBI as a regulator

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 Govt held shares of
nominal value of Rs.2, 20,000.
RBI was nationalized in the year 1949. The general superintendence and direction of the bank
is
entrusted to central Board of Directors of 20 members, the Governor and four deputy
Governors,
one Govt official from the Ministry of finance, ten nominated Directors by the central Govt to
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represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consists of five members each central Govt appointed for a team 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 April1, 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
To operate the credit and currency system of the country to its advantage.

Role of GOI as a regulator of Banking System

Bank regulations are a form of government regulation which subject banks to certain
requirements, restrictions and guidelines. This regulatory structure creates transparency
between banking institutions and the individuals and corporations with whom they conduct
business,
among other things. Given the interconnectedness of the banking industry and the reliance
that the national (and global) economy hold on banks, it is important for regulatory agencies
to maintain control over the standardized practices of these institutions. Supporters of such
regulation often hinge their arguments on the "too big to fail" notion. This holds that many
financial institutions
(particularly investment banks with a commercial arm) hold too much control over the
economy to fail without enormous consequences. This is the premise for government
bailouts, in which government financial assistance is provided to banks or other financial
institutions who appear to be on the brink of collapse. The belief is that without this aid, the
crippled banks would not only become bankrupt, but would create rippling effects throughout
the economy leading to systemic failure.

Objectives of bank regulation

Objectives of bank regulation, and the emphasis, vary between jurisdictions. The most
common objectives are:
1. Prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect
depositors)
2. Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading
conditions for banks causing multiple or major bank failures
3. Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes,
e.g. laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation—to direct credit to favored sectors
6. It may also include rules about treating customers fairly and having corporate social
responsibility (CSR)

General principles of Bank regulation

• Minimum requirements
Requirements are imposed on banks in order to promote the objectives of the regulator.
Often, these requirements are closely tied to the level of risk exposure for a certain sector
of the bank. The most important minimum requirement in banking regulation is
maintaining minimum capital ratios. To some extent, U.S. banks have some leeway in
determining who will supervise and regulate them.
• Supervisory review
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Banks are required to be issued with a bank license by the regulator in order to carry on
business as a bank, and the regulator supervises licensed banks for compliance with the
requirements and responds to breaches of the requirements through obtaining
undertakings, giving directions, imposing penalties or revoking the bank's license.
• Market discipline
The regulator requires banks to publicly disclose financial and other information, and
depositors and other creditors are able to use this information to assess the level of risk
and to make investment decisions. As a result of this, the bank is subject to market
discipline and the regulator can also use market pricing information as an indicator of the
bank's financial health.

Provisions of Banking Regulation Act and Reserve Bank of India Act

This Act applies to following categories of Banks:

• Nationalized Banks
• Non-Nationalized Banks
• Cooperative Banks

Business of banking Companies - Section 6(1) and 6(2) r.w. 56(b)

• Borrowing, raising or taking of money
• Giving advance
• Bills business
• L/C , Bank Guarantee, Indemnity
• Foreign exchange
• Providing safe deposit vaults
• Collecting and transmitting money
• Managing, selling and realizing any property that may come into the possession of the
bank in satisfaction or part satisfaction of any of its dues
• Acquiring, holding and dealing with any property or any right, title or interest in any such
property that may form the security or part of the security for any loans or advances or
which may be connected with such security
• Undertaking and executing trusts
• Acquiring, constructing, maintaining and altering of any building for the purpose of the
bank
• Acquiring and undertaking the whole or part of the business of any person or bank /
company if its nature of business is as per the allowed business for the bank
• Doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the bank
• Any other business the Central Govt. may by notification specify as a allowed business
• Banks are prohibited to do any other business

Cash Reserve (CRR) – Section 18 r. w. 56 (j)

• Every bank is required to keep cash reserve, with itself or by way of balance in the
current account with RBI or Central / District Co-operative Bank or net balance in all
such way, of minimum prescribed % amount of its DTL as of last Friday of fortnight
• A return about this has to be submitted to RBI before 15thof each month about alternate
Friday
Statutory Liquidity Ratio
• Bank shall maintain unencumbered approved securities, valued not exceeding the current
market price, or an amount which shall not be less than 24% of the total of its demand
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and time liabilities (DTL)

Restrictions on loans and advances

• (1) Notwithstanding anything to the contrary contained in section 77 of the Companies
Act, 1956 (1 of 1956), no banking company shall,
• (a) grant any loans or advances on the security of its own shares, or
• (b) enter into any commitment for granting any loan or advance to or on behalf of
• (i) any of its directors,
• (ii) any firm in which any of its directors is interested as partner, manager, employee or
guarantor, or
• (iii) any company [not being a subsidiary of the banking company or a company
registered under section 25 of the Companies Act, 1956 (1 of 1956), or a Government
company] of which 61[or the subsidiary or the holding company of which] any of the
directors of the banking company is a director, managing agent, manager, employee or
guarantor or in which he holds substantial interest, or
• (iv) Any individual in respect of whom any of its directors is a partner or guarantor.

Licensing of banking companies

• Save as hereinafter provided, no company shall carry on banking business in India unless
it holds a license issued in that behalf by the Reserve Bank and any such license may be
issued subject of such conditions as the Reserve Bank may think fit to impose.
• Every banking company in existence on the commencement of this Act, before the expiry
of six months from such commencement, and every other company before commencing
banking business [in India], shall apply in writing to the Reserve Bank for a license under
this section.

Power to publish information

The Reserve Bank or the National Bank, or both, if they consider it in the public interest
so to do, may publish any information obtained by them under this Act in such
consolidated form as they think fit.

Module-2
Banker and customer
Types of relationship between banker and customer
1. General feature of the relation
Commencement of primary general relationship
The primary general relationship between a banker and a customer starts from the time
the customer opens a bank account by depositing money.
Contractual primary general relationship
The primary general relationship between a banker and a customer arises from a contract
between the two. So, it is a contractual relationship. As it is a contractual relationship, it
is governed by the various terms of agreement between the two parties.
Nature of primary general relationship
When a banker receives deposits of money from a customer, he is neither a bailee nor a
trustee nor an agent, but only a debtor of the customer. This view has been endorsed by
several authorities on banking law and also confirmed by many court decisions.
Not a bailee or depositors of customer’s money
A banker is not a bailee or depositary of customer’s money. This is because a bailee
accepts the bailment of certain things on the condition that the things bailed will not be
utilized by him and the identical things will be returned. But a banker doesn’t accept the
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money from the customer on the condition that the money deposited with him will not be
utilized by him and that the identical money (i.e. the same currency notes or coins
deposited with him by the customer) will be returned.
Not a trustee of customer’s money
A banker is not a trustee of the customer’s money. This is because a trustee is required to
use the trust money in accordance with the trust deed, render an account to the
beneficiary for everything he does with the money and is bound to handover the profits
earned from the use of trust money to the beneficiary. But a banker is not bound to
employ the customer’s money in accordance with the terms of any trust deed is not
required to render an account to the customer for everything he does with the money and
is not the use of the customer’s money.
Not an agent in respect of customer’s money
When a banker accepts deposits of money from a customer, he is not an agent of the
customer. This is because an agent is bound to act according to the instructions of the
principal, while investing the principal’s money, render a detailed account for everything
he does with the principal’s money to the principal and is required to handover to the
principal the incomes he earns from the use of principal’s money.
Only a debtor in respect of customer’s money
The banker is just a debtor and the customer is a creditor when he accepts and has the
deposits of the customer. Of course, in case the customer’s account is overdrawn or the
customer has taken loan or any other form of financial accommodation from the banker,
the customer becomes the debtor and the banker becomes the creditor. So, one can
conclude that the primary relationship between a banker and a customer is that of a
debtor and a creditor and their respective positions are determined by the existing state of
the bank account.

Subsidiary feature of the relationship

Bailee and bailer relationship
When a banker accepts valuable and documents form a customer for safe custody, he
becomes a bailee and the customer becomes a bailer.
As a bailee, the banker owes some duties and liabilities to the customer. They are:
a) He is required to safeguard the safe custody deposits of the customer in his hands
with reasonable care.
b) It he fails to take reasonable care in the preservation of the safe custody deposits and
the customers suffers loss as a consequence; he becomes liable to compensate the
customer for the loss.
In this context, it should be noted that the banker is liable only for the losses arising
out of his negligence and not for those losses arising out of reasons beyond his
control, such as fire, burglary, etc. this is because, a banker is only a bailee and not an
insurer of the safe custody deposits left with him.
c) He is required to handover the safe custody deposits to the depositor, whenever he
demands them back.
Trustee and beneficiary relationship
A banker becomes the trustee of his customer, when he is entrusted with some
trust work. For instance, when a customer deposits a certain sum of money with the
banker with specific instructions to use the same for a specific purpose, the bankers
becomes the trustee of the customer in respect of that money until that purpose is
fulfilled.
Agent and principal relationship
When a banker undertakes agency services such as collection cheques, drafts & bills,
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collection of interest and dividends on securities, payment of premium and subscriptions,

purchase and sale of securities, etc, for a customer, he becomes the agent and the
customer becomes the principal.
As an agent the banker owes some duties to the customer they are:
He is required to act in accordance with the instruction of the principal, i.e. the
customer. He is bound to return to the customer all the incomes which he earns as an agents
of the customer.

Banker’s obligation to customers

1. Obligation to honor his customer’s cheques
2. Obligation to maintain the secrecy of the customer’s account
3. Interest rate related complaints.
Banks responsibility
Explain these in writing: give examples
How is interest calculated?
Fixed interest- what is the reset clause?
Floating rate- what is the benchmark used?
Clearly state terms/ conditions in loan document.
Customer’s responsibility
Read before you sign
Do not ignore your doubts-get them clarified
Never sign in blank document
4. Service charges
Bank’s responsibility
Display service charges
Extend concessional rates to special category persons
Have a cap on all charges including interest rate and panel charges
Inform customers of changes; offer option to discontinue facility
Customer’s responsibility
Read all the material sent to you by the bank
Remember
Banks have freedom to set interest rates/ service charges
You have option to choose the bank which offers best rate.
Compare rates-make informed choice.
5. Loan documents, return of securities
Bank’s responsibility
Give customer a complete set of loan agreements and enclosures at time of
sanction/disbursement.
Return the securities as soon as the loan is repaid.
Customer’s obligation
Get a complete set of loan documents from banker
Read the MITC (Most Important Terms and Conditions)
Get securities back as soon as loan is repaid.
6. Recovery of bank dues
Banks responsibility
Place list of recovery agent on website
Ensure recovery agents follow code of conduct
Record all conversations with customers
Customer’s responsibility
Keep your credit card safely
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Be present when card is used by merchant banker

Do not use public computers for internet purchase through credit cards
7. Credit cards
Banks responsibility
Do not issue unsolicited cards-if activated and charged. Pay prescribed
compensation without demur.
Do not issue unsolicited products on cards
Delivery of cards and PINs only to person concerned
Stop lost cards immediately on report of loss.
Consider insurance on lost cards
Send statements on time; use e-statements, SMS alerts, etc to keep the card
holder informed of payments, due dates, etc.
Customer’s responsibility
Keep your credit card safely
Be present when card is used by merchant banker
Do not use public computers for internet purchase through credit cards
Keep credit card number and help line detail in hand
Report immediately if you loss card the card
If you don’t want a card, cut it and send it back to the credit card issuing
authority.
8. ATMs
Banks responsibility
Ensure ATMs are in working mode at all time
Have CCTV in all ATMs
Check audit trails periodically
Check cash handling processes and procedures
Check for quality of notes stacked in the ATMs.
Customer’s responsibility
Keep ATM cards safely
Don’t keep the PIN with the card
Inform discrepancy immediately if possible with the witness of the security
guard.
9. Cheque drop facility
Banks responsibility
Remember-cheque drop facility is only an alternate mode of cheque
collection.
Box should bear legend indication that it is an alternate mode and that
customer can get acknowledgement if required.
Install automatic cheque acknowledging machines which give receipt of
dropping the cheque.
Customer’s responsibility
Insists and obtain acknowledgement for cheques if you want them
10. Cheque collection
Bank’s responsibility
Display bank’s cheque collection policy
Adhere to the displayed policy
Inform discrepancy immediately if possible with the witness of the security
guard.
9. Cheque drop facility
Banks responsibility
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Remember-cheque drop facility is only an alternate mode of cheque

collection.
Box should bear legend indication that it is an alternate mode and that
customer can get acknowledgement if required.
Install automatic cheque acknowledging machines which give receipt of
dropping the cheque.
Customer’s responsibility
Insists and obtain acknowledgement for cheques if you want them
10. Cheque collection
Bank’s responsibility
Display bank’s cheque collection policy
Adhere to the displayed policy
Levy charges as per RBI stipulations
Levy charges as per RBI stipulations
Compensate customer without waiting for request for any delay
Customer’s responsibility
Read the cheque collection policy
Insist and obtain admissible compensation for delay.

