Professional Documents
Culture Documents
Banking
Banking
What is a Bank?
· A bank is defined as a commercial institution licensed as a
receiver of deposits and giver of loans – both short and long term
• Section 5(1)(b) of the Banking Regulation Act, 1949 defines
banking as, “the accepting for the purpose of lending or investment, of
deposits from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise.”
• Section 5(1)( c) defines a banking company as, “any company
which transacts the business of banking in India.”
Prohibited Activities
There are some activities banks are not allowed to do.
The Banking Regulation Act prohibits banks from:
• Engaging directly or indirectly in trading activities and
undertaking trading risks.
• Buying or selling or bartering of goods directly or indirectly.
However, a bank can realize securities given to it or held by it for a
loan, if need arises for the realization of the amount lent.
• Any activity that may be in direct conflict with their other work.
This includes acting as brokers on the stock exchange or in the money
market or in trading goods.
• Engaging on its own account alone or with others in wholesale or
retail trade including import or export trade.
• Acquiring or purchasing any immovable property or any interest
except as necessary for the purpose of conducting its business or of
housing or providing amenities for its staff or for its own use. Otherwise
it should not be held for more than seven years. This period may be
extended by the Reserve Bank by another five years if it is satisfied
that this extension is in the interest of the depositors.
• Acquiring or holding any part of the share capital of, or otherwise
have a direct interest in any financial, commercial, agricultural or other
undertaking.
• Engaging in any trade or buying, selling or bartering of goods for
others except in connection with undertaking the administration of
estates as executor, trustee or otherwise.
• Holding shares in any company whether as pledgee or mortgagee
or absolute owner of an amount exceeding 30 percent of the paid up
capital of that company or 30 percent of its own share capital and
reserves whichever is less.
• Investing in a subsidiary company, financial services company,
financial institution, stock or other exchange where the investment
exceeds 10 percent of the bank’s paid up capital and reserves.
Investment in all such companies should not exceed 20 percent of the
bank’s paid up capital and reserves.
• Participating in equity of financial services ventures including
stock exchanges without obtaining the prior approval of RBI.
Subsidiary
Banking companies may form a subsidiary company, after obtaining
the prior approval of the RBI for:
• Undertaking of any business permitted for a banking company.
• Carrying on the business of banking exclusively outside India
• Undertaking of such businesses which, in the opinion of the
Reserve Bank, would be conducive to the spread of banking in India
• Transacting leasing business and or investing in shares of
equipment leasing companies
Customer
• Sir John Paget says, “to constitute a customer, there must be
some recognizable course or habit of dealing in the nature of regular
banking business….. it is difficult to reconcile the idea of a single
transaction with that of a customer”. It was held in Mathews vs William
Brown & Co (1894) that to constitute a customer , he should have
some sort of an account with the bank. The initial transaction in
opening an account did not set up the relation of a banker and
customer, and there had to be some measure of continuity and
custom. This came to be known as the ‘Duration Theory’.
• The duration theory was set aside by Justice Bailhache in Ladbroke
vs. Todd (1914) wherein it was stated, “ The relation of banker and
customer begins as soon as the first cheque is paid in and accepted for
collection and not merely when it is paid.” Lord Dunedin observed,
“customer signifies a relationship in which the duration is not of the
essence.”
• In General Western Railway C. vs. London and County Banking Co.
Ltd., it was stated, “ A customer is a person who has some sort of
account, either deposit or current or some similar relation with a bank
and from this it follows that any person may become a customer by
opening a deposit or current account or having some similar relation
with a bank.”
• In Central Bank of India vs. Gopinathan Nair, the Kerala High Court
stated, “a customer is a person who has the habit of resorting to the
same place or person to do business”.
It should be noted:
• A single transaction may constitute a customer.
• The customer should have an account
• Some frequency in transactions is expected.
• The dealing must be of a banking nature.
• The customer need not be a person but can be a company, a
society or other legal entity.
General Relationship
· The relationship is that of a debtor and creditor. The position
will depend on whether the bank has lent money or accepted deposits.
• The banker is not a mere depository or trustee. A depository
receives a sealed packet and undertakes to return it unopened. Banks
do this but it is a secondary function.
• The banker is a bailee (customer bailor) when the customer
deposits valuables, bonds or other documents with the bank. As the
custodian of the customer’s assets, the banker is liable for any loss
suffered by the customer due to his negligence.
• The opening of an account by a customer and the banker
accepting this involves a contractual relationship with rights and
obligations both for the banker and the customer.
• The banker has to afford the facility to the customer to draw funds
from his account in the bank by issue of cheques.
• Demand necessary in case of debt from the banker. This means
the depositor has to demand his money as the banker will not in the
ordinary course of events return the deposit unless it is asked for.
• The banker is an agent of the customer for remittances, collection
of cheques and payments on his behalf.
• The banker is a lessor when he leases safe deposit lockers to a
customer.
• The banker is a trustee with regard to safe custody deposits
deposited with the bank.
• The banker is a consultant when he advises customers.
• Under the Indian Limitation Act 1963, to file a suit to recover
money deposited by a customer when it is payable on demand is three
years from the date of demand. With regard to fixed deposits it is three
years from the date the receipt is produced for payment.
• Banks are liable for thefts or embezzlement by employees
committed during the course of the bank’s business. It is irrelevant
whether it was done for the benefit of the employer or not.
• The banker acts as an agent of his customer and performs several
agency functions for the convenience of customers such as the
collection of cheques.
• Refusal by the banker not to provide service to a customer is not
proper even if the customer owes money that has not been repaid.
• A banker can combine one or more accounts kept by a customer
in his own right unless he is under obligation to keep them separate.
However, a banker cannot combine a customer’s personal account with
a joint account. The right to combine two or more accounts is not
applicable to contingent or future debts.
• The customer has no right to treat two accounts as one or
combine them.
Obligations
• Banks have an obligation to honor cheques drawn on it if the
customer has sufficient funds. It is also obliged to honor cheques upto
the overdraft limit of a customer. The obligation is extinguished by a
garnishee order from the court
• Banks are obliged to maintain secrecy of client accounts. There
are times when information may be divulged. The banker may give
information:
• When he is statutorily required to do so.
• With express or implied consent of the customer.
• To other banks. This is known as common courtesy between
banks. In this case apart from making general statements no specific
information such as balances and the like are given.
• If it is in the bank’s interest.
• If the disclosure is in public/ national interest.
• Banker is bound to act according to the directions given by the
customer. If no directions are given the banker should act according to
how he is expected to act.
• Care should be taken to ensure that the information given is
general and only facts that are evident should be revealed. The banker
should avoid giving opinions.
Lien
Lien means the right (of a creditor) to retain (in the absence of an
agreement to the contrary) goods and securities owned by the debtor
bailed (given as security) to the bank until the loan due from the
debtor is repaid. The creditor (bank) has the right to retain the security
of the debtor but not to sell it. The lien may be particular or general.
Particular Lien
· A craftsman can retain those goods on which he has spent time,
effort and money until he is paid.
General Lien
• General lien gives the banker the right to retain goods and
securities entrusted to him in his capacity as a banker and in the
absence of a contract inconsistent with the right of lien (Section 171 of
the Indian Contracts Act, 1872). It extends to all goods placed with him
as a banker by his customer which are not specifically identified for
another purpose. He cannot exercise general lien if:
– The goods and securities have been entrusted to the banker as a
trustee or an agent.
– A contract exists between the banker and the customer that is
inconsistent with the banker’s right of general lien.
• A banker’s lien is more than a general lien. It is an implied pledge
and he has the power to sell the goods in case of default.
• The right of lien is conferred upon the banker by the Indian
Contract Act and as a consequence no separate agreement is required.
To be safe though the banker should take a letter of lien stating that
the goods/ securities are entrusted as security for a loan – existing and
future and that the banker can exercise his lien on them. The banker
can also sell the goods if the customer defaults.
• It should however be noted that the right of lien can be exercised
only on goods standing in the name of the borrower and not jointly with
others.
• The banker can exercise his right of lien on securities remaining in
his possession after the loan for which they were lodged is repaid by
the customer, if no contract to the contrary exists. In such cases there
is a presumption that the customer has re-offered the same securities
as a cover for any other advance outstanding or to be taken
subsequently.
Right of set-off
• This enables a debtor to set off a debt owed to him by a creditor
before the latter recovers a debt due to him from the debtor.
• Banks possess the right of set-off. Banks can combine two
accounts in the name of the same customer and set off the debit
balance in one account with the credit balance in the other.
• The funds must belong to the customer.
• The right of set-off can be exercised if there is no agreement
express or implied that is contrary to this right. It can be exercised only
after a notice is served on the customer intimating the customer that
the banker intends to exercise the right of set-off. To be on the safe
side bankers take a letter of set-off from the customer authorizing the
bank to exercise the right of set-off without giving him any notice.
Right of Appropriation
• In the normal course of business, a banker receives payments
from customers.
• If customers have more than one account or has taken more than
one loan, the customer has the right to direct his banker against which
debt the payment should be appropriated. If the customer does not
advise and there is more than one debt outstanding in the name of the
customer, the bank can exercise its right and apply it in payment of
any debt. The banker can even apply it against time barred debts.
However, once an appropriation has been made it cannot be reversed
• Section 59 of the Indian Contract 1872 states the right of
appropriation is vested in the debtor.
• He can appropriate the payment by an express intimation or
under circumstances implying that the payment is to be applied to the
discharge of some particular debt.
• If the creditor accepts this, it must be applied accordingly.
• Money received should first be set off against interest.
• Section 60 of the Indian Contract Act states that if the debtor
does not intimate or there is no circumstance indicating how the
payment is to be applied, the right of appropriation is vested in the
creditor.
• Section 61 of the Indian Contract Act states that where neither
party makes any appropriation, the payment shall be applied in
discharge of the debts in order of time. If the debts are of equal
standing, the payment should be applied in discharge of each
proportionately.
• Any payment made by a debtor should be applied in the first
instance towards satisfaction of interest and thereafter towards
principal unless there is an agreement to the contrary.
• If a customer has a single account and he deposits and withdraws
money from it regularly, the order in which the credit entry will set off
the debit entry is in the chronological order. This is known as Clayton’s
rule and is based on the judgment made in the Clayton case.
Period of limitation
• The period of limitation for the refund of bank deposits is three
years from the date a customer makes a demand for his money. With
regard to fixed deposits, the limitation is from the date it matures.
Termination of Relationship
• The banker customer relationship terminates on:
• Voluntary termination.
• Death of the customer
• Bankruptcy of the customer
• Liquidation of the company
• Insanity of the customer
BANK CUSTOMERS
Minors
• A minor is someone who is under 18 years of age. If a minor has a
court appointed guardian he/ she will remain a minor till the age of 21.
• In the case of a Hindu minor, the natural guardian is the father and
then the mother. This does not include stepfathers/ stepmothers. In
regard to a minor married girl, her husband shall be the natural
guardian. If the father becomes a sanyasi (Hindu holy man) or does not
remain a Hindu he will not remain a guardian.
• A Hindu father may appoint a guardian. Such a guardian will act after
the death of the parents.
• The court may appoint a guardian if, in the court’s opinion, the father
is unfit be a guardian.
• The Supreme Court has held that a mother can act as the natural
guardian if the father is not in actual charge of the affairs of the minor
because of his indifference or because of an agreement with the
mother.
• The Reserve Bank has advised banks to permit the opening of
minor’s accounts (fixed, saving and recurring deposit accounts) with
the mother as the guardian even if the father of the minor is alive. The
Supreme Court in Githa Hariharan & another held that “and after him”
does not mean after the death of the father but refers to the father’s
absence from the care of the minor’s property. Banks must have in
place safeguards to ensure that the accounts are never overdrawn and
always remain in credit.
• The Contract Act 1872 states that a minor is not capable of entering
into a valid contract. A contract for the supply of necessaries of life to a
minor is, however, a valid contract. A minor can repudiate all other
contracts. A banker must therefore be careful in his dealings with
minors.
• If a minor enters into a contract representing himself as a major and
then refuses to honor the contract on the grounds that he is a minor,
the minor has to restore the benefits he got through the contract.
• Savings accounts (not current accounts) may be opened in the name
of minors. This may be:
• In the name of the minor to be operated upon by the guardian.
• In the name of the minor to be operated by himself if he is 12 years
old or more. Two minors above the age of 12 can operate a joint
account
• At the time of opening the account, the date of birth of the minor is
recorded.
• When the minor reaches maturity, the minor’s account in the
guardian’s name should be closed and the balance should be paid to
the accountholder or the balance should be transferred to a new
account
• If the father of a Hindu minor dies, his mother becomes the natural
guardian. If the mother dies also during his minority there would be
either a guardian appointed by the will of the mother (natural
guardian) or a guardian will be appointed by court. Banks would return
the balance in the account to that guardian.
• In the case of Muslim minors mothers cannot sign as guardians.
• If a minor dies, the guardian can withdraw the balance in the
account. If it is a joint account the balance will be at the absolute
disposal of the guardian.
• If the guardian dies the balance can be paid to the minor after
maturity or to the natural guardian.
• There is no risk in opening an account in the name of a minor so long
as it is not overdrawn. Bankers cannot recover money due if there is a
loan or an overdraft as it is ab initio invalid. If a minor has pledged
assets for a loan, the banker cannot possess these assets, as the
pledge is invalid.
• If an advance is granted to a minor on the guarantee of a third party,
this advance cannot be recovered from the guarantor also as the
contract between the creditor (banker) and the principal debtor (minor)
is invalid.
• Minors can draw, endorse or negotiate cheques and bills but cannot
be held liable or sued if these are not honored.
• A minor can be admitted to a partnership with the consent of the
other partners but he will not be liable for losses. He must within 6
months of becoming a major repudiate his liability as a partner.
Otherwise he can be held liable for the debts of the partnership.
• A minor can be an agent but he cannot be held responsible to his
principal.
Married Women
• A married woman may enter into a valid contract. She may open a
bank account.
• With regard to debts taken the husband will not be liable unless the
loan is taken with his consent and authority or it is for the necessaries
of life.
Pardanashin Woman
• As a pardanashin women is normally completely secluded and does
not generally deal with the public at large, it is presumed that:
1. Any contract that she enters may have been subject to undue
influence and
2. The contract may not have been made freely and with full
understanding of the contract.
• To enforce the contract the other person will have to prove that the
limitations mentioned above do not exist.
Illiterate Persons
• Accounts may be opened for illiterate persons.
• As they cannot sign their names their thumb impressions are usually
taken. These should be attested by a person known to the bank.
• Normally illiterate persons are not given cheque books. To withdraw
money the account holder is expected to come in person and affix his
thumb impression in the presence of a bank official for identification.
• There is no legal bar in two illiterate persons having a joint account.
• Ideally account opening forms should have a clause wherein it is
stated that the terms of account opening and banking has been
explained to the account holder. The account holder should affix his
thumbprint in the presence of a witness/ official.
Lunatics
• Lunatics and persons of unsound mind are not competent to enter
into a valid contract.
• Accounts should not be opened for persons of unsound mind. • If a
banker has discounted a bill written, accepted or endorsed by a person
of unsound mind, the banker can realize the money only if he can
prove that he was not aware of the lunacy of the other person.
• All transactions in the account of a person declared to be of unsound
mind must be suspended when a banker receives notice that an
account holder is of unsound mind.
• If an account holder becomes senile or of unsound mind, he should
not be permitted to handle his account.
Trustee
• A trustee is a person on whom confidence is reposed.
• Trusts are formed by a document called the trust deed.
• Bankers should examine the trust deed thoroughly and determine the
powers vested in the trustees. Trustees are usually expected to act
jointly. They are not permitted to delegate their powers unless the trust
deed permits them to do so.
• If there are two or more trustees, there must be clear instructions
on who may operate the account.
• If one or more trustees dies or retires, the authority vested in the
remaining trustees will be as stated in the trust deed. When all the
trustees are dead, new trustees may be appointed by court.
• The insolvency of a trustee does not affect the trust property and a
creditor cannot recover his claim from the trust.
• The banker must safeguard the interest of the beneficiaries.
Otherwise he may have to compensate them for any fraud on the part
of the trustee.
• Trustees may borrow from banks and pledge or mortgage trust
property only if the trust deed confers these powers on them.
Joint Account
• A joint account is in the name of more than one person.
• The application for the joint account must be signed by all the
persons opening the account.
• Banks should examine every request to open joint accounts carefully.
In particular the purpose, the nature of business and the financial
status of the holders.
• Clear instructions must be procured regarding the manner of
operation which may be:
– By all the depositors jointly;
– By either or survivor;
– By former or survivor;
– By the depositor jointly or by the survivor.
• It should be clearly stated as to who may operate the account and
state their authority. If this is not given then only cheques signed by all
the persons in whose name the account stands should be honored.
• A joint account holder who is authorized to operate the account
cannot by himself appoint an agent to operate the account.
• Any joint account holder (even one not authorized to operate the
account) can stop payment of a cheque.
• The full name of the account should be given on all documents sent
to the bank even if the account is operated by one or some of the joint
account holders.
• The banker must take a mandate to determine who are permitted to
overdraw the account.
• The authority to operate the account can be revoked by any of the
joint holders. It is automatically revoked if any of the joint holders dies,
becomes bankrupt or of unsound mind. In these situations all cheques
must be stopped.
• The banker must be given clear instructions with regard to
withdrawal of securities in the joint account and the powers of joint
account holders to pledge these securities. If one or more of the joint
holders becomes insolvent, the mandate jointly given by them to the
banker ceases to operate. No payments from the account should be
permitted in order to determine the liability of the person who has
become insolvent. Payments may be made only on the instructions of
all the joint account holders and the receiver of the insolvent account
holder.
• The application form should have a clause stating to whom the
balance is payable in the event of the death of an account holder/
account holders. This may be a specific person or the survivor. This
instruction can be revoked by any of the account holders. In that case
the amount will be payable on the discharge of all the joint account
holders.
• On the death of a joint holder:
– If there is no agreement to the contrary, his representative and the
surviving joint holder/s are jointly entitled to claim money from the
bank. If all the joint holders die, the legal representatives of all of them
can jointly claim the amount (section 45 of the Indian Contract Act
1872).
– Where an account is opened “either or survivor”, the banker is not
bound to repay the amount to the representatives of the deceased and
the survivor jointly. It permits him to repay the amount to the survivor.
The banker should also not honor cheques drawn by the deceased joint
holder without obtaining the concurrence of the surviving joint holders.
– If the joint account has a debit balance, the account should be closed
to determine the liability of the deceased joint holder. If not the rule in
Clayton’s case will become applicable.
– If the banker pays the balance to the survivor/s he gets good
discharge (if it is accordance with the mandate of the joint account
holders. He need not investigate whether the survivor is entitled to the
amount in question. The legal heirs of the deceased will need to move
the court if they wish to claim the balance or a part of it.
– Joint holders may together nominate a person who should receive the
money should all of them dies.
Proprietorships
• A proprietorship, though the account of an individual, is the account
he maintains for a commercial enterprise that he owns.
• It is not important that the proprietor alone operates the account. He
can permit/ authorize others to do so too.
Partnership
• A partnership is the “relation between persons who have agreed to
share the profits of the business carried on by all of them acting for
all.”
• A partnership is established by an agreement. This may be oral or
written. As several bodies expect the partnership to be registered and
to avoid ambiguity it is better partnership agreements are written.
• The minimum number of partners in a firm cannot be less than two.
• The number of partners should not exceed the statutory limit. A
partnership firm of more than 10 persons carrying on banking business
or more than 20 persons carrying on any other business is illegal
unless it is registered under the Companies Act 1956 or is a Hindu
undivided family or formed in pursuance of some other law. If the
partnership exceeds this limit it is illegal and it cannot enter into a
contract or sue in its own name.
• If a partner joins or leaves the partnership, the old partnership ends
and a new one comes into place unless there is an agreement of
continuity.
• A minor may be admitted into a partnership provided there are two
others since a minor cannot enter into a legal contract.
• A partnership account must always be opened in the name of the
firm and not in the name of the individual partner/ partners.
• At the time of opening a bank account, the application form should
be signed by all the partners or by those authorized by the partners. In
the latter case there should be a resolution signed by all the
partners.
• If a partner is out of the country the other partners can open an
account. To be safe operations should not be allowed until the partner
returns and signs the account opening documents.
• Specimen signatures of all the partners must be procured.
• The bank should take a letter signed by all the partners that has:
– The names and addresses of the partners,
– The nature of business undertaken and
– The names of the partners who will operate the account.
• The authority for a partner to operate the account can be revoked by
any of the partners by giving notice to the banker. In that circumstance
the banker must stop payment of cheques signed by that partner.
Though the banker may pay cheques signed by all the partners, it is
recommended that a fresh mandate signed by all the partners be
sought.
• A partner can also stop the payment of a cheque signed by any other
partner of the firm. Furthermore sleeping partners and partners who
are not authorized to operate the bank account can also revoke the
authority of other partners and issue instructions to the bank. In such
cases a fresh mandate from the partners should be sought.
• A partner authorized to operate the account cannot delegate his
authority to another person without the consent in writing by all the
partners.
• If a cheque payable to the partnership is endorsed by a partner and is
deposited by him to be credited to his personal account, the
transaction should be done only after checking with all the other
partners.
