Section 5 (b) of the Banking Regulation Act 1949 defines Banking as

Accepting for the purpose of lending and investment, deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise

INTERMEDIATION

Between those who save money and those who need money Financial intermediation plays an important economic function

RISKS IN LENDING Credit Risk Liquidity Risk Interest Rate Risk Banks are essentially risk managers

Payment system Pay deposits on demand Payment through cheques Facilitate movement of money Circulatory system of the economy Financial services provider Products of mutual funds and insurance companies Collection of utility bills, etc.

 Banking

is based on the trust that banks will honour their commitments Principles on which banking business is based Liquidity Safety Profitability Secrecy Service Quality

PAYMENT SYSTEM CONSTITUENT Payments and remittances Collection FINANCIAL INTERMEDIARY Deposit Loan ALLIED SERVICES Distribution Collection Demat services Safe keeping Advisory

written instruction issued by a customer (Drawer) to his bank (Drawee) to pay the specified amount to the person named (Payee) in the cheque Crossed and uncrossed cheques Requirement of sufficient balance for making payment

cheque issued by a bank on itself

For local payments To ensure certainty of payment

An

image of a Bankers cheque

 Cheque

issued by a bank on itself but payable at another branch In case there is no branch of the issuing bank, arrangements can be made with the other bank(s) having its/their branch(es)

cheque which can be paid at any branch of the bank

Networking

of the branches and centralised computer system is a pre-requisite

Faster mode of remitting money to far away places Centralised computer system enables the transaction The payment can be made instantly if the payee / beneficiary has an account with the payment branch In case payer and payee maintain accounts with two different banks, the transaction can be completed through the Reserve Bank of India Cost effective and fast mode of transaction

substitute for cheques Can be used for withdrawing cash from ATM as well as making payments to third parties through POS Account of the customer is debited instantly Add-on facilities 24 X 365 days banking

 Customer

gets certain credit limit from the credit card issuing bank The amount utilized is debited to credit card account Customer gets some time to make payment to the bank Customer gets interest free credit for upto 50 days

A pre-paid debit card Useful for travel abroad Image of a travel card

 Transfer

Local

Clearing ECS or Electronic Clearing Cheque Collection National Clearing CMS Cash Management Services Bills Collection Services involving Foreign Exchange

Transactions involving transfer of money from one account to another account within the branch of a bank or within the branches of the same bank Inter-connection through networking enables speedier transfer within branches Traditional methods (without networking) take time in realisation of proceeds

Facilitating collection of cheques which are drawn on local branches of banks Bankers meet at Clearing House for exchange of cheques RBI and / or SBI and / or commercial banks maintain Clearing House in different locations Days inward and outward cheques between banks are exchanged and transaction amounts are netted Local clearing is NET settlement

Payment instructions are transmitted electronically Covers high volume, low value transactions Both debit (ECS Debit) and credit (ECS Credit) transactions are covered Managed by RBI or SBI Credit ECS

Debit ECS

Example: Interest on Securities, Dividends, Regular Salaries

Example: Insurance premiums, Loan repayments, Utility bill payments

Benefits
Speed Accuracy Secured channel Avoids manual intervention (processing of transactions) Saves time due to systemic handling Benefits flow to bank, customer and user public

Local cheques are collected in local clearing Outstation cheques (upcountry) are collected by sending the cheques to respective banks branches Unlike local clearing, cheque collection takes time due to travel and realisation of proceeds into customers account

Speedier collection of outstation cheques drawn on larger cities RBI has linked larger cities Works under the same principle as local clearing Communication has enabled networking and efficiency in collection Unlike outstation cheque collection, national clearing facilitates faster collection

Best suited for customers with wide network of operations and dealers Enables to manage liquidity efficiently through speedier collection and efficient management of payments Availability of MIS on collections and payments a major benefit of CMS Distributed collection and payment at point of occurrence of transactions Enables customers under CMS to reconcile their payments and collections on a daily basis

Instead of paying through cheques, business houses draw bills of exchange at times Bills can be demand bills or usance bills Invoice, bill and document of title to goods (trade documents) are handed over to the bank by seller The Bank sends the same to the buyers bank for collecting payment Buyers bank hands over all trade documents upon receipt of payment from buyer on a demand bill or receipt of acceptance from the buyer in case of usance bill Buyers bank remits the proceeds to the sellers bank and seller gets money for goods / services sold

Need arises when payments are to be made to a beneficiary in an overseas country in foreign currency Payments received in foreign currency needs to be realised in Indian currency Banks maintain accounts in an overseas country to facilitate transactions involving foreign currency Such accounts are known as Nostro accounts

Current Accounts Demand deposits No interest is paid on balances in current accounts Savings Accounts Demand deposits for non-business entities Interest is paid on balances Fixed Deposit Accounts Accepted for fixed period Pre-mature payment is permitted as measure of customer service Recurring Deposit Accounts Saving of a fixed sum every month for a fixed period

Retail Loans Personal Overdrafts Credit Cards

Retail Loans

Provided to individuals Nature Consumer durables Housing Vehicle Personal expenses Eligibility Margin Interest application Repayment monthly or quarterly Unsecured and secured