Right of lien
The legal right of a creditor to sell the collateral property of a debtor who fails to meet the
obligations of a loan contract. A lien exists, for example, when an individual takes out an
automobile loan.
The condition of the right are:
1. The agent should be lawfully entitled to receive from the principal a sum of money by way
of commission earned or disbursements made or services rendered in the proper execution of
the business of agency.
2. The property over which the lien to be exercised should belong to the principal and it
should have been received by the agent. The property is considered to be sufficient in the
possession of the agent where he has been dealing with it. Thus where an auctioneer was
engaged to sell
furniture at the owner’s house, he was held to be sufficiently in possession to exercise lien for
his commission. The property held by an agent for a special purpose implicitly excludes the
right. Similarly, where possession is obtained without the principal’s authority or by fraud or
misrepresentation, there is no lien, briefly, the agent’s possession must be lawful.
3. The agent has only a particular lien. A particular lien attached only to that specific-matter
in respect of which the charges are due. No other property can be retained.

Right of Setoff
• Set-off means- that the bank can adjust the credit balance in a customer's account against
a debit balance in another account maintained by the same customer.
• In an ongoing, situation, the right of set-off can be exercised by a banker- by serving a
reasonable notice on the customer.
• The right of set-off can be exercised by the banker only when the relationship between
the customer and the banker is that of- Debtor and Creditor.
• The banker can exercised the right of set-off only in respect of- debts due and
determined.
• The following condition are required to be fulfilled before a banker can exercise the right
of set-off- (a)The debt must be a sum certain and due immediately, (b) The debt must
be due by and to the same parties and the in the same right, (c) There should be
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no agreement to the contrary.

• The right to set-off account arise immediately in the following cases- (a) On the death,
mental incapacity or insolvency of a customer, (b) On the insolvency of a firm, or on the
liquidation of a company, (c) On the receipt of garnishee order.
• The right of set-off is available to the banker only in respect of- credit balance held in a
customer's account
• The right of set-off is available to the banker only in respect of- credit balance held in a
customer's account.
• In case of time barred debt- the bank can exercise the right of set-off provided the
debts are due in the same sight.
• Money held in a fixed deposit account may be set-off against an overdraft allowed to the
same customer- only after the fixed deposit has matured for payment.
• For exercising the right of set-off- no document is required to be obtained from the
customer.

Right of appropriation
1. The act of setting aside money for a specific purpose. A company or a government
appropriates funds in order to delegate cash for the necessities of its business operations. This
may occur for any of the functions of a business, including setting aside funds for employee
salaries, research and development, dividends and all other uses of cash. Federal funds must
be
appropriated each year for government programs.
In business use, may also be known as "capital allocation."
2. The claiming of land or intellectual property by a company or organization, or otherwise
marking ownership of previously unclaimed or contested property..
Banker’s legal duty of disclosure and related matters
The banker's duty of confidentiality to the customer
It is an implied term of the contract between customers and their banks and building societies
that these firms will keep their customers’ information confidential. This confidentiality is
not just confined to account transactions – it extends to all the information that the bank has
about the customer. But from time to time, mistakes happen and – for whatever reason –
banks end up releasing information that they should have kept secret. Sometimes, the
resulting breach of confidentiality is little more than technical (in other words, nothing really
flows from it), but occasionally it can have major consequences.

The Tournier principles

First of all, a banker’s duty of confidentiality is not absolute. The 1924 case of Tournier v
National Provincial and Union Bank of England sets out four areas where a bank can legally
disclose information about its customer. These principles still hold good today and are:
• Where the bank is compelled by law to disclose the information
• if the bank has a public duty to disclose the information
• if the bank’s own interests require disclosure; and
• Where the customer has agreed to the information being disclosed.
If we decide that a bank disclosed information under one or more of these circumstances,
then we are unlikely to interfere. But most of the complaints we receive involve situations
where the bank should not have disclosed information – because none of the Tournier
principles applied.
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Liability
If a bank discloses information about a customer in any circumstances other than those
described above, then it has acted wrongly and should, as a general rule, be held liable for the
reasonably foreseeable consequences of its action. Some banks seem to think it should make
a difference if they disclosed the information by accident – but it does not. If a bank’s
carelessness leads to abreach of confidentiality that does not diminish the fact that the bank
acted in breach of a fundamental duty it owed to its customer.
It is relatively rare for us to come across a case where information was disclosed deliberately.
Mostly, it happens by accident.

Consequences of a breach of confidentiality

Customers rightly expect high standards from their banks and building societies. So if they
discover that their private information has been wrongly divulged to someone else, they can
become very unhappy – even if the disclosure has resulted in little more than minor
frustration or embarrassment.
But even a minor mistake by a bank can lead to significant problems – particularly if the
customer is running a business. We have seen cases where simple clerical errors have led to
serious business losses.
The important point here is for the bank to look at the consequences of its actions for the
customer – and to distinguish clearly between "loss" and "distress and inconvenience". All
too often we find that banks fail to do this properly. Even where they accept they have done
something wrong, they often try to settle the matter by offering the customer some money
without first assessing either:
Whether the customer has experienced a true (and reasonably foreseeable) financial loss; or
The real extent to which the customer has suffered distress, embarrassment, or
inconvenience.

Loss
Both banks and customers need to take a realistic look at any real losses resulting from the
bank’s breach of confidentiality. The bank should generally be liable for losses that it could
reasonably have foreseen when it disclosed the information.
In our experience, banks regularly fail to pay proper attention to the true costs that customers
can incur as a direct result of the breach of confidentiality. The key, therefore, is for both
parties to analyse and understand the true effects of the bank’s actions.

Distress and inconvenience

Occasionally, customers who have experienced minimal or no financial loss feel that their
"good name" has been "irreparably damaged" by what has happened. They may go on to
claim large sums of money as compensation, perhaps quoting high-profile court cases.
However, we take a more balanced view.
In exceptional circumstances we might award compensation of some hundreds of pounds for
significant breaches of confidentiality. But any compensation we award is generally far more
modest. Minor mistakes will warrant little more than a nominal payment, if any.
When assessing compensation for distress and inconvenience we follow the approach
outlined in our technical briefing note awards for non-financial loss.

Customers account with banks

Opening
Savings Bank Account
A Savings bank account is the most common operating account for individuals and others for
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non-commercial transactions. A Savings account helps people to put through day-to-day

banking transactions besides earning some return on the savings made. Banks generally put
some ceilings on the total number of withdrawals permitted during specific time periods.
Banks also stipulate certain minimum balance to be maintained in savings accounts.
Normally a higher minimum balance is stipulated in cheque operated accounts as compared
to non-cheque operated accounts. Banks as a rule do not give overdraft facility in a saving
account, but allow occasional overdrawing to meet contingencies.

Who can open a Savings Account?

* By a person in his / her name;
* By two or more persons in their joint names payable to:
- Both or all of them or the survivor or survivors of them; OR
- Either or any more of them or the survivor or the survivors of them; OR
- Former / latter or survivor of a particular person during his lifetime or survivors jointly or
survivor.
* Certain non-profit welfare organizations are also permitted to open Savings bank accounts
with banks.

What a bank asks for while opening an account?

Banks are required to know true identity of the person wanting to open an account. Banks
also seek introduction of the person from an existing account holder. Banks require
photograph of the person to be kept on record for future identification purpose. In terms of
government notification w.e.f. 01.11.1998, banks have to obtain PAN numbers (issued by
Income Tax Dept.) of the
account holder at the time of opening of the account. In the absence of PAN number
customer should give a declaration in the prescribed format (form no.60 or 61 as the case
may be).

What the Customer needs to know while opening a Savings Account?

Ask the bank officials about :
• Minimum balance requirements.
• Penal provisions if the balance falls below the minimum stipulated amounts or return of
Cheques issued or instruments sent on collection.
• Collection facilities etc. offered and charges applicable.
• Details of charges, if any for issue of cheque books and limits fixed on number of
withdrawals, cash drawings, etc.

Fixed or Time Deposits

Time deposits are deposits accepted by banks for a specified period of time. In terms of RBI
directives the minimum period for which term deposits can be accepted is 15 days. The banks
generally do not accept deposits for periods longer than 10 years.
1. Banks pay interest on term deposits based on the period of deposits and normally pay
higher interest for longer term deposits.
2. Banks have full discretion to fix their interest rates on deposits and these rates are varied
from time to time depending on market conditions.

Opening of a time deposit Account

Normally the requirements as given under savings bank account apply to time deposits also.
However, photographs are not insisted for deposits below Rs.10,000/-. Also the requirements
regarding furnishing of PAN number applies only to time deposits over Rs.50,000/- made in
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cash.
Time deposits - Product variations
To suit the needs of the customers banks have introduced innovative variations in the basic
timedeposit format. Flexible deposit is one such innovation. In this case a given deposit is
split into units of smaller amounts for accounting purposes. This enables the customer to
encash any number of units prematurely at any time during the currency of the deposit and
earn the contracted rate of interest on the balance amount.

Current Account
Current accounts are cheque operated accounts maintained for mainly business purposes.
Unlike savings bank account no limits are fixed by banks on the number of transactions
permitted in the Account. Banks generally insist on a higher minimum balance to be
maintained in current account. Considering the large number of transactions in the account
and volatile nature ofbalances maintained overnight banks generally levy certain service
charges for operating a Current account.
In terms of RBI directive banks are not allowed to pay any interest on the balances
maintained in Current accounts. However, legal heirs of a deceased person are paid interest at
the rates applicable to Savings bank deposit from the date of death of the account holder till
the date of settlement.

KYC and Operation

• KYC (Know Your Customer) is a framework for banks which enables them to know /
understand the customers and their financial dealings to be able to serve them better.
• Banking operations are susceptible to the risks of money laundering and terrorist
financing. Therefore, banks are advised to follow certain customer identification procedure
for opening of accounts and monitoring transactions of a suspicious nature for the purpose of
reporting it to appropriate authority.
• Reserve Bank of India has advised banks to make the Know Your Customer (KYC)
procedures mandatory while opening and operating the accounts and has issued the
KYC guidelines under Section 35 (A) of the Banking Regulation Act, 1949.
• Any contravention of the same will attract penalties under the relevant provisions of
the Act. Thus, the Bank has to be fully compliant with the provisions of the KYC
procedures.

When does KYC apply?

Opening a new account.
In respect of accounts where documents as per current KYC standards have not been
submitted while opening the initial account.
Opening a Locker Facility where these documents are not available with the Bank for all
the Locker facility holders.
When the Bank feels it necessary to obtain additional information from existing
customers based on conduct of account.
When there are changes to signatories, mandate holders, beneficial owners etc.
For non-account holders approaching the Bank for high value one-off transactions like
Drafts, Remittances etc.

Advantages of KYC
• Sound KYC procedures have particular relevance to the safety and soundness of
banks, in that:
1. They help to protect banks’ reputation and the integrity of banking systems by reducing
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the likelihood of banks becoming a vehicle for or a victim of financial crime and
suffering consequential reputational damage;
2. They provide an essential part of sound risk management system (basis for identifying,
limiting and controlling risk exposures in assets & liabilities

Objective of KYC guidelines

• To prevent banks from being used, intentionally or unintentionally, by criminal
elements for money laundering activities. KYC procedures also enable banks to
know/understand their customers and their financial dealings better which in turn help
them manage their risks prudently.
4 key elements of KYC policies
1) Customer Acceptance Policy;
2) Customer Identification Procedures;
3) Monitoring of Transactions; and
4) Risk management

Types of Account
One of the main functions of a commercial bank is to accept deposits of money from the
public. The deposit accepted by a bank may be classifies into two broad categories
Time Deposits Demand Deposits
1. Fixed Deposits 1. Savings Deposits
2. Recurring Deposits 2. Current Deposits
Time Deposits
The time deposits are repayable after expiry of a fixed specified period time while demand
deposits are repayable on demand.
i) Fixed deposits
Fixed deposits are those deposits, which are repayable after the expiry of a fixed
specified period of time. They are also called time deposits. The time or period of
deposit may vary from fifteen days to several years. This period decided by the
depositor according to his convenience. The rate of interest is usually higher than
other types of deposits. The rate of interest on fixed deposit depends on period of
deposit; the longer the period of deposit, the higher will be the rate of interest. The
RBI decides the interest rate. On the deposit being made, the banker issues a ‘deposit
receipts’
ii) Recurring deposit
Recurring deposits are variants of fixed deposits. Recurring deposits are also
repayable only after the expiry of a fixed specified period of time but the amount is
deposited in monthly installments. These deposits are meant for people having regular
monthly income. The duration of recurring deposits varies from six months to several
years. Generally the rate of interest on these deposits is higher.

Demand Deposits
i) Savings Deposits
Savings bank accounts are introduced by banks to mobilize small savings and
inculcate the habit of savings in the people. These deposits are repayable on demand,
but bank places certain restrictions on the number of withdrawals. These deposits can
be opened with very small amount. The prescribed minimum balance is different in
different banks. Interests is paid on monthly minimum balances and credited to the
respective accounts half yearly according to the rates prescribed by the RBI from time
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to time.
ii) Current Accounts or Current Deposits
Current accounts are those deposits, which are repayable on demand. There are no
restrictions on the number of withdrawals. The bank don’t pay interest on current
account or deposits, instead they change incidental charge on customers having
current account. This type of deposit is suitable for businessmen who want to make
payments by means of cheques.