• A partner acts as an agent of the partnership for the purpose of the
business of the partnership (firm) and thus binds the partnership by his
acts and deeds. This authority is called “implied authority”.
• Every partner is liable both individually and jointly with other partners
for all the acts of the firm or instruments executed provided they were
done:
– In the name of the firm and
– In connection with the business of the firm
Even one partner can bind the firm for the debts incurred by him on
behalf of the firm. To bind the firm the signature should state the
legend “for and on behalf of the firm” Just stating “XYZ, Partner ABC &
Co” is not sufficient.
• If a partner does something which is not related to the kind of
business carried on by the firm, other partners will not be liable for
losses/ debts incurred.
• A partner has the power to borrow on behalf of the firm to carry on
the firm’s business. Such a debt will be binding on the firm and all the
partners. If however the partner’s powers are limited and he is not
permitted to manage the affairs of the firm, then he does not possess
the power to borrow.
• The liability of a partner is unlimited unless he is a limited partner.
• At dissolution the debts of the firm shall be settled out of the assets
of the firm and the surplus is to be applied to paying the debts of the
partners. If the partners are also indebted, the personal assets of the
partners should be applied first to meet the claims of their individual
creditors. The remaining should be used to meet the dues to the
creditors of the firm. If however the documents are signed by the
partners individually as well as jointly (as a partner) creditors of the
firm can recover their debts simultaneously.
• The joint and several liability of partners continue till:
1. All the debts of the firm are paid
2. The constitution of the partnership changes due to death, retirement
or insolvency of a partner.
• If a partner dies the partnership ends if there is no agreement to the
contrary. The heirs of the partner do not automatically become
members. They have a right to the deceased’s share of the partnership
assets.
• On the dissolution of the partnership arising from the death of a
partner, the firm’s bank account should be closed. This is important
since if the account is overdrawn the liability of the individual partners
would need to be determined.
• If the firm is not dissolved, a new account should be opened in the
name of the reconstituted firm.
• When a partner retires, his liability to outside parties (including the
bank) ceases in respect of all transactions entered into after his
retirement. If the banker is not informed, the retiring partner will
continue to be liable.
• If a partner becomes insolvent the partnership comes to an end. The
insolvent partner ceases to be a partner from the date he is declared
insolvent and will not be liable for transactions entered into after that
date.
• An insolvent partner’s cheques written before his becoming declared
insolvent should be paid only after getting confirmation from all other
partners.
• As soon as a partner is declared insolvent, the account should be
closed and a new account should be opened.
Limited Companies
• Limited companies are legal entities under the law. They are viewed
as persons and are entitled to enter into contracts, own property, sue
in their own name and do all acts that an individual may do. A public
limited company has to have a minimum of seven members. There is
no maximum. On the other hand a private limited company has to have
atleast two members. It cannot have more than fifty members. This
excludes those in the employment of the company during the period of
share allotment.
• Banks must examine the company’s memorandum and articles of
association to determine what it may or may not do.
• The certificate of incorporation and certificate of commencement of
business must be examined as these provide conclusive proof that the
company is incorporated and is permitted to do business. A private
limited company is not required to obtain a certificate of
commencement of business.
• The memorandum of association is the document that details the
constitution of the company. It contains the name of the company, its
authorized share capital, its objects, the amount it may borrow and the
liability of the members. The objects clause is important as any
contract entered into contrary to the objects is unenforceable.
• The articles of association detail the rules and regulations relating to
its internal (day to day) management such as the powers of directors.
• Along with an application to open a bank account, the company must
furnish a board resolution that approves the opening of the bank
account and how the account should be operated and by whom.
• The amount a company can borrow is stated in its memorandum of
association. If the company wishes to borrow more, the excess must be
approved by the members in a general meeting. The maximum that
may be borrowed is stipulated by Section 293 (1) d of the Companies
Act 1956.
• If directors borrow money without authorization and the money is
used by the company, the company is bound to repay the money.
• Banks must ensure that borrowings are only for purposes mentioned
in the memorandum of association.
• The bank must obtain a certified copy of the resolution to borrow.
• The board must also pass a resolution that the borrowing is within its
limits.
• If collaterals are taken for loans/ advances, a charge must be created
with the registrar of joint stock companies within 30 days.
• While granting a loan, it is important to check whether there are prior
charges (which may be fixed or floating) as these can have a prior right
over the charge being created.
• If a director of the company has his personal account with the bank
and he endorses and deposits cheques drawn on the company to his
personal account, the banker must ascertain the nature of the deposit.
Clubs, Societies and Charitable Institutions
• When clubs, societies and charitable institution open accounts with
banks, it should be ensured that they are incorporated.
• These organizations are governed by their byelaws or its constitution
which will detail how they are to operate.
• A resolution of the managing committee is required to open a bank
account. This should detail who are the signatories and the manner the
account should be operated.
• Before permitting a society or club to borrow it should be ensured the
borrowing is permitted.
• If the person appointed to operate the account dies or resigns,
operation should stop till the society/ club nominates another person.
• Care should be ensured that an authorized signatory does not
endorse and bank club/ society cheques into his own account.
Non-Resident
• The Foreign Exchange Management Act defines a resident and states
that all others are non-residents.
This includes:
– An Indian citizen residing abroad for employment, business, vocation
or for any other business.
– Persons of Indian origin holding a passport issued by a foreign
country residing abroad.
– An Indian government servant posted abroad.
– An Indian government servant deputed abroad on assignments with
foreign governments or international agencies.
– An officer of the State government/ public sector deputed abroad on
a temporary assignment.
– An Indian student who goes abroad to study.
– An Indian student who takes up a job after studies in a foreign
university
Foreigners
• Foreigners are citizens of another country who are not of Indian
descent.
• Foreigners residing and working in India may open bank accounts.
• Others may open accounts for a short period of time.
• Prior to opening an account the passport and other documents should
be checked.
KNOW YOUR CUSTOMER
• It means that a banker should know his customers. He should know about their business
and as far as possible the nature of their earnings and their moral standing.
• This is why it is recommended that persons known to the bank recommend prospective
customers. Even though the introducers cannot be sued or otherwise held responsible, the
introducers have a moral responsibility.
• A banker loses the statutory protection available under section 131 of the Negotiable
Instruments Act if it is proved that he was negligent while opening an account.
• Actually, this is also reinforced by the concept of relationship banking. How can you
offer your client exceptional service if you do not know what he requires? You need to be
able to anticipate his requirements. You can do this only if you know your customer well.
The second reason is on borrowing customers. It would be very short sighted to lend to
someone you do not know.
• Although there was some laxity regarding the enforcement of the Know Your customer
(KYC) imperative, recent happenings such as terrorism, money laundering and drug
smuggling has brought the need of KYC to everyone’s focus.
• Headquarters of banks, governments and by extension central banks are insisting on
KYC policies being strictly adhered to.
• In India, The Reserve Bank of India has been issuing guidelines on KYC regularly.
Some of the more important instructions are mentioned below.
• It was instructed:
– In August 1976 that applicants for demand drafts, travelers cheques and money
transfers should affix their Permanent Account Number (PAN) on the application for
transactions of Rs. 10,000 and above.
– In November 1987 it was stated that cash should not be accepted for retirement of
import bills. It was also stated that there must be a reasonable time (say 6 months)
between the time an introducer opens his account and introduces a prospective account
holder. Introduction of an account should enable the proper identification of the person
opening the account so that the person can be traced if the account is misused.
– In April 1991, banks were instructed that travelers cheques, demand drafts, mail
transfers and telegraphic transfers for Rs. 50,000 and above should be by debit to the
customer’s account or against cheques only and not against cash.
– In August 1992 banks were advised to adhere to the prescribed norms and safeguards
while opening accounts.
– In December 1992 banks were asked to ensure that when customers withdrew amounts
from their cash credit/ overdraft accounts that funds were not diverted for the acquisition
of fixed assets, investments in associate companies and acquisition of shares and other
capital market investments.
– In September 1993, banks were asked to be vigilant and ensure proper end use of bank
funds. They were to keep vigil over heavy cash withdrawals by account holders that may
be disproportionate to their normal trade/ business requirements. They were also asked to
question unusual trends.
– In November 1993 on account of fraudulent encashment of interest/ dividend warrants
banks were asked to not open accounts without proper introduction.
– In December 1993 banks were asked to seek customer identification while opening
accounts including the obtaining of photographs of customers.
– In April 1994 the RBI clarified that photographs must be obtained for both residents
and non- residents and for those authorized to operate accounts.
– In September 1994 on account of fraudulent operations in deposit accounts, banks were
asked to examine every request for opening joint accounts very carefully. “Generally
crossed cheques” and payable to “order” were to be collected only on proper
endorsement. Banks were also asked to exercise care in the collection of cheques of large
amounts and ensure that joint accounts are not used for “benami” transactions.
– In May 1995 banks were asked to introduce a system of close watch of new deposit
accounts and monitor cash withdrawals and deposits for Rs. 10 lakhs and above in
deposit, cash credit and overdraft accounts.
– In September 1995 banks were asked to report to the RBI all transactions of Rs. 10
lakhs and above.
– In December 2001, banks were asked to keep a watchful eye on transactions that may
be by terrorist organizations.
– In April 2002 banks were instructed to freeze accounts of individuals and entities
identified by the Security Council Sanctions Committee of the United Nations.
– In May 2002, Banks were asked to ensure no new accounts were opened by banned
organizations.
– In August 2002, the Reserve Bank reinforced its instructions stating:
• The key principle of the “know your customer” procedure should be the identification of
an individual/ corporate opening an account. This should entail an introductory reference
from an existing account holder/ person known to the bank.
• The board of directors must have in place adequate procedures to verify the bona fide
identification of individuals. There should also be processes to monitor transactions of a
suspicious nature.
• This instruction raised the requirement of giving PAN to transactions of Rs. 50,000 or
more (earlier it was Rs. 10,000 – August 1976).
• There must be good control systems plus audits and checks to ensure the bank adheres
to its KYC policies.
• There should be a system at branch level to ensure that lists of terrorist entities are
circulated so that accounts/ transactions are not opened/ consummated.
• Transactions of a suspicious nature must be reported to the appropriate authorities.
• It should be ensured that all the laws are adhered to.
– In May 2004, it was stated that information collected from the customer for KYC
purposes should not be used for cross selling.
• In recent years on account of the proliferation of banks and their opening branches in
locations that they had no branches before, it has been difficult to adhere strictly to KYC
guidelines. In these instances, introductions by prominent citizens and individuals known
to the bank are considered acceptable. The concern is usually with respect to accounts
introduced by outsiders retained for this purpose who are remunerated on the basis of the
number of accounts they introduce. The consensus in these days of intensive competition
is that this is an acceptable risk if proper documentation to verify the antecedents of the
person is taken.
• In November 2004, the RBI issued comprehensive guidelines. These reiterated that the
objective of “Know Your Customer” (KYC) guidelines is to prevent banks from being
used, intentionally or unintentionally, by criminal elements for money laundering
activities or for the financing of terrorism. KYC procedures also enable banks to know /
understand their customers and their financial dealings better which in turn help them
manage their risks prudently. The guidelines are applicable to foreign currency accounts /
transactions and to all new accounts. .
• Banks have been asked to frame their KYC policies incorporating the following four
key elements:
– Customer Acceptance Policy
– Customer Identification Procedures
– Monitoring of Transactions
– Risk management
• For the purpose of KYC policy, a ‘customer’ has been defined as:
– A person or entity that maintains an account and / or has a business relationship with
the bank;
– One on whose behalf the account is maintained (i.e. the beneficial owner). This includes
beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
– Any person or entity connected with a financial transaction, which can pose significant
reputation or other risks to the bank, such as a wire transfer or issue of a high value
demand draft as a single transaction.
• Know Your Customer” (KYC) procedure is to be the key principle for identification of
an individual / corporate opening an account. The customer identification should entail
verification through an introductory reference from an existing account holder / a person
known to the bank or on the basis of documents provided by the customer.
• The Board of Directors of the banks are to have in place adequate policies that establish
procedures to verify the bona fide identification of the individual / corporate opening an
account. Policies to establish processes and procedures to monitor transactions of a
suspicious nature in accounts and systems of conducting due diligence and reporting of
such transactions must be in place.
Monitoring of Transactions
• Ongoing monitoring is an essential element of effective KYC procedures. Banks can
effectively control and reduce their risk only if they have an understanding of the normal
and reasonable activity of the customer so that they have the means of identifying
transactions that fall outside the regular pattern of activity. However, the extent of
monitoring will depend on the risk sensitivity of the account.
• Banks should pay special attention to all complex, unusually large transactions and all
unusual patterns, which have no apparent economic or visible lawful purpose. The bank
may prescribe threshold limits for a particular category of accounts and pay particular
attention to the transactions which exceed these limits.
• Transactions that involve large amounts of cash inconsistent with the normal and
expected activity of the customer should particularly attract the attention of the bank.
• Very high account turnover inconsistent with the size of the balance maintained may
indicate that funds are being washed through the account. High-risk accounts have to be
subjected to intensified monitoring.
• Every bank should set key indicators for such accounts, taking note of the background
of the customer, such as the country of origin, sources of funds, the type of transactions
involved and other risk factors. Banks should put in place a system of periodical review
of risk categorization of accounts and the need for applying enhanced due diligence
measures.
• Banks should ensure that a record of transactions in the accounts is preserved and
maintained as required in terms of section 12 of the PML Act, 2002. It may also be
ensured that transactions of a suspicious nature and / or any other type of transaction
notified under section 12 of the PML Act, 2002, is reported to the appropriate law
enforcement authority.
• Banks should ensure that its branches:
o Continue to maintain proper record of all cash transactions (deposits and withdrawals)
of Rs.10 lakh and above.
o Have an internal monitoring system that has an inbuilt procedure for reporting of large
cash transactions and those of a suspicious nature to controlling/ head office on a
fortnightly basis. Early computerization of branch reporting will facilitate prompt
generation of such reports.
o Report transactions of a suspicious nature to the appropriate law enforcement
authorities designated under the relevant laws governing such activities.
o Have well laid down systems for freezing of suspicious accounts.
o There must be quarterly reporting of suspicious accounts to the audit committee of the
board or the board of directors.
Terrorism Finance
• RBI has been circulating lists of terrorist entities notified by the Government of India to
banks so that banks may exercise caution if any transaction is detected with such entities.
There should be a system at the branch level to ensure that such lists are consulted in
order to determine whether a person/organization involved in a prospective or existing
business relationship appears on such a list. The authority to whom banks may report
accounts suspected to belong to terrorist entities will be advised in consultation with
Government.
Remittances
• Banks must ensure that any remittance of funds by way of demand draft, mail/
telegraphic transfer or any other mode and issue of travelers’ cheques for value of
Rs50,000 and above is effected by way of debit to the customers’ account or against
cheques and not against cash payment.
Customer Education
• Implementation of KYC procedures requires banks to demand certain information from
customers which may be of personal nature or which has hitherto never been called for.
This can sometimes lead to a lot of questioning by the customer as to the motive and
purpose of collecting such information. There is, therefore, a need for banks to prepare
specific literature/ pamphlets etc. so as to educate the customer of the objectives of the
KYC program. The front desk staff needs to be specially trained to handle such situations
while dealing with customers.
DEPOSIT ACCOUNTS
• The acceptance of deposits and maintenance of these deposits is the core activity of
banks. It is arguably the most important function as without deposits banks will not have
funds to invest or lend.
• The relationship between a banker and a customer begins when the customer opens an
account and deposits an amount in that account.
• As customers have different needs, bankers offer different types of deposit accounts.
Demand Deposits
• Demand deposits are those deposits where the money deposited is available to the
depositor on demand.
• There are two types of demand deposit accounts. These are:
• Current Accounts. This is defined by the Reserve Bank as “a form of demand deposit
wherefrom withdrawals are allowed any number of times depending upon the balance in
the account or upto a particular agreed amount and shall also be deemed to include other
deposit accounts that are neither savings deposit or term deposit.”
• Savings Accounts. A savings account has been defined as “ a deposit account …..which
is subject to the restrictions as to the number of withdrawals as also the amounts of
withdrawals permitted by the bank during any specified period.”
• Call Deposits. These are deposits maintained by banks. These are kept overnight or for a
period of time and are interest earning.
Fixed Deposit
• Fixed Deposit. A fixed or time deposit is defined as “a deposit received by a bank for a
fixed period and which is withdrawable only after the expiry of the said fixed period and
shall also include deposits such as recurring, cumulative, annuity, reinvestment deposits,
cash certificates and so on.”
The manner these accounts operate and their differences are detailed in the ensuing
chapters.
• By opening a deposit account, an individual who has no other account with the bank,
begins a relationship. The beginning of a relationship imposes several obligations on a
banker. He must therefore be careful regarding whose accounts he opens.
• An account can be opened by anyone who can enter into a valid contract. Minors may
open an account jointly with their guardians. Bankers may allow minors to open savings
accounts in their single name and operate the account. These will be savings accounts and
minors will not be permitted to overdraw these accounts. This is to inculcate banking
habits.
Persons who are not permitted to open accounts are those who cannot enter into a contract
such as persons of unsound mind.
Introduction
• The Reserve Bank of India insists (and it is good banking practice) that those opening
accounts are properly introduced. This becomes even more important in view of
terrorism, frauds and money laundering. The bank must be satisfied that the person who
opens an account is indeed the person he claims to be and is respectable.
• The banker will get legal protection under Section131 of the Negotiable Instruments Act
(which governs payment and collection of negotiable instruments) only if the bank has
acted in good faith and without negligence. It is presumed that he has not acted without
negligence if he accepts a customer who has not been properly introduced.
• The RBI also states that proper identification enables the bank to trace the person later if
required.
• Therefore the RBI states that the practice of obtaining proper introduction should not be
treated as a mere formality but as a measure to safeguard against opening of accounts by
undesirables or in fictitious names to deposit unaccounted money.
• The account should not normally be opened without a meeting between the bank official
and the customer.
• The introduction should be by:
– An existing customer. It is required that the individual should be of some standing and
been a customer for at least 6 months. This is to ensure accounts are not opened on the
introduction of new account holders or persons having small and marginal balances. The
RBI recommends this interval to enable the bank to monitor transactions in the account
and satisfy itself that transactions in the introducer’s account are satisfactory.
– A respectable person of the local community known to the bank or the bank’s staff.
This is often the case when a bank is opening its first branch in a town/ city.
– Another bank/ banker. This occurs when a person is new to a location but has been
having a banking relationship with another bank in another city.
– Bank managers/ bank staff should be discouraged from giving the introduction. In these
cases, apart from verifying the signatures with the specimen signatures on record, written
confirmation should be procured of the introduction. Till the confirmation is procured, the
bank should not collect cheques/ drafts through the newly opened account.
• The banker will seek from the introducer comfort that the person being introduced is a
respectable person – that he is honest, with integrity and morals. It should be noted that
the introducer has only a moral responsibility. He cannot be sued or otherwise taken to
task if the person he has introduced turns out to be an undesirable person
• Where the customer is not able to provide a satisfactory introduction, it must be made
incumbent on him to provide sufficient proof of his antecedents before the account is
opened.
• Customers of good standing should be educated to realize the implications of
introducing an account without knowing the person introduced.
• The RBI makes concessions regarding those who will be getting credits by way of
salary and makes payments by cheques to government, semi-government agencies and
individuals. In their case a simple introduction is considered adequate
• However, in the case of accounts which are to be used for remittance transactions and
for collection of cheques of substantial amounts besides business payments, deeper
enquiries are required.
• The RBI has advised banks to incorporate a certificate in account opening forms
confirming the identity, occupation and address of the prospective customer signed by the
introducer
• The RBI has also said the role of the introducers should be made more specific. It is not
adequate to say that he has known the person for a sufficient length of time.
• There may be times when the introducer may be unable to visit the bank to introduce the
customer (introduction in absentia). The bank should first verify the signature of the
introducer with the specimen signature on record. The bank should then send a letter to
the introducer thanking him for introducing the customer and the introducer must confirm
in writing that he has introduced the account. This is to satisfy the banker that the
introducer has indeed introduced the customer. Till the written confirmation is procured,
the bank should not collect cheques/ drafts through the newly opened account. The bank
should also send a letter to the customer and get his confirmation for opening the account.
A cheque book should be issued only after written confirmation is received from both the
customer and the introducer.
• If the account has not been properly introduced:
• Deposits received from an un-discharged insolvent not properly introduced carries the
risk of attachment.
• The bank may be exposing itself to the dangers of laundered money.
• Several banks permit fixed deposits to be opened by a “self introduction.” This is by the
person opening the account depositing a cheque drawn by him on another bank where he
maintains an account. Banks consider this an acceptable risk. However, this does not give
the banker any comfort with regard to the moral standing of the person.
• While individuals must be introduced, limited companies, trusts and other bodies cannot
be. In these cases it is the documents that permit their existence that are taken into
account such as the certificate of incorporation and the certificate of commencement of
business.
Photographs
• Banks must obtain photographs of the customer/ customers and all those who are
authorized to operate the account. This is to check the identity of the person operating the
account. In the case of minors, the guardian’s photograph should be obtained. The bank
should obtain the photograph of pardanashin women, in those cases where they open/
operate an account. Photographs of NRE, NRO and FCNR account holders must also be
procured.
• The photographs should be recent.
• The cost of the photographs to be affixed on the account opening forms may be borne
by the customers.
• The customer/s must submit two photographs.
