This action might not be possible to undo. Are you sure you want to continue?
· 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.” Banking involves therefore: • The borrowing, raising or taking up of money; • The lending or advancing of money either with or without security; • The drawing, making, accepting, discounting buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; • The granting and issuing of letters of credit, travelers’ cheques and circulars notes; • The buying and selling of foreign exchange including bank notes; • The buying and selling of bullion and specie; • The acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, bonds, obligations, securities and investments of all kinds; • The purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; • The receiving of all kinds of bonds or valuables on deposit or for safe custody or otherwise; • The providing of safe deposit vaults; • The collecting and transmitting of money and securities; • Carrying on and transacting every kind of guarantee and indemnity business; • Managing, selling and realizing any property which may form the security or part of the security for any loans or advances or which may be connected with any such security; • Acting as agents for any government or local authority or any other person or persons; • Contracting for public or private loans and negotiating and issuing the same; • The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, municipal
or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; • Undertaking and executing trusts; • Undertaking the administration of estates as executor, trustee or otherwise; • Establishing, supporting and aiding institutions funds, trusts etc. for the benefit of its present employees and granting money for charitable purposes; • Acquiring, constructing and maintaining any building for its own purpose; • Selling, improving, managing, developing, exchanging, leasing, mortgaging or disposing its property; • Doing all such things that are incidental or conducive to the promotion or advancement of its business; • Doing all other business specified by the Central Government as the lawful business of a banking company. Leasing and factoring has been specified as permissible for banks by the Central Government. 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 Services rendered by banks • Acceptance of deposits; • Provision of credit; • Collection of cheques, demand drafts, bills of exchange, promissory notes, hundis and foreign documentary and clean bills; • Purchase of local and foreign currency documentary/ clean bills, negotiation of bills under inland and foreign letters of credit, advising of inland and foreign letters of credit established by branches and correspondents; • Carrying out standing instructions for payments; • Issuance of performance and financial guarantees; • Keeping in safe custody deeds and securities; • Purchase and sale of securities; • Remittance of funds; • Collection of interest on securities, dividend on shares and collection of bills; • Credit transfers; • Issue of travelers cheques and gift cheques; • Acting as executors and trustees; • Issuance of credit cards; • Underwriting, acting as bankers to new issues and as bankers for refunds. Banker and Customer
Banker · Section 3 of the Negotiable Instruments Act says that the term ‘banker’ includes any person acting as a banker. · Dr.Herbert Hart, in his book Law of Banking says, “a banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on current account.” · Halsbury’s Laws of England defines a banker as “an individual, partnership or corporation whose sole predominating business is banking, that is the receipt of money on current account or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer.” · Sir John Paget says in his book, ‘The Law of Banking’, ”no person or body corporate or otherwise can be a banker who does not (1) take deposit accounts, (2) take current accounts, (3) issue and pay cheques and (4) collect cheques crossed and uncrossed for its customers.” He adds that, “one claiming to be a banker must profess himself to be one, and the public must accept him as such; his main business must be that of banking from which generally he should be able to earn his living.” 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. There are exceptions: • The banker has no lien on valuables entrusted to the banker as a bailee or trustee. • There is no lien on documents deposited for a special purpose or with specific instruction that the proceeds are to be utilised for a specific purpose. • The banker’s general lien is displaced by circumstances that show an implied agreement inconsistent with the right of general lien. • The banker has no lien on securities left with the banker negligently or inadvertently. • The banker cannot exercise his lien on securities deposited as a trustee in respect of his personal loan. If the banker is not aware that they do not belong to the customer, his lien is not affected. • The banker’s right of lien extends over goods and securities handed over to the banker. Money deposited in the bank and credit balance in the account does not fall in the category of goods and securities. The banker can therefore use his right of setoff as opposed to lien with regard to money deposited with him.
• The right can be exercised on the customer’s property only and not on joint accounts the debtor has. • The banker cannot exercise the right when the debt has not matured or on stolen goods. • The banker cannot exercise lien when he can exercise set off. 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. Automatic right of set off • Death of the customer. • When a customer becomes insolvent. • Garnishee order issued on the customer’s account by court. • When a notice of assignment of credit balance to someone else has been given by the customer to the banker. • When a notice of second mortgage has been received by the bank on the securities already charged to the bank. There are some conditions: • The accounts must be in the same name and in the same right (the capacity of the account holder must be the same). • Funds held in trust accounts are deemed to be in different rights. • The right can be exercised in respect of debts due and not in respect of future or contingent debts. • The amount of debts must be certain and absolute. • The banker may exercise this right at his discretion. • The banker has right to exercise this right before a garnishee order is made effective. • There must be no agreement to the contrary. 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. Right to charge interest • As a creditor the banker has the implied right to charge interest on the advances granted to the customer. Bankers normally charge interest monthly. There may be an agreement otherwise in which case the manner agreed will determine how interest is to be charged. Right to charge service charges • Banks charge customers if their balance is below a stipulated amount, for the usage of ATMs (Automated Teller Machines) and withdrawals. • Banks are free to charge these but the Reserve Bank of India expects banks to advise their customers of this at the time of opening the account and advise them when changes are being made. 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 A customer is one who has an account with a bank. Customers may be minors, married women, pardanashin women, illiterates, lunatics, trustees, executors and administrators, power of attorney holders, joint account holders, proprietorships, Hindu undivided families, partnerships, limited companies, clubs, societies and charitable institutions. They may also be non-residents and foreigners. 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. Executors and Administrators • Executors are persons appointed by the will of a person to manage his estate after his death. The powers and authority of an executor is derived from the will and he has to act in accordance with the directions given in the will. • Administrators are appointed by the court to manage the estate of a deceased person. The administrator is appointed by the court through a letter of administration, which will detail his authority. • They are expected to realize the assets of the deceased person and pay off his debts. • On the death of an account holder, all payments from his account must be stopped. The executor may be allowed to operate the account after he has had the will probated. The administrator can operate the account after he has received the letter of administration. • An account will normally be opened in the name of the executor/ administrator and styled, “MNO executors to the estate of DEF deceased.” • If two executors/ administrators are appointed, they will have a joint interest in the estate of the deceased. This interest cannot be divided. • With regard to bank accounts they should jointly agree on how it is to be operated. If this is revoked, they should sign jointly or the banker should take a fresh letter of authority.
• The banker must be careful to ensure there is no misappropriation. He should not permit transfers to the personal accounts of executors/ administrators. • If an executor/ administrator dies and he is one of the joint signatories of an account, cheques issued should not be dishonored because his powers are vested in the surviving executors/ administrators. • Bankers cannot exercise their right of set off of the deceased’s debit balance against the creditor balance in the executor’s personal account. • If the executor requires a loan to make payments before receipt of the probate, the advances are made on the personal security of the executor. • After probate is granted, the executor may pledge specific assets to obtain an overdraft unless the will specifically forbids it. • If a loan is given all the executors should sign the documents. Power of Attorney Holder • A customer may give another his power of attorney to operate his bank account. • It is a general notice and an authority. It is different from an ordinary mandate to operate a bank account. • The power of attorney holder is an agent of the account holder and acts in his name. • This may be special or specific (to operate the bank account or other specific powers like the sale of property) or general (which may give the holder authority to act on the customer’s behalf for many activities including banking). • The power of attorney should be stamped and registered with the Registrar of Documents or attested by a notary public. • It must be in force at the time the bank account is operated. • The attorney holder must be acting within the scope of authority given to him. • The power of attorney holder must be properly identified and his address should be verified. • As far as possible account the principal should sign the account opening form. If the power of attorney permits the holder to open accounts he may do so. However, confirmation from the principal should be obtained before actual operation. • The account should be opened in the name of the principal with the heading”ABC (principal) by DEF (agent/ power of attorney holder).” • It is not necessary to use the word “constituted attorney.” • If it is signed “per pro ABC,” it means that the holder has the limited authority to sign cheques. • It must be ensured that the power of attorney does not contain
conditions or events on it that will make it difficult for the banker. A condition such as, “during my absence from India” indicates that on his return the power of attorney would be cancelled. The difficulty could be that the bank would not know when exactly the person returned. • A power of attorney holder cannot delegate his powers/ authority to another. • A power of attorney is cancelled: – If the principal cancels the power of attorney – If the purpose for which it has been given ends. – If the principal dies or in some other way loses the ability to enter into a contract (unsound mind) 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. Hindu undivided family • A Hindu undivided family possesses ancestral property and carries on ancestral business. • All the members (coparceners) are descended from a common ancestor. • Ownership of the assets (property) passes onto the members of the
family. • In those families governed by the Mitakshara School of Indian law every male member acquires an interest in the joint property on birth. • After the passing of the Hindu Succession Act the share of a deceased coparcener is divisible among his wife, daughters and other female members as defined in the act. • The family business and assets are managed by the eldest male member. He is known as the karta. The karta has an implied authority to take a loan, execute the required documents and pledge securities on behalf of the family for the sake of the business. It is recommended though that either all the family members sign the documents or they authorize the karta in writing. This is to avoid disputes at a later stage. • The karta is permitted to borrow only for purposes beneficial to the family. • Coparceners’ liability for loans granted is limited to the extent of their interest in the joint property. If, however, they along with the karta ratify the loan, then they become personally liable. • If there is a minor coparcener, his guardian must sign the documents on his behalf. When he reaches 18, he should sign again to signify his assent to the undertaking given by the adult coparceners. • The account is normally opened in the name of the karta or in the name of the HUF business. • The account is operated by the karta or authorized coparceners. 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. A person resident in India is: (i) A person residing in India for more than one hundred and eighty two days during the course of the preceding financial year but does not include: (A) A person who has gone out of India or stays outside India, in either case – (a) for or on taking up employment outside India, or (b) for carrying on a business or vocation outside India, or (c) for any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period. (B) A person who has come to India or stays in India, in either case other than: (a) for or on taking up employment in India, or (b) for carrying on a business or vocation in India, or (c) for any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) Any person or corporate body registered or incorporated in India. (iii) An office, branch or agency in India owned or controlled by a person resident outside India. (iv) An office, branch or agency in India outside India owned or controlled by a person resident in India. A person resident outside India is a person who is not resident in India i.e. a person who stays outside India or has otherwise gone out of India. (a) for or on taking up employment outside India, or (b) for carrying on a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his
intention to stay outside India for an uncertain period. 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 Persons of Indian origin • In 2002 the Government of India created a new category called Persons of Indian Origin (PIO). • A PIO is “a foreign citizen not being a citizen of Pakistan, Bangladesh and other countries as may be specified by the Central Government from time to time if: (i) he/ she at any time held an Indian passport; or (ii) he/ she or either of his parents or grand parents or great grand parents was born in and permanently resident in India as defined in the Government of India Act 1935 and other territories that became part of India thereafter provided neither was at any time a citizen of Pakistan, Bangladesh and other countries as may be specified by the Central Government from time to time. (iii) he/ she is a spouse of a citizen of India or a person of Indian origin covered under (i) or (ii) above.” • Facilities available to a PIO – He does not require a visa to visit India. – He does not need to register if his stay in India does not exceed 180 days. – If a PIO’s continuous stay exceeds 180 days he/ she will have to get himself/ herself registered within 30 days of the expiry of 180 days with the concerned Foreigners’ Registration Officer at the district headquarters where the PIO is residing. – A PIO holder enjoys parity with NRIs in respect of all facilities available to the latter in the economic , financial and educational fields except in matters relating to the acquisition of agricultural/ plantation properties. No parity is allowed in the sphere of political rights. Dual Citizenship