Types of customers
Lunatics
A lunatic is person of unsound mind (irresponsible person). The position of lunatics
under Indian law, Under Indian contract Act, a contract with or by a lunatic are void. The
reason being the lunatic being of unsound mind is not competent to comprehend a contract.
If the banker without knowing that the person is lunatic opens an account and enters into
a contract acting in good faith is protected. But when once he gets a notice of lunacy of a
person, he should not entertain any contract either existing or new.
Drunkards
Under section 12 of Indian contract Act 1872, a sane man who is delirious from favor or
who is drunk that he can’t under the contract, or form rational judgment can’t enter into
contract while delirium or drunkenness lasts. When a customer who is drunk presents a
cheque across a counter the payment must be witnessed.
Minors
Under section 3 of the Indian majority act, 1875, a minor is a person who has not
completed the age of 18 years. In case a guardian to the person or property of minor is
appointed by the court, or the property of the minor is placed under the charge of court wards
before he completes the age of 18 years, he continues to be a minor until he completes the
age of 21 years.
Married women
The law that exists today in India doesn’t make any distinction between the contractual
capacity of a man or an unmarried lady and a married woman. So, a married woman enjoys
the same contractual capacity as a man or an unmarried lady. She can acquire and sell
property, lend or borrow and enter into contracts and bind her personal or separate property
called “Stridhan”.
Partnership firm
Section 4 of partnership act 1932, defines partnership as “the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all”.So, a partnership is an association of two or more persons who agree to carry on a
business jointly and share the profits of that business. The person who form the partnership
are called “partners” individually and a “firm” collectively. The name under which they carry
on the business is called “firm name”. They can open the account in their firm’s name.
Joint stock companies (Public Limited Companies)
A joint stock company is an association of persons under the companies act. It is an
artificial person created by law with perpetual succession and common seal. A joint stock
company is a separate legal entity. So, a bank account can be opened in its name.
However, while opening and maintaining an account in the name of public limited company,
a banker has to be very careful. He is required to take the following precautions in dealing
with a public limited company:
1. He should call for and examine the original certificate of incorporation to ascertain
whether the company is legally incorporated or not. The certificate of incorporation is the
conclusive proof of the incorporation of the company.
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It is also advisable for the banker to obtain and retain under his custody a certified copy
of the incorporation certificate for his future reference.
2. He should obtain a certified copy of the memorandum of association of the company as
amended up to date and ascertain the objects for which the company is formed, the
authorized capital of the company and the liability of the members of the company. A
knowledge of the objects of the company as specified in the Memorandum of association
is absolutely necessary for the banker, because any act done, or contract entered by the
company, which is outside the scope of the objects, is ultra-virus, (i.e. beyond the powers
of company) and is, therefore not binding on the company.
Trustee
Section 3 of Indian Trust contact Act, 1882 defines a trust as an obligation annexed to the
ownership of property and arising out of a confidence reposed in and accepted by the owner
or
declared and accepted by him for the benefit of another or of another and the owner” so, a
trustee
is person to whom the management of a property is entrusted by one in trust, i.e. out of
confidence reposed in him, for the benefit of another. In short, a trustee is one who manages a
trust.

Nomination
Nomination is a facility that enables a deposit account holder(s) (individual or sole
proprietor) or safe deposit locker holder(s) to nominate an individual, who can claim the
proceeds of thedeposit account(s) or contents of the safe deposit locker(s), post the demise of
the original depositor(s) or locker holder(s).

Benefit of nomination
The benefit of nomination is that in the event of death of an account holder(s) or locker
holder(s), the Bank can release the account proceeds or contents of the locker to the
nominee(s) without insisting upon a Succession Certificate, Letter of Administration or Court
Order. The nominee holds the monies in the capacity of a Trustee on behalf of the legal heirs
of the deceased account holder(s) or locker holder(s) and the Bank's liability is duly
discharged on payment to the Nominee.

Who can nominate?

• Bank account holders having deposit accounts in their individual names or in joint names
of two or more individuals can appoint a nominee to their accounts.
• A sole proprietor can appoint a nominee to the sole proprietorship account with the bank.
• In the case of a deposit account in the name of a minor, nomination shall be made by a
person lawfully entitled to act on behalf of the minor in respect of a deposit account.
• Safe deposit locker holder(s) can appoint nominee(s) on their Safe deposit locker(s).
• A nomination can be made only in respect of a deposit account which is held in the
individual capacity of the depositor, and not in any representative capacity such as the
holder of an office like Director of a Company, Secretary of an Association, partner of a
firm, or Karta of an HUF.

How can register a nomination?

Specific nomination forms need to be completed and submitted to the Bank for registering the
nomination facility. Different forms are applicable to register nominations on deposit
accounts and safe deposit lockers. The Bank will acknowledge receipt of the nomination form
and send a confirmation of having recorded the same. This confirmation must be kept
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securely either with the deposit account holder or with the nominee, if the account holder so
wishes

Settlement of death claims

An announcement of death in newspaper, production of a death certificate or a report from a
reliable source etc., will be sufficient notice to the Bank about the death of the Account
Holder.
As soon as the Branch becomes aware of the death of the A/C Holder, it will record the fact
in the relevant account in the system and stop operation in the A/C.
Intimation to the Nominee, if any:
If the deceased A/C holder had appointed a nominee, a letter will be issued to the nominee
informing him/her about the death of the account holder.
Further operation in the Account:
Further operation in the different types of account will be allowed as follows:-
a) Individual A/Cs:
No further cheques should be paid even though they be dated prior to the date of death of the
A/C holder.
b) Joint A/Cs:
If the balance is payable to the survivor(s), cheques signed by the survivor(s) may be paid to
the debit of the a/c, but it is preferable that survivor(s) is/are advised to close the a/c and
transfer the balance to a new a/c in his/her/their name(s)., Fresh Account Opening Form duly
filled in and signed by the survivor(s) should be obtained. If the balance is not payable to the
survivor(s), the a/c should be stopped.
c) Proprietary A/Cs:
No further cheques should be paid even though they be dated prior to the date of death of the
A/C holder.
d) Partnership A/Cs:
The death of a partner has, ordinarily, the legal effect of dissolving the firm. The surviving
partner(s) can, however, operate the A/C for the purpose of winding up; and any cheques
drawn by the surviving partner(s) can be paid. Cheques drawn by the deceased partner and
presented after his death, should not be paid. The branches should request the surviving
partner(s) to close the a/c by drawing a cheque signed by all of them and open a new a/c
through which all further transactions may be passed.
e) Joint Hindu Family Firm A/c:-
In case of death of the Karta, the operation in A/c should be stopped.
f) Trust A/cs.:-
The Trustees have to act jointly unless there is an express provision to the contrary in the
Trust Deed. In case of death of any, trustee, the operation on the a/c should be stopped unless
the,relative Trust Deed confers express powers on the surviving trustee to act. In the absence
of any specific provision in the Trust Deed, it is not safe for the Bank to assume that the
surviving trustees possess full powers to deal with the A/C. Branches should, therefore, not
allow the surviving trustees to operate on the a/c or withdraw the balance. In case of death of
sole trustee, operation on the A/C should be immediately stopped.
g) Executor’s and Administrator’s A/C: -
On the death of an executor or administrator unless otherwise provided for the in the Will or
Probate or Letter of Administration, all the powers of the office bearers become vested in the
surviving executors or administrators. ,
The a/c should be allowed to be operated by co-executor(s), but the cheques signed by the
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deceased executor or administrator and presented after notice of his death should not be paid
in the a/c. In case of death of a sole Executor or Administrator, it will be necessary to obtain
fresh order of the court appointing a new Administrator.
h) Limited Company’s A/Cs:
Where notice of death is received in respect of a person who is authorized to operate an A/C
of a Limited Co., outstanding cheques drawn by such person of the Company can still be
paid. The Board resolution submitted by the Company regarding the operation of its A/C
should be
examined by the branch to see whether any amendment or new resolution is necessary.
i) Association, Society, club A/c.:
The instructions given in respect of Limited Company‘s A/Cs shall also apply to A/Cs of
Association, Society, Club etc.
j) Accounts operated by a holder of Power of Attorney or Letter of Mandate:
Upon the death of the principal, the authority of Attorney or Mandate holder stands cancelled.
The operation on the a/c should be immediately stopped and no cheques signed by
Attorney/Mandate holder should be paid after receipt of notice of death of the Principal.

Module 3
The Negotiable Instruments Act 1881

Meaning

“A negotiable instrument means a promissory note, bill of exchange or cheque payable

either to order or to bearer”.

Features of Negotiable Instruments

 Easy Transferability- A negotiable instrument is freely transferable. Usually, when we

transfer any property to somebody, we are required to make a transfer deed, get it registered,
pay stamp duty, etc. But, such formalities are not required while transferring a negotiable
instrument. The ownership is changed by mere delivery (when payable to the bearer) or by
valid endorsement and delivery (when payable to order). Further, while transferring it is also
not required to give a notice to the previous holder.
 Title- Negotiability confers absolute and good title on the transferee. It means that a
person who receives a negotiable instrument has a clear and undisputable title to the
instrument. However, the title of the receiver will be absolute, only if he has got the
instrument in good faith and for a consideration. Also the receiver should have no knowledge
of the previous holder having any defect in his title. Such a person is known as holder in due
course.
 Must be in writing- A negotiable instrument must be in writing. This includes
handwriting, typing, computer print out and engraving, etc.
 Unconditional Order- In every negotiable instrument there must be an unconditional
order or promise for payment.
 Payment- The instrument must involve payment of a certain sum of money only and
nothing else. For example, one cannot make a promissory note on assets, securities, or goods.
 The time of payment must be certain- It means that the instrument must be payable at a
time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a
negotiable instrument. However, if the time of payment is linked to the death of a person, it is
nevertheless a negotiable instrument as death is certain, though the time thereof is not.
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 The payee must be a certain person- It means that the person in whose favor the
instrument is made must be named or described with reasonable certainty. The term ‘person’
includes individual, body corporate, trade unions, even secretary, director or chairman of an
institution. The payee can also be more than one person.
 Signature- A negotiable instrument must bear the signature of its maker. Without the
signature of the drawer or the maker, the instrument shall not be a valid one.
 Delivery- Delivery of the instrument is essential. Any negotiable instrument like a cheque
or a promissory note is not complete till it is delivered to its payee. For example, you may
issue a cheque in your brother’s name but it is not a negotiable instrument till it is given to
your brother.
 Stamping- Stamping of Bills of Exchange and Promissory Notes is mandatory. This is
required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of
the pronote or bill and the time of their payment.
 Right ot file suit- The transferee of a negotiable instrument is entitled to file a suit in his
own name for enforcing any right or claim on the basis of the instrument.
 Notice of transfer- It is not necessary to give notice of transfer of a negotiable
instrument to the party liable to pay.
 Presumptions- Certain presumptions apply to all negotiable instruments, for example
consideration is presumed to have passed between the transferor and the transferee.
 Procedure for suits- In India a special procedure is provided for suits on promissory
notes and bills of exchange.
 Number of transfer- These instruments can be transferred indefinitely till they are at
maturity.
 Rule of evidence- These instruments are in writing and signed by the parties, they are
used as evidence of the fact of indebtness because they have special rules of evidence.
 Exchange- These instruments relate to payment of certain money in legal tender, they are
considered as substitutes for money and are accepted in exchange off goods because cash can
be obtained at any moment by paying a small commission.

Important concept and explanations under the Negotiable Instruments Act

 The Paying Banker

The bank on which a cheque is drawn (the bank whose name is printed on the cheque) and
which pays the amount for which the cheque is written and deducts that sum from the
customer's account.
A Banker who holds the account of the drawer of the cheque and is obliged to make payment,
if the funds of the customer are sufficient to cover the amount of he cheque drawn or if
overdrawing facility is given to the customer.

 Cheque
A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. That is the drawer directs the bank to pay a certain
sum to payee on his demand.

A bill of exchange is an instrument in writing containing an unconditional order, signed by

the maker, directing the banker to pay a certain sum of money only to or to the order of a
certain person or to the bearer of the instrument
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Rules
1. All Cheques are bill of exchange but all bill of exchanges are not Cheques.
2. Usually banks provide their customers with printed cheque forms which are filled up and
signed by the drawer.
3. The signatures must tally with specimen signature of the drawer kept in the bank.
4. A cheque must be dated.
5. A cheque becomes due for payment on the date specified in it.
6. A cheque drawn on a future date is valid but it is payable on and after the date specified.
Such Cheques are called postdated Cheques.

Essentials of a Cheque
1. It must be unconditional order
2. It must be in writing
3. It must be drawn on a specified banker
4. it must be signed by the drawer
5. The order must be for the payment of a certain sum of money only
6. Drawer, drawee and payee must be certain
7. The payee must be certain
8. The amount must be payable on demand

Dishonor of Cheques

 Dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to the
payee. Whenever the cheque is dishonoured, the drawee bank instantly issues a
'Cheque Return Memo' to the payee banker specifying the reasons for dishonor

 A negotiable instrument may be dishonored by non-payment or non-acceptance.