• Only one set of photographs need to be obtained. Separate photographs should not be
obtained for each category of deposit. The applications for different types of deposit
accounts should be properly referenced.
• For operations in the accounts, banks should not insist on the presence of the account
holder unless the circumstances so warrant.
• Photographs cannot be a substitute for specimen signatures.
• Photographs need not be insisted upon in the following cases:
• A new savings account where cheque facility is not provided.
• Fixed and other term deposits upto an amount of Rs. 10,000.
• Banks, local authorities and government departments (excluding public sector
undertakings or quasi-government bodies) are exempt from the requirement of
photographs.
• Photographs need not be obtained for borrowal accounts – cash credit, overdrafts and
the like.
• Banks need not insist on photographs for accounts of staff members (single/ joint).
• Banks must obtain full and complete address of depositors and records these in the
books and account opening documentation so that the customers can be traced without
difficulty.
• Independent confirmation of the address must be obtained in all cases (recent telephone
bill, electricity bill that is in his name or some other acceptable correspondence or
document like a ration card. A driving licence and even a passport (sometimes) is not an
acceptable document in support of one’s address (as they may not be upto date). As an
abundant precaution, banks should, after the account has been opened, send a letter to the
customer at the address on the account opening form.
• PAN/GIR of account openers with an initial deposit of Rs. 50,000 and above must be
obtained.
• If an account opener does not have a PAN/ GIR number, he must be requested to submit
Form 60 of the Income Tax Department (form of declaration to be filed by a person who
does not have a permanent account number and who enters into any transaction specified
in rule 114B)
Specimen Signature
• The specimen signature of the client has to be procured with the account opening
documentation, as it is on this signature that cheques and other documents of instruction
will be actioned.
Authorization
• The opening of new accounts should be authorized by the branch manager or by the
person to whom the authority has been delegated.
Completion of formalities
• It must be ensured that all account-opening facilities are undertaken at the bank’s
premises and no document is allowed to be taken out for execution.
• When an exception has to be made banks may depute an officer to verify the particulars,
obtain a signed photograph on a suitably formatted verification sheet, forward by
registered post account opening forms to clients for verification etc. before any operations
are conducted in the account.
• Banks must insist on a declaration from the account holder to the effect that he is not
enjoying any credit facility with any other bank or obtain a declaration giving particulars
of credit facilities enjoyed by him with any other bank.
• The account opening bank must ascertain all the details and should inform the
concerned lending bank.
• The account opening bank should obtain a no-objection from lending banks.
• If there is a consortium, the bank must inform the consortium leader or if there is a
multiple banking arrangement, all the banks in the arrangement.
Documentation
An individual should:
• Make an application in the prescribed form. The applicant should state:
– His name;
– Occupation;
– Full address
– His Permanent Account Number (PAN). If he does not have one he should fill in and
submit form 60 issued by the Income Tax Department.
• Before opening an account, the banker must be satisfied of the identity of the person and
that he is respectable. If not the banker is within his rights in refusing to open the account.
The normal documents seen to be satisfied on identity are:
– Driving licence
– Passport
– Photo credit card
– Election ID Card (Voter’s identity card)
– Personal Account Number (PAN) card
– Government ID Card. The Reserve Bank has advised banks that pay books or postal
identification cards or identity cards of armed forces/ police/ government departments or
passports may be considered acceptable to establish the identity of a person seeking to
open a savings account without a cheque facility
– Letter from a recognized public authority or public servant verifying the identity and
residence of the customer to the satisfaction of the bank.
• With regard to address, telephone bill, bank statement, recent electricity bill, ration card
or letter from employer will suffice.
• At the time of opening the account, the account holder and all those authorized should
sign their names on the specimen signature card. It is this signature the banker will
compare with when cheques are issued on the account or instructions are given.
• If the signature is not attested the signature can be verified from the person’s passport or
by a self cheque or it can be verified by another banker (if the individual has another
account).
Partnerships
• Partnership Companies should submit:
– A certified true copy of the partnership agreement;
– A list of all the partners and their addresses (including telephone numbers) mentioning
if there are any limited partners;
– Attested true copy of a resolution of the partners to open an account and the manner
how it is to be operated or a letter signed by all the partners addressed to the bank to open
a deposit account. This is to ensure their joint and several liability;
– Power of attorney granted to a partner or an employee to transact business;
– PAN Card;
– Telephone or other bill as proof of address.
Limited Companies
• Limited Companies should submit:
• Their memorandum and articles of association;
• The certificate of incorporation;
• The certificate of commencement of business (public limited companies);
• A copy of a resolution passed by the Board of Directors to open a account and the
manner it is to be operated (names/ designations of the persons permitted to operate the
account along with the authority given to them ;
• Principal place of business;
• Copy of the PAN card;
• Mailing address and fax number;
• Proof of address.
• Banks need to be vigilant against business entities being used by individuals as a ‘front’
for maintaining accounts with banks. Banks should examine the control structure of the
entity, determine the source of funds and identify the natural persons who have a
controlling interest and who comprise the management. These requirements may be
moderated according to the risk perception e.g. in the case of a public limited company it
will not be necessary to identify all the shareholders.
Correspondent Banking
• Correspondent banking is the provision of banking services by one bank (the
“correspondent bank”) to another bank (the “respondent bank”). These services may
include cash/funds management, international wire transfers, drawing arrangements for
demand drafts and mail transfers, payable-through-accounts, cheques clearing, etc.
• Banks should gather sufficient information to understand fully the nature of the business
of the correspondent/respondent bank. Information on the other bank’s management,
major business activities, purpose of opening the account, identity of any third party
entities that will use the correspondent banking services and regulatory/supervisory
framework in the correspondents/respondent’s country may be of special relevance.
• Similarly, banks should try to ascertain from publicly available information whether the
other bank has been subject to any money laundering or terrorist financing investigation
or regulatory action.
• While it is desirable that such relationships should be established only with the approval
of the board, in case the boards of some banks wish to delegate the power to an
administrative authority, they may delegate the power to a committee headed by the
chairman/CEO of the bank while laying down clear parameters for approving such
relationships. Proposals approved by the committee should invariably be put up to the
board at its next meeting for post facto approval. The responsibilities of each bank with
whom correspondent banking relationship is established should be clearly documented.
• In the case of payable-through-accounts, the correspondent bank should be satisfied that
the respondent bank has verified the identity of the customers having direct access to the
accounts and is undertaking ongoing due diligence on them. The correspondent bank
should also ensure that the respondent bank is able to provide the relevant customer
identification data immediately on request.
• Banks should refuse to enter into a correspondent relationship with a “shell bank” (i.e. a
bank which is incorporated in a country where it has no physical presence and is
unaffiliated to any regulated financial group). Shell banks are not permitted to operate in
India. Banks should also guard against establishing relationships with respondent foreign
financial institutions that permit their accounts to be used by shell banks. Banks should be
extremely cautious while continuing relationships with respondent banks located in
countries with poor KYC standards and countries identified as non-cooperative in the
fight against money laundering and terrorist financing. Banks should ensure that their
respondent banks have anti money laundering policies and procedures in place and apply
enhanced due diligence procedures for transactions carried out through the correspondent
accounts.
CURRENT ACCOUNT
Definition
– This is defined by the Reserve Bank as “a form of demand deposit wherefrom
withdrawals are allowed any number of times depending upon the balance in the account
or upto a particular agreed amount and shall also be deemed to include other deposit
accounts that are neither savings deposit or term deposit.”
– A current account is opened usually for commercial or business purposes where there
are a large number of transactions.
– It is a running and active account and there are no restrictions on the number of
transactions and the amount of transactions.
Credit Discipline
• The RBI has stated that that to maintain credit discipline banks should:
o Insist on a declaration from the account holder to the effect that he is not enjoying any
credit facility with any other commercial bank or obtain a declaration giving particulars
of credit facilities enjoyed with any other commercial bank.
o Ascertain whether he/ she is a member of any other cooperative society/ bank. If so the
details should be procured.
o If the prospective customer is enjoying credit facility from any other commercial or co-
operative bank, the bank opening the current account should inform the concerned
lending bank and insist on a no objection certificate. If the facility is from a co-operative
bank, it is essential for the bank to comply with the requirements of the co-operative
societies act/ rules of the state regarding membership and borrowings.
o If due diligence is carried out on the request of a prospective customer who is a
corporate or large borrower enjoying facilities from more than one bank, the banks may
inform the consortium leader, if under consortium and the concerned banks, if under
multiple banking arrangement.
o Banks may open current accounts of prospective customers if no response is received
after a minimum period of a fortnight. If a response is received within a fortnight, banks
should assess the situation with reference to the information provided on the prospective
customer by the bank concerned and are not required to solicit a formal no objection,
consistently with true freedom to the customer of banks as well as needed due diligence
on the customer of the bank.
Operation
• At the time the account is opened, the customer would mention how the account should
be operated. This is important for joint accounts or accounts with multiple holders.
• This is also important should anything occur to the account holders. The terms used are:
– Single;
– Joint;
– Either or survivor. In this case should one of the account holders die, the survivor can
draw the balance in the account.
• At the time the account is opened, the customer should ideally open the account with a
cash deposit. An account should not be opened on a zero balance (whenever possible) as
the banker in this instance has not taken on deposit any amount.
Current Accounts operation
• An account holder will deposit cash or cheques into his account. The details are entered
in a paying in book/ slip and then the book/ slip along with the cheques/ cash is handed
over to the teller.
• The teller verifies the amount and stamps the customer’s copy confirming receipt.
• The Reserve Bank has stated that no bank should refuse an acknowledgement if the
customer makes a deposit at the counters of the bank.
• Customers can also deposit cheques/ cash in drop in boxes/ ATMs but they do so at their
risk as they would not receive a confirmation of the deposit.
• There is no restriction on the amount that may be deposited in a current account.
• Third party cheques and cheques with endorsements may be deposited in current
accounts.
• As a banker one is expected to check the end use of funds. Therefore, if a partner or an
authorized signatory is transferring funds from the partnership/ company’s account to his
personal account, the banker should ascertain and be satisfied with the reason.
• Customers make withdrawals from the account by drawing cheques (or withdrawal slips
if they do not have a cheque book).
• The banker will compare the signature on the cheque, the amount, whether the customer
has sufficient balance and the date. If all are in order payment will be made.
• With regard to customers who are too ill to sign a cheque or cannot be physically
present - they can put their thumb impression or a mark on the cheque and this must be
identified by two independent witnesses known to the bank.
• There are no restrictions on the number of withdrawals that may be made in a period.
Cheque book
• When a cheque book is exhausted, the customer should fill in a cheque requisition form
(contained in the cheque book) and hand it to the bank.
• Normally banks send new cheque books to customers by courier. The RBI has stated
that cheque books should be handed over to customers/ their representatives at the branch
of the bank where they bank if they want it given to them at the bank.
Passbook/ Statement
• Banks either give customers a passbook which details their account or at the end of a
month send their customers a statement of their account with the bank.
• The Reserve Bank has stated that entries in passbooks should not be inscrutable and that
brief intelligible particulars must be entered.
Stopping Operations
• Operations in an account will be stopped:
– On receipt of notice of death of a customer;
– On receipt of notice of the insanity of a customer;
– On being advised that the customer is insolvent;
– On receipt of a garnishee order from the court;
– On receipt of notice of assignment of the credit balance in the account of a customer to
a third party.
Interest
• Banks do not pay interest on balances maintained in a current account.
• The Reserve Bank prohibits the payment of interest in a current account. In addition the
Reserve Bank prohibits the payment of countervailing interest
• Countervailing interest is defined as “any benefit of interest allowed on any account in
the nature of current account maintained with the bank”. In short if a depositor is given a
free holiday for a current account maintained, the free holiday would be viewed as
countervailing interest.
• Banks are permitted to pay interest on the current account of a Regional Rural Bank
(RRB) they have sponsored. The rate that can be paid is half a percent lower than the
borrowing rate for the RRB.
• Since May 1983 banks have been permitted to pay interest on the balances in the current
account standing in the name of a deceased individual depositor/ sole proprietorship
concern from the date of the depositor’s death till the date the account is closed at the rate
applicable to savings deposits.
Dormant accounts
• If there has been no customer initiated transaction in the account for two years, the
account will be designated a dormant account. Many banks designate accounts as dormant
if there are no customer-generated transactions for six months.
• These accounts are subject to greater checks, as they are susceptible to fraud.
Charges
• Banks often insist on a minimum average monthly/ quarterly balance to be maintained
in the account. If the balance is not maintained a service charge is levied.
• Clients must be advised of any changes in charges.
Nomination
• The Banking Laws (Amendment) Act 1983 inserted section 45ZA to permit the facility
of nomination.
• A single depositor (sole proprietor) can, in the event of his death, nominate who should
be paid the balance lying to his credit in his account.
• Nomination may be made in favor of individuals only and not associations, societies,
trusts or any organization or their office bearers.
• Bodies and incorporated entities cannot make nominations
• Nomination confers upon the nominee the right to receive the deposit from the bank.
• If the nominee is a minor the depositor/s may appoint a person to receive the amount
during the minority of the nominee.
• Nominations may be varied or cancelled at any time.
• On making payment to the nominee the bank is fully discharged from its liability
regarding the deposit.
Deceased Depositor
• Where a depositor has utilized nomination facility and made a valid nomination or
where the account was opened with the survivorship clause (either or survivor, or anyone
or survivor or former or survivor or latter or survivor), payment of the balance in the
deposit account to the survivor(s)/ nominee of a deceased deposit account holder
represents a valid discharge if:
o The bank has exercised due care and caution in establishing identity of survivor/
nominee and death of account holder (through documentary evidence).
o There is no court order restraining the bank from making the payment.
o It is made clear to the survivor(s) that he would be receiving payment as a trustee of the
legal heirs of the deceased depositor;
o The RBI has stated that in these cases insistence on production of legal representation is
superfluous and unwarranted. Banks should not ask for succession certificates, letter of
administration or probate. Banks should not seek to obtain any bond or indemnity.
• Where the deceased depositor has not made any nomination or the account does not
have a survivor clause banks are expected to follow a simplified procedure for repayment
to legal heirs without inconveniencing them.
• Deceased depositors may receive monies in their name. To avoid hardships banks
should either open an account styled “Estate of Shri ………….. , (the deceased)” where
all amounts received are deposited or the survivor/ nominee can authorize the bank to
return the monies received with the remark “Account holder deceased”. The survivor/
nominee can then approach the remitter to effect payment to them.
• Banks should settle claims and release payment within 15 days from receiving claim
along with documents such as proof of death of depositor.
Closing an account
• To close an account all the account holders should write to the bank stating their intent
to close the account. They must also submit all unused cheques to the bank. Incorporated
entities and associations should also submit a copy of the resolution wherein it was agreed
that the bank account be closed.
• The bank usually asks the account holder/s to sign one cheque in blank. This is the
demand by the account holder for the balance in his account.
• All unused cheque leaves should be cancelled and returned to the bank.
• The bank may also request the customer to close his account if:
– The customer is no longer a desirable person.
– The account has not been operated for a long time.
• If a customer cannot be traced, the balance is placed in an unclaimed deposits account.
• If a statement or correspondence sent to the customer is returned, the balance should be
transferred to a dormant account (to keep a check on the account) or in some other
“watch” account.
Prohibitions
• No bank:
– May pay a rate of interest higher than that stipulated from time to time by the Reserve
Bank of India.
– May pay brokerage or gifts to agents/ others for deposits placed at the bank.
– May use outsiders for the collection of deposits.
– Should launch prize/lottery or other schemes to attract deposits.
– Should resort to unethical practices to attract deposits.
– May pay countervailing interest on any current account maintained with it.
– Pay interest on margin money held in current account
SAVINGS ACCOUNT
Savings Account
• Savings accounts have been defined as “ a deposit account …..which is subject to the
restrictions as to the number of withdrawals as also the amounts of withdrawals permitted
by the bank during any specified period”.
• A savings account is meant to encourage savings and is focused on individuals
• By opening an account an individual begins a relationship with the bank.
Cheque book
• When a cheque book is exhausted, the customer should fill in a cheque requisition form
(contained in the cheque book) and hand it to the bank.
• Normally banks send new cheque books to customers by courier. The RBI has stated
that cheque books should be handed over to customers/ their representatives at the branch
of the bank where they bank if they want it given to them at the bank.
Passbook/ Statement
• Banks either give customers a passbook which details their account or at the end of a
quarter send their customers a statement of their account with the bank.
• The Reserve Bank has stated that entries on statements/ passbooks should not be
inscrutable and that brief, intelligible particulars must be entered.
Interest
• Interest is paid on these accounts as it is intended to encourage savings.
• The Reserve Bank stipulates the interest that may be paid on these accounts. It is
currently 3½% per annum. In October 2005, The Governor of the Reserve Bank during
his half yearly review stated that this may be deregulated as it is unfair to pay interest at a
rate lower than the rate of inflation.
• Interest is normally payable at quarterly or longer rests.
• Interest is calculated on the lowest balance in the savings account between the 10th and
the end of the month.
• Interest is credited only if it is one rupee or more
• Scheduled banks with deposits of less than Rs. 25 crores are permitted to give, at their
discretion, an additional ½%
• Banks are permitted to pay their employees an additional 1% interest. This is subject to
a declaration from the employee that the money belongs to him.
• Additional interest of 1% is also payable to retired employees (but not those who have
resigned) and the spouse of a deceased retired employee.
• Additional interest of 1% per annum may be paid to an association or fund whose
members are employees of the bank.
• Additional interest of 1% per annum may also be paid to the chairman and executive
director of the bank during their tenure.
• All transactions including the payment of interest should be rounded off to the nearest
rupee.
• If interest over Rs. 5000 is paid, tax must be deducted at source.
Stopping Operations
• Operations in an account will be stopped:
– On receipt of notice of death of a customer;
– On receipt of notice of the insanity of a customer;
– On being advised that the customer is insolvent;
– On receipt of a garnishee order from the court;
– On receipt of notice of assignment of the credit balance in the account of a customer to
a third party.
Dormant accounts
• If there has been no customer initiated transaction in the account for two years the
account will be designated a dormant account. In some banks an account is designated
dormant if there are no customer generated transactions for six months.
• These accounts are subject to greater checks as they are susceptible to fraud.
Charges
• Banks often insist on a minimum average quarterly balance to be maintained in the
account. If the balance is not maintained a service charge is levied.
• Clients must be advised of any changes in charges.
Nomination
• The Banking Laws (Amendment) Act 1983 inserted section 45ZA to permit the facility
of nomination.
• A single depositor can, in the event of his death, nominate the person who should be
paid the balance lying to his credit in his account.
• With regard to a joint account all the depositors together may nominate a person to
whom in the event of their death the amount to their credit in the joint account may be
paid.
• Nomination may be made in favor of individuals only and not associations, societies,
trusts or any organization or their office bearers.
• Nomination confers upon the nominee the right to receive the deposit from the bank.
• If the nominee is a minor the depositor/s may appoint a person to receive the amount
during the minority of the nominee.
• Nominations may be varied or cancelled at any time.
• On making payment to the nominee the bank is fully discharged from its liability
regarding the deposit.
Deceased Depositor
• Where a depositor has utilized nomination facility and made a valid nomination or
where the account was opened with the survivorship clause (either or survivor, or anyone
or survivor or former or survivor or latter or survivor, payment of the balance in the
deposit account to the survivor(s)/ nominee of a deceased deposit account holder
represents a valid discharge if:
• The bank has exercised due care and caution in establishing identity of survivor/
nominee and death of account holder (through documentary evidence);
• There is no court order restraining the bank from making the payment;
• It is made clear to the survivor(s) that he would be receiving payment as a trustee of the
legal heirs of the deceased depositor.
• The RBI has stated that in these cases insistence on production of legal representation is
superfluous and unwarranted. Banks should not ask for succession certificates, letter of
administration or probate. Banks should not seek to obtain any bond or indemnity;
• Where the deceased depositor has not made any nomination or the account does not
have a survivor clause banks are expected to follow a simplified procedure for repayment
to legal heirs without inconveniencing them.
• Deceased depositors may receive monies in their name. To avoid hardships banks
should either open an account styled “Estate of Shri ………….. , (the Deceased)” where
all amounts received are deposited or the survivor/ nominee can authorize the bank to
return the monies received with the remark “Account holder deceased”. The survivor/
nominee can then approach the remitter to effect payment to them.
• Banks should settle claims and release payment within 15 days from receiving claim
along with documents such as proof of death of depositor.
• The above guidelines will be applicable for dealing with requests for access to the
deceased’s safe deposit lockers/ safe custody articles.
Closing an account
• To close an account all the account holders should write to the bank stating their intent
to close the account. They must also submit all unused cheques to the bank.
• The bank usually asks the account holder/s to sign one cheque in blank. This is the
demand by the account holder for the balance in his account.
• The bank may also request the customer to close his account if:
• The customer is no longer a desirable person.
• The account has not been operated for a long time.
• If a customer cannot be traced, the balance is placed in an unclaimed deposits account.
• If a statement or correspondence sent to the customer is returned, the balance should be
transferred to a dormant account (to keep a check on the account) or in some other
“watch” account.
Prohibitions
• No bank:
– May pay a rate of interest higher than that stipulated from time to time by the Reserve
Bank of India.
– May pay brokerage or gifts to agents/ others for deposits placed at the bank.