Personal Overdraft
For unexpected and periodic requirements

Eligibility Margin Interest application Repayment Unsecured and secured

Credit Cards
For purchases / withdrawals

Eligibility Credit limit Repayment monthly or in installments Unsecured

Business credit
For acquisition of fixed assets For financing current assets

Eligibility Amount Borrowing/repayment Secured and unsecured

Given for acquiring of fixed assets Secured by a charge on the assets created out of bank finance Margin requires to be contributed Repayment is out of profits generated by the assets created and is spread over a time in installments

The assets required by the business are acquired by the bank and leased out to the customer Lease rentals are paid by the customer Not very popular now as the tax incentives available earlier are now withdrawn

In this section you will understand the various types of working capital facilities Nature
overdraft cash credit packing credit demand loans and lines of credit business cards

Given for financing the working capital cycle Can be Pre sale or Post sale financing Overdraft

Cash Credit

For meeting short term requirements For meeting temporary mismatches in cash flow Can be secured or unsecured Most Common and popular facility in India Running Account Permanent in nature Limit established and withdrawals within limit Secured by a hypothecation charge on current assets Margin is maintained over the value of assets

Packing Credit

Similar to cash credit For meeting export orders Originally on order to order basis Presently running account facility is permitted Concessive interest rate Liquidation can be only by export proceeds Delay in liquidation attracts penalty Secured by a charge on the current assets

Sagar mal sharma

Demand Loans/Lines of Credit

Demand loan is for meeting short term requirements Attracts cheaper interest Preferred by large corporates as cost effective Liquidated at the end of the stipulated period Line of Credit is an assurance by the banker to make available short term credit when needed Terms and conditions are pre-agreed Gives a feeling of security for the corporate The assurance is over a period of time

Business Card
Equivalent of a credit or debit card to individuals Enables business entities to make their purchase of required supplies without resorting to use of cheques or demand drafts Interest is charged from day one Being popularized in India

In this section you will understand the various modes of financing post sale or credit sales
Cheque purchase Bill purchase Bill Discount Letter of Credit Bill Negotiation Guarantees

Cheque Purchase
Avoids delay involved in collection of cheques Funds are made available to sellers immediately Interest is charged from the date of purchase to date of realization of the cheque

Bill Purchase
Advance against documentary bills is payable at sight Bills are then sent for collection Advance is liquidated from collection proceeds Interest is charged from the date of purchase to the date of receipt of proceeds is recovered upfront

Bill Discount
Advance against documentary Usance bills Interest charged for the Usance period is called discount Discount is recovered upfront

Letter of Credit

Guarantee given by the purchasers bank to the seller that the bill representing sale of goods will be paid Parties to an LC are applicant (buyer of goods), issuing bank (buyers bank), and beneficiary (Seller of goods) Treated as a credit facility by the buyers bank It is a non-fund based facility Normally secured by a charge on current assets Commission is charged resulting in fee income to bank

Bill Negotiation
Purchase or discounting of a bill accompanied by an LC Risk to negotiating bank is less Interest/discount is charged upfront

Guarantees
Issued by banks at the request of customers in respect of transactions other than normal trade transactions It can be as a replacement of EMD, for receipt of mobilisation advance, for release of retention money, towards payment of penalty for non performance Commission is charged for issue of guarantee resulting in fee income to bank It is a non-fund based facility

The services provided by banks under the role of provider of allied services are
Distribution Collection of taxes and bills DeMAT accounts Safe keeping Advisory services

In banking today, distribution of products and third parties have assumed great importance due to

Activities involved are:

Generation of fee income Ability to provide single umbrella service Ability to create exit barrier Mutual Fund Units Insurance Products Sale of Bonds Trade in Gold / Gold coins Mobile Phone Recharge Shares of companies offering Public Issues

 The

products offered by banks within the collection service are Taxes Utility Bills

A depository is like a bank. Only difference is that it holds your securities and not cash The account opened with a depository participant is called a DeMat account Dematerialisation is the process of converting physical shares into electronic form Rematerialisation is the process of converting securities from electronic form into physical form

Physical securities are transferred on basis of transfer deeds, DeMat securities get transferred electronically Each security (i.e., share of a particular company) has a unique identification No. called ISIN (International Securities Identification Number) through which the securities are recognised

Transfers are affected

The entire clearing process is put through a central depository At present we have two depositories, namely CDSL & NSDL who are registered with SEBI

Through the TIFD or Delivery Slip Which is given by the seller to his DP The shares will be transferred out of the sellers DeMat account And into the buyers DeMat account with his DP

Safe Deposit Vault:

Safe keeping facility is a traditional function of banks Lockers provided at very reasonable rates Rents are charged as per size of the locker and are payable in advance Lockers can be hired by individuals, firms, Ltd. Companies, associations, societies etc Lockers are rented out for a minimum period of one year

Safe Custody Service:

Under safe custody, banks accept sealed packets for safe keeping in their strong rooms for which a receipt is issued Articles are returned upon the customer handing over the receipt Not offered any more as a matter of course Banks today deposit the duplicate keys of branches for safe custody with other banks in the area for use in emergencies

The product offered by banks within the Advisory service is: Investment Advice

Banking Channels:
ATMs POS Terminals Internet banking Phone banking Mobile banking Branch

Migrating from branch banking to other channels- Advantages:

Convenience to customers Cost effective to banks Nearly 70% of transactions through nonbranch channels