 A cheque and promissory note may be dishonored by non-payment
 A bill of exchange may be dishonored either by;
1. Non acceptance or by
2. Nonpayment
1. Dishonor by Non Acceptance
A bill of exchange is said to be dishonored by any one of the following reasons;
a) If the drawee does not accept the bill within 48 hrs from the time of presentment
b) If there are several drawees and all of them do not accept
c) When the presentment of acceptance is excused, and the bill is not accepted. (Say some
excuse for acceptance)
d) When drawee become insolvent or died
e) When the drawee gives a limited acceptance
f) When the drawee is incompetent to contract
g) When the drawee is a fictitious person
2. Dishonour by Non-Payment
A promissory note, bill of exchange, or cheque is said to be dishonoured by nonpayment if
the
maker fails to make payment on the date of maturity.
A cheque is dishonored by non payment as soon as a banker refuses to pay.

Notice of dishonour
When a negotiable instrument is dishonoured the holder must give notice of dishonour to
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all the prior parties

Notice by whom?
1. Notice by holder or any other a party
2. Chain method of notice of dishonour
3. Notice by principal or agent

Form of Notice
1. It may be oral or written
2. Clearly indicate the reason for dishonour
3. It must be given within in a reasonable time
Circumstances when a banker is bound to dishonour of a cheque
1. When customer countermands payments
2.Garnishee order (issued by high court)
3. Death, Insolvency or insanity of the customer
4. Notice of assignment (letter to transfer)
5. Defective title of the party
6. Loss of cheque
7. Postdated or stale cheque
8. When the cheque is irregular (may change cheque book, any information missing)
9. Closing of account
10. On transfer of accounts 10. On transfer of accounts
11. When a cheque is Mutilated (Torn)
12. When there is material alteration
13. When the amount in words and figures differs
14. If the cheque is undated
15. The cheque is not presented in banking hours

 Negotiation
It is the transfer of an instrument from one person to another in such a manner so as to
convey
the title and constitute the transferee the holder thereof. It may be;
a. Negotiable by mere delivery
Payable even to agent to keep it for payee
b. Negotiable by endorsement and delivery
Unless the holder signs his endorsement on the instrument, the transferee does not become a
holder.

 Endorsement
The literal meaning of the word endorsement is writing on the back of an instrument. Under
the
NI Act, it means, writing of the name of the endorsee on the back of the instrument by the
endorser under his signature with the object of transferring the rights therein. If an instrument
is fully covered with endorsements and no space is left, further endorsement can be made on
a slip of paper (called alonge) annexed thereto

Kind of Endorsement
1. Blank or general endorsement
Just put the signature of endorser without mention the name of endorsee
Eg: sd/-
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D.Mohan
2. Special or full endorsement
Including the name of endorsee
Eg: Pay to Ghosh or order sd/-
D.Mohan
3. Restrictive endorsement
An endorsement, when it prohibits or restricts the further negotiation of the
instrument.
Eg: pay to Ghosh only sd/-
D.Mohan

4. Conditional or Qualified
An endorsement is conditional or qualified if it limits or negates the liability of the endorser
Eg: pay to ghosh on Signing a receipt Sd/-
D.mohan
5. Partial endorsement
When an endorser endorses only a part of the amount mentioned in the instrument. it is
irregular

 The collecting Banker

A Collecting Banker is one who undertakes to collect various types of instruments
representing
money in favour of his customer or his own behalf from the drawers of these instruments;
some
are negotiable instruments as provided for in the negotiable instruments Act. 1881 and some
are
quasi negotiable instruments

Duties & Responsibilities of Collecting Bankers:

1. Acting as agent: While collecting an instrument, whether for credit to customer’s
account or for himself, the Bankers works as agent of his customer. As an agent he has
generally to take such steps & precautions to protect the interest or his customer as a man
of ordinary prudence would take to safe-guard his own interest.
2. Scrutinizing the instruments: Name of the holder, Branch name, date, amount in world
and
figure, any cutting without signature, material alteration of any to be checked carefully.
3. Checking the endorsement: Bankers has to check the instrument whether it has been
endorsed properly.
4. Presenting the instrument in due time: It is the responsibility of the collecting bank to
present the instrument in due time to the paying bank.
5. Collecting the proceeds in the payee’s account: It is the duty of collecting banks to
collect and credit the proceed of the instruments to the proper/correct account.
6. Notice of dishonor and returning the instruments: If any instrument is dishonored by
the paying bank it should be informed to the customer on the business day following the
receipt of the unpaid instruments.

Collecting Banker’s Protection:

Under section 131 of negotiable instrument Act the collecting banker is not liable to the true
owner of a cheque or a banker’s draft if his title to the instrument proves defective provided
the
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cheque or draft was one crossed generally or specially to himself and collected for a customer
is
good faith and without negligence.
The above statutory protection is available to the collecting banker only if he fulfills the
following conditions:
• The cheque he collected is a crossed cheque.
• He collected such crossed cheque only for his customer as an agent & not as a holder for
value.
• He collected such crossed cheque in good faith and without negligence

 Negligence
There are a variety of ways in which a bank can be considered to be negligent in undertaking
its
duties towards its customers, many of which are noted in the discussion above by implication.
In
broad terms, for the customer to raise the issue, it will be necessary to challenge the
efficiency of the security mechanisms put in place by the bank or offer a credible alternative
explanation for what happened.

 Bill of exchange
A bill of exchange is an instrument in writing containing the unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to or to the order of
a certain person or to the bearer of the instrument”.
Three parties:
• The maker of bill of exchange is called the drawer.
• The person who is directed to pay is called the drawee.
• The person who will receive the money is called the payee

Specimen of bill of exchange

 Rs 5000 Place.
Date.
On demand pay to Rajesh or order, the sum of Rs 5000/- (Rupees Five thousand only) for
value
received.
To Ajith Sd- Stamp
(Address) Babu
Here Babu is the drawer
 Ajith is the drawee (Acceptor)
 Rajesh is the payee

Essentials of bill of exchange

• The instrument must be in writing.
• The instrument must contain an order to pay.
• There must be three parties.
• The instrument must be signed by the drawer.
• The amount of money to be paid must be certain.
• The payee must be certain.
• It must comply with the formalities as regards date, stamp etc
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 Promissory note
“A promissory note is an instrument in writing containing an unconditional undertaking
signed
by the maker, to pay a certain sum of money only to or to the order of a certain person or to
the
bearer of the instrument”.
Two parties:
 The person who makes the promissory note and promises to pay is called the maker.
 The person to whom the payment is to be made is called the payee.

Essentials of a promissory note

1. Pro notes must be in writing
2. A Promise to pay must be express.
3. Definite and unconditional
4. To be signed by the maker
5. Certainty in the case of parties.
6. Certainty in the case of sum of money
7. Promise to pay money only
8. Formalities are not essential. Formalities like time, place registration Number etc is not
required. But it must be stamped as per stamp act.
9. It may be payable on demand or after a definite period of time - Where there is no time is
mentioned the note is payable on demand.
Discharge of negotiable instruments
 An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable.
 This would happen when the party who is ultimately liable on the instrument is
discharged from liability.
 In such a case even in holder in due course does not acquire any right under the
instrument
Modes of Discharge
1. by payment.
2. By Debtor as a holder
2. By express waiver- holder gives up his right.
3. By cancellation-holder may cancel the instrument.
4. by material alteration or lapse of time.
Discharge of a party or parties
1. By payment
2. By cancellation
3. By release (let loose)
4. By allowing drawee more than 48 hours
5. By delay in presentment of cheque
6. Cheque payable to order (fraudlent payee)
7. By operation of law
8. By material alteration
9. By taking limited acceptance
10. By not giving notice of dishonor

 Hundis
A hundi is a financial instrument that developed in Medieval India for use in trade and credit
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transactions. Hundis are used as a form of remittance instrument to transfer money from
place to
place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in
trade
transactions.

Types of Hundis
a.Sahyog Hundi: This is drawn by one merchant on another, asking the latter to pay the
amount to a third merchant. In this case the merchant on whom the hundi is drawn is of some
'credit worthiness' in the market and is known in the bazaar. A sahyog hundi passes from one
hand to another till it reaches the final recipient, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment. Sahyog means co-operation in Hindi and
Gujrati, the predominant languages of traders. The hundi is so named because it required the
co-operation of multiple parties to ensure that the hundi has an acceptable risk and fairly
good likelihood of being paid, in the absence of a formalized credit monitoring and reporting
framework.
b.Darshani Hundi: This is a hundi payable on sight. It must be presented for payment
within a reasonable time after its receipt by the holder. Thus, it is similar to a demand bill.
c.Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.

Module 4
Banking Technology
A. Concept of universal banking
Universal banking is a combination of Commercial banking, Investment banking,
Development
banking, Insurance and many other financial activities. It is a place where all financial
products
are available under one roof. So, a universal bank is a bank which offers commercial bank
functions plus other functions such as Merchant Banking, Mutual Funds, Factoring, Credit
cards,
Housing Finance, Auto loans, Retail loans, Insurance, etc.
Advantages of Universal Banking
 Investors' Trust: Universal banks hold stakes (equity shares) of many companies. These
companies can easily get other investors to invest in their business. This is because other
investors have full confidence and faith in the Universal banks. They know that the
Universal banks will closely watch all the activities of the companies in which they hold a
stake.
 Economics of Scale: Universal banking results in economic efficiency. That is, it results
in lower costs, higher output and better products and services. In India, RBI is in favour
of universal banking because it results in economies of scale.
 Resource Utilization: Universal banks use their client's resources as per the client's
ability to take a risk. If the client has a high risk taking capacity then the universal bank
will advise him to make risky investments and not safe investments. Similarly, clients
with a low risk taking capacity are advised to make safe investments. Today, universal
banks invest their client's money in different types of Mutual funds and also directly into
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the share market. They also do equity research. So, they can also manage their client's
portfolios (different investments) profitably.
 Profitable Diversification: Universal banks diversify their activities. So, they can use the
same financial experts to provide different financial services. This saves cost for the
universal bank. Even the day-to-day expenses will be saved because all financial services
are provided under one roof, i.e. in the same office.
 Easy Marketing: The universal banks can easily market (sell) all their financial products
and services through their many branches. They can ask their existing clients to buy their
other products and services. This requires less marketing efforts because of their well-
established brand name. For e.g. ICICI may ask their existing bank account holders in all
their branches, to take house loans, insurance, to buy their Mutual funds, etc. This is done
very easily because they use one brand name (ICICI) for all their financial products and
services.
 One-stop Shopping: Universal banking offers all financial products and services under
one roof.One-stop shopping saves a lot of time and transaction costs. It also increases the
speed or flow of work. So, one-stop shopping gives benefits to both banks and their
clients.

Disadvantages of Universal Banking

 Different Rules and Regulations: Universal banking offers all financial products and
services under one roof. However, all these products and services have to follow
different rules and regulations. This creates many problems. For e.g. Mutual Funds,
Insurance, Home Loans, etc. have to follow different sets of rules and regulations, but
they are provided by the same bank.
 Effect of failure on Banking System: Universal banking is done by very large banks.
If these huge banks fail, then it will have a very big and bad effect on the banking
system and the confidence of the public. For e.g. Recently, Lehman Brothers a very
large universal bank failed. It had very bad effects in the USA, Europe and even in
India.
 Monopoly: Universal banks are very large. So, they can easily get monopoly power
in the market. This will have many harmful effects on the other banks and the public.
This is also harmful to economic development of the country.
 Conflict of Interest: Combining commercial and investment banking can result in
conflict of interest. That is, Commercial banking versus Investment banking. Some
banks may give more importance to one type of banking and give less importance to
the other type of banking.

B. Home banking
The practice of conducting banking transactions from home rather than at branch locations.
Home banking generally refers to either banking over the telephone or on the internet. The
first
experiments with internet banking started in the early 1980s, but it did not become popular
until
the mid-1990s when home internet access was widespread. Today, a variety of internet banks
exist which maintain few, if any, physical branches.

C. ATMs (Automated Teller Machines)

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ATMs are primarily used for performing some of the banking functions such as the
withdrawal
of cash or the deposit of cash/cheque, etc., by using an ATM card.
Convenience of ATMs
To the customer
• 24/7 access availability
• Less time for transactions (less queue)
• Privacy in transactions
• Any branch/anywhere banking enabled
• Acceptability of card across multiple bank ATMs, even foreign tourists can access
Master/visa ATMs
• Other services enabled in ATMs in addition to cash dispending includes clearing cheques
deposits balance enquiry, cheque book requisition, details of recent transactions.

To the Bank

• Cost of setting up ATMs is lower than setting up a branch
• Migration of the routine transactions to the ATMs frees the bank staff for more productive
work
• ATMs serve as the crucial touch point for cross-selling of the bank’s products
• Enable the banks to display products on the screen and serves as a media for publicity for
the bank
• Less hassle in handling cash.

ATMs customer Inference

• Video Display Monitor
• Keyboard/Keypad
• Touch screen

D. Internet Banking
 A system allowing individuals to perform banking activities at home, via the internet.
 The automated delivery of new and traditional banking products and services directly
to
customers through electronic, interactive communication channels.
 Some online banks are traditional banks which also offer online banking, while others
are
online only and have no physical presence.