– Use outsiders for the collection of deposits.
– Should launch prize/lottery or other schemes to attract deposits.
– Should resort to unethical practices to attract deposits.
• A fixed or time deposit is defined as “a deposit received by a bank for a fixed period and
which is withdrawable only after the expiry of the said fixed period and shall also include
deposits such as recurring, cumulative, annuity, reinvestment deposits, cash certificates
and so on.”
• In short, fixed deposits are:
– Placed with the bank for a fixed period.
– It is repayable on the expiry of that period.
– The rates offered on these are higher than on savings accounts as the banker knows in
advance when repayment has to be made.
– A variation is the “notice deposit” which is a “term deposit for a specific period but
withdrawable on giving at least one complete day’s notice.
• Pre-liberalization (prior to 1992) the Reserve Bank stipulated the rates banks may offer
customers. Now banks are permitted to fix their own rates on fixed deposits of different
maturities.
• Changes in rates are to be decided by the board of directors or a body/ group authorized
by the board.
• Banks must disclose in advance the schedule of interest rates that they offer on deposits.
• The minimum period a fixed deposit may be placed is 7 days.
• The maximum period a deposit may be placed is 120 months (IBA Code for Banking
Practices). Banks can accept deposits for a longer period if ordered to do so by the courts
(such as in the case of minors who have more than 10 years to become majors). It is
unusual for deposits to be placed for more than 5 years.
Interest
• Interest is paid on fixed deposits placed with banks.
• Banks are free to determine the rate of interest that may be paid on fixed deposits. The
rates must be approved by the board or a body to whom the board has delegated this
responsibility to.
• Banks may offer deposits on a floating rate. These must be clearly tied to an anchor
rate.
• Interest should be paid at quarterly or longer rests. Interest is normally paid on the
maturity of the deposit.
• Interest can be paid monthly by discounting the quarterly interest.
• Interest is calculated on the daily balance.
• On deposits of less than 3 months or where the quarter is incomplete interest should be
paid on the number of days reckoning the year at 365 days.
• In leap years some banks have calculated interest on 366 days. The Reserve Bank, in
this instance, leaves it to the bank to determine how interest is to be calculated.
• Interest is credited only if it is one rupee or more.
• Differential rate of interest can be paid on a single term deposit of Rs. 15 lakhs and
above but not on the aggregate of individual deposits where the total exceeds Rs. 15
lakhs.
• Scheduled banks with deposits of less than Rs. 25 crores are permitted to give, at their
discretion, an additional ½%
• Banks are permitted to pay their employees an additional 1% interest. This is subject to
a declaration from the employee that the money belongs to him.
• Additional interest of 1% is also payable to retired employees (but not those who have
resigned) and the spouse of a deceased retired employee.
• Additional interest of 1% per annum may be paid to an association or fund whose
members are employees of the bank.
• Additional interest of 1% per annum may also be paid to the chairman and executive
director of the bank during their tenure.
• All transactions including the payment of interest should be rounded off to the nearest
rupee.
• The Reserve Bank permits banks to offer senior citizens a higher rate of interest on their
deposits.
• Public sector banks may pay additional interest of 1.28% per annum over the normal
rate of interest on deposits over 2 years to Armed Forces funds if these deposits are not
linked with payment of insurance premia with banks.
Tax deduction
• Banks are to deduct tax at source on interest paid in excess of Rs. 5000 per annum to
any depositor. This is not per deposit but per individual. Therefore if an individual has 5
deposits and the aggregate interest earned on these is Rs. 7000 though in each individual
deposit, interest does not exceed Rs. 2000, tax must be deducted at source.
Operation
• On opening a fixed deposit account, the bank must issue a fixed deposit that states on its
face:
– The date of issue;
– The due date;
– The amount;
– The rate of interest;
– The period of the deposit; and
– The amount at maturity.
Early withdrawal
• Sometimes a customer may want to encash his deposit before maturity.
• In that case, the customer would have to request the bank to do so.
• Banks are permitted, at their discretion, to permit early withdrawal and may, if they
wish charge penal interest for early encashment of 1%.
• The Reserve Bank states that penal interest should not be charged if the deposit is
reinvested in a fresh deposit immediately.
• The rate of interest that will be paid is the rate for the period the deposit has been with
the bank.
• Banks may disallow premature withdrawal of large deposits held by entities other than
individuals and HUFs if such depositors have been so advised at the time the account was
opened.
Renewal
• Deposits are renewed on maturity on the request of the depositor.
• Deposits may be renewed before maturity provided:
– It is renewed before the date of maturity and
– The period of renewal is longer than the remaining period of the original deposit.
• Interest on renewal will be:
– On the original deposit at the rate applicable to the period for which the deposit has
actually run.
– Interest for the period from the date of renewal will be allowed at the rate prevailing on
the date of renewal.
Maturity
• The deposit matures at the end of the period it has been placed for.
• On maturity, the depositor must instruct the bank to renew the deposit. The bank cannot
do so on its own
• The depositor if he does not want to renew the deposit can ask for it to be paid to him
either by a cheque/ draft or credited to an account he has. This instruction would normally
be in the account opening instructions.
• If the depositor does not renew or claim the deposit on maturity, the deposit will be
designated as an overdue deposit in the books of the bank.
• The bank cannot close the deposit and repay the depositor if the depositor does not make
a demand.
• If the deposit matures on a Sunday/ holiday/ non working day, the bank should pay
interest at the originally contracted rate on the deposit amount for the Sunday/ holiday/
non business day. The deposit would be paid on the succeeding working day.
Repayment
• Repayment must be by an account payee cheque if the deposit with interest is Rs.
20,000 or more. Repayment can also be made by crediting the current/ savings account of
the depositor.
• Repayment of interest or principal must not be made to the account of another person.
• Repayment is usually made in the name of the first named person.
Recurring Deposit
• A variant is the recurring deposit or cumulative deposit.
• Its intent is to inculcate the habit of saving.
• Depositors can save a recurring amount every month for the period selected.
• If the depositor closes his account within three months no interest is paid.
Deceased Depositor
• Where a depositor has utilized the nomination facility and made a valid nomination or
where account was opened with the survivorship clause (either or survivor, or anyone or
survivor or former or survivor or latter or survivor, payment of the balance in the deposit
account to the survivor(s)/ nominee of a deceased deposit account holder represents a
valid discharge if:
o The bank has exercised due care and caution in establishing identity of survivor/
nominee and death of account holder (through documentary evidence);
o There is no court order restraining the bank from making the payment;
o It is made clear to the survivor(s) that he would be receiving payment as a trustee of the
legal heirs of the deceased depositor.
• The RBI has stated that in these cases insistence on production of legal representation is
superfluous and unwarranted. Banks should not ask for succession certificates, letter of
administration or probate. Banks should not seek to obtain any bond or indemnity
• Where the deceased depositor has not made any nomination or the account does not
have a survivor clause banks are expected to follow a simplified procedure for repayment
to legal heirs without inconveniencing them.
• Deceased depositors may receive monies in their name. To avoid hardships banks
should either open an account styled “Estate of Shri ………….. , (the Deceased)” where
all amounts received are deposited or the survivor/ nominee can authorize the bank to
return the monies received with the remark “Account holder deceased”. The survivor/
nominee can then approach the remitter to effect payment to them.
• Banks should settle claims and release payment within 15 days from receiving claim
along with documents such as proof of death of depositor.
Prohibitions
• No brokerage in the form of commission or gifts should be paid to collect deposits.
• No one should be employed to collect deposits on payment of commission
• No incentive should be given as prizes for deposit mobilization schemes.
• No advance should be given on fixed deposits of other banks.
• Deposits should not be accepted at the request of private financiers under an
arrangement that provides for deposit receipts to be issued in the name of their clients
• Banks cannot employ/ engage any individual, firm, company or association for
collection of deposits on payment of remuneration or fees or commission.
• Banks cannot prematurely repay the term deposits of their customers on their own.
• Resident Foreign Currency Account in India (by Project / Service Exporter for
execution of Contract Abroad
– A citizen of India being a project / service exporter may open, hold and maintain a
foreign currency account (in any convertible foreign currency) with a bank outside or in
India subject to the following conditions:
• Exporters will have to open, hold and maintain a separate foreign currency account for
each project under execution abroad;
• No rupee loans is permissible against the security of balances held in such accounts and
no overdraft in the account shall be permitted;
• The balances in the account will be subject to statutory reserve requirements;
• The account shall be closed immediately after completion of the project;
• The entire balance should be transferred to rupee account and / or EEFC account, as the
case may be.
– The project funds temporarily rendered surplus may be invested in short-term deposits
not exceeding one year and on maturity, they should be transferred to the project foreign
currency account.
– The maturity of the fixed deposits should not in any case go beyond the date of the
completion of the project.
– The credits permitted in these accounts include:
– Interest earned on surplus funds parked in short-term deposits.
– Payment in foreign currency received from the client.
– The debits to these accounts should be:
• Payment to overseas supplier of goods and services to the extent approved by the
approving authority.
• Transfer of funds to the project site.
• Bank Charges.
• Project related expenses in rupees.
• Transfer of funds to rupee account in case payment made by the client for supply of
material / equipment from India has to be temporarily credited to the account.
• Conversion of balance in the account into Indian rupees at the end of the contract.
All other debits/ credits would require prior approval of the approving authority / RBI.
Rupee accounts
• The different types of rupee accounts a non-resident may have are:
– Non-resident (ordinary) (NRO) account
– Non-resident external (NRE) account.
• There were two other types earlier – the Non-resident Non Repatriable (NRNR) and the
Non-resident Special Rupee (NRSR) account. These have been discontinued with effect
from April 1, 2002 and September 30, 2002 respectively.
• Interest
– The board or a body approved by the board has to approve the interest rates offered on
deposits of various maturities.
– The rate of interest earned on these deposits would vary according to the currency.
– Interest is paid in the same currency in which the deposits are held.
– Interest is credited either half yearly or annually (at the option of the deposit holder).
– Penalty for premature withdrawals is chargeable on premature termination of the
deposits. If these deposits are withdrawn prematurely within the period of I year no
interest is payable. The penal interest on deposits held for more than one year prematurely
withdrawn is 1%. This is chargeable at the discretion of the bank.
– The interest on the deposit is paid on the basis of 360 days in a year.
– Banks should pay interest at the originally contracted rate on the deposit amount for the
holiday/ weekend intervening between the date of expiry and the date of payment.
– The interest should be calculated and paid in the following manner
• For deposits upto one year, at the rate applicable without any compounding effect.
• For deposits more than one year, at intervals of 180 days each and there after for the
remaining number of days.
• The depositor will have the option to receive the interest on maturity with the
compounding effect.
– Interest shall be paid within the ceiling rate of LIBOR/ SWAP rates for the respective
currency/ corresponding maturities minus 25 basis points. On floating rate deposits
interest shall be paid within the ceiling of SWAP rates for the respective currency/
maturity minus 25 basis points, For floating rate deposits the interest reset period will be
6 months. In respect of yen deposits bank can set FCNR (B) deposit rates which may be
equal to or less than LIBOR.
– The LIBOR/ SWAP rates as on the last working day of the preceding month would
form the base for fixing ceiling rates for the interest rates that would be offered effective
from the following month.
– Banks have the option to choose the current SWAP rates quoted on any online screen
based information system while offering FCNR(B) deposits.
– Member or retired member of the bank’s staff, either singly or jointly or the spouse of a
deceased member or a deceased retired member, can at the discretion of the bank, be
allowed additional interest at a rate not exceeding 1%.. This is provided the depositor/s
are non-residents/ of Indian nationality or origin and the depositor has given a declaration
that the money is his/hers.
• Premature Withdrawal
– Premature withdrawals are permitted.
– Bank’s can, at their discretion, levy penalties for premature withdrawals.
– Banks can also levy penalties to recover swap costs.
– If the premature withdrawal takes place before completion of stipulated period and no
interest is payable, banks can (at their discretion) levy penalty to cover swap costs.
– The components of penalty must be brought to the notice of the depositor. If this is not
done, the bank will have to bear the exchange loss arising out of the premature
withdrawal.
– Conversion of FCNR(B) to NRE deposits and vice versa before maturity will be
considered a premature withdrawal and attract the penal provisions.
• Loans
– Foreign currency /rupee loans to deposit holders against their own deposits (not against
third party) can be availed of
– The bank is free to charge a rate of interest without reference to its own benchmark
prime lending rate (BPLR). These include deposits in the name of:
• Borrower either singly or jointly.
• One of the partners of a partnership firm and advance is made to that firm.
• Proprietor of a proprietary concern and the advance is made to such a concern.
• A ward whose guardian is competent to borrow on behalf of the ward and where
advance is made to the guardian in such a capacity..
– The documents should be executed by the deposit holders themselves and not by their
power of attorney holders.
– The maturity of the loans should not exceed the maturity of the deposit under any
circumstances.
– The loan can be sanctioned for purposes other than re-lending or carrying on
agricultural/plantation activities or for investment in real estate business.
– The repayment must be effected in India by fresh remittances in foreign exchange or by
adjustment of the deposit.
– Loans upto $250,000 or its equivalent can be given to close relatives who are resident
from an FCNR (B) account.
– The rate of interest charged can be without reference to Prime lending Rate (PLR).
– Banks can also charge a rate less than that prescribed for advances upto Rs. 3 lakhs
when granted to a staff member or retired staff member/spouse or spouse of deceased
staff member or retired member.
– When a loan is granted against a third party FCNR (B) deposit, the bank can charge
interest without reference to PLR on a loan upto Rs. 2 lakhs.
– If it is above Rs. 2 lakhs then it must be at the rate prescribed by the RBI.
– If the deposit against which the loan had been given is withdrawn before the stipulated
period, the advance should not be treated as an advance against a term deposit and interest
should be charged as prescribed by the RBI.
– A bank is permitted to determine the margin that will be kept against the loan.
Prohibitions
No bank should:
• Accept or renew deposits over five years.
• Discriminate in the matter of interest paid on the deposits between one deposit and
another accepted on the same date and for the same maturity.
• Permission to offer varying rates is based on the size of deposits subject to conditions
such as:
– Banks must determine currency wise minimum quantum on which differential rates of
interest can be offered.
– The differential rate must be within overall ceiling
– The rates should not be subject to negotiation.
– No brokerage or commission should be paid on these.
– No person/ agency should be employed to collect these deposits on payment of
commission or fees.
Contractors
• The approving authority of the overseas contract i.e. Authorized Dealers / EXIM Bank/
Working group to permit project / service exporters are permitted to open, hold and
maintain foreign currency account in India.
• Earlier project / service exporters were required to approach RBI for permission to open
such accounts in India.
CERTIFICATE OF DEPOSIT
Form
• Banks and financial institutions should issue CDs only in the dematerialized form.
• Investors however have (Depositories Act 1996) the option to seek the certificate in
physical form. Issuance of a CD will attract stamp duty.
• Certificates must be printed on good quality security paper and care should be taken that
it cannot be tampered with.
Issuance
• Certificates of deposit can be issued by:
• Scheduled commercial banks excluding regional rural banks (RRBs) and local area
banks and
• Select all India financial institutions that have been permitted by RBI to raise short-term
resources
Minimum Size
• The minimum amount of a certificate of deposit is Rs. 1 lakh. The minimum deposit that
can be accepted from a single subscriber should not be less than Rs. 1 lakh.
• They must be in multiples of Rs. 1 lakh there-after.
Eligibility to subscribe
• Certificates of deposit can be subscribed for by:
• Individuals Corporations;
• Trusts;
• Funds;
• Associations; and
• Non Resident Indians (NRI) may purchase these on nonrepatriable basis. This must be
stated on the face of the CD These cannot be endorsed to another NRI in the secondary
market.
Maturity
• Maturity should not be less than 7 days and not more than one year.
• Financial Institutions can issue these for a period of not less than I year and not
exceeding three years from the date of issue.
Issue Price
• CDs may be issued at a discount on face value.
• Banks and financial institutions are permitted to issue these on floating rate basis
provided the methodology of compiling the floating rate is objective, transparent and
market based. The interest rate on floating rate CDs will have to be reset periodically. The
issuing bank is free to determine the discount/ coupon rate.
• Banks must keep statutory reserves (CRR and SLR) on the issue price of CDs.
Transferability
• Physical CDs are freely transferable by endorsement and delivery
• Dematerialized CDs can be transferred in the same manner as other dematerialized
securities.
Lock in
• There is no lock in period for CDs.
Loans/ Buybacks
• Banks and financial institutions cannot grant loans against CDs.
• Banks and financial institutions cannot buy back their own CDs before maturity.
Security
• As physical CDs are freely transferable by endorsement and delivery banks must ensure
certificates are printed on good quality security paper.
• CDs should be signed by two or more authorized signatories.
Repayment
• CDs are due on the date stated on the instrument.
• There is no grace period.
• If the maturity date is a holiday, the issuing bank must make payment on the preceding
working day.
• The physical CD must be presented for payment by the last holder.
• Payment should only be by crossed cheque.
• Holders of dematted CDs should approach depository participants for encashment.
Lost Certificates
• Duplicate certificate may be issued after:
• A notice is given in atleast one local newspaper.
• There has been the lapse of a reasonable time from the date of notice in the newspaper –
about 15 days.
• The investor executes an indemnity bond
• Duplicate certificates should be issued only in physical form.
• No fresh stamping is required.
• The duplicate certificate should clearly state that it is a duplicate one.
NEGOTIABLE INSTRUMENTS
The Act
• The Negotiable Instruments Act is based upon English Common Law relating to
promissory notes, bills of exchange and cheques. It is a codification of English Common
law with some changes made to it that are specific to India.
Definition
• The Act does not define a negotiable instrument. Section 13 states, “ a negotiable
instrument means a promissory note, bill of exchange or cheque payable to order or
bearer.” This section does not rule out any other instrument that satisfies the essential
features of negotiability.
• Justice K. C. Willis defines a negotiable instrument as “one the property in which is
acquired by anyone who takes it bona fide and for value notwithstanding any defect of
title in the person from whom he took it.”
• Thomas in his book “Commerce; its theory and practice” defines it as “one which is by
a legally recognized custom of trade or by law, transferable by delivery in such
circumstances that (a) the holder of it for the time being may sue on it in his own name
and (b) the property in it passes free from equities to a bona fide transferee for value,
notwithstanding any defect in the title of the transferor.”
Parties
• Any person who is capable of entering into a contract and to bind himself can make,
accept or negotiate a negotiable contract. Additionally it can be drawn, accepted and
negotiated by an authorised agent on behalf of the principal.
• A person not capable of entering into a contract cannot bind himself by being a party to
a negotiable instrument. Therefore minors, lunatics, insolvents and others who cannot
enter into a contract cannot be party to negotiable instruments.
Characteristics
• Free transferability. Transfer can be by delivery if it is a bearer instrument or by
endorsement and delivery if it is payable to order.
• Title to transferee. Transferees who take the instrument bona fide and for valuable
consideration get good title despite any defect in title of transferor.
• Entitlement to sue. The holder can sue in his own name.
Presumptions
• Consideration: Every negotiable instrument is made or drawn for a consideration.
• Date: That the negotiable instrument was drawn on the date shown on the face of it.
• Acceptance before maturity: That the bill of exchange was accepted before it became
overdue (matured).
• Transfer before maturity: That the negotiable instrument was transferred before its
maturity.
• Order of the Indorsements: That the indorsements are made in the order that they
appear.
• Stamping of the instrument: That the instrument has been properly stamped.
• Holder is holder in due course: That the holder is a holder in due course except where
the instrument has been obtained, by means of fraud or an offence, from its lawful owner.
• Proof of dishonor: If a suit is filed upon an instrument which has been dishonored the
Court shall on the submission of proof presume the fact of dishonor unless it is disproved.
Rules of estoppel
Holders of negotiable instruments are estopped (cannot) :
• Deny original validity of the document. The maker and drawer are responsible for the
existence of the instrument and cannot deny its validity.
• Deny capacity of the payee to indorse. The maker cannot deny the capacity of payee to
indorse in a suit by a holder in due course.
• Deny signature or capacity of prior party. An indorser cannot, in a suit by a holder in
due course, deny the signature or capacity of any prior party.
Payee
A negotiable instrument can be made payable in the following ways:
• Payable to bearer. This signifies an instrument is payable to the person who bears it or
on which the last endorsement is in blank. This can be converted into an indorsement in
full from “in blank”. Then the holder will not be able to negotiate by mere delivery but
would need to indorse before delivery.
• Payable to order. This is when it is payable to:
– The order of a specified person
– A specified person or his order
CHEQUES
• Cheques are used to withdraw monies from current and savings accounts.
• A cheque is defined as a “bill of exchange drawn on a specified banker and not
expressed otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.”
• A cheque in the electronic form means a cheque “which contains the exact mirror image
of a paper cheque and is generated, written and signed in a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometric
signature) and asymetric crypto signature”.
• A truncated cheque means a cheque “which is truncated during the course of a clearing
cycle either by the clearing house or by the bank whether paying or receiving payment
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing”.
• Cheques are used to withdraw monies from current and savings accounts.
• A cheque is defined as a “bill of exchange drawn on a specified banker and not
expressed otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form.”
• A cheque in the electronic form means a cheque “which contains the exact mirror image
of a paper cheque and is generated, written and signed in a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometric
signature) and asymetric crypto signature”.