• On December 22, 2003 the Citizenship (Amendment) Act 2003 was passed permitting nationals of certain countries dual citizenship provided they are of Indian origin. • In this context Indian origin will mean a citizen of another country who is eligible to become a citizen of India at the time of commencement of the constitution or belonged to a territory that became a part of India after August 15, 1947. The act does not cover those people who, at any time , were citizens of Pakistan, Bangladesh or any other country which the government may notify in the official gazette. • Those who acquire citizenship will be known as an “overseas citizen of India.” • An “overseas citizen of India” is defined as a person who: (i) is of Indian origin being a citizen of a specified country, (ii) or/ was a citizen of India immediately before becoming a citizen of a specified country and is registered as an overseas citizen of India by the Central Government. (iii) an overseas citizen will not be entitled to the rights conferred on a citizen of India and will not have the right to equality of opportunity in matters of public employment, will not have voting rights and also will not be eligible to be a member of either the Lok Sabha or the Rajya Sabha. • Dual citizenship has been extended to people of Indian origin living in Australia, Canada, Finland, France, Greece, Ireland, Israel, Italy, the Netherlands, New Zealand, Portugal, Republic of Cyprus, Sweden, Switzerland, UK and the United States of America. It is proposed to offer this to those in all countries. • No person who has been deprived of his Indian citizenship will be registered as an overseas citizen of India except by an order of the Government. • They will not be required to have a visa while visiting India and can buy property and enjoy equality with non – resident Indians in economic, financial and educational fields. • The fee to secure Indian overseas citizenship is Rs. 12,500. Of this $25 would be non refundable if the application is turned down. 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 is important, in these days of drugs smuggling, terrorism, financial fraud, money laundering and arms dealing that banks know whom their customers are. Banks must be comfortable with the bona fides and the integrity of their customers. The need increases as external people like general selling agents introduce a number of customers. Apart from this, in order to develop a long term relationship, it is an imperative that the banker knows as much as possible about his customer. What does this mean? • 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. Reserve Bank of India • 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. Customer Acceptance Policy (CAP) • There must be a clear customer acceptance policy that lays down explicit criteria for acceptance of customers. The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank. o No account is opened in anonymous or fictitious/ benami name(s); o Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorization of customers into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level II and level III); customers requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs) may, if considered necessary, be categorized even higher; o Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of the Prevention of Money Laundering (PML) Act, 2002 and guidelines issued by Reserve Bank from time to time; o Accounts should not be opened nor should an existing account be closed where the bank is unable to apply appropriate customer due diligence measures i.e. bank is unable to verify the identity and / or obtain documents required as per the risk categorization due to
non cooperation of the customer or non reliability of the data / information furnished to the bank. It may, however, be necessary to have suitable built in safeguards to avoid harassment of the customer. For example, decision to close an account may be taken at a reasonably high level after giving due notice to the customer explaining the reasons for such a decision; o Circumstances, in which a customer is permitted to act on behalf of another person / entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate holder or where an account may be opened by an intermediary in a fiduciary capacity; o There must be checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc. o Banks should prepare a profile for each new customer based on risk categorization. The customer profile must contain information relating to the customer’s identity, social / financial status, nature of business activity, information about his clients’ business and their location etc. The nature and extent of due diligence will depend on the risk perceived by the bank. However, while preparing customer profile banks should take care to seek only such information from the customer, which is relevant to the risk category and is not intrusive. The information provided by the customer for KYC compliance while opening an account is confidential and divulging any details thereof for cross selling or any other purpose would be in breach of customer confidentiality obligations. Any other information from the customer should be sought separately with his/ her consent and after opening the account. Banks are to strictly ensure compliance with their obligations to the customer in this regard. o For the purpose of risk categorizations, individuals (other than high net worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile may be categorized as low risk. Illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government departments & Government owned companies, regulators and statutory bodies etc. In such cases, the policy may require that only the basic requirements of verifying the identity and location of the customer be met. Customers that are likely to pose a higher than average risk to the bank may be categorized as medium or high risk depending on customers background, nature and location of activity, country of origin, sources of funds and his client profile etc. Banks may apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive ‘due diligence’ for higher risk customers, especially those for whom the sources of funds are not clear. Examples of customers requiring higher due
diligence may include (a) nonresident customers, (b) high net worth individuals, (c) trusts, charities, NGOs and organizations receiving donations, (d) companies having close family shareholding or beneficial ownership, (e) firms with sleeping partners, (f) politically exposed persons (PEPs) of foreign origin, (g) nonface to face customers, and (h) those with dubious reputation as per public information available, etc. o It is important to bear in mind that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged. Customer Identification Procedure (CIP) • The policy approved by the board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity / veracity or the adequacy of the previously obtained customer identification data. Customer identification means identifying the customer and verifying his/ her identity by using reliable, independent source documents, data or information. Banks need to obtain sufficient information necessary to establish, to their satisfaction, the identity of each new customer, whether regular or occasional, and the purpose of the intended nature of banking relationship. Being satisfied means that the bank must be able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance with the extant guidelines in place. Such riskbased approach is considered necessary to avoid disproportionate cost to banks and a burdensome regime for the customers. Besides risk perception, the nature of information / documents required would also depend on the type of customer (individual, corporate etc.). • For customers that are natural persons, the banks should obtain sufficient identification data to verify the identity of the customer, his address / location, and also his recent photograph. • For customers that are legal persons or entities, the bank should: o Verify the legal status of the legal person/ entity through proper and relevant documents; o Verify that any person purporting to act on behalf of the legal person / entity is so authorized and identify and verify the identity of that person; o Understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person. • Banks may frame their own internal guidelines based on their experience of dealing with such persons/entities, normal bankers’ prudence and the legal requirements as per established practices.
• It should be noted that wherever banks desire to collect any information about the customer for a purpose other than KYC requirements, it should not form part of the account opening form. Such information may be collected separately, purely on a voluntary basis, after explaining the objectives to the customer and taking his express approval for the specific uses to which such information could be put. • There must be Know Your Customer procedures for existing customers. • Banks are expected to have adopted due diligence and appropriate KYC norms at the time of opening of accounts in respect of existing customers. However, in case of any omission, the requisite KYC procedures for customer identification should be completed at the earliest. Additionally, banks must, on the basis of materiality, apply the KYC guidelines to all existing accounts. • Transactions in existing accounts should be continuously monitored and any unusual pattern in the operation of the account should trigger a review of the customer confidential documentation measures. Banks could apply monetary limits to such accounts based on the nature and type of the account. It may however be ensured that all existing accounts of companies, firms, trusts, charities, religious organizations and other institutions are subjected to minimum KYC standards which would establish the identity of the natural/ legal person and those of the “beneficial owners.” Banks should also ensure that term/ recurring deposit accounts or accounts of similar nature are treated as new accounts at the time of renewal and subjected to revised KYC procedures. • Where the bank is unable to apply appropriate KYC measures due to nonfurnishing of information and or/ noncooperation by the customer, the bank should close the account or terminate the relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level. • To ensure that existing small account holders are not inconvenienced and the KYC procedure is completed in time, banks may limit the application of KYC procedures to existing accounts where the credit or debit summation for the financial year ended March 31, 2003 is more than Rs.10 lakh or where unusual transactions are suspected. • KYC procedures must applied to all existing accounts of trusts, companies/firms, religious/charitable organizations and other institutions or where the accounts are opened through a mandate or power of attorney. 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. Highrisk 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. Adherence to Foreign Contribution Regulation Act (FCRA), 1976 • Banks should also adhere to the instructions on the provisions of the Foreign Contribution Regulation Act, 1976 cautioning them to open accounts or collect cheques only in favor of associations that are registered under the Act by the Government of India. A certificate to the effect that the association is registered with the Government of India should be obtained from the concerned associations at the time of opening of the account or collection of cheques. • Branches of banks should be advised to exercise due care to ensure compliance and desist from opening accounts in the name of banned organizations and those without requisite registration. 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. Introduction of New Technologies – Credit cards/debit cards/smart cards/gift cards • Banks should pay special attention to any money laundering threats that may arise from new or developing technologies including internet banking that might favor anonymity, and take measures, if needed, to prevent their use in money laundering schemes. • Many banks are engaged in the business of issuing a variety of electronic cards that are used by customers for buying goods and services, drawing cash from ATMs, and can be used for electronic transfer of funds. Further, marketing of these cards is generally done through the services of agents. Banks should ensure that appropriate KYC procedures are
duly applied before issuing the cards to the customers. It is also desirable that agents are also subjected to KYC measures. Importance of RBI Guidelines • It should be noted that RBI guidelines are issued under Section 35 (A) of the Banking Regulation Act, 1949 and any contravention will attract penalties under the relevant provisions of the Act. Banks are advised to bring the guidelines to the notice of their branches and controlling offices. • RBI guidelines also apply to the branches and majority owned subsidiaries located abroad, especially, in countries that do not or insufficiently apply the Financial Actions Task Force (FATF) recommendations, to the extent local laws permit. When local applicable laws and regulations prohibit implementation of these guidelines, that fact should be brought to the notice of Reserve Bank. KYC and Lower income Groups • In October 2005, the RBI stated that these guidelines should not be an excuse for banks to keep the poor away from the banking system. Though the KYC guidelines require an individual opening a new account to produce a number of identification documents, these could be done away with for lower income groups. The RBI has asked banks to ensure that the inability of the lower income group to produce documents to establish their identity and address does not lead to their financial exclusion and denial of banking services. A simplified procedure could be provided for opening of account in respect of those persons who do not intend to keep balances above Rs. 50,000 and whose total credit in one year is not expected to exceed Rs.100,000. 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. Types of deposit accounts • The different types of deposit accounts a customer can place his money in are: • Demand deposits • Fixed or time deposits
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. OPENING OF DEPOSIT ACCOUNTS • 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. Who places their funds in deposit accounts? • Deposits are opened by those who have funds in hand. These include: • Individuals; • Sole Proprietorships;
• Hindu Undivided Families (HUF); • Partnerships; • Trusts; • Associations / Societies and Clubs; • Limited Companies. 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, semigovernment 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 undischarged 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 quasigovernment 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). Address of Account holder • 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 Number • 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 accountopening 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. Additional precaution for current 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 noobjection 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). Client accounts opened by professional intermediaries • When the bank has knowledge or reason to believe that the client account opened by a professional intermediary is on behalf of a single client, that client must be identified. • Banks may hold pooled accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds or other types of funds. Banks also maintain pooled accounts managed by lawyers/chartered accountants or stockbrokers for funds held on deposit or in escrow for a range of clients. • Where funds held by the intermediaries are not comingled at the bank and there are subaccounts, each of them attributable to a beneficial owner, all the beneficial owners must be identified. Where such funds are comingled at the bank, the bank should still look through to the beneficial owners. • Where the banks rely on the customer due diligence (CDD) done by an intermediary, they should satisfy themselves that the intermediary is regulated and supervised and has adequate systems in place to comply with the KYC requirements. It should be understood that the ultimate responsibility for knowing the customer lies with the bank. A sole proprietorship should submit: • A certified true copy of its shops and establishments licence or any other approval from the government. • A declaration from the sole proprietor that he is the sole proprietor Accounts of Politically Exposed Persons(PEPs) resident outside India • Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state owned corporations, important political party officials, etc. • Banks should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. • Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for PEP should be taken at a senior level. This should be clearly spelt out in Customer Acceptance policy. • Banks should also subject such accounts to enhanced monitoring on an ongoing basis. • The above norms may also be applied to the accounts of the family members or close relatives of PEPs.