How can you use internet banking?

Step 1: Access Internet Banking - Obtain your User ID and Passwords.
Step 2: Create your Own Unique User ID.
Step 3: Link the Account Number to your User ID

Advantages
Cost less
Transaction speed
Efficiency
Speed banking
Vast coverage

Issues in internet banking

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Security
Learning difficulties
Lack of skilled personnel
Technical breakdowns
Long start up time
inexpensive

Security risks
Increasing number of fraudulent websites
Fake emails purporting to be sent from banks
Use of Trojan horse programs to capture user ids and password

E. Mobile Banking
Use mobile device to connect to a financial institution to view account balances and
transactions,
transfer funds between accounts, pay bills, receive account alerts, deposit checks, etc.

Mobile Payment
Use mobile device for purchase or other payment-related transaction at point of sale
(proximity) or via internet (remote)
May be conducted via SMS, MMS, mobile Internet, downloadable application,
contactless or barcode technology
Process and settle over traditional banking networks (credit, debit, ACH), mobile carrier
or other third party network

Mobile Banking Security Preventive Measures

Banks
Secure (encrypt) communication channels: SMS, browser based, downloadable apps
Assign security levels & user authentication based on payment type, transaction value,
number of daily transactions, etc.
Set transaction limits
Know your vendor: ensure mobile apps have built-in safeguards to limit security breaches
in case device lost or stolen
Apply due diligence for new customers by authenticating account number and user name
Educate consumers on security policies and tools
Consumers
Set strong passwords, install anti-virus software on smart phones
Know the developer before downloading applications
o How well have they tested the app?
o Is it certified?
Do not store sensitive data on mobile phone
Receive mobile alerts on potentially fraudulent transactions

F. Core Banking Solutions

Sum total of all the information technology components that enable a bank to manage its
core business activities in a centralized model
Round the clock processing of all the products, services and information of a bank
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24/7/365 Model

Application Areas
Balance of payments and withdrawal are done.
Mobile banking
Internet banking
ATM’s
Recording of transactions
Passbook maintenance
Interest calculations on loans and deposits
Customer records
Need Of Core banking solution
To meet the intense competition and changing market dynamics in an over banked
environment.
To meet the regulations and compliance requirements (example in order to meet the
Basel II norms banks must enhance their IT infrastructure).
To meet the demands of customers who are better informed, more demanding and less
loyal than ever.
To enhance efficiency and effectiveness.
Increasing customer satisfaction and convenience
Freeing up time for branch staff to focus on sales and marketing
Simplifying process for employeesEnhancing bank’s competitiveness in the market
Improved process efficiency Shrinking margins.

Benefits to Banks
Replace old technology seamlessly with a state-of-the-art n-tier application.
Replace multiple disparate and older generation systems with a single integrated
multiproduct
processing application across various countries.
Streamline operations by integrating the enterprise, to existing in house applications and
to offer a single customer view.
Create a virtual banking operation from ground-up and offer a host of banking products.
Enable multiple new delivery channels (Internet Banking, 7 X 24 ATM, Mobile
Banking,
Tele-banking and Point of Sale Terminals) allowing the bank to reach out to new
customers and segments.
Move to centralized processing and handle much higher volumes without a
proportionate
increase in resources or infrastructure costs.
Use business intelligence tools to analyze customer needs and create new products and
offerings.
Build and retain customer relationships based on the strength of customer service
capability.
Enable and modify product offerings quickly and efficiently based on customer’s market
needs.
Reduce costs, improve bottom-line and stakeholder rewards.
Quick and easy introduction of new products and services

Benefits to Customer
Customer can enjoy the Online and real time banking facilities through ATMs
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Point of sale terminals (POS) Internet

Mobile phones and Kiosks
Quick realization of instruments lodged for collection
on-line and easy fund transfer (intra-bank as well as inter-bank) etc

G. Debit card
A bank-issued card that allows its user to access their funds for the purpose of paying for
merchandise. A debit card acts like a credit card, the difference being that funds are
immediately
taken from the cardholders accounts.
H. Credit card
Pre-approved credit which can be used for the purchase of items now and payment of them
later.

Classification of Credit card

Based on mode of credit recovery
• Charge Card-A card that charges no interest but requires the user to pay his/her balance
in full upon receipt of the statement, usually on a monthly basis. While it is similar to a
credit card, the major benefit offered by a charge card is that it has much higher, often
unlimited, spending limits.
Revolving credit card-A line of credit where the customer pays a commitment fee and is
then allowed to use the funds when they are needed. It is usually used for operating
purposes, fluctuating each month depending on the customer's current cash flow needs
Based on status of credit card
• Standard Card- it is a generally issued credit card
• Business Card- (Executive cards) it is issued to small partnership firms, solicitors,
taxconsultants,
for use by executives on their business trips.
• Gold Card-a credit card issued by credit-card companies to favoured clients, entitling
them to high unsecured overdrafts, some insurance cover, etc
Based on geographical validity
• Domestic card- Cards that are valid only in India and Nepal are called domestic cards.
• International Card- credit Cards that are valid internationally are called international
cards.
Based on franchise/ Tie-up
• Proprietary card- A bank issues such cards under its own brands. E.g. SBI card Cancard
of Canara bank
• Master Card- this card is issued under the umbrella of “MasterCard International”
• VISA Card – it is issued by any bank having tie up with “VISA international”
. • Domestic Tie-up Card- it is issued by any bank having tie up with domestic credit card
brands such as CanCard and IndCard.
Based on issuer Category
• Individual Cards- Non-corporate cards that are issued to individuals
• Corporate Cards- Issued to corporate and business firms.

I. Smart card
The smart card looks exactly like any other plastic card or an ATM card with an integrated
circuit (IC Chip) installed. The IC chip contains memory, may contain a processor, and
communicates with the external world through contacts on the surface of the card. The size,
position and utility of the contacts are specified by an international standard, so that cards can
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interact with a variety of equipment

J. Electronic Payment systems

Electronic Payment is a financial exchange that takes place online between buyers and
sellers.
The content of this exchange is usually some form of digital financial instrument (such as
encrypted credit card numbers, electronic Cheques or digital cash) that is backed by a bank or
an
intermediary, or by a legal tender. Electronic payment system is a system which helps the
customer or user to make online paymentfor their shopping.
The various factors that have lead the financial institutions to make use of electronic
payments
are:

Decreasing technology cost:

The technology used in the networks is decreasing day by day.
 Reduced operational and processing cost:
Due to reduced technology cost the processing cost of various commerce activities becomes
very less. A very simple reason to prove this is the fact that in electronic transactions we save
both paper and time.
 Increasing online commerce:
Some Examples of EPS
Online Reservation
Online Bill Payment
Online Order Placing (Nirulas)
Online Ticket Booking ( Movie)

Two Storage Methods

On-line
Individual does not have possession personally of electronic cash
Trusted third party, e.g. online bank, holds customers’ cash accounts
Off-line
Customer holds cash on smart card or software wallet
Fraud and double spending require tamper-proof encryption

Types of EPS
1. E-cash: A system that allows a person to pay for goods or services by transmitting a
number from one computer to another. Like the serial numbers on real currency notes,
the E-cash numbers are unique. This is issued by a bank and represents a specified sum
of real money.
2. E-wallets: The E-wallet is another payment scheme that operates like a carrier of e-cash
and other information. The aim is to give shoppers a single, simple, and secure way of
carrying currency electronically. Trust is the basis of the e-wallet as a form of electronic
payment.
3. smart cards
4. credit cards

K. Cheque truncation
Movement of the physical instrument is curtailed
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Image of the payment instrument is captured along with MICR data simultaneously
Clearing Process completed based on Electronic data and image of the Cheques

Benefits of the cheque truncation system

Facilitate Banks to increase productivity and avail all the benefits of smarter technology
of Electronic Cheque Presentment
Better Operational efficiency
Faster clearing cycle of payment instruments
Cost saving in terms of storage and transport cost
Optimal Customer satisfaction

Business Opportunities - Banks

• Improved handling of post-dated Cheques deposited by the customer, as the images can
be scanned and stored and the system can automatically process the scanned images on
the due date.
• Improved business intelligence systems can be put in place.
• Introduction of new payment system products like e-Cheques
• Better funds management
• Reduction in Transaction cost
• Better management of space and manpower
Reduction in Transaction cost
• Better management of space and manpower
• Improved regulatory compliance.
• Improved Management Information Systems which will facilitate better decision making.

Business Opportunities - Customer

• Faster realization of Funds
• Better funds management
• Can avoid visit to the Branch as more outlets will be available for depositing Cheques for
clearing, at convenient locations.

Business Opportunities -Vendors

• Upgrade of Technology opens up new business opportunities for vendors and solution
providers.
• Can improve the Brand image of their products by providing improved functionalities for
image capture, storage and retrieval
• Scope for improvement in processing capabilities , especially scanners and servers

Point of Truncation
• Originating Branch
• ATM / Customer Location
• An identified Branch for a Cluster of Branches
• Service Bureau
• Service Branch of Originating Bank

L. ECS (Electronic Clearing Service)

Electronic mode of payment / receipt for 1 transactions that are repetitive and periodic in
nature.
ECS is used by institutions for making bulk 2 payment of amounts towards distribution of
dividend, interest, salary, pension, etc
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For bulk collection of amounts towards telephone 3 / electricity / water dues, cess / tax
collections, loan installment repayments, periodic investments in mutual funds,
insurance premium etc
Parties involved in ECS payment system
• Payee- one who is going to receive
• Payer- one who is going to pay
• Payee’s bank
• Payer’s bank
• Clearing House- Facilitates the interaction between two banks

Prerequisites to avail the ECS facility

• Both the parties must have bank accounts
• Banks involved have to be the member of the local clearing house

Types of ECS process

• Credit request
Example of a credit request: Jivan Tyres Ltd. has to pay monthly salaries to its employees
who have accounts across different banks The initiator can be the paying bank, requesting a
credit to the receiving bank
• Debit Request
Example of a Debit request State Electricity board wants to receive monthly bill payment
monthly from its customers In this case the initiator of the process is the payee’s bank

Payment process in case of a cheque

• Initiator is always the presenting bank (bank that demands for payment and further
receives payment) requesting the debit to the paying bank

M. EFT (Electronic Fund Transfer)

Exchange of money from one account to another through computer
Cardholder-initiated transactions, using a payment card such as a credit ordebit card
Direct deposit payment initiated by the payer
Direct debit payments, sometimes called electronic checks, for which a business debits
the consumer's bank accounts for payment for goods or services
Wire transfer via an international banking network such as SWIFT
Electronic bill payment in online banking, which may be delivered by EFT or paper
check
Transactions involving stored value of electronic money, possibly in a private currency
Process of EFT
Entering Supplier Master Information
Entering Payment Instrument Defaults
Entering Bank Account Information

Various modes of EFT in India

NEFT-NATIONAL ELECTRONIC FUNDS TRANSFER
RTGS-REAL TIME GROSS SETTLEMENT
IMPS-IMMEDIATE PAYMENT SERVICE
NEFT-National Electronic Funds Transfer
The National Electronic Funds Transfer is a nation-wide money transfer system which
allows customers with the facility to electronically transfer funds from their respective
bank accounts to any other account of the same bank or of any other bank network
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Funds transfer through NEFT requires a transferring bank and a destination bank.
Before transferring funds via NEFT you register the beneficiary, receiving funds. For
this you must possess information such as name of the recipient, recipient’s bank name, a
valid account number belonging to the recipient and his respective bank’s IFSC code.
Any sum of money can be transferred using the NEFT system with a maximum capital
of
Rs. 10, 00, 000.

RTGS- Real time Gross Settlement

It is a real time funds transfer system which facilitates you to transfer funds from one
bank to another in real time or on a gross basis. The transaction isn’t put on a waiting list
and cleared out instantly.
RTGS payment gateway, maintained by the Reserve Bank of India makes transactions
between banks electronically. The transferred amount is instantly deducted from the
account of one banks and credited to the other bank’s account.
The minimum value that can be transferred using RTGS is Rs. 2 Lakhs and above.
However there is no upper cap on the amount that can be transacted.
The remitting customer needs to add the beneficiary and his bank account details prior to
transacting funds via RTGS. The details required while transferring funds would be the
beneficiary’s name; his/her account number, receiver’s bank address and the IFSC code
of the respective bank.

Advantages of EFT
Increase efficiency and productivity.
Manage cash flow easily.
Improve safety and control.
Saves money.
Less paper works.
Eliminate the risks associated with lost, stolen, or misdirected cheques
EFT Provides our office with the capacity to,
Automate our payments.
Electronically update our accounts information.
Streamline our cash flow.
Reduce administrative cost.
Eliminate overdue accounts.
Manage delayed disbursements.
Get set up and add customers

UPI
Unified Payments Interface (UPI) is an instant payment system developed by the
National Payments Corporation of India (NPCI), an RBI regulated entity. UPI is built over
the IMPS infrastructure and allows you to instantly transfer money between any two parties'
bank accounts.

Module 5
International Banking

Exchange rates and forex business

► Fixed Exchange Rate System
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Fixed rates provide greater certainty for exporters and importers.