• A truncated cheque means a cheque “which is truncated during the course of a clearing
cycle either by the clearing house or by the bank whether paying or receiving payment
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing”.
PAY______________________________________OR BEARER
____________________________________________________
334678 400700456 10
Characteristics
– A cheque is an unconditional order on a specified banker where the drawer has his
account.
– A cheque is payable only on demand
– A cheque is drawn for a certain sum of money.
– Cheques are revocable by countermanding payment.
– Cheques are determined by the death or insolvency of the drawer.
– All cheques are bills of exchange but all bills of exchange are not cheques.
Forms
– Bearer cheque – Either expressed to be so payable or on which the last endorsement is
in blank.
– Order cheque – Either expressed to be so payable or expressed to be payable to a
particular person without indicating an intention that it is not transferable.
– Crossed cheque – A cheque that can be collected only through a banker.
Bank Draft
• A bank draft is an order drawn by an office of a bank upon another office of the same
bank instructing the other office to pay a specified sum to a specified person or his order.
• Drafts can be issued either against cash or by debiting a client’s (the entity requesting
the draft) account
• Features of a draft
– It is issued by a bank on one of its branches.
– It cannot be payable to bearer.
– The relationship between the purchaser of the draft and the banker is that of creditor and
debtor.
– The purchaser of a draft can by returning the draft have it cancelled before it has been
delivered to the payee.
– The purchaser cannot have the draft cancelled after it has been delivered to the payee.
– A bank cannot ordinarily refuse to pay the amount unless there is some doubt on the
identity of the person presenting it.
• Marked cheques
• In certain cases a cheque is marked or certified by the banker on whom it is drawn as
“good for payment.”
• This marking does not amount to acceptance but is very similar and protects the person
to whom the cheque is issued against the cheque being refused for payment later.
• An open cheque is one that can be paid by the paying banker across the counter.
• Open cheques are made out to:
• Bearer. The banker need not seek the identification of the person.
• Order. Paid by the banker on being satisfied about the true identity of the presenter.
Crossing of Cheques
• Crossing is an instruction given to the paying banker that it should not be paid across the
counter but through a banker.
• Payment can only be collected through a banker.
• Crossing is made by drawing two parallel lines across the face of the cheque with or
without the addition of certain words.
Types of crossing
• General
• Special
• General Crossing
– Two traverse lines across the face of the cheque with or without the words “& co” or
the words “non negotiable.”
– Where a cheque is crossed generally, the banker on whom it is drawn should pay it
through a banker
– Cheques that are crossed generally and payable to “order” should be collected only on
proper endorsement by the payee.
• Special crossing
– Within the two traverse lines the drawer writes specific instructions such as to which
bank it should be paid to.
– The intent of a special crossing is to pay it if it is presented though a specific banker
such as at XYZ Bank.
– Some cheques are crossed “account payee”. This is a restrictive crossing that the cheque
should be paid to the account of a specific person. It is also a warning to the collecting
banker to ensure that the cheque is to be deposited in the account of a specific depositor.
The paying banker needs to only ensure that it bears no other endorsement than that of the
payee..
This is only permitted if the bank to whom it is crossed does not have a branch at the
paying banker’s place.
• Cheque crossing
o Holder of a cheque can cross it or add to existing crossing.
o Banker to whom it is crossed can cross it.
o Cheque crossings can be opened by the drawer by cancelling the crossing with his full
signature
o The Negotiable Instruments Act specifically states what amounts to a crossing. A
cheque with the words “not negotiable” without the two traverse lines is not a crossed
cheque. The traverse lines are essential for a crossing.
o If a cheque bears a single line it is not a crossed cheque.
o It is presumed that the banker on whom it is drawn has made payment to a banker who
acts for the true owner of the cheque, though in fact the amount of the cheque may not
reach the true owner. In short the banker is protected.
• It is the duty of the banker who receives payment on an electronic image of a truncated
bill held with him to verify the prima facie genuineness of the cheque to be truncated and
any fraud, forgery or tampering on the face of the instrument that can be verified with due
diligence and ordinary care.
• A bank on whom a cheque is drawn is liable to make payment on the cheque only
during banking hours.
• If payment is after banking hours the amount cannot be debited to the client’s account
till the bank opens.
• When payment is to be refused:
– The cheque is undated.
– The cheque is stale. A cheque is stale if it has not been presented for payment for six
months
– The instrument is inchoate or not free from reasonable doubt.
– The cheque is postdated and presented for payment before the date.
– The customer’s funds are not “properly applicable” to the payment of the cheque by the
customer.
– The customer’s account is overdrawn.
– A garnishee or other legal order from the court attaching the customer’s account has
been served on the bank. If the attachment is on one person then a joint account cannot be
attached by the garnishee order. Credits to the account subsequent to a garnishee order
are not attachable. Trust accounts cannot be attached by a garnishee order while a
partnership account can be. A banker with a prior right of set-off is not bound by a
garnishee order. If the garnishee order is received after presentation and debiting the
cheque to the account but before payment, the bank can technically pay the cheque,
though it would be better to refuse payment. If the cheque is received through clearing
and the garnishee order is received before the time stipulated for return of cheques, the
cheque must be returned. If the cheque has been credited to another person’s account and
then the garnishee order is received, the credit can be cancelled and the cheque returned
unpaid provided that the account holder has not been advised of the credit.
– The customer has died or been declared insolvent or a lunatic.
– The cheque contains material alterations or irregular signature.
– Notice of closure of account has been served on the bank.
– The customer has countermanded payment.
– Ambiguity in the material part of the cheque.
– Difference between the amount of the cheque in words and in figures.
– Irregular indorsements.
– The cheque is mutilated.
– Signature of the drawer has been forged.
Collection
• Collecting Banker
• Holder for value
• Agent of customer
• Protection of collecting banker
– The collecting banker has no liability if:
• The collecting banker acted in good faith and without negligence.
• The collecting banker acts only to receive payment of the crossed cheque for a banker.
• The crossing was made before the cheque fell into the hands of the collecting banker.
– He is protected if he paid amounts of cheque later found bad if:
• The cheque was a crossed cheque;
• Payment received for customer;
• Payment rec’d in good faith/ no negligence.
REMITTANCE BY RESIDENTS
General Availability
The remittances residents are permitted are:
In case of issue of travelers cheques, the traveler should sign the cheques in the presence
of an authorized official and the purchaser’s acknowledgement for receipt of the travelers
cheques should be held on record.
Out of the overall foreign exchange being sold to a traveler, exchange in the form of
foreign currency notes and coins may be sold up to the limit indicated below:
The forms A2 relating to sale of foreign exchange for travel abroad, should be retained
for a period of one year by the authorized dealers, together with the related documents,
for the purpose of verification by their Internal Auditors. Such forms need not be obtained
by the authorized dealers for remittance applications not exceeding USD 5,000.
In cases where the remittances are allowed on the basis of self declaration, the onus of
furnishing the correct details in the application, will remain with the applicant who has
certified the details relating to the purpose of such remittance.
Medical Treatment Banks may release foreign exchange upto $100,000 for medical
treatment abroad on the basis of self declaration without insisting on any estimate from a
hospital, doctor in India or abroad. With regard to amounts required in excess of
$100,000 an estimate from a doctor in India or a doctor/ hospital abroad is required. A
person who has fallen sick after proceeding
abroad may be released foreign exchange for treatment outside India. In addition $25,000
can be taken for meeting boarding/ lodging/ traveling expenses of the patient and the
person accompanying the patient. Additional amounts can be taken by providing
documentary evidence of the higher requirement.
Remittance for consultancy services procured from outside India. The limit is to be US $
1 million. Remittance is to be allowed on the submission of documents.
Documentation
The Reserve Bank will not, generally, prescribe the documents which should be verified
by the authorized dealers while releasing foreign exchange. In this connection, sub-
section (5) of Section 10 of the Foreign Exchange Management Act, 1999 provides that
an authorized person (bank/ authorized dealer) shall require that a person make such
declaration and give such information as will reasonably satisfy him that the transaction
will not involve and is not designed for the purpose of any contravention or evasion of the
provisions of the Act or any rule, regulation, notification, direction or order issued there
under.
Authorized dealers (AD) are also required to keep on record any information/
documentation, on the basis of which the transaction was undertaken, for verification by
the Reserve Bank. In case the applicant refuses to comply with any such requirement or
makes unsatisfactory compliance therewith, the authorized person shall refuse in writing
to undertake the transaction and shall, if he has reasons to believe that any
contravention/evasion is contemplated by the person, report the matter to Reserve Bank.
In order to provide hassle free service to the residents, it has also been decided to simplify
the procedures and documentation formalities in respect of non-import remittances.
Accordingly, in consultation with FEDAI, the A-2 form has been modified to incorporate
the application form and the declaration in terms of Section 10(5) of FEMA, 1999.
Authorized dealers have specifically been advised to release foreign exchange upto USD
100,000 each for employment abroad, emigration, maintenance of close relatives abroad,
education abroad and medical treatment abroad without insisting on any supporting
documents but on the basis of self declaration incorporating certain basic details of the
transactions and submission of Form A2.
Private Visits
Foreign exchange for private visits for travel outside India for any purpose may be given
on the basis of a declaration given by the traveler regarding the amount of foreign
exchange availed of in a year.
Private Travel
The limit for private travel is $ 10,000 per year. This is for travel to places other than
Bhutan and Nepal.
For travel to Nepal and Bhutan Indian currency without any limit may be taken except
Indian currency notes of denominations of Rs. 500 and above. No release of foreign
exchange may be made for travel to Nepal and Bhutan.
Payment in Rupees
Authorized dealers may accept payment in cash upto Rs. 50,000 (Rupees fifty thousand
only) against sale of foreign exchange for travel abroad (for private visit or for any other
purpose). Wherever the sale of foreign exchange exceeds the amount equivalent to
Rs.50,000, the payment must be received only by a:
(i) crossed cheque drawn on the applicant’s bank account, or
(ii)crossed cheque drawn on the bank account of the firm/company sponsoring the visit
of the applicant, or
(iii)Banker’s Cheque/Pay Order/ Demand Draft.
Where the rupee equivalent of foreign exchange drawn exceeds Rs 50,000 either for any
single drawal or more than one drawal reckoned together for a single journey/visit, it
should be paid by cheque or draft, as explained above.
Endorsement on Passport
It is not mandatory for authorized dealers to endorse the amount of foreign exchange sold
for travel abroad. However, if requested by the traveler, they may record under their
stamp, date and signature, details of foreign exchange sold for travel.
Other Travel
Amount permitted for business travel or attending a conference or specialized training or
for maintenance expenses of a patient going abroad for medical treatment or check-up
abroad or for accompanying as attendant to a patient going abroad for medical treatment/
check-up is $25,000 irrespective of period of stay.
Small Remittances
Banks may release upto $5000 or equivalent on the basis of a simple letter stating the
name, address of the beneficiary and the purpose of the remittance as long as the foreign
exchange is being purchased for a current account transaction (not included in the
Schedule I and II of Government Notification on Current Account Transactions).
Authorized dealers need not insist on submission of A-2 Form. The payment is to be
made by a cheque drawn on the applicant’s bank account or by a Demand Draft. All that
is required is a letter from the applicant.
ICCs can be used on the internet for any purpose other than prohibited items such as
lottery tickets, banned magazines, participation in lotteries etc.
The credit limit will be the limit fixed by the card issuing agency. There is no monetary
ceiling fixed by the RBI for remittances.
ICC cannot be used for purchase of lottery tickets, proscribed or banned magazines,
participation in sweepstakes, payment for call back services.
Residents can use international credit cards for making payments towards expenses while
on a visit outside India to the extent of the limit of the card.
Residents can use ICCs on internet for any purpose for which exchange can be purchased
from an authorized dealer in India, e.g. for import of books, purchase of downloadable
softwares or import of any other item permissible under the EXIM Policy
Investment in Shares
Corporates may invest in the equity of those listed foreign companies who have a
shareholding of atleast 10% in Indian Companies. These Indian Companies should be
listed on a stock exchange in India. The investment should not exceed 25% of the Indian
companies net worth (as on the date of the last audited Balance Sheet).
It also permitted residents to invest in the equity of those overseas foreign companies who
have a shareholding of atleast 10% in Indian Companies without any limit.
Residents and corporates may invest in rated bonds and fixed income securities.
Individuals can invest in overseas companies that Indian listed companies are permitted
to without limit
Tour operators
Tour operators may remit cost of rail/ road/ water transportation charges outside India
without prior approval from RBI, net of commission due to Indian agent. Sale can be
made against payment in Indian rupees. Or in foreign exchange releases for visits abroad.
Cost in Indian rupees need not be adjusted against travelers foreign exchange entitlement.
Regarding consolidated tours arranged by travel agents for foreign tourists visiting India
and neighboring countries, part may need to be remitted to travel agents/ hotels for
services rendered in neighboring countries. These can be remitted after ensuring amount
does not exceed amount initially remitted into India.
Cultural Tours
Dance troupes, artistes, etc., who wish to undertake tours abroad for cultural purposes
should apply to the Ministry of Human Resources Development (Department of
Education and Culture), Government of India, for their foreign exchange requirements.
Authorized dealers may release foreign exchange, on the strength of the sanction from the
Ministry, to the extent and subject to conditions indicated therein.
Cable operators
Cable operators may pay collected subscriptions to overseas media companies.
Telephone Cards
Agents in India issuing prepaid telephone cards can remit sale proceeds of these cards, net
of their commission, to the issuers of the telephone cards. The cost of such cards in
Indian rupees need not be adjusted in the travel entitlement.
Global Bids
With regard to global bids received for projects to be undertaken in India, foreign
exchange may be sold to resident Indian company awarded the contract.
Foreign Embassies
Foreign embassies can purchase foreign exchange towards payment of fees to schools/
educational institutions under the administrative control of foreign embassies.
The authorized dealer should also follow up to ensure that the beneficiary of the advance
remittance has fulfilled his obligations under the contract or agreement with the remitter
in India.
The facility under this scheme is not available for the following:
1. Remittances for any purpose specifically prohibited (purchase of lottery / sweep stakes,
tickets prescribed magazines etc).
2. Remittances made directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan.
3. Remittances made directly or indirectly to countries identified by the Financial Action
Task Force (FATF) as “ non co- operative countries and territories” viz. Cook Islands,
Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines and Ukraine.
4. Remittances directly or indirectly to those individuals and entities identified as posing
significant risk of committing acts of terrorism as advised separately by the Reserve Bank
to the banks.
To avail the facility, the individual will have to designate a branch as an authorized dealer
through which all the remittances under the scheme will be made. Also he should furnish
an application letter cum declaration in the prescribed format and a declaration that the
funds belong to the remitter and will not be used for the purposes that are prohibited.
There is also a reporting requirement on the Authorized Dealers. The remittances made
under this scheme will be reported in the R-Return in the normal course. They may also
keep on record on a dummy Form A2, in respect of remittances exceeding USD 500.
They must also furnish a quarterly return, which contain the information on the number of
applicants and total amount remitted to the Chief General Manager, External Payment
Division, Foreign Exchange Department, Reserve Bank Of India, Central Office,
Mumbai.
Restriction
The RBI announced on February 4, 2004 that resident individuals may freely remit upto
$25,000 per annum for any purpose resulted in several banks placing advertisements
seeking deposits abroad from residents. The RBI has therefore issued another circular on
March 18, 2004 which states that “all banks, both Indian and foreign, including those not
having an operational presence in India, should seek prior approval from RBI for the
schemes being marketed by them in India to residents either for soliciting foreign
currency deposits for their foreign/ overseas branches or for acting as agents for overseas
mutual funds or any other foreign financial services company.”
Remittance by Artiste
ADs may freely allow remittances by artistes e.g. wrestler, dancer, entertainer, etc.
Authorized dealers may effect remittances at the request of agents in India who have tie
up arrangements with hotels/agents, etc., abroad for providing hotel accommodation or
making other tour arrangements for travelers from India, provided the authorized dealer is
satisfied that the remittance is being made out of the foreign exchange purchased by the
concerned traveler from an authorized person (including exchange drawn for private
travel abroad).
Authorized dealer may open foreign currency accounts in the name of agents in India who
have tie up arrangements with hotels/agents, etc., abroad for providing hotel
accommodation or making other tour arrangements for travelers from India provided:-
a) the credits to the account are by way of depositing:
i) Collections made in foreign exchange from travelers and
ii) Refunds received from outside India on account of cancellation of bookings/tour
arrangements, etc., and
b) The debits in foreign exchange are for making payments towards hotel
accommodation, tour arrangements, etc., outside India.
A person resident in India can open a Resident Foreign Currency (Domestic) Account.
The eligible credits to the Resident Foreign Currency (Domestic) Account, out of foreign
exchange acquired in the form of currency notes, bank notes and travelers cheques, are as
under :-
(i) acquired by him from an authorized person for travel abroad and represents the
unspent amount thereof.
Or
(ii) acquired by him, while on a visit to any place outside India, by way of payment for
services not arising from any business in or anything done in India.
Or
(iii) acquired by him, from any person not resident in India, and who is on a visit to
India, as honorarium, gift, for services rendered or in settlement of any lawful obligation.
Or
(iv)acquired by him by way of honorarium, or gift, while on a visit to any place outside
India.
Overseas Investment
An Indian entity may invest upto 200% of its net worth in overseas joint ventures and/ or
wholly owned subsidiaries in any bona fide business activity under the automatic route.
The ceiling is not applicable to investments made out of balances held in EEFC accounts
and out of proceeds of ADR/ GDR issues.
Import of Services
Advance remittance for providing services under current account transactions for which
release of foreign exchange is permitted. Where it exceeds $100,000, a guarantee from as
bank of international repute situated outside India or guarantee from an authorized dealer
in India or the overseas beneficiary should be obtained.
NRI/ PIO may remit sale proceeds of immovable property sold by him out of rupee funds
provided the property was held by him for a period not less than ten years. If the property
is sold after being held for less than ten years, remittance can be made if the sale proceeds
for the balance period were held in an NRO account (Savings/ Term Deposit) or in any
other eligible investment.
They are eligible to receive remittances from close relatives from India upto $ 100,000
for maintenance and upto $1,000,000 out of sale proceeds of assets/ balances in their
account maintained with an authorized dealer in India.
Note
Banks must ensure that any remittance of funds by way of demand draft, mail/ telegraphic
transfer or any other mode and issue of travelers’ cheques for value of Rs50,000 and
above is effected by way of debit to the customers’ account or against cheques and not
against cash payment.
Banks and authorized dealers may accept payment in cash upto Rs. 50,000 against sale of
foreign exchange for travel abroad. Where it exceeds Rs. 50,000 the payment should be
by cheque/ debit to the buyer’s account or a demand draft.
CLEARING
Introduction
A merchant or a purchaser when he makes a purchase would draw a cheque in
payment of the goods purchased or services availed of.
This would then be given to the vendor who would take it to the banker on whom
it was drawn and collect the monies due to him.
As trade developed and individuals began to sell goods in different cities, in other
countries and in multiple currencies, it was no longer feasible for individual
sellers to go from one bank to another to collect their dues.
It was this that resulted in the birth of clearing and clearing-houses.
Clearing
Clearing can be defined as an arrangement through which a bank exchanges
cheques drawn on other banks for those drawn on it.
This exchange is done at the clearing-house.
Clearing-house
A clearing-house is a place where banks that are members of the clearing-house
meet to hand over cheques.
The London clearing-house was established between 1750 and 1770 as a place
where the clerks of the bankers of the City of London could assemble daily to
exchange with one another the cheques drawn upon and bills payable at their
respective houses.
At first the clearing-house was simply a place of meeting.
It came to be perceived that the sorting and distribution of cheques could be more
expeditiously conducted by the appointment of two or three common clerks to
whom each bankers clerk could give all the instruments he wished to collect
and from whom he could receive all those payable at his own house (bank).
The payment of the balance settled the transaction.
The settlement was by a payment into or from the account the bank had with the
Bank of England.
In 1858, the use of the clearing-house was further extended to include the settlement
of exchange between the country bankers of England. Before this the country
banker had to send the cheque by post to London and each cheque
necessitated a separate payment in London. From 1858, the country banker
would send his cheques to his London correspondent who would collect the
cheques and then credit the country banker’s account.
At the early stage the clearing-house consisted of one long room. Around the walls
and down the centre desks were placed, each allotted to a bank. Clerks
moved from one desk to another handing or collecting cheques.
At the time there were three clearings in London – at 10.30 AM, at noon and at 2.30
PM.
In 1907 these were divided into town, metropolitan and country clearings.
India
In India clearing-houses were presided over by the Imperial Bank of India (now the
State Bank of India) until 1935.
The Reserve Bank of India when constituted in 1935 took over the clearing-house
function.
In those cities that the Reserve Bank has a presence, the Reserve Bank manages the
clearing-house.
In other cities and towns the State Bank of India and its associates manage clearing
and in some cases a public sector bank (where the State Bank and its
associates do not have a dominant presence).
There are presently 1047 clearing-houses in India with 42 clearing-houses having
MICR capability.
Clearing-houses are autonomous institutions having their own rules regarding the
conduct of operations.
These rules relate to admission of members and sub members, entrance fees,
minimum balance of deposit, meetings, quorum, representation and other
matters.
Membership
Banks may be direct members or sub members.
All the branches of the member bank within the clearing-house jurisdiction will
submit the instruments deposited by customers drawn on other members
operating in the area.