Accounts of nonfacetoface customers • With the introduction of telephone and electronic banking, banks are increasingly opening accounts for customers without the need for the customer to visit the bank branch. • In the case of nonfacetoface customers, apart from applying the usual customer identification procedures, there must be specific and adequate procedures to mitigate the higher risk involved. • Certification of all the documents presented may be insisted upon and, if necessary, additional documents may be called for. In such cases, banks may also require the first payment to be effected through the customers account with another bank which, in turn, adheres to similar KYC standards. • In the case of crossborder customers, there is the additional difficulty of matching the customer with the documentation and the bank may have to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a regulated and supervised entity and has adequate KYC systems in place. Lower income groups • In October 2005, the RBI stated that KYC guidelines should not be an excuse for banks to keep the poor away from the banking system. Though the KYC guidelines require an individual opening a new account to produce a number of identification documents, these could be done away with for lower income groups. The RBI has asked banks to ensure that the inability of the lower income group to produce documents to establish their identity and address does not lead to their financial exclusion and denial of banking services. A simplified procedure could be provided for opening of accounts in respect of those persons who do not intend to keep balances above Rs. 50,000 and whose total credit in one year is not expected to exceed Rs.100,000. Hindu Undivided Families • Hindu undivided families should submit: • A HUF declaration that has been signed by all the coparceners affirming the composition of the HUF, its karta and names and relationship of all coparceners including minor sons and their dates of birth; • A HUF deed (if there is one); • The account is opened in the name of the karta or in the name of the HUF business; • Certified true copies of the IT Returns for the last two/ three years. 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. An Association/ Society/ Club • An association/ society/ club should submit: – Its certificate of registration (if it is required to be registered); – A copy of its governing body resolution; – A certified true copy of its byelaws/ model byelaws; – List of the management committee members; – Names and addresses of all committee members including phone numbers; – Management committee resolution to open a deposit account and the manner it is to be operated. A Trust/ Nominee oe Fiduciary Account • There exists the possibility that trust/nominee or fiduciary accounts being used to circumvent the customer identification procedures. Banks should determine whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary. If so, banks may insist on receipt of satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are acting. The bank should also obtain details of the nature of the trust or other arrangements in place. • While opening an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and the settlors of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries should be identified when they are defined. In the case of a foundation, steps should be taken to verify the founder managers/ directors and the beneficiaries, if defined. • A trust/ nominee or fiduciary account should submit: • A certified true copy of the trust deed or the charter under which it is operated; • Its byelaws; • A list of its trustees including their address and phone number; • A resolution of the trustees to open a deposit account and the manner it is to be
operated. 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, payablethroughaccounts, 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 payablethroughaccounts, 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 noncooperative 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. Who opens current accounts? • Current accounts are opened by those who have commercial interests and have the need to issue many cheques. These include: – Individuals; – Sole Proprietorships; – Hindu Undivided Families (HUF);
– Partnerships; – Trusts; – Associations / Societies and Clubs; – Limited Companies. Opening of a current account • 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. • If the account has not been properly introduced: – The banker cannot avail of the statutory protection under Section 131 of the Negotiable Instruments Act, if he collects a cheque, bill and the likes on behalf of a customer who has no title to it or whose title is defective. – If an overdraft has been given by mistake, the bank bears the risk of loss if the overdraft is not repaid. – Deposits received from an undischarged insolvent not properly introduced carries the risk of attachment. – If a cheque book is given to an undesirable customer, the bank faces the risk of cheques being issued without sufficient balance. • Several banks permit accounts 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 and comfort with regard to the moral standing of the person. 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 cooperative bank, it is essential for the bank to comply with the requirements of the cooperative 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 customergenerated 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. Who opens these accounts? • Individuals open savings accounts. • With regard to those who intend to keep balances not exceeding Rs. 50,000 in all their accounts taken together and the total credit in all advances taken is not expected to exceed Rs. 100,000, banks can open accounts with: – Introduction from another account holder who has been subject to full KYC procedure. The introducer’s account must be at least six months old and satisfactorily operated. – Photograph of the person opening the account and his address must be certified by the introducer or there must be some other acceptable evidence of identity and address. – The customer must be made aware that if his balances exceed Rs. 50,000 or his advances exceed Rs. 100,000, no further transactions will be permitted till full KYC procedures are completed. The customer should be made aware when either balance touches 80 percent of the amount permitted. • In times of calamity like the floods in Maharashtra, the RBI permitted banks to operate with: – Introduction from another account holder. – Documents of identity along with document of address (electricity bill or ration book) – Introduction by two neighbors who have documents of identity. • Savings accounts cannot be opened in the name of government departments except in the case of certain specified institutions such as primary cooperative credit societies
financed by the government, khadi and village industries board and societies registered under the Societies Registration Act 1860. • The RBI has also asked banks to make available a “basic no frills account” either with nil or very low minimum balances that would make such accounts accessible to vast sections of the population. Savings Accounts operation • An individual has cash/ cheques which he wishes to deposit into his account. To do so 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 savings account. • Third party cheques may not be deposited in savings accounts. • 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 restrictions on the number of withdrawals that may be made in a period. This number varies from bank to bank. • If the number of transactions are more than that permitted, a service charge is levied for every transaction that exceeds the permitted number. 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.
FIXED DEPOSIT ACCOUNT • 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. • Preliberalization (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. Who opens fixed deposits? • Those who have funds in hand open fixed deposits. These include: – Individuals; – Sole Proprietorships; – Hindu Undivided Families (HUF); – Partnerships; – Trusts; – Associations / Societies and Clubs; – Limited Companies. 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. Renewal of overdue deposits • Banks may renew deposits at an interest rate prevailing on the date of maturity provided the depositor approaches the bank within 14 days from the date of maturity of the deposit. • If the application for renewal is made after 14 days the rate of interest should be the rate prevailing on the date of renewal of deposit. • Banks are free to determine the rate of interest between the date of maturity and the date of renewal. • The policy on all aspects of renewal of over due interest are to be decided by the respective boards of banks. This policy must be non discretionary and non discriminatory. Advance on Fixed Deposits • Banks may grant loans on the security of the fixed deposit. • Banks should maintain a reasonable margin on any advance or facility given against the security of a term deposit. • Banks are free to charge a rate of interest without reference to its prime lending rate (BPLR). If the term deposit is withdrawn before completion of the prescribed minimum maturity period it should not be treated as an advance against the term deposit and interest should be charged at the rates prescribed by the RBI. • On advances given on the security of fixed deposits to third parties upto Rs. 2 lakhs banks can charge interest without reference to its BPLR. If it exceeds Rs. 2 lakhs it should be at the rates prescribed by the RBI. • All transactions should be rounded to the nearest rupee. Fractions of 50 paise and above are to be rounded up and fractions below 50 paise should be rounded down. • Cheques issued by customers containing fractions of a rupee should not be rejected or dishonored. Joint Holdings
• Fixed deposits may be in the joint names of two or more persons. • If one of the joint depositors requests for premature withdrawal, it should be done only after getting the consent of the other depositors. • If one joint depositor wants a loan against a fixed deposit, it should be given only after all the other joint holders have signed the request. • No one joint depositor’s request should be entertained. All the joint holders must sign all requests. Loss of Fixed Deposit Receipt • A fixed deposit receipt is not negotiable nor is it transferable. • If the receipt is lost, customers will ask for a duplicate. This is because banks insist on fixed deposit receipts to be discharged and surrendered before payment is affected. • Therefore to issue a duplicate, all the holders should request for a duplicate receipt in writing and execute a letter of indemnity. A note must also be made in the bank’s records that a duplicate has been issued. 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. Deposit of deceased depositor • A term deposit with interest becomes payable on maturity to the heir/ legal representative of a deceased depositor. If the amount is claimed before maturity, the Reserve Bank has permitted banks to pay applicable interest without charging penalty. • If the death takes place before maturity and the deposit is claimed after the maturity, interest is to be paid at the contracted rate upto maturity and then at the savings account rate. • If the bank agrees to split the deposit and issue two or more receipts it should not be construed as early withdrawal of the deposit if the period and aggregate amount is unchanged. • The RBI has asked banks to incorporate a clause in the account opening form to the effect that in the event of the death of the depositor, premature termination of term deposits would be allowed. This would not attract any penal charge • With regard to premature withdrawal of deposits placed with all India financial institutions for medical exigencies, educational expenses and other such reasons the Reserve bank states that no interest is payable if withdrawn before the expiry of 6 months. If the withdrawal is between 6 and 12 months interest not exceeding the savings account bank rate is to be paid. 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 ACCOUNTS • Residents with foreign currency can open these accounts. • These include export earners, non residents on their becoming residents, those returning to the country with foreign exchange after a business trip or holiday and foreigners. Different Types of Accounts • The different types of accounts that can be opened in foreign currency are: – Resident Foreign Currency Accounts (RFC); – Exchange Earners Foreign Currency Account (EEFC); – Resident Foreign Currency (Domestic) Account; – Resident Foreign Currency (External) Account; – Resident Foreign National’s account; – Diamond Dollar Account. • Resident Foreign Currency Accounts (RFC) – These accounts can be opened by a person of Indian nationality or origin, who has returned to India for permanent settlement or persons inheriting assets abroad from persons who acquired such assets while being a non resident. – The account can be opened in any foreign currency other than the currency of Nepal or Bhutan. – Persons who have been resident outside India for a continuous period of not less than one year (exclusive of short visits for personal reasons) who return to India for permanent settlement should change the status of their NRO/NRE Account from nonresident to resident and inform the bank of the change in status. Such persons have to close NRE and FCNR (B) deposit accounts on maturity. The proceeds can be transferred either partly or wholly to an RFC account. – An RFC account can be a current, savings or fixed deposit account. – The term of the fixed deposit can be from 30 days to 6 months. – Cheque facility is not available for current accounts.