► Flexible Exchange Rate System
Flexible exchange rate or floating exchange rates change freely and are determined by trading
in
the forex market.

Exchange rate fluctuations

A reliable forecast or future spot rate is called study of empirical patterns of exchange rate
fluctuation. It provides essential information for an exchange rate exposure
.
Foreign exchange
It is the mechanism by which the currency of one country gets converted into
the currency of another country.
The conversion of currency is done by the banks who deal in foreign exchange. These banks
maintain stocks of one currencies in the form of balances with banks

Operation of foreign exchange market:

Foreign exchange market operates either as:-
1. Spot Market: (Current Market)
Spot market for foreign exchange is that market which handles only spot transaction or
current
transactions.
Principle characteristics:-
 Spot Market is of daily nature. It does not trade in future deliveries.
 Spot rate of exchange is that rate which happens to prevail at the time when transactions
are incurred.
2. Forward Market:
Forward Market for foreign exchange is that market which handles such transaction of
foreign
exchange as are meant for future delivery.
Principles Characteristics:-
 It only caters to forward transaction.
 It determines forward exchange rate at which forward transaction are to be honored.

The Foreign Exchange Market for Beginners

► The foreign exchange market or forex market as it is often called is the market in which
currencies are traded.
► Currency Trading is the world’s largest market consisting of almost trillion in daily
volumes and as investors learn more and become more interested, market continues to
rapidly grow.
► All trades that take place in the foreign exchange market involve the buying of one
currency and the selling of another currency simultaneously. This is because the value of
one currency is determined by its comparison to another currency.
► The first currency of a currency pair is called the “base currency,” while the second
currency is called the counter currency.
► Foreign exchange Capital Markets (FXCM) is an online currency trading firm that offers
a free demo account to traders who are new and interested in the foreign exchange
market.
► Registering for a demo account allows a new trader to download the online trading
platform that is used by the company’s clients trading live accounts and make trades as if
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they were doing it with real money.

Characteristics of foreign exchange

 Its huge trading volume representing the largest asset class in the world leading to
high liquidity.
 Its geographical dispersion
 Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15
GMT on Sunday until 22:00 GMT Friday.
 The use of leverage to enhance profit and loss margins and with respect to account
size.

Correspondent banking and NRI accounts

A Correspondent Banking relationship involves the provision of banking services by one
financial institution (a Correspondence bank) to another financial institution
(Correspondent Banking Client)
In which the financial institution carry on activities or business at or through permanent
establishments in different countries
It is also possible for one bank to open a Correspondence Account with another bank that
already has an existing Correspondent facility
The banking services provided by Correspondent Bank may involve provision of cash
management services, international fund transfers, check clearing, foreign exchange
services, loans and letters of credit
Correspondent banking as the banking services – mainly payments, cash management
and trade services - provided by banks to customers via other banks.

NRI Accounts

Types of NRI bank account

Non-Resident Externals (NRE) Fixed Deposits
Non-Resident Ordinary (NRO) Savings Account
Foreign Currency Non-Resident (FCNR)Fixed Deposits
Resident Foreign Currency (RFC)Fixed Deposits

Non-Resident External (NRE) Fixed Deposits

The Non Resident External (NRE) saving account is open for Indian residing abroad .this
account will help you to transfer foreign earning easily to India .NRE account can be opened
in
any bank as saving and fixed deposit account.

Benefits of NRE Account

There is no tax and no wealth tax
The currency maintain in this account is in Indian rupees
Funds can be easily transferred from NRE account to NRO account
Joint account facility is available with only NRI`s.
Nomination facility is available with only NRI Indians

Non-Resident Ordinary (NRO) Savings Account

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Non Resident ordinary (NRO) account is just like any other bank account with the only
difference that this account is being opened for only those individuals who are leaving India
for
taking an employment or establishing a business outside India. The existing accounts for
these
Indians are also termed as Ordinary Non Resident account or an NRO Accounts. These
accounts
can also be opened through foreign remittance. Thus it’s a rupee denominated account

Benefits of NRO Account

Interest earned on these accounts is high as Banks can themselves determine interest
rates.
These accounts also offer joint account facility with a resident or a NRI individual.
Nomination facility is available with both NRI and resident Individuals.

Foreign currency nonresident (FCNR) fixed deposit

FCNR Deposits are maintained in foreign currency and they are completely safe against any
exchange rate fluctuations.

Benefits of FCNR
Interest is payable in the same currency of the deposit at Half yearly.
FCNR account can be opened jointly with other non-residents.
FCNR a/c can be converted or amount transferred to NRE accounts.
No income tax on interest earned.

Resident Foreign Currency (RFC) Fixed Deposits

RFC Deposit has been specially created for persons of Indian nationality or origin returning
to
India permanently for settlement after having been a resident outside India for a continuous
period of at least one year.

Benefits of RFC
The account will be denominated in USD, GBP, and EURO.
The account can be held singly or jointly.
The account can be maintained in the form of Term Deposit account.
The balance in the account can be freely used for local disbursements.

Additional Service [Money Transfer]

An individual resident Indian can borrow sum not exceeding USD 250,000 or its
equivalent staying outside India, subject to the conditions that:
The minimum maturity period of the loan is one year;
The loan is free of interest

Letters of Credit
A letter of credit is a document from a bank guaranteeing that a seller will receive payment
in
full as long as certain delivery conditions have been met. In the event that the buyer is unable
to
make payment on the purchase, the bank will cover the outstanding amount.
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Types of Letter of Credit

Most letters of credit are import/export letters of credit which, as the name implies, are
used in
international trade. The same letter of credit would be termed an import letter of credit by the
importer and an export letter of credit by the exporter. In most cases the importer is the buyer
and the exporter is the beneficiary.

 The revocable letter of credit can be changed at any time by either the buyer or the
issuing bank with no notification to the beneficiary. The most recent version of the
UCP, UCP 600, did away with this form of letter of credit for any transaction under
their jurisdiction.

 The irrevocable letter of credit only allows change or cancellation of the letter of
credit by the issuing bank after application by the buyer and approval by the
beneficiary. All letters of credit governed by the current UCP are irrevocable letters of
credit.

 A confirmed letter of credit is one where a second bank agrees to pay the letter of
credit at the request of the issuing bank. While not usually required by law, an issuing
bank might be required by court order to only issue confirmed letters of credit if they
are in receivership. As you mightguess, an unconfirmed letter of credit is
guaranteed only by the issuing bank. This is the most common form with regard to
confirmation.

 A letter of credit may also be a transferrable letter of credit. These are commonly
used when the beneficiary is simply an intermediary for the real supplier(s) of the
goods and services or is one of a group of suppliers. It allows the named beneficiary
to present its own documentation buttransfer all or part of the payment to the actual
supplier(s). As you might guess, an untransferrable letter of credit does not allow
transfer of payments to third parties.
 A letter of credit may also be at sight, which is payable as soon as documentation has
been presented and verified, or payment may be deferred (also called a usance letter
of credit) until a certain time period has passed or the buyer has had the opportunity
to inspect or even sell the related goods.
 A red clause letter of credit allows the beneficiary to receive partial payment before
shipping the products or performing the services. Originally these terms were written
in red ink, hence the name. In practical use, issuing banks will rarely offer these terms
unless the beneficiary is very creditworthy or an advising bank agrees to refund the
money if the shipment is not made.
 A back to back letter of credit is used in a trade involving an intermediary, such as a
trading house. It is actually made up of two letters of credit, one issued by the buyer's
bank to the intermediary and the other issued by the intermediary's bank to the seller.
Foreign currency Loans
Foreign currency loans are all loans given or taken for which the contract currency is
different to
the local currency (balance sheet/company code currency).

Eligibility
Exporters for working capital needs
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Importers for meeting import obligations

Importers of capital goods
Those customers who have earlier raised medium-term FC Loans for meeting capital
expenditure from overseas financial institutions, so that these loans can be foreclosed
(subject to RBI guidelines)
Loan to JV/WOS entities of Indian companies.
High value corporate clients with a good track record, to meet working capital
requirements in substitution of WCDL
Those customers who are looking for conversion of rupee term/cash credit.

Period
Working capital for exporter/importer- 6 months to one year.
Importers of capital goods-3 years (subject to availability of funds)
Substitution of WCDL/Cash Credit – 6 months to one year.
In case of Term Loan Conversion- 6 months to 3 years (subject to availability of funds)

Quantum/ Currency
On transaction to transaction basis within the existing credit facilities
Minimum USD 0.50 mn. (Rs. 2.00 Crores) equivalent.
Normally in US$, FC Loans can also be availed in Pound Sterling or in Euros subject to
availability of funds

Rate of Interest
Bench marked to relevant LIBOR rates

Repayment
Bullet payment (one lump sum) by:
Tendering export documents
Proceeds of export collection bills
Debit to EEFC accounts
Purchase of foreign currency from the bank at contracted/ready rate if forward booking is
waived.
Term loans for import of capital goods – repayment in stipulated installments
Conversion of rupee term loans – as per original sanction terms

Procedure
Roll-over at the sole discretion of the Bank
In case of loans on floating rate basis the rates will be reset once in every six months
Interest charged on reducing balance method.
Forward cover for appropriate maturity to be booked.
Forward cover can be waived for customers having natural hedge.
Prepayment generally not permitted
In exceptional cases prepayment permitted. However, as an exception, prepayment is
permitted in certain cases, with levy of penalty.

Facilities for exporters and importers

Facilities for Exporter
Export Credit
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Rupee export credit (pre-shipment and post-shipment) :

Bank offers both pre and post shipment credit to the Indian exporters through Rupee
denominated loans as well as foreign currency loans in India.
Exporters having firm export orders or L/C from a recognized Bank can avail the export
credit facilities from United Bank of India provided they satisfy the required credit
norms. The details of the credit norms can be obtained from the nearest authorized branch
of the Bank.
Post shipment rupee export credit is available for a maximum period of -180- days
/360daysfrom the date of first disbursement. The corporate, if required can book forward
contracts in respect of future export credit drawals.

Export bill rediscounting:

Bank offers financing of export by way of bill discounting of export bills to provide post
shipment finance to the exporters at competitive international rate of interest.
The export bills (both Sight and Usance) can be purchased/ discounted provided they
comply with the norms of the Bank/ RBI.
All exporters are eligible to cover the bills drawn under L/C, non-credit bills under
sanctioned limits under the Bill discounting Scheme.

Export credit in foreign currency

Pre-shipment credit in foreign currency (PCFC):
Bank provides PCFC in the foreign currency to the exporters enabling them to fund their
procurement, manufacturing/ processing and packing requirements. These loans are
available at very competitive international interest rates covering the cost of both
domestic as well as import content of the exports. The PCFC can be availed in US$,
Euro, GBP and Japanese Yen.
The corporate / exporters with a good track record can avail a running account facility
with the Bank for PCFC. To qualify for this purpose, the exporter’s overdue bill should
not exceed 5% of the average annual export realization during the preceding -3- years.
PCFC in foreign currency is available for a maximum period of -180- days from the date
of first disbursement similar to the case of Rupee facility.

Export bill rediscounting:

Bank offers financing of export by way of bill discounting of export bills to provide post
shipment finance to the exporters at competitive international rate of interest. This facility
is available in -4- currencies i.e. US$, Pound Sterling, Euro and JPY.
The export bills (both Sight and Usance) can be purchased/ discounted provided they
comply with the norms of the Bank/ RBI.
All exporters are eligible to cover the bills drawn under L/C, non-credit bills under
sanctioned limits under the Bill discounting Scheme.

Exporter Gold Card

Bank has formulated Gold Card Scheme for its exporter clients based on the scheme drawn
up
by Reserve Bank of India. The scheme proposes to ensure easy availability of export credit
on
best terms to credit worthy exporters with good track record. The card to be offered by
United
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Bank of India will be known as ‘United Bank of India Expo Gold Card’. The salient features
of
the scheme are as under:

Eligibility under the Scheme:

All exporters , including those in small and medium sector having good track record and
credit
worthiness depending on the credit rating done as per bank’s norms.
Exporters whose accounts have been classified as ‘Standard’ continuously for a period of
three
years and there are no irregularities/adverse features in the conduct of the accounts will be
considered.
The scheme will not be applicable to those exporters who are blacklisted by ECGC or
included in RBI’s defaulter’s list/caution list or making losses for the past 3 years or having
overdue export bills in excess of 10 per cent of the current year’s turnover.
In order to recognize exporters undertaking exports on collection basis, it has been decided
that they will also be considered for grant of United Bank of India Expo Gold Card under the
above scheme provided they have been dealing with our bank for a period of at least three
years.

Fixation of Credit Limit:

In-principle limits will be sanctioned for a period of three years with a provision for
automatic
renewal under this scheme subject to fulfillment of the terms and conditions of sanction.
Efforts will be made to meet PCFC requirements of the Gold Card holders by giving them
priority over non-export borrowers. Bank will also consider providing foreign currency term
loans to Gold Card Holders on priority basis.