Sub members, who are sponsored by a member bank, participate in the same
manner as a branch of a member bank. These are those who do not have
many instruments to submit to or receive from clearing.
The membership to the clearing-house is through a joint decision of the general
body of the clearing-house.
All banks including State Co-operative banks and General Post Offices are eligible
to become members of the clearing-house.
In India the clearing system is local and restricted to all the banks and branches
situated in the area under a particular zone.
The zones may be that of a city or a town or an area.
All the branches of the member bank within the clearing-house jurisdiction can
present and receive cheques drawn on any other member bank / branch within the
clearing-house jurisdiction.
Each member bank in a centre is represented in the clearing-house by its service
branch which collects all the instruments from the various branches and
consolidates them for presentation to all the banks in the clearing-house. Similarly
it receives and distributes all the instruments drawn upon its branches by other
banks in the clearing-house.
Hierarchy
The hierarchy:
The clearing-house is headed by a President, who is the officer-in-charge of the
bank managing the clearing-house.
The President is assisted by a Standing Committee comprising of a few
representatives of member banks to help him resolve urgent problems.
The instruments presented at a clearing-house are:
Cheques;
Drafts;
Payment Orders.
These are the instruments that are deposited by customers for collection.
Types of clearing
Outward Clearing.
Inward Clearing.
Outward Clearing
Outward clearing refers to instruments that are deposited by customers that are
drawn on other banks that need to be presented at clearing.
This can be further divided to:
Local clearing (instruments drawn on banks in that city)
Outstation Clearing (instruments drawn on banks outside the city). These may be
within the country or on banks in other countries.
Branches normally collect all the local cheques and other instruments deposited
by customers and after ensuring they have all the relevant details send them
to their service branch. The service branch then present these at the clearing-
house.
With regard to outstation cheques practices can differ:
Some banks send the instruments to branches they have in the locations where
the banks on whom the instruments are drawn for collection.
Others hand over the instruments to a large bank who have branches in multiple
locations for collection.
The bank can also participate in National Clearing. This is managed by the
Reserve Bank. Cheques drawn on metropolitan centres listed in are cleared in
eight days. In other cases cheques drawn on other centres are cleared in
fourteen days except those drawn on state capitals (other than North Eastern
States and Sikkim) where they are cleared in 10 days.
If there are delays banks are expected to pay interest for the period of delay at
the rate applicable for a fixed deposit for the period of delay beyond the
stipulated days. If the delay is abnormal then penal interest at the rate of 2%
above the fixed deposit rate has to also be paid.
Cheques are posted to the representative branch or correspondent branch for
presentation in the clearing-house in the outstation centre.
On realization, the proceeds are remitted to the original presenting bank for
credit to the customer’s account.
There is often considerable delay in the payment transaction both for the
recipient of the funds as well as the banks involved.
In the interest of the customer, the Reserve Bank has directed that banks should
give immediate credit for all outstation instruments upto Rs. 15,000 to
individuals who are maintaining satisfactory accounts. Customers will have to
bear service and postal charges. If a client deposits two outstation cheques
below Rs. 15,000, he may only draw upto Rs. 15,000. The bank’s exposure is
thus limited to Rs. 15,000. In the event of the cheque being returned unpaid,
the customer will have to pay interest for the period for which funds were
utilized.
Inward Clearing
The service branch will collect cheques drawn on the bank and the cheques would
then be checked for completeness – signature, whether there is adequate
balance, date and the likes.
If there is any inconsistency the cheque is returned.
It should be remembered that all paper based instruments have to be presented
at the drawer bank either in person or by another bank in clearing or through
collection.
Delays is due to the requirement of physical presentation of the paper
instrument.
Return clearing
Return clearing is the aggregate of all unpaid items. This:
is debited to the original presenting bank.
is credited to the drawee bank.
Credit given to payee is reversed.
• If a cheque is to be paid in the same city (local cheque), the cheque will clear on
the third working day.
• In large cities a system called high value clearing facilitates clearing on the same
day.
• Regarding outstation cheques time taken to realize can vary from eight (National
Clearing) to fourteen days (except for those drawn on state capitals. These will
normally clear in ten days). .
In metropolitan cities with MICR clearing systems, the amount of a cheque drawn
on any other metropolitan center and presented for collection should be
credited in the customer’s account by the same day of the following week.
With regard to state capitals, customer’s account should be credited within
ten days. Immediate credit should be given to outstation cheques upto Rs.
15,000 deposited for satisfactorily operated accounts. If a person deposits
more than one cheque of Rs. 15,000 or below, then withdrawal can be limited
to Rs. 15,000 thus ensuring the bank’s exposure does not exceed Rs. 15,000.
Banks are required to develop their own policy in this regard.
With regard to high value instruments (Rs. 100,000 or more) credit is given to the
depositor the same day. There are however some conditions:
The instrument should be drawn on a bank in the city’s commercial centre. The
area is defined for every city. Both the presenting (collecting bank) and the
paying bank must be in the commercial area.
The depositor should deposit the instrument early in the morning usually by 11.00
AM. This can differ from bank to bank.
The cheques are presented at clearing around noon.
Banks know whether the instruments have been honored by 4.30PM that evening.
Settlement
Claims are made by every bank on every other bank.
The Credit or debit position of the individual bank is determined.
The account the bank maintains with the Reserve Bank of India is then either
credited or debited (depending on whether monies are due to the bank or due
from it).
MICR
• MICR was introduced in India in the mid 1980s to facilitate the clearing of
cheques.
• Uptil then all cheques deposited were separated into banks and then machine
totaled to determine the amount due from a bank. This then had to be agreed
to the amount actually credited to deposit accounts. There were many errors
and considerable time was spent in reconciling figures.
• As volumes grew, it became necessary to mechanize clearing. This was
introduced using Magnetic Ink Character Recognition) MICR technology. MICR
technology enabled machines to sort cheques into banks and amounts due from
each thus ensuring speed and accuracy.
• To facilitate Cheque processing all instruments (cheques) have to be of a
standard format and size (8 X 3 2/3). These are printed on MICR grade quality
paper with a read band of 5/8 in width at the bottom reserved for MICR coding (in
E-138 Font).
1. The cheques are printed by approved printers. Not all printers are
permitted.
2. The MICR has a distinct code structure.
• The code line is divided into five fields with distinct separations.
• The first six numeric digits (numbers) are the Cheque serial
number.
• In the next band there are nine numbers. These are as follows:
i. The first three numbers represent the city ( Mumbai is 400)
ii. The next three numbers represent the Bank ( American Express
is 031; HDFC is 240)
iii. The next three numbers represent the branch (each branch has
a distinct number)
• When a new bank opens, it may not have the volume to be
admitted as a member of the clearing-house. In these cases, it
becomes a sub member. These banks would have the code number
of the sponsoring bank followed by the branch code which normally
would commence from 251.
• The next six numeric digits are optional. Some banks write the
account number. On others these represent the customer
identification number). In regard to Government cheques issued by
the RBI alone these are seven digits. Government accounts are 10
digits in length – 7 digits occurring in the account number field and
3 in the transaction code field
• The transaction code field comprises of two digits (except for
government cheques which have three)
• The last field represents the amount field and consists of 13
digits. The amount is encoded in paise without the decimal point.
Pin ABC BANK
Here …………….20….
Pay
Cross
Here ……………………………………………………………………………………………
………….
……………………………………………………………….……
OR BEARER
RUPEES ……………………………………………….……………………..
………………………………………………………….…………… Rs.
A/c No. 09582000000000
Rubber
Stamp
For MNO Ltd. Here
ABC BANK
"000000" 4000172 59 11
MICR Band
Code Line
To Remain
Untouched
AMOUNT TO
CLEAR CHEQUE CITY BANK BRANCH TRANSACTION
BE ENCODED
BAND FIELD NUMBER CODE CODE CODE CODE
BY YOUR BANK
560 Bangalore
700 Kolkata
600 Chennai
682 Kochi
400 Mumbai
110 New Delhi
Cheques Deposited
All cheques deposited for clearing by customers are to be crossed with a Special
clearing stamp. The bank would also stamp its certification or confirmation of the
various endorsements on the Cheque and an undertaking to the effect that the
proceeds will be credited to the payee’s account on realization.
Cheques deposited by clients are separated between intercity and intracity (National
clearing and others).
The amount of the cheque is coded in onto the cheque in the area designated (the
last field).
The cheques are then put through a reader/ sorter that lists amounts, differentiates
between banks and reads all the other fields and prepares a listing that details the
number of cheques, the banks they relate to and the amount.
These lists are submitted to the clearing-house along with the instruments.
ELECTRONIC BANKING
• Many financial institutions use ATM or debit cards and Personal Identification Numbers
(PINs) for this purpose. Some use other forms of debit cards such as those that require, at
the most, the customer’s signature or a scan.
• Shared payment network arrangements allow participating banks to issue universal
cards that can be used on the electronic banking services shared by the different banks.
• Electronic banking now involves many different types of transactions.
o Bank Teller Machines;
o Automated Teller Machines;
o Internet Banking;
o Debit Cards;
o Telephone Banking.
Internet Banking
• Internet Banking permits an account holder to access his account by a computer from
home or other remote location and issue instructions.
• The account is accessed by the account holder stating a unique identification customer
number and a password.
• Customers can:
• Ascertain their account balance;
• Transfer amounts from one account to another;
• Arrange for the issuance of a cheque;
• Instruct payments to be made;
• Request for a cheque book;
• Request for a statement of their account;
• Make a fixed deposit.
• There is a confidentiality issue as hackers could get vital numbers and then withdraw
amounts.
• The integrity of the system is extremely important.
• Once the transaction instructions are issued, it is very difficult to repudiate them.
Telephone Banking
• Telephone banking is a facility offered to customers whereby they can, by dialing a
number, issue instructions or seek information.
• The customer when he makes a call is answered by an operator in a call centre. This
person has access to the customer’s account. To ensure that it is indeed an authorized
person who is seeking information, the customer would be required to state an identifying
number (personal identification number), date of birth, billing address or any other unique
information. On being satisfied that it is indeed the customer, the transaction required is
carried out. These may include:
• Transfers to a fixed deposit;
• Balance enquiry;
• Request for a cheque book;
• Request for a statement;
• Payment of a bill.
• There is one concern. In many instances the information required is in the public domain
and therefore it is possible for a person not properly authorized to access sensitive
information.
Cards
• There are several cards issued to customers to facilitate banking activities. These cards
are in plastic and usually about 8.5 cm by 5.5 cm in size. The name of the holder is
embossed as is the number of the card. It also has an expiry date.
Charge Card
• In these cards transactions are accumulated over a period of time (generally a month)
and then the total is debited to the account. The card- holder is given 25 to 50 days to pay.
These are called charge cards as the transactions are accumulated and not debited to the
account immediately. The amount on a charge card is payable in full and no credit is
given.
• American Express and Diners Cards are the major charge cards in circulation. These are
also called T & E cards.
Credit Card
• Credit cards are similar to charge cards. At the end of a month details of all amounts
purchased are sent to the card- holder who is required to pay a minimum amount (if he
does not wish to pay the entire amount). He is then given credit for the balance not paid
and charged interest on the balance (varies between 2 – 3% per month).
• The major credit card issuers are Mastercard and Visa and most banks offer either
Mastercard or Visa linked cards. This is for acceptability at vendor establishments.
Debit Card
• Debit cards are dissimilar to charge and credit cards as the holder receives no credit. As
soon as a transaction is undertaken, the customer’s account is debited with the amount of
the purchase. If the customer does not have sufficient balance the transaction is rejected.
• These are issued by banks and is linked to the account of the holder. The great benefit is
that individuals cannot buy more than they have funds for.
• Debit cards are similar to ATM cards and have a unique number.
• Bank customers may use this to withdraw money from ATMs by punching in their
personal identification number or they may pay for goods and services
• When paying for goods/ services the vendor swiped the card through a point of sale
terminal. The customer’s account is checked and if there is adequate balance, the account
is debited and the vendors account is credited.
• The great benefit is that the customer will not, by using these, create huge outstandings.
• The flaw is that customers cannot avail of credit (as they can with a credit card).
Smart Card
• A smart card is like any other credit card. It however has an integrated circuit (IC) chip
installed in it. The chip contains memory, may contain a processor and communicates
through contacts on the surface of the card.
• As these are difficult to copy there is a move to make credit cards and other cards smart
cards.
Electronic Purse
• An electronic purse is a smart card that has transferred into it an amount of money.
Every time a transaction is entered into, the purse is depleted by the money taken out.
Once empty it can be electronically replenished.
• The Negotiable Instruments Act states that a truncated cheque means a cheque “which is
truncated during the course of a clearing cycle either by the clearing-house or by the bank
whether paying or receiving payment immediately on generation of an electronic image
for transmission, substituting the further physical movement of the cheque in writing”.
• Cheque Truncation is a system of cheque clearing and settlement between banks based
on electronic data/images or both without physical exchange of instrument. Cheque
truncation is being currently used in many countries and is being introduced in India in
April 2006.
o To introduce cheque truncation in India, a working group was constituted by the
Reserve Bank. The working group submitted Part I of its report in July 2003 and
suggested a model for the cheque truncation in India. The major recommendations of the
working group were:
The physical cheque should be truncated within the presenting bank.
Within the presenting bank the point of truncation could be decided by each individual
member bank providing for service bureau models where banks can approach or set up
service bureaux for capturing images and MICR data.
Settlement should be generated on the basis of current MICR code line data.
Electronic images should be used for payment processing.
Grey scale technology should be deployed for imaging.
Images should be preserved for eight years.
A centralized agency per clearing location should act as an image warehouse for the
banks. The group recommended norms for agencies to provide the service.
Public Key Infrastructure should be deployed to protect images and data flow over the
network.
Benefits
• The main advantage is reducing the delay, high costs and risk of fraud inherent in the
paper based clearing system
• Bank customers would get their cheques realised faster as T+0 local clearing and T+1
inter-city clearing is possible in cheque truncation system (CTS). As straight through
processing and automated payment processing are enabled by CTS faster realization is
accompanied by a reduction in costs for the customers and the banks. It is also possible
for banks to offer innovative products and services based on CTS. The banks have
additional advantage of reduced reconciliation and clearing frauds.
Legal Issues
• The collecting bank under a truncated environment has to verify the genuineness of the
cheque based on visible features.
• It is being suggested that the clearing-house cannot be held responsible for fraud,
forgery etc. As per the recommendations of the working group, the clearing-house will be
doing settlement based purely on MICR data and will act as a pass through for the
images. Therefore, the clearing-house cannot be held responsible for the fraud, forgery of
cheques as it cannot even open the images sent in by the banks.
• Protests have to be lodged per the timings of the existing return cycle.
• On the right of the drawee bank to seek further information on the veracity/genuineness
of the cheque, the amended NI Act already provides for the same. The drawee bank can
seek not only further information but can also seek the physical instrument for
verification and can retain it if the payment has been made accordingly.
• Images must be retained for 8 (eight) years.
ECS Credit
• This is a method of payment whereby the institutions having to make a large number of
payments can directly deposit the amount electronically into the bank accounts of those
they need to make the payment to.
• The scheme covers bulk payment transactions like periodic payments of salary, interest,
dividends and the likes and obviates the need to prepare a large number of warrants,
dispatching them by post and reconciling the payments later. Often each individual
payment is of a repetitive nature and of a relatively small amount.
• The system works on the basis of one debit transaction triggering a large number of
credit entries.
• These credits or electronic payment instructions which possess details of the
beneficiaries account number, amount and branch bank are communicated to the bank
branches through their respective service branches for crediting the accounts of the
beneficiaries either through magnetic media duly encrypted or through hard copy.
• Electronic clearing has been facilitated by MICR and the fact that several companies
issue cheques that are payable at par at many locations (such as dividend cheques).
• ECS credit can only be given to customers who have accounts in banks that participate
in this form of settlement.
• The magnetic tape/ floppy is the basis for the sponsor bank to debit the users account
and the destination banks to credit the destination account holders accounts.
• National clearing cell (NCC) would process the transaction.
• The minimum number of transactions per user institution is 2500. The maximum value
of any single item should not be more that 100,000 in a day at a centre.
• It is safe as there is no chance of the payment going astray.
• A deficiency is that sometimes the customer is not advised of the credit to his account
by the recipient bank even though beneficiaries are to be informed of credits to their
account and the nature of the credit.
ECS Debit
• ECS debit is a scheme which facilitates payment of charges to utility services such as
electricity, telephone companies, payment of insurance premia, loan installments etc. by
customers.
• ECS envisages a large number of debits resulting in a single credit simultaneously.
• It works on the principle of pre-authorized debit systems under which the account
holders’ account is debited on the appointed date and the amounts are passed onto the
utility companies.
• The scheme thus::
o Facilitates faster collection of bills by companies
o Enables better cash flow management
o Eliminates the need to go to collection centres/ designated banks by customers.
• The individual transaction limit under the scheme is Rs. 50,000 (Rs. 25,000 earlier).
• The amount may vary from month to month.
• The benefits include faster collection of bills by companies, better cash flow
management and eliminates the need for customers to go to collection centres/ banks to
make payment. Additionally it ensures that a facility is not cut off for non- payment.
• The concern many consumers have in accepting this is giving a blanket permission to
debit their account on the assumption that the bill amount is correct. If there is an error
then the consumer has to expend considerable effort in getting the excess repaid.
• To address this concern, an ECS variant called ECS Utility Bills Payment RAPID
(Receipts and Payments Instruments/ Documents) has been introduced in Mumbai for
BEST customers.
o RAPID is a post verification scheme. The consumer verifies the bill and the customer
has the option to pay the bill in cash or have the bank debit his account.
o In this the utility department prepares the bill in three parts – receipt to the customer,
voucher for the collecting bank and the third containing an MICR band is sent to the
service branch.
o The first part of the receipt is returned to the customer by the collecting branch duly
affixing the paid stamp.
o The collecting bank’s service branches need to have a personal computer attached to a
small MICR Reader/ Encoder to enable them to capture the data in the third part of the
bill which has the MICR read band. The service branch transmits the data to the National
Clearing Cell (NCC).
• At the NCC, the accounts of the various collecting banks are debited and the account of
the sponsor bank is credited.
• The scheme is beneficial to corporates as they get the amounts due to them on the
stipulated date and is useful to customers as they are able to verify the accuracy of the
billed amounts before effecting payment.
Electronic banking, also known as electronic fund transfer (EFT), uses computer and
electronic technology as a substitute for cheques and other paper transactions. They refer
to any transfer of funds that is initiated by electronic means such as an electronic
terminal, telephone, computer, ATM or magnetic tape. EFTs are initiated through devices
like cards or codes that permit account holders to authorize payments and access their
account.
RBI EFT
RBI EFT is a Scheme introduced by Reserve Bank of India (RBI) to help banks offering
their customers money transfer service from account to account of any bank branch to any
other bank branch in places where EFT services are offered.
The EFT system presently covers nearly 5000 branches of the 27 public sector banks and
55 scheduled commercial banks at the 15 centres (viz., Ahmedabad, Bangalore,
Bhubneshwar, Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur,
Mumbai, Nagpur, New Delhi, Patna and Thiruvananthpuram). Funds transfer is possible
from any branch of these banks at these centres to other branch of any bank at these
centres both inter-city and intra-city.
A customer can to avail of these services approaches the bank can issue instructions to
make a payment either by making a cash payment or authorizing his account to be
debited. He has to give full details regarding whose account is to be credited including his
bank account and bank.
If the remitting bank transmits the funds transfer message to RBI so as to hit the first
settlement at 12 noon, the receiving bank’s account is credited by RBI at the destination
centre and beneficiary gets the credit on Day 1 itself. If the same is included in
subsequent settlements i.e., for 2 pm and 4 pm, the beneficiary gets credit on Day 2.
As the scheme is retail in nature the maximum amount permitted per transfer is Rs.
100,000.
The system operates in the following manner:
Step-1: The remitter fills in the EFT Application form giving the particulars of the
beneficiary (city, bank, branch, beneficiary’s name, account type and account number)
and authorizes the branch to remit a specified amount to the beneficiary by raising a debit
to the remitter’s account.
Step-2: The remitting branch prepares a schedule and sends the duplicate of the EFT
application form to its Service branch for EFT data preparation. If the branch is equipped
with a computer system, data preparation can be done at the branch level in the specified
format.
Step-3: The Service branch prepares the EFT data file by using a software package
supplied by RBI and transmits the same to the local RBI (National Clearing Cell) to be
included for the settlement of 12 noon, 2 pm and 4 pm.
Step-4: The RBI at the remitting centre consolidates the files received from all banks,
sorts the transactions city-wise and prepares vouchers for debiting the remitting banks on
Day-1 itself. City-wise files are transmitted to the RBI offices at the respective destination
centres.
Step-5: RBI at the destination centre receives the files from the originating centres,
consolidates them and sorts them bank-wise. Thereafter, bank-wise remittance data files
are transmitted to banks on Day 1 itself. Bank-wise vouchers are prepared for crediting
the receiving banks’ accounts the same day or next day.
Step-6: On Day 1/2 morning the receiving banks at the destination centres process the
remittance files transmitted by RBI and forward credit reports to the destination branches
for crediting the beneficiaries’ accounts.
EFT is an improvement over the other facilities for several reasons.