– Balance held in a RFC account (both interest and principal) is repatriable without prior permission of RBI for a bona fide purpose. – A RFC account is free from all restrictions regarding utilization including any restrictions on investments outside India. – Interest earned on the balance in this account is taxfree for 2 years from the date of return to India. – The account can be held jointly or singly. – Nomination facility is available. If the account holder dies and the nominee is abroad, the balance in the account can be repatriated to him/ her. – Loans may be granted against the balances lying in the account subject to commercial judgment. – Deposits that may be credited to the account are: • Remittances from outside India representing funds in bank accounts outside India, income such as dividend, interest, profit, rent and the likes earned on eligible assets held abroad and sale proceeds of eligible assets. • Pension and other monetary benefits received from outside India arising out of employment taken up outside India prior to returning to India. • Interest earned on RFC Accounts. • Foreign currency notes/ traveler’s cheques brought back by returning nonresidents. • Balances in nonresident external and foreign currency nonresident accounts. • Proceeds of insurance claims/ maturity value or surrender value of insurance policies taken by the holder while a nonresident and settled in foreign currency. This can include policies issued by insurance companies in India and registered with IRDA to conduct insurance business. – The funds in an RFC account are free from all restrictions regarding utilization. – The funds may even be used for making investments outside India. • Exchange Earners Foreign Currency Account (EEFC) – A person resident in India may open, hold and maintain this account. – The account will be maintained only in the form of noninterest bearing current account. – No credit facilities either fundbased or nonfund based, should be permitted against the security of balances held in the account. – The limits of eligible credits to the accounts are: • 100% for Status Holder Exporter (as defined in Exim Policy in force); • 100% for Export Oriented Unit/s, Unit/s in Export Processing Zones (EPZs), Software Technology Park (STP) and Electronic Hardware Technology Park (EHTPs); • 50% for other persons resident in India; • This is in respect of inward remittance received through normal banking channel, other
than the remittance received pursuant to any undertaking given to the Reserve Bank or which represents foreign currency loan raised or investment received from outside India or those received for meeting specific obligations by the account holder. • Individual professionals are permitted to keep up to 100 per cent of their foreign exchange earnings from consultancy and other services rendered to persons or bodies outside India, in their foreign exchange earners’ foreign currency (EEFC) account. This is for the benefit and convenience of individual professionals, lawyers, doctors, artists, architects, engineers, consultants, cost/chartered accountants, directors on boards of overseas companies and the likes. • Payments received in foreign exchange by a unit in domestic tariff area (DTA) for supply of goods to a unit in special economic zones out of its foreign exchange currency account may be credited to an EEFC account. – Exporters may extend trade related loans / advances to overseas importers out of their EEFC balances without any ceiling. – Exporters may repay packing credit advances whether availed in rupee or in foreign currency from balances in their EEFC A/c. and / or rupee resources to the extent exports have actually taken place. – Purchase of foreign exchange from the market for refunding advance payments credited to accounts would be permitted only after utilizing the entire balance in the exporter’s EEFC accounts maintained at different banks/ branches. • With regard to units in Special Economic Zones (SEZ): – All foreign exchange funds received by the unit in the SEZ should be credited to this account. This also includes foreign exchange purchased by units in DTA for making payment towards goods supplied by Units in SEZs; – No foreign exchange purchased in India against rupees is to be credited to the account without the permission of the Reserve Bank; – The funds must represent bona fide transactions of the unit in the SEZ. • Balances in EEFC accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They may, however, be rolled over. • Investments in overseas joint ventures may be funded out of balances in EEFC accounts. • Cheque facilities are available for operating an EEFC account. • Exporters are permitted to grant trade related loans/ advances from their EEFC account to overseas exporter importer clients without any ceiling. Where the amount of loan exceeds USD 1,00,000, a guarantee of a bank of international repute situated outside India will be required to be provided by the overseas borrower in favor of the lender. – These funds are not to be lent or made available to any person or entity in India. The balances may be credited to NRE/FCNR (B) Account, at the option/request of the account holders consequent upon change in the residential status from resident to nonresident.
– Claims settled in rupees by ECGC should not be construed as export realization in foreign exchange and claim amount should not be credited to the EEFC account. – Prior approval of the Reserve Bank is not required for remittances made from EEFC accounts for consultancy services received. • Resident Foreign Currency (Domestic) Accounts (RFCD) • A person resident in India may open RFCD accounts out of foreign exchange acquired in the form of currency notes, bank notes and traveler’s cheques: – Acquired 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 – Acquired from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation. – Acquired by way of honorarium or gift while on a visit to any place outside India. – Being the unspent amount of foreign exchange acquired from an authorized person for travel abroad. – Being proceeds of life insurance policy claims/maturity/surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business. – Being gifts received from close relatives. – Debits can be towards: • Current account transactions. • Capital account transactions. – These accounts are current accounts and will earn no interest. – There are no ceilings to the balance that may be held in these accounts. – Balances in the RFC (D) accounts may be credited to NRE/FCNR (B) Account, at the option/request of the account holders consequent upon change in their residential status from resident to nonresident. • Resident Foreign Currency (External) Account (RFCE) – A firm or company incorporated in India may open, hold and maintain a foreign currency account outside India by making remittances from India for the purpose of normal business operations of a branch office or a representative there. – Indian companies or individuals executing turnkey projects or civil construction contract may open foreign currency accounts abroad. – A national of another country living in India and working for a foreign company on deputation in India or a citizen of India employed by a foreign company outside India on deputation in India may open, hold and maintain a foreign currency account with a bank outside India and receive the salary payable to him for services rendered in India, by
credit to such account provided that: • The amount to be credited to that account does not exceed 75 percent of the salary accrued to or received by such person from the foreign company; • The remaining salary is paid in rupees in India; • Income tax is paid on the entire salary in India. – The surplus funds held in this account should not be invested abroad without prior permission of the RBI and any funds rendered surplus should be repatriated to India. – The following information / statements are to be submitted: • The account number, name of bank, place and country where the account is opened within 15 days from the date of opening of such account; • Statement of operation on the account should be on half yearly basis; • Bank certificates evidencing the amount repatriated periodically; • Closure of foreign currency account with bank certificates evidencing transfer of balance to India immediately on completion of the relevant contract. – A liberalized remittance scheme of USD 25000 for resident individuals per calendar year for any purpose has been introduced. Resident individuals are now permitted to open maintain and hold foreign currency accounts with a bank outside India without the prior approval of the RBI for the purpose of making remittances under the scheme. • 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 shortterm 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 shortterm 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. • Bank accounts for resident foreign nationals – Branches of foreign firms in India and foreign nationals resident but not permanently resident in India are permitted to open bank accounts. – Care should be taken that the foreign currency is not given to residents. – No rupee loans can be given except for personal loans. This may be up to Rs.5 lakhs. – Diplomatic missions, diplomatic personnel and nondiplomatic staff of foreign embassies, who are nationals of the concerned foreign countries and hold official passport can maintain foreign currency deposit accounts. • Diamond Dollar Account (DDA) – Diamond dollar accounts can be opened by firms and companies dealing in purchase/sale of rough or cut and polished diamonds / diamond studded jewelry. They should have a track record of at least three years in import or export of diamonds and an average annual turnover of Rs. 5 crores or above during preceding three licensing years (licensing year is from April to March) – However not more than five Diamond Dollar Accounts can be opened with the banks. – Under the DDA Scheme, it would be in order for banks to liquidate PCFC granted to a DDA holder by dollar proceeds from sale of rough, cut and polished diamonds by him to another DDA holder. NONRESIDENT ACCOUNTS • Nonresident bank accounts may be: – Rupee accounts
– Foreign currency accounts Rupee accounts • The different types of rupee accounts a nonresident may have are: – Nonresident (ordinary) (NRO) account – Nonresident external (NRE) account. • There were two other types earlier – the Nonresident Non Repatriable (NRNR) and the Nonresident Special Rupee (NRSR) account. These have been discontinued with effect from April 1, 2002 and September 30, 2002 respectively. Nonresident (ordinary) account • The account that an Indian has in India is converted to an NRO account when he emigrates or goes abroad to work except if he goes to Nepal or Bhutan. • Nonresidents may open accounts designated as NRO for receiving monies in Indian rupees • Bangladeshis and Pakistanis require RBI approval to open this account. • The monies in these accounts represents rupee funds/ earnings in India. • These can be savings, current, recurring or fixed deposit accounts. • These may be opened jointly with Indian residents or other nonresidents. • Credits may be from foreign remittances, travelers cheques, foreign currency, proceeds of foreign currency nonresident (FCNR) deposits or nonresident external (NRE) deposits or all legitimate dues in India like rents, dividends and the like. • Account holders should give an undertaking that the credits and debits in the account will be in accordance with Reserve Bank of India (RBI) regulations. • Funds from these accounts are not normally repatriable unless specifically permitted by RBI such as current income. • Remittances made would be after deduction of applicable taxes. • Interest on savings accounts are at the same rate as resident accounts. • Upto $1 million can be repatriated for education, sale proceeds of immoveable property, medical expenses and the likes. • This can also be used to pay on monies spent on International Credit Cards. Nonresident (external) account • This has to be opened with convertible foreign exchange. • Withdrawals are permitted for local payments, transfer to NRE/ FCNR accounts and investments permitted by the RBI. • The intent of these accounts is to help individual nonresidents to place their funds in Indian rupees to meet expenses in India or to make investments.