Non Fund Based Facilities & Other Services

Non-Fund Based Facilities
United bank of India issues Bid Bond, Performance and other guarantees in favour of the
beneficiaries abroad on behalf of Indian Exporter customers.
Other Services
Advising / Confirmation of Export Letters of Credit: Exporters can insist their export
letter of credit are advised through United Bank of India to ensure timely delivery.
Assisting in compiling credit reports on the overseas buyers.
Derivativeproducts to cover exchange risk
Collection of exports bills: Concentrating your Documentary collection activities with
United Bank of India your exporting hassles is eliminated. You will experience fewer
delay in receiving export proceeds and have efficient cash management.
Maintains EEFC Account of its customers. The Exchange Earners Foreign Currency
(EEFC) Deposits Scheme was started by RBI in the year 1992 with the introduction of
Liberalized Exchange Rate Management System. Under this scheme, the recipient of
inward remittances, exporters and other eligible bodies are allowed to keep a portion of
their inward remittances / export proceeds in foreign currency with the banks in India
which can later be utilized for permissible purposes

Bank Facilities for Importers

Import Finance:
Bank provides various types of funding/ services to the importers for facilitating the imports
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in the country. The vast network of branches and Correspondent Banks worldwide facilitate
prompt & efficient services to the importers. All the facilities are subject to the prevalent
rules of the Bank/ RBI guidelines.
The various facilities provided are:
Collection of import bill.
Opening of Import L/Cs (Sight/ DA)
Financing of import by way of Foreign Currency Loans
Issuing Guarantees etc. on behalf of importers.
Collection of import bills:
The import bills are collected through the 47 authorized branches at very competitive rates.
The Bank has correspondent relationship with reputed International Banks throughout the
world and can provide the services to importers who may be importing from any part of the
globe.
Letter of credit:
Bank offers L/C facility for the purchase of goods in the international market. Being a
Prime Bank of repute, the L/Cs of the United Bank of India are well accepted in the
International market.
With the Letter of Credit of United Bank of India, importers can build up better trust/
confidence in their suppliers and develop other business relationship at a much faster
pace.
The L/C facility can be granted to the importers after assessing their requirement/
credit worthiness/ financial strength and other parameters being to the satisfaction of
the Bank.
Bank guarantees:
Bank on behalf of importers/ other customers issues guarantees in favour of beneficiaries
abroad.
The guarantees can be both Performance and Financial.
Other services:
Bank Provides its customer facilities for hedging exchange risk by booking forward
contracts,
The Bank obtains credit report of the overseas seller for its customers and also undertakes
remittance connected with the import including advance remittance.
The Bank facilitates in arrangement of Buyers credit for importer customers and also
issued LOC/LOU on behalf of their customers.

Role of ECGC, RBI and EXIM bank

Export Credit Guarantee Corporation of India (ECGC)
The ECGC Limited (ECGC) was established on 30 July 1957 with an objective to
provide insurance cover in respect of risks in export trade.
These risk may include loss of money on account of foreign buyer becoming bankrupt or
sudden import or exchange restrictions resulting in stopping of payments etc.
The Export Credit Guarantee Corporation of India Limited is a company wholly owned
by the Government of India based in Mumbai, Maharashtra.
It provides export credit insurance support to Indian exporters and is controlled by the
Ministry of Commerce. Government of India had initially set up Export Risks Insurance
Corporation (ERIC) in July 1957.
It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in
1964 and to Export Credit Guarantee Corporation of India in 1983. In 2014 August, the
Company was again renamed as ECGC Limited
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What does ECGC do?

Provides a range of credit risk insurance covers to exporters against loss in export of
goods and services.
Offers Export Credit Insurance for Bankers and financial institutions to enable exporters
to obtain better facilities from them.
Provides Overseas Investment Insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan.

How does ECGC help exporters?

Offers insurance protection to exporters against payment risks
Provides guidance in export-related activities
Makes available information on different countries with its own credit ratings
Makes it easy to obtain export finance from banks/financial institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas buyers

RBI:
RBI has issued Authorized Dealers (AD) licenses to banks, all India financial
institutions and a few co-operative banks to undertake foreign exchange transactions
in India
It has also issued Money Changer licenses to a large number of established firms,
companies, hotels, shops, etc.
Money changers help facilitate encashment of foreign currencies of foreign tourists
Entities authorized to buy and sell foreign currency notes, coins and travelers’
Cheques are called full-fledged money changers
Those authorized only to buy are called restricted money changers

EXIM Bank
Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament “THE
EXPORT-IMPORT BANK OF INDIA ACT, 1981” for providing financial assistance to
exporters and importers, and for functioning as the principal financial institution for
coordinating
the working of institutions engaged in financing export and import of goods and
services with a view to promoting the country’s international trade and for matters connected
therewith or incidental thereto.
Exim Bank has two broad business streams: one, the traditional export finance typical of
export
credit agencies around the world and two, financing of export oriented units (export
capability
creation), which are non-traditional for export credit agencies. Since inception, Exim Bank
has
been the principal financial institution in the country for financing project exports and exports
on
deferred credit terms. As per Memorandum PEM (Memorandum of Instructions on Project
Exports and Service Exports) of Reserve Bank of India, the following constitute project
exports:
i. Supply of goods / equipment on deferred payment terms
ii. Civil construction contracts
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iii. Industrial turnkey projects

iv. Consultancy / services contracts

The covers issued by ECGC can be divided broadly into four groups:
1. Standard Policy
Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard Policy,
is
the one ideally suited to cover risks in respect of goods exported on short term credit; i.e.
credit
not exceeding 180 days. The policy covers both commercial and political risks from the date
of
shipment.
2. Other Specific Policies
Specific Policies are designed to protect Indian firms against payment risks involved in a)
exports on deferred terms of payment b) services rendered to foreign parties and c)
construction
works and turnkey Projects undertaken abroad. These policies are issued separately for each
specific contract, and cover risks normally from the date of contract.
ECGC provides for an insurance cover named as Construction Works Policy to provide cover
to
an Indian contractor who executes a civil construction job abroad.
3. Financial Guarantees
Financial Guarantees are issued to banks in India to protect them from risks of loss involved
in
their extending financial support at pre-shipment and post-shipment stages. These also cover
a
host of non-fund based facilities that are extended to exporters.
Export Performance Guarantee
Export Performance Guarantee is an insurance cover for banks, which issues various kinds of
guarantees on behalf of exporters in order to facilitate export transactions
4. Special Schemes
Transfer Guarantee meant to protect banks which add confirmation to Letters of Credit
opened
by foreign banks, Insurance cover for Buyers Credit and Lines of Credit, and Exchange
Fluctuation Risk Insurance.

Module-6
Banker as lender

Types of loans
Home Loan
Home Loans are taken by people for a variety of home-related purposes such as construction
of
home, home renovation, home extension, buying of property or land, or payment of stamp
duties.
Home loans comprise an adjustable or fixed interest rate and payment terms. Some types of
home loans are mentioned below:
Home Purchase Loan
Land Purchase Loan
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Home Construction Loan

Home Extension Loan
Home Renovation Loan
Stamp Duty Loan
NRI Home Loans
Loan Against Property

Personal Loan
This type of loan is given to individuals after accessing their credentials based on their
profession or business, or any other sources of income. The loan can be utilised for any
purpose,
for example, paying debt, marriage expenses or vacation expenditure. No collateral security
is
required for this type of loan. The span of personal loan repayment varies from 12 months to
60
months depending upon the principal amount and the EMIs. The interest rate ranges from 15
percent to 28 percent varying from bank to bank. Approximately 2 percent of the total loan
amount is charged as the loan processing fee. Generally, banks rules prohibit prepayment of
loan
for the initial six months; otherwise 2 percent to 4 percent of the outstanding amount is
charged
as the prepayment fees. The EMI starts once the disbursement of loan has been made.

Business Loan
This type of loan is provided to either existing businesses or those venturing into new
business.
As banks provide loans on the basis of individual's credentials, it is bit difficult to get a loan
for
starting a business. It is very important for individuals (starting a business) to have a clear
cutbusiness plan as it is the most important requirement to convince the banks that your
business
has the capability of repayment. Banks then rely on individual's background, assets/property,
previous loan history and dedication towards work. Banks also prefer those individuals who
have
already insured the property for their business. Nowadays, banks are working on providing
more
lucrative and easy business loans options for the first time business owners.
For existing businesses, loan is provided in the following ways:
Term loans – Amount provided for a fixed tenure at the applicable interest rate: three years
for
short term loan and 10-15 years for long term loans.
Bank overdraft limits – Ability to withdraw more money than what is deposited.
Bill Discounting – Short-term borrowing used to improve a company's working capital and
cash flow position.
Letter of credit for international business – Bank guaranteeing of a buyer's payment to a
seller
in specified period.

Education Loan
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Required by and provided to students who want to pursue higher education in resident
country or
abroad. Students should have an admission offer from an institution before they apply for an
education loan. The loan takes care of the fees of the institution including examination and
library fees; travel expenses for abroad; cost of books and equipments required; any
insurance
for the student, if applicable; and any additional expenses such as tours, thesis, project work,
etc.
The terms of education loans vary from bank to bank.
The RBI has fixed certain norms on the total amount of loan that can be disbursed; however,
banks can increase or decrease the limit depending on the institution. For studying in India,
Rs.
10 lakh is the average and for studying abroad, the average is Rs. 20 lakh. For a loan amount
up
to Rs. 4 lakh, parents should be the joint borrowers and above that amount, a guarantee or
some
security in terms of tangible assets is required, depending upon the bank. Simple rate of
interest
is charged depending upon the base rate of the bank.
It is not mandatory to pay the interest during the study period; however, if paid regularly
during
the study period, some concession is also provided by a few banks. The repayment tenure
varies
between 10 years and 15 years depending upon the loan amount and repayment begins
between
six months and two years of the course completion. Early repayment has no associated
charges.

Gold Loan
Gold loan is imparted only on providing gold as security to a bank or any other lending
institution. It is considered as one of the safest methods as the loan amount is provided on the
basis of the security submitted. Amount ranging from Rs. 5k to 25 lakh can be taken as loan
against gold. Amount equivalent to 80 percent to 90 percent (varying from bank to bank) of
the
total value of the gold is given as loan to the borrower. Depending upon the bank, the tenure
of
gold loan varies from one day to two years. The extension of tenure is also allowed by few
banks. The rate of interest usually ranges from 14 percent to 24 percent, depending upon the
financial institution. The banks charge processing fees of up to 1.5 percent. There is no
prepayment fee. You can repay the gold loan any time during the tenure. EMI policy also
varies
from bank to bank; few banks prefer EMIs where interest and principal are charged monthly,
whereas few only charge the interest on a monthly basis and offer flexibility for the payment
of
the interest amount.

Vehicle/ Car Loan

Compared to other loans, it is easier and simpler to take vehicle loans. Vehicle loans involve
less
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paperwork and around three to six working days are required to get the clearance. The
interest
rates vary from bank to bank based on their base rate. The repayment process involves
monthly
EMIs and early repayment options

Overdraft facilities
An overdraft occurs when money is withdrawn from a bank account and the available balance
goes below zero. In this situation the account is said to be "overdrawn". If there is a prior
agreement with the account provider for an overdraft, and the amount overdrawn is within the
authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative
balance exceeds the agreed terms, then additional fees may be charged and higher interest
rates
may apply.

Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include:
Intentional short-term loan - The account holders finds themselves short of money and
knowingly makes an insufficient-funds debit. They accept the associated fees and cover the
overdraft with their next deposit.
Failure to maintain an accurate account register - The account holder doesn't accurately
account for activity on their account and overspends through negligence.
ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient
availability
of funds. The account holder may or may not be aware of this fact at the time of the
withdrawal.
If the ATM is unable to communicate with the cardholder's bank, it may automatically
authorize
a withdrawal based on limits preset by the authorizing network.
Temporary Deposit Hold - A deposit made to the account can be placed on hold by the
bank.
This may be due to Regulation CC (which governs the placement of holds on deposited
checks)
or due to individual bank policies. The funds may not be immediately available and lead to
overdraft fees.
Unexpected electronic withdrawals - At some point in the past the account holder may have
authorized electronic withdrawals by a business. This could occur in good faith of both
parties if
the electronic withdrawal in question is made legally possible by terms of the contract, such
as
the initiation of a recurring service following a free trial period. The debit could also have
been
made as a result of a wage garnishment, an offset claim for a taxing agency or a credit
account or
overdraft with another account with the same bank, or a direct-deposit chargeback in order to
recover an overpayment.
Merchant error - A merchant may improperly debit a customer's account due to human
error.
For example, a customer may authorize a $5.00 purchase which may post to the account for
$500.00. The customer has the option to recover these funds through chargeback to the
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merchant.
Chargeback to merchant - A merchant account could receive a chargeback because of
making
an improper credit or debit card charge to a customer or a customer making an unauthorized
credit or debit card charge to someone else's account in order to "pay" for goods or services
from
the merchant. It is possible for the chargeback and associated fee to cause an overdraft or
leave
insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that
received the chargeback.
Authorization holds - When a customer makes a purchase using their debit card without
using
their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the
customer's account reducing the customer's available balance. However the merchant doesn't
receive the funds until they process the transaction batch for the period during which the
customer's purchase was made. Banks do not hold these funds indefinitely, and so the bank
may
release the hold before the merchant collects the funds thus making these funds available
again.
If the customer spends these funds, then barring an interim deposit the account will overdraw
when the merchant collects for the original purchase.
Bank fees - The bank charges a fee unexpected to the account holder, creating a negative
balance or leaving insufficient funds for a subsequent debit from the same account.[3]
Playing the float - The account holder makes a debit while insufficient funds are present in
the
account believing they will be able to deposit sufficient funds before the debit clears. While
many cases of playing the float are done with honest intentions, the time involved in checks
clearing and the difference in the processing of debits and credits are exploited by those
committing check kiting.
Returned check deposit - The account holder deposits a check or money order and the
deposited item is returned due to non-sufficient funds, a closed account, or being discovered
to
be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated
fee,
an overdraft results or a subsequent debit which was reliant on such funds causes one. This
could
be due to a deposited item that is known to be bad, or the customer could be a victim of a bad
check or a counterfeit check scam. If the resulting overdraft is too large or cannot be covered
in a
short period of time, the bank could sue or even press criminal charges.
Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or
money
order known to be bad is deposited (see above) by the account holder, and enough money is
debited before the fraud is discovered to result in an overdraft once the chargeback is made.
The
fraud could be perpetrated against one's own account, another person's account, or an account
set
up in another person's name by an identity thief.
Bank Error - A check debit may post for an improper amount due to human or computer
error,
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so an amount much larger than the maker intended may be removed from the account. Some
bank errors can work to the account holder's detriment, but others could work to their benefit.
Victimization - The account may have been a target of identity theft. This could occur as the
result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account
takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit
tocause one. The money or checks from an ATM deposit could also have been stolen or the
envelope lost or stolen, in which case the victim is often denied a remedy.
Intraday overdraft - A debit occurs in the customer’s account resulting in an overdraft
which
is then covered by a credit that posts to the account during the same business day. Whether
this
actually results in overdraft fees depends on the deposit-account holder agreement of the
particular bank.