The primary modes of funds transfer at present are demand draft, mail transfer and
telegraphic transfer. The demand draft facility is paper based. The remitter, after
purchasing demand draft from a bank branch, dispatches the same by post/courier to the
beneficiary. The beneficiary, in turn, lodges the draft to his/her bank for collection and
clearing. The time taken for completing the process is about 10 days. In the case of
telegraphic transfer, fund reaches the beneficiary either on the same day or the next; but
both the remitter and the beneficiary would have to be account holders of the same bank.
If they are customers of different banks, a good deal of paper processing is required.
On the other hand, RBI EFT system is an inter-bank oriented system. RBI acts as an
intermediary between the remitting bank and the receiving bank and effects inter-bank
funds transfer. The customers of banks can request their respective branches to remit
funds to the designated customers irrespective of bank affiliation of the beneficiary.
Limit
There is no value limit for individual transactions.
Acknowledgment for transfer
The receiving branch acknowledges every transaction it receives after crediting the
beneficiary’s account. The acknowledgment particulars reach the remitting branch as an
inward message on Day 3 of the EFT processing cycle. The remitting branch will,
therefore, have precise information as to when the beneficiary’s account was credited.
It is not necessary for all branches to have computer systems. Branches can send the
remittance details to their service branch in paper format (the copies of the EFT
Application Forms submitted by the remitting customers accompanied by a Remittance
Scroll). The Service branch will make data entry and transmit the funds transfer
information electronically to local NCC. But, if a branch has computer facility, it can
transmit funds transfer information electronically to its service branch either on a floppy
or through a network. This would minimize the data entry work at the service branch.
RTGS Membership
• There are 4 types of membership – Type A, B, C and D
• Membership Type “ A “
• All Scheduled banks, including scheduled co-op. banks.
• Are eligible for all types of transactions, including customer-based transactions.
• Will have a Participant Interface (PI) each
• Eligible for Intra-day liquidity support from the RBI.
• Membership Type “ B “
• All Primary dealers
• Eligible for all types of RTGS transactions excluding customer-based RTGS
transactions.
• Have Participant interface (PI) each.
• Eligible for intra-day liquidity support from RBI
• Membership Type “ C”
• A bank or a Primary Dealer, operating in Call Money Market and maintaining one or
more Current Accounts in the Deposit Accounts Department, RBI, Mumbai.
• Will not have PI and not eligible for Intra-day Liquidity support from RBI.
• Will deal through Sponsor bank, which is Type A member.
• Only one sponsor bank permitted at a time.
• Membership Type “ D “
• All clearing entities, other thanA, B, C types.
• Each member will have a Net Settlement Interface software from RBI.
• Eligible to submit Multilateral Net Settlement batch/s(MNSBs) for settlement, and will
receive notifications, including broadcast.
• Transaction types:
A) Inter-institutional transactions.
B) Customer transactions.
C) Delivery versus Payment transactions.
D) Own Account transfers transactions.
E) Multilateral Net Settlement Batches (MNSB) transactions.
Important information:
1) Under RTGS, the debit is initiated first and there is no instrument like cheque, DD, or
Banker’s cheque as in the case high value clearing.
2) The debit is against the written request of the customer, or RTGS message to that
effect.
3) RTGS System works on 362 days in a year. The days it does not are the 3 national
holidays, i.e.. 26th January, 15th August and 25th December.
4) In RTGS, the beneficiary’s account number is vitally important, even if the
beneficiary’s name is spelt incorrect/ different.
5) In its present form, RTGS is in short swift in Rupee.
6) There are sender / receiver transaction code in 11 characters, of which,
– First 4 characters represent the bank/institution’s name in short.
– Fifth character is marked ‘0’ (zero) and is reserved by RBI without allotment.
– Last 6 characters in the code are institutions choice for referring to their department /
office. These six characters can be digits / alphabets or both.
7) In the outgoing the sender is able to details of the total messages sent and messages
pending for authorization in the queue.
8) Authorization is possible through digital card signatures, issued by IDRBT,
Hyderabad. However, password based method can be used for initiating the message by
the clerical level, by the respective institution.
9) “Logica” software used in RTGS is supplied by RBI.
10) RTGS is used a “selling” product by bankers to attract high net worth individuals /
corporate for routing their high value transactions in trade.
Important terminologies:
• IDL _ Intra Day Liquidity
• PI – Participant Interface
• IFTP – Inter-bank Funds Transfer Processor
• SOD - Start of the Day
• EOD – End of the Day
• FIFO – First In First Out
• DvP - Delivery Vs. Payment
• CCIL – Clearing Corporation of India Ltd.
• IDRBT CA– Institute for Development and Research in Banking Technology
(Hyderabad) Certifying Authority.
• UTR – Unique Transaction Reference
S.W.I.F.T.
• S.W.I.F.T (SWIFT) is the acronym for the Society for Worldwide Interbank Financial
Telecommunications.
• Its headquarters are in La Hulpe near Brussels, Belgium.
• It runs a worldwide network by which messages concerning financial transactions are
exchanged between banks and other financial institutions globally.
• It was established as a cooperative society in 1973 under Belgian Law by 239 banks in
15 countries.
• It was started to establish a common language for financial transactions and a shared
data processing system through a worldwide network communications network.
• Its fundamental operating procedure and rules were laid down in 1975 and the first
message was sent in 1977.
• It operates as a non-profit making society.
• It has members in excess of 7000 in over 200 countries worldwide and handles over 7
million messages every day.
• Apart from a hub in Brussels, SWIFT has hubs in New York and in the Netherlands.
• The society functions round the clock for operational services of its members globally
• India joined the society in 1991.
• Initially only 41 banks in India participated. Presently because of its efficiency and the
fact that nearly all banks world-wide are members, most banks in India are also members
of SWIFT. In India bank locations are connected to the SWIFT regional processor in
Mumbai.
Membership of SWIFT
• Any bank / financial institution can become a member of the society by paying the
relevant fees, subject to the terms and conditions and the approval of the society.
• On becoming a member, the new member is allotted an address called Bank
Identification Code (BIC) of 8 characters.
• This address is circulated by the society to its members and only then can the new
member can participate in the SWIFT system.
• The society updates the BIC Directory at regular intervals.
Precautions
• The sender should use the correct format prescribed for different purposes.The relevant
columns in the format should be correctly filled in.
• Once the message is complete and sent, the SWIFT-FIN Center acknowledges the same
with an ACK message. In case there is any technical / formatting error, the FIN center
sends a NAK message (Not Acknowledged) with details of the error field. The sender has
to make corrections in the relevant field/s and send the message again to the SWIFT –FIN
center.
• The sender, when he receives ACK copy from the SWIFT-FIN center, gets legal
protection for any disputes, if any, in future.
• To maintain its secrecy, the society sends to each of its members, rectified / changed
program intimations at regular intervals.
Advantages of SWIFT
• It is operational throughout the year 24 hours a day.
• Funds transfers are effected by the banks by using conventional instruments like DD,
TT, etc., which though time tested can lead to duplication in payment and also gives
scope for perpetration of fraud. Hence the need for a computerized solution was desired
which would expedite payment and also eliminate the opportunity for commission of
fraud or misappropriation of funds. The SWIFT method is totally system based and the
duplication of message is cautioned and has minimized these difficulties
• Transmission of messages are immediate and all messages are acknowledged (either
accepted or rejected).
• Information is confidential and is protected against unauthorized disclosure and
tampering.
• SWIFT assumes financial liability for the accuracy and timely delivery of all validated
messages from the point they enter the network to the point they leave the network.
• In case of trade related activities, the process of transmission of documentary credits /
issue of guarantees too needed to be automated. SWIFT meets this requirement.
• Remittances and messages are transmitted in seconds to the beneficiary.
• Uniform Customs and Practices Board’s International Remittance and
Telecommunications Department supports the services in processing outgoing and
incoming remittances for local and international funds transfers through SWIFT.
Bank draft
• Banks often, at the request of customers, issue bank drafts or demand drafts payable in
another city/ location where they have offices. It t is issued by the bank on one of its
branches.
• A bank draft is an order drawn by an office of a bank upon another office of the same
bank instructing the other office to pay a specified sum to a specified person or his order.
• Although a bank is not specially mentioned as a negotiable instrument, it has all the
characteristics of one and in a case the Allahabad High Court in 1960 held that a bank
draft is a bill of exchange as it fulfills all the requisites of one.
• Drafts can be drawn either against cash or by debiting a client’s (the entity requesting
the draft) account. It must be noted that drafts are always issued for consideration
received in advance
• Drafts of Rs. 50,000 or more must be issued only against another cheque or by debiting
the purchaser’s account.
• Banks normally charge a commission for the issuance of a draft.
• By purchasing a draft an individual does not become a customer. . The relationship
between the purchaser of the draft and the banker is that of creditor and debtor
• It cannot be payable to bearer.
• The purchaser of a draft can by returning the draft have it cancelled before it has been
delivered to the payee.
• The purchaser cannot have the draft cancelled after it has been delivered to the payee..
• A bank cannot ordinarily refuse to pay the amount unless there is some doubt on the
identity of the person presenting the draft.
• If a draft is lost before it is handed over to the payee and is without any endorsement,
the bank can refuse payment. The bank must inform the drawee branch about the loss.
• Duplicate drafts can be issued if the bank is satisfied that the draft has been lost/
mutilated and a confirmation is received from the drawee bank that the draft has not been
paid. The purchaser should furnish an indemnity bond before a duplicate draft is issued.
• Drafts are sought because of the comfort to receivers as it is considered often as good as
money (if not better) since the bank issuing it is bound to honor it. Refusal is tantamount
to stating the bank is bankrupt.
Travelers cheque
• Traveler’s cheques are issued by banks and financial institutions like American Express
to travelers.
• They are for the convenience of travelers and are considered safer than money since if
these are lost the issuing company will issue duplicates on being intimated of the loss.
• They are convenient as they are issued in different denominations and in different
currencies.
• Travelers cheques upto Rs. 50,000 can be purchased in cash. Above this amount a
person can purchase them only against a cheque/ draft or by debit to his account.
• Travelers cheques are widely accepted – not only at banks but at shops, hotels and other
outlets.
• On purchasing a travelers cheque, the purchaser is required to sign the cheque in the
presence of the issuer. Then when encashing it he is required to again sign it in front of
the person accepting the cheque. The two signatures are compared before the travelers
cheque is accepted. In addition, the identity of the person is also required to be proven.
• No commission is normally charged when travelers cheques are issued.
• There is no expiry date for travelers cheques and they never go stale.
Standing instructions
• Bank customers have payments they need to make with frightening regularity such as
life insurance premium, rent, subscriptions, equated monthly installments on housing
loans, hire purchase loans and the like. Banks can take this responsibility over from
customers and make these payments on their behalf after receiving instructions.
• These instructions would be to make a specific payment to a person/ organization on a
specific date. The payment may be monthly, quarterly, half yearly or annually. The period
(length of time) the payments are to be made would also be specified.
• The customer can, at any time, instruct the bank, to stop payment.
• The bank is not bound to make payment if the customer does not have an adequate
balance. The assumption is that the payment will be made provided the customer keeps
the account adequately funded.
CASH
• Cash is money held in the form of currency notes or in coins or in accounts with other
banks that are available on demand or after giving notice.
• Banks hold cash in two forms:
– Cash with banks and
– Cash in hand
• The intent is to keep as little cash as possible as cash does not earn any interest while the
bank has to pay interest to its depositors on amounts they have deposited in the bank.
Cash in hand
Cash is kept by banks to meet day to day needs.
The amount kept by a bank will vary from bank to bank and from branch to branch as
the demands of customers will vary.
Banks will aim to keep the minimum they require to meet needs as cash is
unproductive and earns no interest.
The cash held in a bank branch may be divided into cash:
• In the vault and
• With tellers.
– Excess Money
• If the branch has more money than it requires it would surrender the extra money that it
has either to the Reserve Bank or to another bank with whom it has a relationship or to
the bank’s currency chest branch.
• Large banks and those that have several branches in a city often have a currency chest.
This is technically money of the Reserve Bank that the bank keeps on behalf of the
Reserve Bank.
NOTES
• Notes refers to currency notes issued by the Reserve Bank of India. This is legal tender
and are in several denominations.
• The RBI has issued instructions that notes must not be stapled. This was because earlier
banks had the habit of awkwardly stapling the notes and binding bundles with multiple
staples. The result was that it was very difficult to separate the notes and the multiple
stapling also resulted in the notes tearing.
Forged Notes
• If a forged note is presented, the presenter’s (tenderer’s) name and address should be
noted. He should be given an acknowledgement.
• The note should be stamped “ COUNTERFEIT BANK NOTE” and impounded. The
stamp must also state the name of the bank, the branch and date. The stamp should be
5cms by 5 cms (uniform size).
• The note should be sent to the local police for investigation by filing a first information
report (FIR). A copy of the FIR must be sent to the RBI.
• If only one or two notes are detected and the tenderer appears innocent, a police
complaint need not be lodged. The notes must be impounded and sent to the RBI.
• All branches should be equipped with ultraviolet lamps.
Coins
• The RBI has issued instructions that banks must accept coins as it is legal tender. This
notice was issued as there were several banks that refused to handle a large amount of
coins deposited because of the time it would take to count it.
Dual Custody
• As a matter of control the bank must be under dual control. This means that the second
key and the combination should be with another person. This ensures that if the vault is to
be opened there has to be two persons present and embezzlement will therefore not
happen unless there is collusion.
• The controls on cash must be very strong. Cash is fungible – changes form and once lost
is difficult to trace.
RETAIL LOANS
Retail loans are those that are given to individuals to meet their needs as opposed to
corporate to meet business or commercial imperatives.
The Reserve Bank has not stipulated (apart from housing, loans against shares, and
educational loans on aspects of these loans. The general features of these loans are
detailed in the next few chapters. These may, of course vary from bank to bank in some
degree and is intended only to give the reader an understanding of how the loans are
structured.
PERSONAL LOANS
Personal loans are loans advanced to individuals for a need. These could be to meet
marriage expenses, hospitalization/ medical costs, costs for a holiday or for some other
need.
Eligibility
• These loans are advances to persons over the age of 18/ 21 who have sufficient
disposable income to repay the loan in monthly installments.
• Usually these loans are not advanced to individuals who are likely to retire with one to
two years.
• A certain minimum annual income is also expected – the quantum varies from bank to
bank.
Quantum of loan
• The amount that is advanced is usually based on the nature of the loan, the take home
and disposable income of the person seeking the loan.
These loans are between Rs.50, 000 to Rs.200, 000. The amount does vary from bank to
bank.
Rate of Interest
• The rate of interest would vary from bank to bank.
Security
• These loans are usually unsecured.
Consumer durable loans are for the purchase of consumer durables such as washing
machines, dish washers, mobile phones, refrigerators, cooking ranges, music systems,
televisions and the like.
Eligibility
• These loans are normally extended to persons over the age of 18 who have sufficient
disposable income to repay the loan in monthly installments,
Quantum of Loan
• These loans are not large and is usually below Rs. 100,000.
• They may be for an amount as low in some cases as Rs. 5,000.
• As the amounts are usually not large, normally 90% of the value (and in cases 100%) is
advanced.
Interest
• The rate of interest varies from bank to bank.
Security
• These are usually unsecured though at times certain equipment such as computers may
be hypothecated.
Quantum
• The amount advanced will depend on the amount required, the nature of the expense and
the earnings of the professional.
• To qualify within this category it should not exceed Rs. 10 lakhs of which working
capital finance should not exceed Rs. 2 lakhs.
Rate of Interest
• The rate will vary from bank to bank.
Security
• These loans are secured by the asset purchased with these loans.
VEHICLE LOANS
Eligibility
• Most banks expect the applicant to be at least 21 years of age and not more than 60
years old.
• As a safety criteria to satisfy themselves that the person has the ability to repay other
aspects may be looked at such as for how long the person has been employed, other assets
and the like.
• In addition the net take home pay/ disposable income will be checked to determine
whether the applicant can repay the loan.
• With regard to professionals & Self Employed Persons such as Doctors, Engineers,
Architects, Chartered Accountants, Lawyers, Consultants, Agriculturists, Businessmen
etc. their income should be adequate to pay the monthly installments.
Quantum of Loan
• While this may vary, usually the loan is up to 80% (in case of both new and old
vehicles; but not older than 5 years) of the cost / invoice value of the vehicle including
accessories and registration expenses in the case of new vehicles.
Rate of Interest
• The rate of interest will vary from bank to bank.
Repayment
• Entire loan with interest is required to be paid in 36 to 60 equated monthly installments.
Security
• Hypothecation of vehicles purchased out of bank finance.
• Hire purchase is to be got noted in the registration book issued by the Regional
Transportation Officer.
Insurance
• The vehicle purchased must be comprehensively insured to its full value with a clause
stating that if it is damaged beyond repair, the insurance money be paid to the bank. .
Guarantor
• As an additional security, at times a guarantor acceptable to the Bank is taken as
Guarantor.
EDUCATIONAL LOAN
The Indian Bank’ Association has suggested a model scheme and the Reserve Bank has
suggested that banks adhere to it as much as possible while developing their own
scheme.
The Reserve Bank suggests that the main emphasis should be to ensure that every
meritorious student though poor is provided with an opportunity to pursue education with
the financial support from the banking system with affordable terms and conditions and
that no deserving student be denied an opportunity to pursue higher education for want of
financial support.
Eligibility Criteria
The courses that are eligible in India and abroad for a loan and those who are eligible are:
Studies in India:
• School education including plus 2 stage.
• Graduation courses : BA, B.Com., B.Sc., etc.
• Post Graduation courses : Masters & Phd.
• Professional courses : Engineering, Medical, Agriculture, Veterinary, Law, Dental,
Management, Computer etc.
• Computer certificate courses of reputed institutes accredited to Dept. of Electronics or
institutes affiliated to university.
• Courses like ICWA, CA, CFA etc.
• Courses conducted by IIM, IIT, IISc, XLRI. NIFT etc.
• Courses offered in India by reputed foreign universities.
• Evening courses of approved institutes.
• Other courses leading to diploma/ degree etc. conducted by colleges/ universities
approved by UGC/ Govt./ AICTE/ AIBMS/ ICMR etc.
• Courses offered by National Institutes and other reputed private institutions. Banks may
have the system of appraising other institution courses depending on future prospects/
recognition by user institutions.
Studies abroad :-
• Graduation : For job oriented professional/ technical courses offered by reputed
universities.
• Post graduation : MCA, MBA, MS, etc.
• Courses conducted by CIMA- London, CPA in USA etc.
Student eligibility :
• Should be an Indian National.
• Secured admission to professional/ technical courses through Entrance Test/ Selection
process.
• Secured admission to foreign university/ Institutions.
• There is no need to have secured a minimum qualifying mark.
Margin
• Loan upto Rs.4 Lakhs - no margin need be insisted upon.
• Loan above Rs. 4 lakhs, the margin should be 5% for studies in India and 15% for
studies abroad.
• Scholarship/ assistantship to be included in margin.
• Margin may be brought in on year-to-year basis as and when disbursements are made on
a pro-rata basis.
Security
• No security need to be insisted upon for loans upto Rs. 4 lakhs.
• For loans above Rs. 4 lakhs collateral security of suitable value or co-obligation of
parent/ guardians/ third party along with the assignment of future income of the student
for payments of installments should be obtained.
Documentation
• Both the student and the parent/guardian should execute the document.
• The security can be in the form of land/ building/ Govt. securities/ Public Sector Bonds/
Units of UTI, NSC, KVP, LIC policy, gold, shares/ debentures, bank deposit in the name
of student/ parent/ guardian or any other third party with suitable margin.
• Wherever the land/ building is already mortgaged, the unencumbered portion can be
taken as security on II charge basis provided it covers the required loan amount.
• In case the loan is given for purchase of computer the same to be hypothecated to the
Bank.
Banks who wish to support highly meritorious/ deserving students without security may
delegate such powers to a fairly higher level authority.
Rate of Interest
• Loans upto Rs.4 lakhs – interest rate should not exceed prime lending rate ( PLR).
• Loans above Rs.4 lakhs - PLR + 1%
• The interest to be debited quarterly/ half yearly on simple basis during the Repayment
holiday/ Moratorium period.
• Penal interest @ 2% be charged for above Rs.4 lakhs for the overdue amount and
overdue period.
Sanction
• The loan to be sanctioned as per delegation of powers preferably by the Branch nearest
to the place of domicile.
• The Reserve Bank states that no application for educational loan received should be
rejected without the concurrence of the next higher authority.
• The loan to be disbursed in stages as per the requirement/ demand directly to the
Institutions/ Vendors of books/ equipments/ instruments to the extent possible.
Repayment
• Repayment holiday/moratorium : Course period + 1 year or 6 months after getting job,
whichever is earlier.
• The loan to be repaid in 5-7 years after commencement of repayment. If the student is
not able to complete the course within the scheduled time extension of time for
completion of course may be permitted for a maximum period of 2 years. If the student is
not able to complete the course for reasons beyond his control, sanctioning authority may
at his discretion consider such extensions as may be deemed necessary to complete the
course.
• The accrued interest during the repayment holiday period to be added to the principal
and repayment in Equated Monthly Installments (EMI) fixed.
• 1-2% interest concession may be provided for loanees if the interest is serviced during
the study period when repayment holiday is specified for interest/ repayment under the
scheme.