• The accounts may be savings accounts or term deposits. • Monies in this account are freely repatriable. • Only foreign remittances, travelers cheques/ foreign currencies or proceeds of NRE deposits or FCNR Deposits or interest on NRNR deposits should be deposited in this account. • The maturity proceeds of NRNR deposits may also be credited to this account. • No rupee funds should be credited to this account. • Joint accounts are permitted provided all account holders are NRIs. A resident Indian cannot be a joint account holder. • NRE Savings holders can withdraw savings deposits at any time and therefore banks should not mark any lien on these deposits. • Power of attorney holders can operate the account for local payments and approved investments. • Repatriable term deposits can be made in the normal course for a minimum period of one year and a maximum of three years. • Loans against term deposits can be availed of for personal/ business purposes. However, loans against term deposits cannot be taken for relending, agriculture/ plantation or for investments in real estate • Interest on savings accounts will be at domestic savings deposit rate (3 1/2% p.a..) • On NRE fixed deposits for one to three years the interest rate should not exceed the LIBOR/Swap rates for the US dollar of the corresponding maturity plus 75 basis points. 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 rate. The interest rate for three year deposits will apply in case maturity exceeds three years. • Interest should be rounded to two decimal points. • Can be freely converted to foreign currency nonresident (FCNR (B)) Deposits. • Premature closing of NRE term deposits for investment in resident foreign currency (RFC) account does not attract the provisions relating to premature withdrawal. Foreign currency accounts The different types of Foreign Currency accounts a nonresident may have are: – Foreign Currency (Nonresident) Deposit Accounts (FCNR (B)). – Temporary Foreign Currency Accounts. Foreign Currency (Nonresident) Deposit Accounts (FCNR (B)) • Nonresident Indians, persons of Indian origin/ nationality, residing outside India are eligible to open FCNR (B) accounts. • Overseas corporate bodies are no longer permitted to open these accounts. If there is an
FCNR(B) account in the name of an Overseas Corporate Body (OCB) it can be continued till maturity and on maturity the proceeds must be repatriated. • These fixed deposits are denominated in certain foreign currencies.. • The currencies that these deposits may be maintained are the US dollar, the British pound sterling, the Euro, the Japanese yen, the Australian dollar and the Canadian dollar . • Interest earned on these accounts is also in foreign currency and taxfree. • FCNR (B) deposit accounts are term deposits and are held by banks for maturities between one year and five years. • Repatriation of funds in foreign currencies is permitted. • Recurring deposits are not accepted under the FCNR (B) scheme. • A FCNR (B) deposit account may be opened by nonresidents: • In foreign currency or • By an inward remittance in convertible foreign currency through normal banking channels (The remittances should normally be received in the designated currency in which the account is to be opened) or • By tendering traveler’s cheque while on a visit to India or • By funds received in rupees to the account a nonresident bank maintains in India with the bank (vostro account) or • By funds that are of a repatriable nature (per RBI regulations) or • By transfer from an existing NRE/FCNR (B) account. • Only Authorised Dealers/Authorised Banks are permitted to accept deposits. • However, all others may continue to hold and renew existing deposits held in their books in the name of NRIs on repatriatiable or nonrepatriatiable basis, as the case may be. • The interest earned on such deposits can be repatriated as it is considered current income. • These funds can also be credited to nonresident external (NRE) savings accounts. • The RBI will not provide any exchange rate guarantee to banks for deposits of any maturity. • The maturity proceeds will be payable in the same currency. There will, thus, be no foreign exchange fluctuations risk. The main reason for opening these accounts are to protect savings from depreciation in the value of the rupee. The funds can be repatriated abroad freely. • Nonresident accounts cannot be opened by the nonresident’s power of attorney (POA) holder in India. • The account opener must, at the time of opening the account, undertake to inform the bank on relocating permanently to India. • A nonresident can also open the account during his visit to India with travelers cheques. • The bank has the responsibility to satisfy itself that the account is in order and the
account opener is indeed a nonresident. This is normally by checking the individual’s passport and examining the visa or stay permit in the country where the person resides. • Nomination facility is available for these accounts • The account can be held jointly with another nonresident of Indian origin. • The account may also be held jointly with minors provided the minors are also non residents. • A joint deposit account with a person resident is not permissible. • A loan against the deposits held in this account is also permissible subject to certain constraints as to its utilization. This includes a stipulation that the loan cannot be used for the purpose of investment in India or for relending or for investment in arm houses/ real estate. • The main reason for maintaining FCNR (B) deposit accounts is to protect the account from depreciation in the value of the rupee. • The funds in this account are freely remittable abroad • Transfer of funds from an existing NRE account to FCNR (B) account and vice versa of the same account holder is permitted without RBI approval.. • 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 nonresidents/ 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. • Interest on overdue deposits – Interest payable on the renewal of an overdue deposit (if the overdue period from the date of maturity to the date of renewal (both days inclusive) does not exceed 14 days) is at the discretion of the bank. The rate of interest should be the appropriate rate of interest for the period of renewal as prevailing on the date of maturity or on the date of renewal (whichever is lower). – Where overdue period exceeds 14 days and if the depositor places the entire amount of overdue deposit or a portion as a fresh FCNR (B) deposit, banks may fix their own rate for the overdue period on the amount placed as a fresh term deposit. – The rate on the deposit renewed must be the rate prevailing at the date of maturity. – Banks can recover the interest paid for the overdue period if the deposit is withdrawn
before completion of the minimum stipulated period under the scheme, after renewal. • 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 relending 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. • Interest on the death of a depositor – Interest should be paid at the contracted rate. – If the deposit is being claimed before maturity, the bank must pay interest at the applicable rate prevailing on the date of placement of the deposit, without charging any
penalty. – If the death is before the maturity of the deposit and the claim is after the date of maturity, the bank should pay interest at the contracted rate till the date of maturity. – From the date of maturity the bank should pay simple interest at the applicable rate operative on the date of maturity to the date of payment. – If the depositor dies after the date of maturity, the interest paid should be at the savings deposit rate of deposits under the Resident Foreign Currency Account Scheme till the date of payment. – The bank can agree to split the deposit to two or more receipts in the name of claimants separately. This will not be considered premature withdrawal. – If the claimants are residents, the proceeds should be converted into rupees at the time of payment. • Addition/ deletion of name of joint account holders. – At the request of all the joint holders names may be deleted/ added. – The amount or duration of the original deposit should not undergo a change in any manner and all the joint holders must be nonresidents of Indian nationality or origin. – While doing so the bank should ascertain reason from applicants for requiring the change. On opening accounts in the name of Pakistanis and Bangladeshis though of Indian origin prior RBI approval is required. Temporary Foreign Currency Accounts. – Organizers of international seminars, conferences, conventions etc. are permitted to open temporary foreign exchange account. These accounts are operated for the receipt of the delegate fee and payment towards expenses including payment to special invitees abroad. Authorized dealers can open such an account subject to the organizers obtaining the prior approval from the concerned Administrative Ministry of Government of India. – Credits to these accounts: • All inward remittances in foreign currency towards registration fees payable by overseas delegates, grant, sponsorship fees and donations, received from abroad, in connection with the conference, convention, etc. – Debits to these accounts: • Payment to foreign/special invitees attending the conference, etc., on the specific invitation of the organizers, towards travel, hotel charges, etc., and honorarium to foreign guest speakers; • Remittance towards refund of registration fees to foreign delegates and unutilized sponsorship/grant amount, if any; • Bank charges, if any;
• Conversion of funds into rupees. – All other credits/debits would require the prior approval of the Reserve Bank of India. – The Account should be closed immediately, after the conference/event is over. NRI’s return to India • Deposits held by an NRI on his return to India for permanent residence can continue till maturity at the contracted rate. • For reserve requirements this will be considered as a resident deposit from the date of return of the depositor. • Premature withdrawal will be subject to the penal provisions of the scheme. • On maturity these should be converted to Resident Rupee Deposits or RFC (if eligible) at the account holder’s option. • NRI policy holders who are beneficiaries of insurance claims/ maturity settled in respect of policies issued by insurance company in India may credit proceeds to RFC account opened by them on becoming residents. • Penal provision on premature conversion can be waived if the balance held is placed in an RFC account. • With regard to interest, it should be paid at the time of conversion of FCNR (B) to RFC even if it has not run for a minimum maturity period. • The rate must not exceed the rate payable on savings bank deposits held under the RFC scheme. • For all other purposes these deposits will be treated as resident deposits from the date of return. • An account holder also has an option of converting these deposits into an RFC account on maturity on satisfying certain conditions. • If the deposits are withdrawn before maturity, all directions of the RBI including charging of penal interest will apply. • Cardholders can settle charges for the use of International Credit Cards out of funds held in the Card Holder’s FCNR (B) Account. • Balances in the EEFC and RFC (D) accounts may be allowed to be credited to NRE/FCNR (B) Account, at the option/request of the account holders consequent upon change in the residential status from resident to nonresident. • Facilitation of better hedging opportunities to holders of FCNR (B) deposits, deposit holders can book cross currency (not involving the rupee) forward contracts to convert the balances in one currency to another foreign currency in which FCNR (B) deposits are permitted to be maintained at the option of the account holder. • Such contracts once cancelled cannot be rebooked.
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. Overseas Corporate Bodies (OCB) • OCBs shall not maintain NRE Accounts, FCNR (B) accounts and NRO Deposit accounts with authorized dealers in India. • All existing NRE accounts of OCBs are to be closed and balances repatriated. • NRE Deposits (Recurring or fixed), FCNR (B) accounts and NRO deposits (recurring or fixed) may be permitted to continue till the original maturity. • The maturity proceeds of NRE deposits and FCNR (B) accounts should be repatriated expeditiously. • No new NRE/ FCNR (B) / NRO accounts in the names of OCBs are to be opened nor are deposits to be renewed. 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. Project offices set up by foreign companies • Foreign currency accounts may be opened for project offices approved by RBI. • Debits permitted are for payment related expenditure. • Credits should be for foreign currency receipts from the project sanctioning authority and remittance from parent/ group company abroad.
• The account should be closed on the completion of the project. • Intermittent remittances by project offices pending winding up are permitted provided the authorized dealer is satisfied with the bona fides of the transaction. Foreign citizens of Non Indian Origin • NRO accounts can be opened for them with funds remitted from outside India through banking channels or by sale of foreign exchange brought into India by them. CERTIFICATE OF DEPOSIT • It is a negotiable money market instrument which is issued in a dematerialized form or as a usance promissory note for funds deposited at a bank or other eligible financial institution for a specified time 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 shortterm resources Quantum that may be issued • Banks are free to issue as many as they require. • Financial Institutions may issue as much as they may within the limit set by the Reserve Bank. 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 thereafter.
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”. ABC BANK Date………….. PAY______________________________________OR BEARER RUPEES ___________________________ Rs. ................. ____________________________________________________ A\c No. 51003465 ABC BANK LTD. Carmichael Road, Sankaran Nair Mumbai 400026, Maharashtra 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. Who may cross a cheque – Drawer – the drawer may cross the cheque generally or specially. – Holder – Where the drawer has not crossed the cheque, the holder may cross it generally or specially. – Banker – Where a cheque is crossed specially, the collecting banker may cross it again to another banker as its agent for collection. This is called double special crossing.
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.. • Cheques marked Not Negotiable – The principle of “nemo dat quod non habet” (nobody can pass on a title better than what he himself has) will be applicable. – The title of the transferee would be vitiated by the defect in the title of the transferor. – The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith. • Cheques marked Account payee – This is an instruction to the collecting banker that he should collect the amount of the cheque for the benefit of the payee’s account only and no body else. – This crossing does not restrict transferability but in practice these are not transferred as the collecting banker had to credit the payee’s account. – The Reserve Bank has also stated that these should not be credited to any one else’s account.
– The RBI has also stated that “account payee” cheques of third parties should not be collected • Cheques that are double crossed. – These are to be collected by the banker specified. – It cannot be crossed again as the purpose of the first is frustrated by the second crossing. 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. • Liability on wrong payment of a crossed cheque. – If a crossed cheque is wrongly paid, the banker is liable to the true owner for any loss he has sustained. • Protection on uncrossed cheques – If the banker pays an uncrossed cheque in due course, he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the indorsement on the cheque. • Protection in respect of crossed cheques – When a banker pays a cheque drawn by his customer, he can debit the drawer’s account even though the amount of the cheque does not reach the owner. • Prerequisites for claiming protection – The payment has been made in due course:
• According to the apparent tenor of the instrument. • In good faith. • To any person in possession thereof. • In circumstances, which do not excite any suspicion that he is not entitled to receive payment of the cheque. • 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. • Liability of drawee of cheque – Drawee is under a duty to pay the cheque provided he has in his hands sufficient funds of the drawer. – If the banker refuses payment without sufficient cause he must compensate the drawer (not the holder) for any loss. – The banker should pay the cheque only when he is required to. – The compensation payable will be based on the damage caused to the drawer. • 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 setoff 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. • Cheques written in Hindi with a valid Hindi date are valid. • The paying banker must ensure that the signature on the cheque compares with the specimen signature. • If it differs or the signature is false, payment must be refused. • The banker is liable on the payment of forged cheques even if the client was negligent. • The Mumbai High Court in a decision in 2005 held that banks must pay the value of cheques they have sent if they were lost in transit/ sent for collection • Dishonor of cheque – If on presentation the banker does not pay, the cheque is said to be dishonored. – On dishonor, the cheques negotiability is lost. – Dishonor can be rightful or wrongful. If wrongful, the drawee can bring an action against the bank. – Dishonor of a cheque due to lack of funds is an offence and action can be taken against the drawer. • Holders of cheques must present these at the bank upon which it is drawn. If payment is refused by the bank, the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed. • If the holder does not present the cheque in time, the position of the bank may become precarious and the bank may not honor the cheque. In this case the drawer is not responsible if the bank refuses payment on presentment. In short the cheque must be presented before the relation between the drawer and the banker has been altered to the prejudice of the drawer.