Discounting of bills
Bill of Exchange, is an instrument in writing which is an unconditional order to pay a certain
amount of money to a specified person.
The transaction is practically an advance against the security of the bill and the discount
represents the interest on the advance from the date of purchase of the bill until it is due for
payment. Under certain circumstances, the Bank may discount a bill of exchange instead of
negotiating them.
The seller who is the holder of a accepted B/E has two options :
1. Hold on the B/E till maturity and then take the payment from buyer.
2. Discount the B/E with discounting agency.

Discount:
Seller can take the accepted B/E to a discounting agency and obtain ready cash.
The act of giving accepted B/E for ready money is call discounting the B/E.
The difference between ready money paid and the face value of the bill is called
the discount.

Types of Bills
1. Demand Bill: This is payable immediately “at sight” or “on presentment” to the drawee.
A bill on which no time of payment or “due date” is specified is also termed as a demand
Bill.
2. Usance Bill: This is also called time bill. The term usance refers to the time period
recognized by custom or usage for payment of bills
3. Documentary Bill: These are the B/Es that are accompanied by documents that confirm
that a trade has taken place between the buyer and the seller of goods. These
documentsinclude the invoices and other documents of title such as railway receipts, lorry
receipts
and bills of lading issued by custom officials.
4. Clean Bill: These bills are not accompanied by any documents that show that a trade has
taken place between the buyer and the seller. Because of this, the interest rate charged on
such bills is higher than the rate charged on documentary bills.

Creation of a B/E
Suppose a seller sells goods or merchandise to a buyer. In most cases, the seller would like to
be
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paid immediately but the buyer would like to pay only after some time, that is, the buyer
would
wish to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity
on
the buyer. The seller has now assumed the role of a creditor; and is called the drawer of the
bill.
The buyer, who is the debtor, is called the drawee. The seller then sends the bill to the buyer
who
acknowledges his responsibility for the payment of the amount on the terms mentioned on the
bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third
party willing to take on the credit risk of the buyer.

Financing book debts and supply bills

When a bank receives a deposit of checks from a payee, it will credit the payee's account with
the funds represented by the checks. However, the bank has not really received the cash yet,
since it must still collect the funds from the bank of the paying party. Until the bank collects
the
funds, it is at risk of having a negative cash flow situation if the payee uses the cash it has just
received.
To avoid this risk, the bank posts the amount of the deposit with a value date that is one or
more
days later than the book date. This value date is the presumed date of receipt of the cash by
the
bank. Once the value date is reached, the payee has use of the funds. The value date may be
categorized by the bank as 1-day float, 2+-day float, or some similar term.

Charging of security bills

Charging of security is done by banks to safe guard their advances by taking different
kinds of securities reason being to fall back on it in case of loan is defaulted.

Type of Charges
Assignment – it is a mode of providing security to a banker for an advance includes
transfer of a right, property or debt.
Lien – right of the banker to retain possessions of the goods and securities owned by the
debtor until debt due is paid
Set-off – Total or partial merging of a claim of one person against another in a
counterclaim by the latter against the former.
Mortgage – Transfer of interest in immovable property to secure an advanced loan or an
existing debt or performance of an obligation.
Pledge – Bailment of goods for providing security for payment of debt or performance of
promise.
Hypothecation – Charge upon any movable property created by a borrower in favor of a
secured creditor without delivery of possession of the movable property, also called as a
mortgage of a movable property.

Pledge
Bailment of goods as security for payment of debt or performance of a promise:PLEDGE
Bailer: PAWNER
Bailee: PAWNEE
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Example:
A borrows Rs.100 from B & keeps his watch as security : pledge

Rights of Pawnee
Right of retainer{S.173}: right to retain goods until dues paid
Right of transfer for subsequent advances:{S.174}: on lending money to same debtor
without further security ;right to retain earlier goods extends
Right to extraordinary expenses {S.175}
Right to sue the pawnor or sell the goods on default.

Rights of Pawnor
Enforcement of pawnee’s duties
Defaulting pawnor’s right to redeem

Mortgage
A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to
raise
capital to buy real estate; or by existing property owners to raise funds for any purpose while
putting a lien on the property being mortgaged. The loan is "secured" on the borrower's
property.
This means that a legal mechanism is put in place which allows the lender to take possession
and
sell the secured property ("foreclosure" or "repossession") to pay off the loan in the event that
the
borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is
derived from a "law French" term used by English lawyers in the Middle Ages meaning
"death
pledge", and refers to the pledge ending (dying) when either the obligation is fulfilled or the
property is taken through foreclosure. Mortgage can also be described as "a borrower giving
consideration in the form of a collateral for a benefit (loan).

Standard or conforming mortgages

Many countries have a notion of standard or conforming mortgages that define a perceived
acceptable level of risk, which may be formal or informal, and may be reinforced by laws,
government intervention, or market practice. For example, a standard mortgage may be
considered to be one with no more than 70-80% LTV and no more than one-third of gross
income going to mortgage debt.
A standard or conforming mortgage is a key concept as it often defines whether or not the
mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which
it
may be sold. In the United States, a conforming mortgage is one which meets the established
rules and procedures of the two major government-sponsored entities in the housing finance
market (including some legal requirements). In contrast, lenders who decide to make
nonconforming loans are exercising a higher risk tolerance and do so knowing that they face
more challenge in reselling the loan. Many countries have similar concepts or agencies that
define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to
limits
or higher risk weightings for non-standard mortgages. For example, banks and mortgage
brokerages in Canada face restrictions on lending more than 80% of the property value;
beyond
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this level, mortgage insurance is generally required

Foreign currency mortgage

In some countries with currencies that tend to depreciate, foreign currency mortgages are
common, enabling lenders to lend in a stable foreign currency, whilst the borrower takes on
the
currency risk that the currency will depreciate and they will therefore need to convert higher
amounts of the domestic currency to repay the loan

Assignment
Essentially, an assignment is the transfer of ownership. An example of an assignment is
when a person sells his or her car, thereby transferring the title to another.
When assigned, the option writer has an obligation to complete the requirements of the
option contract. If the option was a call (put) option, then the writer would have to sell
(buy) the underlying security at the stated strike price.

Example:
One example of assignment is 'transfer by the holder of a life insurance policy (the assignor)
of
the benefits or proceeds of the policy to a lender (the assignee), as a collateral for a loan'. In
such case in the event of the death of the assignor, the assignee is paid first and the balance (if
any) is paid to the policy's beneficiary. However, insurance policies other than life
insurance, may not be used for this purpose.

Module 7
Asset Liability Management (ALM) in Banks

Asset Liability Management

The process by which an institution manages its balance sheet in order to allow for
alternative interest rate and liquidity scenarios
Banks and other financial institutions provide services which expose them to various
kinds of risks like credit risk, interest risk, and liquidity risk
Asset-liability management models enable institutions to measure and monitor risk,
and provide suitable strategies for their management.

Components of Liabilities
1. Capital:
Capital represents owner’s contribution/stake in the bank.
- It serves as a cushion for depositors and creditors.
- It is considered to be a long term sources for the bank.

2. Reserves & Surplus

Components under this head includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
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3. Deposits
This is the main source of bank’s funds. The deposits are classified as deposits payable
on ‘demand’ and ‘time’. They are reflected in balance sheet as under:
a) Demand Deposits
b) Savings Bank Deposits
c) Term Deposits

4. Borrowings: (Borrowings include Refinance / Borrowings from RBI, Inter-bank & other
institutions)
I. Borrowings in India
i) Reserve Bank of India (Including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts
Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice

2) Investments
A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under:
I. Investments in India in:
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares, Commercial Papers, COD & Mutual Fund Units etc.)
II. Investments outside India in
Subsidiaries and/or Associates abroad

3) Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on demand
iii) Term Loans
B. Particulars of Advances:
i) Secured by tangible assets (including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
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4) Fixed Asset
I. Premises
II. Other Fixed Assets (Including furniture and fixtures)

5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source (Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others

Significance of Asset Liability Management

Liquidity risk: the current and prospective risk arising when the bank is unable to meet its
obligations as they come due without adversely affecting the bank's financial conditions.
From an ALM perspective, the focus is on the funding liquidity risk of the bank, meaning
its ability to meet its current and future cash-flow obligations and collateral needs, both
expected and unexpected. This mission thus includes the bank liquidity's benchmark
price in the market.
Interest rate risk: The risk of losses resulting from movements in interest rates and their
impact on future cash-flows. Generally because a bank may have a disproportionate
amount of fixed or variable rates instruments on either side of the balance-sheet. One of
the primary causes are mismatches in terms of bank deposits and loans.
Currency risk management: The risk of losses resulting from movements in exchanges
rates. To the extent that cash-flow assets and liabilities are denominated in different
currencies.
Funding and capital management: As all the mechanism to ensure the maintenance of
adequate capital on a continuous basis. It is a dynamic and ongoing process considering
both short- and longer-term capital needs and is coordinated with a bank's overall strategy
and planning cycles (usually a prospective time-horizon of 2 years).
Profit planning and growth.
In addition, ALM deals with aspects related to credit risk as this function is also to
manage the impact of the entire credit portfolio (including cash, investments, and loans)
on the balance sheet. The credit risk, specifically in the loan portfolio, is handled by a
separate risk management function and represents one of the main data contributors to the
ALM team.

Purpose and objectives

An effective Asset Liability Management Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to
attain a predetermined acceptable risk/reward ratio
It is aimed to stabilize short-term profits, long-term earnings and long-term substance of
the bank. The parameters for stabilizing ALM system are:
o Net Interest Income (NII)
o Net Interest Margin (NIM)
o Economic Equity Ratio

Prerequisites for ALM

1. Awareness for ALM in the Bank staff at all levels–supportive Management & dedicated
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Teams.
2. Method of reporting data from Branches/ other Departments. (Strong MIS).
3. Computerization-Full computerization, networking.
4. Insight into the banking operations, economic forecasting, computerization, investment,
credit.
5. Linking up ALM to future Risk Management Strategies.

Assets and Liabilities Committee (ALCO)

ALCO, consisting of the bank's senior management (including CEO) should be
responsible
for ensuring adherence to the limits set by the Board
Is responsible for balance sheet planning from risk - return perspective including the
strategic management of interest rate and liquidity risks
The role of ALCO includes product pricing for both deposits and advances, desired
maturity profile of the incremental assets and liabilities,
It will have to develop a view on future direction of interest rate movements and decide
on
a funding mix between fixed Vs. floating rate funds, wholesale vs. retail deposits, money
market Vs. capital market funding, domestic vs. foreign currency funding
It should review the results of and progress in implementation of the decisions made in
the
previous meetings

Activities of ALCO
ALCO decision making unit- Responsible for balance sheet planning from risk return
perspective
Monitoring the market risk levels by ensuring adherence to the various risk limits set by
the bank
Articulating the current interest rate view and a view on future direction of interest rate
movements
Deciding the business strategy of the bank, consistent with the interest rate view, budget
and pre-determined risk management objectives
Determining the desired maturity profile and mix of assets and liabilities
Product pricing for both assets and liabilities side
Deciding the funding strategy i.e. source and mix of liabilities or sale of assets
Reviewing implementation of decisions made in the previous meeting

Module 8
Contemporary Issues in Modern Banking System