Follow Up
• Banks to contact college/ university authorities to send the progress report at regular
intervals in respect of students who have availed loans.
Processing Charge
• No processing/ upfront charges should be collected on educational loans.
Capability Certificate
• Banks can also issue the capability certificate for students going abroad for higher
studies. For this financial and other supporting documents may be obtained from
applicant, if required.
• Some foreign universities require the students to submit a certificate from their bankers
about the sponsors’ solvency/ financial capability. This is to afford them comfort that the
sponsors of the students going abroad for higher studies are capable of meeting the
expenses of the students till they complete their studies.
Other conditions
• No due certificate need not be insisted upon as a pre-condition for considering an
educational loan. However, banks may obtain a declaration/ an affidavit confirming that
no loans are availed from other banks.
• Loan applications have to be disposed of within a period of 15 days to 1 month, but not
exceeding the time norms stipulated for disposing of loan applications under priority
sector lending.
• In order to bring flexibility in terms like eligibility, margin, security norms, banks may
consider relaxation in the norms on a case to case basis delegating the powers to a fairly
higher level authority.
Introduction
• Advances against security of shares/debentures/bonds may be given to individuals, share
and stock- brokers and market makers.
Advances to individuals
• Banks may grant advances against the security of shares, debentures or bonds to
individuals subject to the following conditions:
i. Loans against shares, debentures and bonds of public sector undertakings (PSUs) may
be granted to individuals to meet contingencies and personal needs or for subscribing to
rights or new issues of shares/debentures/bonds or for purchase in the secondary market,
against the security of shares/debentures/bonds held by the individual.
ii. Loans against the security of shares, debentures and PSU bonds if held in physical
form should not exceed the limit of Rs. 10 lakhs per borrower if the shares are in physical
form and Rs. 20 lakhs per borrower if the shares are in dematerialized form.
iii. Banks can grant advances to employees for purchasing shares of their own companies
under Employee Stock Option Plans to the extent of 90% of the purchase price or Rs. 20
lakhs whichever is lower.
iv. Banks should maintain a minimum margin of 50 percent of the market value of equity
shares/convertible debentures held in physical and dematerialized form. These are
minimum margin stipulations and banks may stipulate higher margins for shares whether
held in physical form or dematerialized form. The margin requirements for advances
against preference shares/non-convertible debentures and bonds may be determined by
the banks themselves.
v. Each bank should formulate with the approval of the Board a Lending Policy for grant
of advances to individuals against shares/debentures/bonds keeping in view the general
guidelines given by the Reserve Bank. Banks should obtain a declaration from the
borrower indicating the extent of loans availed of by him from other banks as input for
credit evaluation. It would also be necessary to ensure that such accommodation from
different banks is not obtained against shares of a single company or a group of
companies. As a prudential measure, each bank may also consider laying down an
aggregate limit of such advances.
General guidelines
i. Statutory provisions regarding the grant of advances against shares contained in
Sections 19 (2) and (3) and 20 (1) (a) of the Banking Regulation Act 1949 should be
strictly observed.
ii. Banks should be concerned with what the advances are for, rather than what the
advances are against. While considering grant of advances against shares/debentures
banks must follow the normal procedures for the sanction, appraisal and post sanction
follow-up.
iii. Advances against the primary security of shares/debentures/bonds should be kept
distinct and separate and not combined with any other advance.
iv. Banks should satisfy themselves about the marketability of the shares/debentures and
the networth and working of the company whose shares/debentures/bonds are offered as
security.
v. Shares/debentures/bonds should be valued at prevailing market prices when they are
lodged as security for advances.
vi. Banks should exercise particular care when advances are sought against large blocks
of shares by a borrower or a group of borrowers. It should be ensured that advances
against shares are not used to enable the borrower to acquire or retain a controlling
interest in the company/companies or to facilitate or retain inter-corporate investments.
vii. No advance against partly paid shares should be granted. Whenever the limit/limits of
advances granted to a borrower exceeds Rs. 10 lakhs, it should be ensured that the said
shares/debentures/bonds are transferred in the bank’s name and that the bank has
exclusive and unconditional voting rights in respect of such shares. For this purpose the
aggregate of limits against shares/debentures/bonds granted by a bank at all its offices to a
single borrower should be taken into account. Where securities are held in dematerialized
form, the requirement relating to transfer of shares in bank’s name will not apply and
banks may take their own decision in this regard. Banks should however avail of the
facility provided in the depository system for pledging securities held in dematerialized
form under which the securities pledged by the borrower get blocked in favor of the
lending bank. In case of default by the borrower and on the bank exercising the option of
invocation of pledge, the shares and debentures get transferred in the bank’s name
immediately.
viii. Banks may take their own decision in regard to exercise of voting rights and may
prescribe procedures for this purpose.
ix. Banks should ensure that the scrips lodged with them as security are not
stolen/duplicate/fake/benami. Any irregularities coming to their notice should be
immediately reported to RBI.
x. The Boards of Directors may decide the appropriate level of authority for sanction of
advances against shares/debentures. They may also frame internal guidelines and
safeguards for grant of such advances.
xi. Banks operating in India should not be a party to transactions such as making
advances or issuing back-up guarantees favoring other banks for extending credit to
clients of Indian nationality/origin by some of their overseas branches, to enable the
borrowers to make investments in shares and debentures/bonds of Indian companies.
Interest
• Banks are free to determine the rate of interest without reference to the BPLR
(Benchmark Prime Lending Rate)
Prohibitions
• Banks cannot sanction loans to trusts and endowments against the security of shares and
debentures.
• Banks cannot sanction loans against the equity shares of the banking company to its
directors.
• Banks cannot advance loans to their employees through employee trusts set up by them
under ESOP/ IPO or from the secondary market.
Ceiling
• A bank’s total exposure including both fund based and non fund based to the capital
market in all forms (including advances to individuals) must not exceed 5% of its total
advances as on March 31 of the previous year.
• Within this ceiling the bank’s direct investment should not exceed 20% of its net worth.
HOUSING FINANCE
The Reserve Bank has stated that banks are free to evolve their own guidelines with the
approval of their Boards on aspects such as security, margin, age of dwelling units,
repayment schedule, etc.
Types
The following types of bank finance is considered direct housing finance:
• Bank finance extended to a person who already owns a house in a town/village where he
resides, for buying/ constructing a second house in the same or other town/ village for the
purpose of self- occupation.
• Bank finance extended for the purchase of a house by a borrower who proposes to let it
out on a rental basis on account of his posting outside the headquarters or because he has
been provided accommodation by his employer.
• Bank finance extended to a person who proposes to buy an old house where he is
presently residing as a tenant.
• Bank finance granted only for purchase of a plot, provided a declaration is obtained
from the borrower that he intends to construct a house on the said plot, with the help of
bank finance or otherwise, within such period as may be laid down by the banks
themselves.
Supplementary finance
• Banks may consider requests for additional finance within the overall ceiling for
carrying out alterations/ additions/repairs to the house/flat already financed by them.
• In the case of individuals who might have raised funds for construction/ acquisition of
accommodation from other sources and need supplementary finance, banks may extend
such finance after obtaining pari passu or second mortgage charge over the property
mortgaged in favor of other lenders and/or against such other security, as they may deem
appropriate.
Housing Loans
Housing Loans are advanced for:
• The purchase of as house/ flat or the purchase of a plot of land for the construction of a
house.
• The renovation/ repair of an existing house/ flat.
• Extending an existing house.
• Short term bridge finance while purchasing another hose/ flat.
Eligibility
• Those eligible are all individuals above the age of 18 years with adequate income to
repay the loan in equated monthly installments.
• Housing loans are not normally extended to individuals who are above 58 years of age
as they would retire in a short while.
Quantum
• The quantum will vary from bank to bank. Banks would normally stipulate a minimum
of Rs. 100,000. The maximum would depend on the bank and could vary from Rs. 10
lakhs to Rs. 2 crores or more.
• The loan amount for repairs would normally be less – around Rs. 10 lakhs.
• The amount advanced will be based on the individual’s gross pay or take home pay or
net disposable income – the criteria differs from one bank to another.
Margin
• The entire amount is rarely advanced. The loan is usually between 80% and 85% of the
cost of the house/ flat is the amount disbursed.
Rate of Interest
• Interest may be fixed or floating.
Security
• The property purchased is usually the security and a mortgage is taken on the property.
• As an additional security guarantees may be taken.
Dangers
• The individual is a risk. The person may not want to repay. As a rule employed person
are better risks than self-employer/ unemployed persons. Women are better risks than
men.
• The class of society the person comes from has an effect on the risk. Middle class
persons are better risks than affluent/ poor people.
• The area a person stays is significant. Certain areas have a higher rate of default.
• The profession the person pursues is important.
• Sales are being done to direct selling agents. The risk in this instance is that they have a
vested interest in the loan being disbursed (as they are remunerated on the number of
loans sourced).
• The asset may be difficult to repossess.
Risk Containment
• Determine the nature of the work done by the person.
• The individual’s past credit history (if available).
• Do not lend to people in certain professions.
• Check the area the person stays in.
• Check the individuals take home salary, net disposable income and spending pattern.
• Ascertain the number of dependants.
• Check whether there are imminent expenditure imperatives like a daughter’s marriage.
Documents to be checked
• Identity.
• PAN Card.
• Salary slips if employed or financial statements for atleast two years if self employed.
• Address.
• Credit card/ loan repayment history.
• Bank statements.
• Documents supporting assets owned such as house.
Other verification
• Address verification.
• Office verification.
Safety Indicators
• House owner.
• Loan will be repaid before retirement.
• Borrower has adequate resources to repay.
• Good loan record.
• Credit card holder with no history of default.
DEMATERIALIZATION OF SHARES
Dematerialization
• Dematerialization (“Demat” in short form) is the method by which a person can get his
physical share certificates converted into electronic form, for the same number of holding
which is credited to his demat account with a Depository Participant (DP).
• It is a process by which the physical share certificates of an investor are taken back by
the Company and an equivalent number of securities are credited in electronic form at the
request of the investor. For this an investor will have to first open an account with a
Depository Participant and then request for the dematerialization of his share certificates
through the Depository Participant. The dematerialized holdings are credited into the
account he has with the DP. This is quite similar to opening a Bank Account.
• Dematerialization of shares is optional and an investor can still hold shares in physical
form. However, to sell the shares through the stock exchanges one has to dematerialize it
before he sells it and similarly, if an investor purchases shares, the delivery of the shares
will be in the demat form.
Meaning of a Depository
• A Depository (NSDL (National Stock Depository Limited) & CSDL (Central Stock
Depository Limited) ) is an organization like a Central Bank where at the request of a
shareholder his securities are held in the electronic form through the medium of a
Depository Participant.
• A Depository Participant (DP) is also the account holder’s representative (agent) in the
depository system providing the link between the Company and the account holder.
Other
• Dematted shares can be converted back into physical shares
• One may open accounts with several DPs
BANCASSURANCE
• Bancassurance in its simplest form is a term which is coined to denote the combination
of banking and insurance business within the same organization. It is the sale of life
pension and investment products through the branch network of a bank. Bancassurance,
is also known as Allfinanz and it describes a package of financial services that can fulfill
both banking and insurance needs at the same time.
• Bancassurance has many forms and varies from country to country depending upon the
demography and economic and legislative climate of that country.
• Banks view this as an avenue of product diversification and a source of additional fee
income. There is no risk as in the case of advances as this is non fund based. For
Insurance companies it is a tool for increasing their market penetration and premium
turnover. The customer sees Bancassurance as a bonanza in terms of reduced price, high
quality product and delivery at doorsteps.
• The most important reason for banks to offer these products as their sale improves their
ROI (reurn on investment) as it is non fund based fee income. (ROA). Banks that
effectively cross-sell financial products can leverage their distribution and processing
capabilities for profitable operating expense ratios.
• Sale of personal line insurance products through banks meets an important set of
consumer needs. Most large retail banks have a large customer base, which they can
utilize in selling them personal line insurance products. Another important factor is the
personal approach that banks have towards customers is helpful in the sale of personal
insurance.
• Also another important factor that banks have over traditional insurance distributors is
the lower cost per sales lead made possible by their sizable customer base. Banks also
enjoy significant brand awareness within their geographic regions. This results in a lower
per-lead cost when advertising through print, radio and/or television.
• Banks have excellent marketing and processing capabilities. They utilize this extensive
experience in marketing to both existing customers (for retention and cross selling) and
non-customers (for acquisition and awareness). And because they also have access to
multiple communications channels, such as statement inserts, direct mail, ATMs,
telemarketing, etc. Banks proficiency in using technology has resulted in improvements
in transaction processing
MUTUAL FUNDS
Mutual Fund
• A Mutual fund in simple terms is made up of money that is pooled together by a large
number of investors who give their money to a fund manager to invest in stocks and/ or
bonds.
• These investors buy the units of a fund that best suits their needs.
• The Fund then invests the pool of money (called a corpus) in securities -- this could be
shares, debentures, money market instruments, etc.- depending on the constitution and
objective of the scheme.
• The income earned through the investments, as well as the capital appreciation realized
by the investments, are allocated amongst the investors in proportion to the number of
units they own.
• These gains are distributed to investors either by way of dividends or through an
increase in the value of their units, or through an allocation of additional units - or a
combination of the three.
Advantages
• Mutual Funds provide investment products that cater to the needs of different classes of
investors, whereas Banks, for instance, offer only a few standardized products. Mutual
Funds occupy the middle ground - between large financial institutions, which offer
standardized financial products, and the very small private banks that offer extremely
customized products and services.
• Mutual Funds reduce or largely eliminate the burden, paperwork and hassles small
investors experience in managing a diverse portfolio on their own.
• Mutual Funds also provide the investment know-how and trading capabilities that small
or novice investors cannot be expected to possess.
• Mutual Funds give an investor a high degree of liquidity as it can be purchased and sold
quickly.
• Mutual Funds make it easy for small retail investors to invest in instruments that are
otherwise not available to them. For example, small investors may not be offered high
quality debentures directly. The issuers choose to place these with large institutions,
including Mutual Funds. For the borrower, this kind of a bulk placement lowers the cost
of raising funds. When the investor invests in the Mutual Fund he/she, in effect, gets
access to investments in these debentures. The same is the case with Government
Securities. As of now, this is a wholesale market. However, an investor can invest in
Government Securities through a Gilt Fund.
• The Government also provides a range of tax benefits to those who invest in Mutual
Funds. So
Disadvantages
• Unlike saving instruments offered by banks, Dividend payouts can vary and sometimes
there may be no dividend declared for a particular period.
• An investor managing his own portfolio can separately sell those shares that have gone
up and buy those whose price has decreased but when he buys or sells a unit in a Mutual
fund he ,in effect buys or sells every share/security in his fund’s portfolio whether he is
making a profit or a loss by trading at that time. Thus individual discrimination is not
available to investors in Mutual funds - it is either all or none trading the funds portfolio.
• But again, these disadvantages matter only to investors who are extremely well
informed and experienced in the market. Most investors are better off investing through a
Mutual Fund.
Open-ended scheme
• In an Open-ended scheme, subscriptions to and redemptions from the Mutual Fund
scheme are open at all through the year excepting the period of book closing.
• The number of units outstanding in an open-ended scheme vary, as investors buy and
sell units.
• In an open-end fund, there is no fixed number of units issued.
• Open-end schemes are not listed on the stock exchanges. Units are purchased and sold
directly through the Mutual Fund. • Open-ended schemes can be purchased and sold at
close to their Net Asset Value (plus or minus an entry or exit load).
• They may or may not have a specified redemption period.
Closed-ended scheme
• These are open only during a specified period.
• The units of a closed-ended scheme have a fixed maturity period. This can vary from 3
to 15 years. An individual investor can move into and out of the investment, but the unit
remains outstanding.
• After the initial offer, a closed-end fund is listed on a stock exchange and, thereafter,
investors can purchase and sell these units only through the stock exchange.
• Close-Ended schemes generally trade at a discount to the NAV, but the discount
narrows as the date of maturity approaches.
Income scheme
• This is aimed at maximizing current income (interest and dividend) of investors. It is a
scheme that is typically debt-oriented, which provides interest at regular intervals and has
limited downside. Capital appreciation in such a scheme is generally less than in a pure
equity fund. Income schemes normally provide higher returns than Bank Fixed Deposits.
Many income schemes invest about 15% of the corpus in equities, as a result of which
they have the potential to provide much higher returns than a pure bond fund.
Balanced Fund
• Balanced funds are funds that invest both in shares and fixed income securities in the
proportion indicated in their offer document. The returns to investors provided by these
schemes are moderate and at a moderate risk. A typical equity/debt mix in a balanced
fund could be 40:60.
Sector Fund
• A sector fund is one whose portfolio is built around a particular sector or theme. It could
be appropriate for an investor who lacks expertise or knowledge about a particular sector.
Some of the recent sector funds floated have included those focusing on the information
technology and fast moving consumer goods (FMCG) sectors. A sector fund is inherently
riskier than a diversified fund because the portfolio is concentrated in one sector only.
However, in good markets, sector funds can provide above average returns.
Gilt Fund
• Gilt fund invest much of their corpus in sovereign securities issued by the Central
Government, with a very small portion invested in the Inter-Bank Call Money market. All
these instruments carry the highest credit rating, thus providing the highest level of safety.
The default risk in these instruments is virtually zero. Regulations in force now, permit
non-Government Provident Funds, Superannuation Funds and Gratuity Funds to invest in
100% Gilt schemes floated by Mutual Funds.
Bond Fund
• A Bond Fund is a different form of an Income Fund, with the only difference being that
the entire corpus is invested in bonds. Unlike some income funds, no portion of the
corpus is invested in equities. Thus, the returns on a Bond Fund will generally vary less
than the returns on an Income Fund that may have a 10-15% equity component.
Index Fund
• An Index Fund is a fund that has the objective of tracking one of the popular stock
market indices. Thus, the returns on an Index Fund will approximate the changes in the
index that is used as the base. Of all the investment options, an Index Fund is one of the
more passive avenues.
Price
• When Units are purchased in an initial offer, they are priced at par value -- normally
Rs 10 per unit. A load factor is usually incorporated if it is a equity fund or the bulk of
investments are in equity.
• When units are purchased at a time other than the initial issue, the purchase price is the
Net Asset Value (NAV) plus (wherever applicable) a front-end load.
• In the case of a closed-end fund, the purchase is based on the price that is being quoted
on the stock exchange where it is listed. The quoted price would usually be at a discount
to the NAV.
• Suitability for investor: The investor needs to make sure that the fund fits his
investment objectives and criteria -- in terms of risk, total returns, tax objectives,
frequency of dividend payouts, etc.
• Fund Managers track record: The Fund/Fund Manager should have a proven track
record regarding efficient fund management. Further, one should not concentrate on only
one-year returns , it should be over longer periods, in up markets and down.
• Portfolio quality: The fund should generally have investments in high quality shares
and securities that are reasonably liquid. You have to be careful about speculative grade
paper that is very risky and can backfire anytime. Also you should know that a good
portfolio is one which is reasonably diversified.
• Number of retail investors and size of corpus: It is always easier to deploy and
manage a small fund, but on the other hand even if a few investors exit, a small fund
could find itself in trouble ,whereas large funds can seize opportunities that smaller funds
may not be able to capitalize on.
• Weighted average maturity (in case of debt funds): If interest rates move down, a
portfolio that is weighted towards securities of longer maturities proves advantageous.
However, if interest rates rise, such a portfolio loses out.
Safe deposit locker facility is one that is offered by banks especially in residential areas to
help individuals safeguard their valuables.
Lease
• Banks normally expect the individual hiring a locker to execute a lease agreement.
• The relationship in this instance between the banker and the customer is that of a lessor
and a lessee.
• The lease rent charged would vary from bank to bank and is dependant on the size of the
locker leased.
Eligibility
• Any individual is entitled to hire a locker from a bank.
• Some banks insist that the hirer either open a savings/ current account or place an
amount with the bank in a fixed deposit.
Operation
• A locker may be hired in a single name or in joint names.
• If it is joint names there must be clarity on how it will be operated.
• When a holder seeks to open the locker, the banker has the person sign a register in his/
her presence. After checking the signature the banker accompanies the holder to the
locker.
• Lockers usually open with two keys – one being with the banker and the other with the
holder. These two keys are inserted at the same time to open the locker.
• After the locker is opened, the banker usually leaves, leaving the holder to either place
more articles in the locker or remove articles from the locker.
• If the lessee of the locker dies, the banker may hand over custody to the survivor if the
operation was “either or survivor” or the nominee. The survivor/ nominee in this case
accepts control of the contents as a trustee.
• If the operation was single, and there was no “either or survivor clause’ or nomination
made, the possession of the locker should be given to the legal heirs on their submitting a
succession certificate.
• Whenever possession is given and contents are handed over a third party, a detailed
inventory should be taken. This should be ideally in the presence of the bank’s lawyer and
the lawyer of the person who is being handed possession of the contents.
Nomination
• Nomination facility is available with lockers.
Liability
• Bankers are not liable for items lost from the locker nor for individual items claimed to
be missing as the banker does not know the contents of the locker.
• The exception is when due to gross negligence the locker is opened and items are stolen.
Even then it is difficult to quantify the loss as the contents are only known to the holder.
In these situations courts usually determine whether banks are liable to pay damages and
the amount.
SAFE CUSTODY