• When an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the tenor of the instrument. If the suspicion is that of fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification, provided the truncated cheque so demanded shall be retained by it if payment is made accordingly. • It should be remembered that if a bill is not presented in time the drawer is discharged but the drawer of a cheque (if there is a delay) is discharged only if he has suffered some loss or injury and that too to the extent of such loss or injury and that too, to the extent of the loss only. If the bank is solvent, the drawer will be liable unless it becomes time barred by the statute of limitations. • Presentment may be made to an authorized agent or if dead, legal representatives or if insolvent to assignees • Any person liable to pay, and called upon by the holder to pay, is before payment entitled to have it shown and is on payment entitled to have it delivered to him. • If the instrument is lost or cannot be produced, the banker can ask to be indemnified against any further claim thereon against him. • Regarding cheques in an electronic form or a truncated cheque even after the payment, the banker who has received the payment shall be entitled to retain the truncated cheque. • Any person liable to pay, and called upon by the holder to pay, is before payment entitled to have it shown and is on payment entitled to have it delivered to him. • A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument shall be prima facie proof of such payment. – If a payment is made of an altered cheque – the alteration not being apparent, it is assumed that the payment has been made in due course. – Where the cheque is an electronic image of a truncated cheque, any difference in tenor of such electronic image and the truncated cheque shall be a material alteration. The bank or clearing house must ensure the exactness of the apparent tenor of the electronic image of the truncated cheque while truncating and transmitting the message. A bank or clearing house receiving a transmitted electronic image of a truncated cheque shall verify from the transmitting party that the image is exactly the same. – If a cheque is not presented for payment within a reasonable time after its issue, the drawer is not liable for the delay. If the drawer suffers some loss due to the failure of the bank, the drawer is discharged as against the holder to the extent of losses suffered by him. • If a cheque is dishonored for lack of funds, the drawer can be punished with imprisonment upto one year and/ or with a fine upto double the amount of the cheque if:
• The cheque has been presented to the bank within a year from the date on which it was drawn or within its validity. • The payee or holder makes a demand for payment by giving notice in writing to the drawer within 30 days of the receipt of the information. • The drawer of the cheque fails to make payment within fifteen days of receipt of the notice. 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. Liability of collecting banker – The collecting banker is liable: • For the genuineness of endorsements; • For opening account without introduction; • If he does not present cheques within a reasonable time. REMITTANCE BY RESIDENTS General Availability The remittances residents are permitted are: Employment abroad $ 100,000 Emigration $ 100,000 Maintenance of relatives abroad $100,000 Education abroad $100,000 per year No self supporting documents are required. On the basis of a self declaration
incorporating the details, the remittance can be made. The foreign exchange must be purchased by cheque/ draft or debit to an account. 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: (i) Travelers proceeding to countries other than Iraq, Libya, Islamic Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent States Not exceeding USD 2000 or its equivalent (ii) Travelers proceeding to Iraq or Libya, Not exceeding USD 5000 or its equivalent (iii) Travelers proceeding to Islamic Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent States. Full exchange may be released 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, subsection (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 nonimport remittances. Accordingly, in consultation with FEDAI, the A2 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 checkup abroad or for accompanying as attendant to a patient going abroad for medical treatment/ checkup 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 A2 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. International Credit Cards Resident individuals maintaining a foreign currency account are free to obtain international credit cards (ICC) issued by overseas banks and other agencies. Charges incurred can be met out of funds held in such foreign currency accounts or through remittances through a bank where the holder has a savings/ current account. Remittances should be made to the card issuing authority and not to a third party. 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 Resident individuals maintaining a foreign currency account with an authorized dealer in India or a bank abroad, as permissible under extant Foreign Exchange Regulations, are free to obtain ICCs issued by overseas banks and other reputed agencies. The charges incurred against the card either in India or abroad, can be met out of funds held in such foreign currency account/s of the card holder or through remittances, if any, from India only through a bank where the cardholder has a current or savings account. The remittance for this purpose, should also be made directly to the cardissuing agency abroad, and not to a third party. International Debit Cards International debit cards can only be used for permissible current account transactions.
They cannot be used in the internet for the purchase of prohibited items. Store value cards No prior permission from the RBI is required for the issue of these cards. Usage is limited to permitted current account transactions. 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. One hundred percent export oriented units (EOUs) One hundred percent EOUs may sell goods manufactured by them to other one hundred percent EOUs in foreign exchange. Bank may sell foreign exchange to buyer units. Foreign Embassies Foreign embassies can purchase foreign exchange towards payment of fees to schools/ educational institutions under the administrative control of foreign embassies. Advance Remittance for Current Account Transactions Authorized dealers must obtain a bank guarantee from a bank of international repute outside India or an authorized dealer in India (if such guarantee is issued against the counterguarantee of a bank of international repute situated outside India) for advance remittance for any current account transaction exceeding $100,000. If the amount exceeds $100,000 a guarantee must be obtained from a bank of international repute outside India or an authorized dealer in India (if such guarantee is issued against the counterguarantee of a bank of international repute situated outside India). 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. Purchase Shares under ESOP Scheme A resident individual who is an employee or a director of an Indian office or a branch of a foreign company or of a subsidiary of a foreign company in India can remit upto $20,000 in a calendar year to purchase equity shares offered by the foreign company under employees stock option (ESOP) scheme. This limit is removed if the following are
observed: • The shares under ESOP are offered at a concessional price. • The foreign equity holding in the Indian company is not be less than 51%. They are also permitted to freely sell the shares provided the proceeds thereof are repatriated to India. Purchase Eurail Tickets/ Passes These may be paid for in Indian rupees and the amount paid need not be adjusted against the traveling entitlement of foreign exchange for a private visit. Overseas Phone cards These may be paid for in Indian rupees. These need not be adjusted against the travel entitlement. Embassy schools Foreign exchange may be sold to pay fees to schools under the administrative control of foreign embassies. Consultancy Prior approval of the RBI is not required to pay for consultancy services procured from outside India even if the payment is made out of money in an EEFC account. Units in Domestic Tariff Areas Units in domestic tariff areas (DTAs) are permitted to purchase foreign exchange from dealers to pay for goods supplied by them to 100% EOUs, EPZs, ETTs and STPs. The facility as to units in DTAs for payments towards goods supplied to them by units in SEEPZ has been withdrawn. External Commercial Borrowings (ECB) Units in Special Economic zones (SEZ) can raise ECBs for its requirement. It should not transfer or on lend any borrowed funds to its sister concern or any other unit in Domestic Tariff Area (DTA). Liberalized remittances Scheme of $25,000 Dealers may freely allow remittances upto $25,000 per year for permissible current or capital account transactions or a combination of both. This facility is in addition to those already available for private travel, business travel, gift remittances, donations, studies medical treatment etc. The facility is available to all resident individuals but not to corporates, partnership firms, HUF, Trusts etc. The facility permits resident individuals to acquire and hold immovable property or shares or any other asset outside India without
prior approval of the Reserve Bank. Individuals are also permitted to open, maintain and hold foreign currency accounts with a bank outside India for making remittances under the scheme without prior approval of Reserve Bank and the foreign currency account may be used for putting through all transactions connected with or arising from remittances eligible under the scheme. 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. Authorized dealers are required to comply with the following requirements: • While allowing the facility Authorized Dealers are required to ensure that the “Know Your Customer” Guidelines have been implemented in respect of these accounts. • They should also comply with the Anti Money Laundering Rules in force while allowing the facility. • The applicant should have maintained the bank account with the bank for a minimum period of one year prior to remittance. If the applicant is a new customer of the bank, Authorized Dealers should carry out due diligence on the opening, operation and maintenance of the account and should also obtain a bank statement of the previous year from the applicant to ensure the source of the fund. If the bank statement is not available, copies of latest Income Tax Assessment Order or Return filed by the applicant should be obtained. • The Authorized Dealer should ensure that the payment is received out of funds belonging to the person seeking to make the remittance, by a cheque drawn on the applicant’s bank account or by a debit his account or by Demand Draft / Pay Order. • The authorized Dealer should certify that the remittance is not being made directly or
indirectly by/ or to ineligible entities and that the remittances are made in accordance with the instructions in this regard. There is also a reporting requirement on the Authorized Dealers. The remittances made under this scheme will be reported in the RReturn 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.” Goods by way of gifts Export of goods by way of gifts is permissible subject to a declaration by the exporter that the value does not exceed Rs. 5 lakhs. Remittance for securing Insurance for Health from a Company Abroad Remittance may be made freely for payment for securing insurance for health from a company abroad. Remittance by Artiste ADs may freely allow remittances by artistes e.g. wrestler, dancer, entertainer, etc. Remittances for Tour Arrangements, etc. Authorized dealers may remit foreign exchange upto a reasonable limit, at the request of a traveler towards his hotel accommodation, tour arrangements, etc., in the countries proposed to be visited by him, provided it is out of the foreign exchange purchased by the traveler from an authorized person (including exchange drawn for private travel abroad.
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. Commission to Agents abroad for Sale of Residential Flats/ Commercial Plots in India Remittance by way of commission to agents abroad for sale of residential flats/commercial plots in India, exceeding 5 per cent of the inward remittance requires RBIs approval. ADs may freely allow such remittances upto USD 25,000 or 5 per cent of the inward remittance, per transaction, whichever is higher. Shortterm Credit to Overseas Offices of Indian Companies Short term credit to overseas offices of Indian companies does not requires the prior approval of RBI. Remittance for Advertisement on Foreign Television Channels RBIs prior approval is not required in cases where the export earnings of the advertiser are less than Rs.10 lakhs during each of the preceding 2 years. ADs may freely allow remittances for advertisement on foreign television channels. Remittance of Royalty and Payment of lump sum fee ADs may allow remittances for royalty and payment of lumpsum fee provided the payments are in conformity with the norms laid down i.e. royalty does not exceed 5 per cent on local sales and 8 per cent on exports and lumpsum payment does not exceed USD 2 million.
Remittance for Use and/or Purchase of Trademark/Franchise in India. ADs may freely allow remittances for use of trade mark/franchise in India. However, RBIs prior approval is required for remittance towards purchase of trademark/franchise. Remittance of Hiring Charges of Transponders. The proposal for hiring of transponders by TV Channels and internet service providers will require prior approval of the Ministry of Information & Broadcasting. Unspent foreign exchange Other than surrendering the exchange, a returning traveler is permitted to retain upto $2000 in travelers cheques and currency notes. He may also retain coins without any limit. 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. Period of surrender of foreign exchange In case the foreign exchange purchased for any purpose is not used for the purpose or for any other purpose for which purchase or acquisition of foreign exchange is permitted, the same or the unused portion thereof is required to be surrendered to an authorized person within a period of 90 (ninety) days from the date of its purchase or 180 (one hundred and eighty) days in the case of travelers cheques. In cases where a person approaches an authorized person for surrendering foreign
exchange after 90 days, the authorized person should not refuse to purchase the foreign exchange merely on the ground that the prescribed period of 90 days has expired. 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. REMITTANCES BY NON RESIDENTS Remittance of assets by foreign national of non – Indian origin A foreign national of non – Indian origin who has retired from an employment in India or who has inherited assets from a person resident in India or who is a widow of an Indian citizen in India may remit an amount not exceeding $ 1,000,000 per calendar year on production of documentary evidence supporting acquisition/ inheritance of assets. This remittance facility is not available to citizens of Nepal and Bhutan. Remittance of assets by NRI/ PIO An NRI may remit upto $1,000,000 per year out of the balances in his Non Resident (ordinary) account/ sale proceeds of assets (inclusive of inheritance). On production of documentary evidence in support of acquisition, inheritance or legacy and a tax clearance/ no objection certificate from the income tax authority. This includes legacy/ inheritance to an arrangement under a settlement whereby the property is passed onto the legatees during the lifetime of the owner/ parent who retains a life interest in the property. 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.
Regarding remittance of sale proceeds of assets acquired by way of remittance or legacy for which there is no lockin period, documentary evidence must be submitted. Remittance of sale proceeds of residential property purchased by NRIs/ PIO out of foreign exchange. There is no lockin period for remittance of sale proceeds of residential property purchased by NRIs/ PIO out of foreign exchange. Remittance of sale proceeds is restricted to not more than two such properties. Remittance representing refund of application/ earnest money on account of non allotment is permitted together with interest if the original payment was made out of NRE/FCNR account of the account holder or the remittance was from outside India through normal banking channels. Remittance of current income Remittance of current income like rent, dividend, interest of NRIs/ PIOs who do not maintain an NRI(O) account is freely allowed. They may also credit this to a Non Resident External Account. Facilities for Students Students going abroad for studies are treated as NRIs. 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. Income tax clearance Remitters will be permitted to make remittances on the production of an undertaking and a certificate from a Chartered Accountant. International Credit Cards Banks may issue international credit cards to NRIs/ PIOs without prior approval of the RBI. 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 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.
–A clearing-house is a place where banks that are members of the clearing-house meet to hand
–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
–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.
–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 clearinghouse.
–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
–Clearing-houses are autonomous institutions having their own rules regarding the conduct of
–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.
Uniform Regulations and Rules(URR) •The Reserve Bank of India laid these down in 1986.
•They were designed to provide a uniform framework for the conduct of clearing throughout
the country. •These have been adopted individually by the general body of each clearing-house. •These rules govern the conduct of the clearing-houses in India. •They prescribe a fair membership criteria. •They provide for penalties in the case of default. •They also provide for Hours of Clearing and Return of Documents. •They have laid down clear procedures for settlement of clearing transactions. •The rules detail the manner payable and receivable differences should be settled. •The rules prescribe for a minimum balance to be kept by sub members with the bank managing the Clearing-house. •The rules detail the penalties for defaulting in maintaining the minimum balance and the overdraft, if any, due to adverse clearing position. •The rules lay down the mechanism to be followed in the event of the default by a member in meeting its clearing liabilities. •Individual Clearing-houses are free to frame their own rules consistent with the broad framework provided by the Regulations. •Based on the needs of the members as also local trade and consumer associations, a clearinghouse may decide on the number of presentation clearings and corresponding return clearings. 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 •With regard to outstation cheques practices can differ:
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.
–Some banks send the instruments to branches they have in the locations where the banks on
whom the instruments are drawn for collection. for collection.
–Others hand over the instruments to a large bank who have branches in multiple locations –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. customer’s account.
•On realization, the proceeds are remitted to the original presenting bank for credit to the •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 •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.
checked for completeness – signature, whether there is adequate balance, date and the likes.
•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.
Time taken for clearing
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). Other functions of the Clearing-house
•Apart from facilitating the exchange of instruments the clearing-house is involved in
settlements which may be:
–Settlements of claims; –Settlement with major banks; –Settlement with Central bank.
Inter branch clearing • Cheques drawn different branches of the same bank need not be sent to the clearing-house. • The service branch acts as the settlement branch for the branches. • The instruments are sent to the drawee branches. • The inter branch accounts are credited or debited internally.
•Cheques are, to facilitate clearing, have critical data such as the location, city, amount and •The process is known as Magnetic Ink Character Recognition or MICR.
type of transaction printed with a special ink which can recognize characters. This is by the imbedding of metal in the ink.
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. 2. The cheques are printed by approved printers. Not all printers are permitted. 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.
Pay ……………………………………………………………………………………… ………………. ……………………………………………………………….…… OR BEARER RUPEES ……………………………………………….…………………….. Rs. ………………………………………………………….…………… A/c No. Ltd.
ABC BANK 09582000000000
Rubber Stamp Here
SUBMEMBER OF CORPORATION BANK ABC BANK Bank Ltd. Signatory Nariman Point, Mumbai 400 021 Authorised
T TO CLEAR ENCODED BAND FIELD YOUR BANK Some city codes 560 700 600 682 400 110 Bangalore Kolkata Chennai Kochi Mumbai New Delhi
AMOUN CHEQUE NUMBER CITY CODE BANK CODE BRANCH CODE TRANSACTION CODE BE BY
MICR Band Code Line To Remain Untouched
Some bank codes 002 012 013 026 030 State Bank of India Bank of Baroda Bank of India Union Bank of India ABN Amro
031 035 036 150 211 240 259
American Express BNP Paribas Standard Chartered Bank Bank of Bahrain and Kuwait UTI Bank HDFC Bank IDBI Bank
Some transaction codes 10 11 12 13 14 15 16 17 18 19 28 29 30 Savings account cheque Current account cheque Banker’s cheque Cash credit account cheque Dividend Warrant Traveller’s cheques/ Pre denominated bank orders (not exceeding Rs. 1000/-) Demand draft Cheque issued in lieu of existing payment order Gift cheque Interest warrant Refund warrant/ debenture redemption warrant/ interest rebate warrant At par current account cheque other than dividend/ interest/ refund warrant Stockinvest
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. The Clearing Process 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. Bank Teller Machines • These are installed at fully automated bank premises. • Unlike ATMs they require the presence of an employee of the bank to operate. Automated Teller Machines • Automated Teller Machines or 24hour Tellers are electronic terminals that allow a person to bank almost any time. • There are two types – interior and exterior. Interior are those in banking premises whereas exterior are in malls/ shopping centres and other locations. • Automated Teller Machines (ATMs) facilitate the withdrawal of money at times when banks are not open (outside banking hours) and are primarily used for performing some of the banking functions such as withdrawal of cash or deposit of cash/cheque etc., by using an ATM card. • Each customer is provided with an ATM card with a unique Personal Identification Number (PIN). Whenever a customer performs a transaction, the person has to key in the PIN which is validated by the ATM, before the machine permits any transaction. The PIN has to be kept secret by the customer, to prevent any misuse or fraudulent transactions in the event of loss of the card. • Standalone ATMs made their appearance in India, in the early 1990s. These were mostly installed by foreign banks in their branch premises, as per the then existing policy. Easing of restrictions on the location of ATMs has led to their being installed at convenient places such as airports, central business districts, hospitals etc. • IBA has set up a Shared Payment Network System (SPNS) or SWADHAN network of ATMs of its member banks in Mumbai. The network went live on February 1, 1997. The objective behind the SWADHAN network is to provide 24 hours, 7 days in a week and 365 days in a year, electronic banking service to the customer of a member bank any where in the city of Mumbai. The member banks which participate in the network issue cards to their customers for transacting on SWADHAN network. The customer is free to
conduct transactions at the ATMs of any of the member banks located in the neighborhood. The services offered under SPNS are cash withdrawal, balance enquiry, cash/cheque deposit, transfer of funds, request for cheque book, standing instructions and statement of account, and change of PIN. The ATMs of member banks are connected to a Central Switch through MTNL leased lines. The Central Switch which is the heart of the SWADHAN network is located in Dadar and is connected to three zonal hubs. These hubs are located in Chembur, Fort and Andheri. The ATM in a particular area is connected to the nearest zonal hub. The cardholders database is kept at the Central Switch. Banks update the balances at the Switch at predetermined frequencies. On a daily basis the Switch provides settlement reports necessary for arriving at interbank settlement. Bank of India, a public sector commercial bank, acts as the settlement bank for all interbank transactions in SWADHAN. Every member bank has to maintain a deposit of Rs.25,000/ with the settlement bank. • Generally, ATMs must tell you they charge a fee and its amount on or at the terminal screen before you complete the transaction. • Most commercial banks have their own ATMs. In the case of smaller banks they piggyback, at times, on the ATMs of larger banks to allow their customers access to money outside banking hours. 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. TRUNCATED CHEQUE CLEARANCE • 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 clearinghouse 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. How does it work? • A scanner in the local branch where the cheque is deposited is used to capture the image of the cheque and send it to an automated clearinghouse and from there onto the paying bank. Returned cheques follow the same route. • Only 2 legs will be imaged. The returns leg is kept out. Physical cheques will remain at the branch. • In the pilot cheque truncation project the current paper based clearing will be replaced by image and data clearing for outward and inward and only data for return item processing. Cheque data and images will be stored in image archives for outward and inward items. • The archive at the clearinghouse will retain all the clearing images and data for eight years. The paper instruments are required to be retained for eight years till further instructions on the subject are evolved. • The size and the configurations of the systems to be used for outward and inward processing is a function of the banks’ business requirements and is to be worked out by the banks based on the volume of inward and outward instruments of the bank, the period of retention of such inward and outward images and MICR data by the bank and size of the images of the cheques. The exact size of the three prescribed images of each image may vary according to the source instrument of the different banks. However, for the purpose of sizing, banks could choose conservatively 75 (seventy five) KB as the size of
the three prescribed images along with the digital signature. The point of truncation and the retention period shall have a bearing on the storage requirements and banks need to suitably work out the storage requirements of their systems accordingly. Banks also need to consider the scalability of their systems depending upon the future requirements. • The Reserve Bank will provide only the Clearinghouse Interface (CHI) application software to the member banks. The member banks have to purchase (i) appropriate hardware, (ii) systems software and (iii) networking infrastructure. The CHI will act as a gateway for outward and inward MICR data and the images of the instruments to be sent to/received from the Clearinghouse over the network/media. The Clearinghouse Interface is a Windows based software with embedded Oracle Relational Database to be loaded on the Gateway Server. The Gateway shall be deployed using the Public Key Infrastructure for all its communication with the Clearinghouse. The Clearinghouse Interface shall aggregate the images and MICR data received from the branches for outward presentation and will deliver the inward images and MICR data drawee bank branchwise to the respective Clearinghouse Interfaces. The images have to pass the required Image Quality Assurance (IQA) and Image Quality Usability (IQU) specifications which will be issued by the RBI, failure to do so may result in rejection of such images. • As CTS clearing is based on images it is important that the source documents are image friendly. The Cheques have to be printed on the MICR standard stationary given in the MICR procedural guidelines and the size of the cheque remains unchanged. However, banks need to take certain precautions which include: • The background color should be light to enhance the text and dark colors in the background may be avoided. • Features which are heavy on design or excessive use of microlettering may be avoided as they reduce the contrast between background and the text. Holograms and Logos and other unique features of an instrument may remain on the face of the instrument. • As a guide, ideally the bank’s imaged based processing system/s must have the following characteristics: • Redundancy with no single point of failure. • High availability. • Flexible to meet the bank’s current and future needs (distributed capture, centralized capture, cluster model, Image Service Bureau, ATM/POS, Corporate Customer capture etc). • Seamless Interface to the RBI CHI system. • Must meet the clearing window and recovery procedures with the CHI. • Images and data to meet the IQA/IQU and security and other specifications from RBI.
• Provide webinterfaces at the branches for marking returns and printing of images. • Capable of burning CDs for the outward presentation and inward presentation to the paying branches. • Track and monitor the sending and receiving of the items from the various points of truncation. • Update the bank account processing system 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 intercity 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. Other important information • 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. • When an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the tenor of the instrument. If the suspicion is that of fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification, provided the truncated cheque so demanded shall be retained by it if payment is made accordingly. • Regarding cheques in an electronic form or a truncated cheque even after the payment, the banker who has received the payment shall be entitled to retain the truncated cheque. • A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument shall be prima facie proof of such payment. • If the payment has been made on an altered cheque and the alteration is not apparent payment is deemed to have been made in due course. Where the cheque is an electronic image of a truncated cheque, any difference in tenor of such electronic image and the truncated cheque shall be a material alteration. The bank or clearinghouse must ensure the exactness of the apparent tenor of the electronic image of the truncated cheque while
truncating and transmitting the message. A bank or clearinghouse receiving a transmitted electronic image of a truncated cheque shall verify from the transmitting party that the image is exactly the same. Risks in Cheque Truncation • The introduction of the truncation process will change the roles and the responsibilities of the various participants in the truncation process and may lead to introduction of certain risks that will have to be mitigated. These are documented below: o At the presenting bank level, the responsibility to verify the genuineness of the cheque based on the apparent tenor or the visible features of the cheque presented for collection may lead to banks refusing to accepting a genuine cheque or accepting a forged cheque based on a manual scrutiny. Images and MICR data to be sent to the clearinghouse have to be matched before they are released to the Clearinghouse. o The Clearinghouse will have to assume that the data given by the banks is the data meant for that day’s clearing and will have to arrive at the settlement based on this assumption. If the MICR data given by the bank is not that matching with the day’s image the bank has sent for collection, it may lead to erroneous settlement and large returns. • Truncating cheques entails additional operational risks. Banks will have to take adequate measures to ensure that all necessary safeguards are provided for – in consonance with legal requirements and banking practice while making payments, especially for high value instruments. • The drawee bank has to verify the signature on the image of a cheque. If a drawee bank chooses to verify signatures on the images of cheques above a cutoff amount only, then it runs the risk of paying some forged instruments. 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 clearinghouse cannot be held responsible for fraud, forgery etc. As per the recommendations of the working group, the clearinghouse will be doing settlement based purely on MICR data and will act as a pass through for the images. Therefore, the clearinghouse 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. ELECTRONIC CLEARING SERVICE • Electronic Clearing Service is a facility of electronically sending payment instructions. • The objective is to provide an alternate method of effecting bulk payment transactions which would obviate the need for issuing and handling paper instruments thereby facilitating customer service • This service is in operation in 15 centres where clearinghouses are managed by the Reserve Bank of India and 31 centres where they are being managed by the State Bank of India and its associates. • The scheme is designed for high volume transactions and to discourage low volume presentations • This is further divided into ECS Credit and ECS debit. 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 preauthorized 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 FUNDS TRANSFER 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 intercity and intracity. 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: Step1: 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. Step2: 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. Step3: 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. Step4: The RBI at the remitting centre consolidates the files received from all banks, sorts the transactions citywise and prepares vouchers for debiting the remitting banks on Day1 itself. Citywise files are transmitted to the RBI offices at the respective destination centres. Step5: RBI at the destination centre receives the files from the originating centres, consolidates them and sorts them bankwise. Thereafter, bankwise remittance data files are transmitted to banks on Day 1 itself. Bankwise vouchers are prepared for crediting the receiving banks’ accounts the same day or next day. Step6: 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 interbank oriented system. RBI acts as an intermediary between the remitting bank and the receiving bank and effects interbank 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. Additional organizational structure Each participating bank has to identify a branch at the respective centre to act as the link point for transmitting all outward messages and receiving all inward messages. The Service Branches/Main Branches of banks who have been coordinating the cheque clearing work are in the best position to discharge this role. So no additional organisational infrastructure is required to be created. Processing charges/Service charges While RBI has waived processing charges till March 31, 2006, levy of service charges by banks is left to the discretion of respective banks. Benefits the banks? • Banks can now provide interbank TT service. • Reconciliation is automatic. • Banks can make use of the EFT infrastructure for introducing new payment/cash management products to their customers. The number of outstation cheques issued by customers and consequent service load on banks may decline over a period of time. REAL TIME GROSS SETTLEMENT Real time gross settlement (RTGS) • RTGS is an internationally accepted system to minimize the settlement risk. • It is the centerpiece of an integrated payment system. • The settlement occurs simultaneously for delivery of payments (i.e. in real time) for full value of each payment (i.e. gross). • It was introduced in India in March 2004. By March 2006 10,000 branches of banks will have this facility. • The system allows banks to give electronic instructions to transfer funds from their
account to that of another bank. • Under this system payment occurs only if there is transfer of settlement balances between accounts at the Reserve Bank of India. All payments settled under realtime gross settlement are same day funds. • The RTGS system is maintained and operated by the RBI. • In real time gross settlement system (RTGS), both processing and final settlement of funds transfer instruction takes place simultaneously and continuously. • Transfer of funds is made individually and sequentially on a gross basis. • As it is a real time settlement system, final settlement takes place continuously provided that a payee bank has sufficient covering balance. Advantages of RTGS system: 1) Individual and sequential settlement in RTGS makes it easier to ensure unconditional, irrevocable finality of settlement. 2) Due to elimination of time lag in settlement, the risk that debtor might fail is greatly reduced. 3) Progress in information technology has made RTGS feasible, easier and less costly to build and operate. RTGS Membership • There are 4 types of membership – Type A, B, C and D • Membership Type “ A “ • All Scheduled banks, including scheduled coop. banks. • Are eligible for all types of transactions, including customerbased transactions. • Will have a Participant Interface (PI) each • Eligible for Intraday liquidity support from the RBI. • Membership Type “ B “ • All Primary dealers • Eligible for all types of RTGS transactions excluding customerbased RTGS transactions. • Have Participant interface (PI) each. • Eligible for intraday 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 Intraday 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. Account & Funding • All A and B type members will open a separate account called “Settlement Account”, with Deposit Accounts Department (DAD), RBI. • This settlement account should be funded to take care of the transactions in the queue. Intraday Liquidity support • Intra day liquidity (IDL) support by RBI is available for Type A and B members, in their settlement account, specially opened for RTGS purpose, with DAD, RBI. • IDL is against the securities held ( 95% of securities) in special general ledger account identified for RTGS purpose. • Settlement of IDL Support Account: • Normally by the end of the day, this support should be liquidated and made nil. • If any member fails to repay the IDL by day end, the securities against which such IDL has been availed of will get transferred to the RBI’s Investment Account. • On the next working day, the member will have to repurchase the securities from the RBI’s investment account, before the RTGS start of the day. • The member will not be supported for IDL till the repurchase. • If the member does not repurchase the above securities within the stipulated period of time, it will be seriously viewed by RBI. • The member will be imposed penalties, at the applicable rate. • Additionally, the member will also be liable for suspension from RTGS membership. • Transaction types: A) Interinstitutional 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 – Interbank 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 (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 nonprofit 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 worldwide 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. How does SWIFT operate? • SWIFT enables banks and institutions (its members) to send secure and reliable messages, since the entire transmission of messages is system based, with uniformity in language and format and authenticated at every level. • Each member is provided with an interfaceterminal with SWIFT Link Network(SLN). • The sending banker / institutions transmit the message in the relevant format (formats are predesigned by SWIFT) to the SWIFT Hub (also called the FIN center) and the FIN
center arranges to transmit to the beneficiary’s bank / institution. • In those countries where banks do not have many branches / offices, they operate through a correspondent bank for all transactions. • Where such correspondent bank’s services are availed, the process of transmitting message will need the details of such correspondent bank. • It is also in the practice that different correspondents’ services are availed in different countries, and different accounts are maintained for different banking purposes. • When messages are transmitted through correspondent bank services, the additional details such as correspondent bank’s name, BIC address, account numbers are also to be included in the message, in the relevant column of the SWIFT format. • The message transmitted through SWIFT is received within a few seconds by the ultimate beneficiary institution, if the receiver is “logged in” the interface. • In case the receiving participant is not on, the messages are arranged in queue at the FIN center and whenever the receiver “logs in” the interface, the messages are pumpedin from the SWIFT hub to the beneficiary’s interface. Messages and Fields • In the SWIFT messages that are normally exchanged between banks have been divided into categories such as: – Customer Transfers and Cheques. – Financial Institution Transfers – Financial Trading. – Collections and Cash letters. – Documentary Credits & Guarantees. – Securities. – Precious Metals and Syndications. – Travelers Cheque.s – Cash Management and Customer Status – Supporting System Messages.. • The serial number given against each category is known in SWIFT as the CATEGORY CODE. • Under each category, various types of messages are sent / received by banks. • For example, under the category Documentary Credit, messages pertaining to Issuance of L/C, Amendments to L/C, Reimbursement claim, Advice of discrepancy in documents etc., are transmitted by banks. • Each of the above messages is considered as a MESSAGE TYPE. • SWIFT has defined various message types not only under the category of Documentary credit but also under other categories.
• These messages types, normally referred to as MT, have been given a three digit identification number. – The first digit of the MT indicates the category to which it belongs • Normally the following details appear in any SWIFT message: – Date and time of receipt of message – Message Input Reference – SWIFT Input – Sender – Receiver – Transaction reference number – Related Reference – Date (YYMMDD) – Currency Code – Amount – Narrative 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 SWIFTFIN 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 SWIFTFIN 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. Remittance through SWIFT • What should a customer do to send a remittance through SWIFT? – If a customer A decided to remit funds to another person B through SWIFT, he would instruct his banker to do so, mentioning the name of B’s bank, SWIFT code (if known to him) of B’s bank and B’s account number. – The sending bank debits the account of A and does the needful. – Banks undertake to effect remittances on behalf of their Resident and NonResident customers who expect the funds to be places at the disposal of the beneficiary in the shortest possible time.
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. Commonly Used SWIFT Formats • Format 103 – Customer Funds transfer from Correspondent banks • Format 202 – Institutional transfer • Format 999 – Free format, for any query /clarification • Format 199 – Customer payment query OTHER PAYMENT AVENUES 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 with banks • Banks keep cash or balances with: • The Reserve Bank of India and • Other commercial banks. – Cash with the Reserve Bank of India • Commercial Banks keep money with the Reserve Bank for two purposes: – To meet Statutory requirements. Banks are under the Banking Regulation Act required to keep a certain percentage (not exceeding 20%) of their net demand and time liabilities in cash with the Reserve Bank of India. At present the percentage that they are required to keep is 5.00 %. The RBI does not pay any interest on 3% of the 5.00% kept. On the remainder interest is paid at the bank rate. The average daily CRR balance must be 70%
of the total CRR requirement on all days of the fortnight. . – To make payments to and receive amounts from other commercial banks. This may be with regard to investment transactions or clearing or other interbank transaction including borrowing from or lending to commercial banks. – Cash with other banks • Accounts are kept with other banks for commercial needs. Banks in India often maintain accounts with banks in other countries for trade transactions. • Accounts may be maintained with other banks in India for convenience especially if the bank does not have a branch in a particular location or alternatively if services of another bank is availed of for cash management or clearing or other services. 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. • Cash in the vault – The amount kept in the vault is the total the branch estimates is required to meet its needs. It is usually for this amount or slightly more that the bank will take insurance cover. – This money is kept in a safe inside a strong room or a vault and is under the custody of a cashier. • Cash with tellers – Normally at the start of each day, the cashier hands over to tellers cash for the day. The amount handed out to tellers will depend on the bank and the usual volume of transactions the bank has. – In addition each teller often has a certain amount in his box as bait money. This consists of assorted notes. The numbers of these notes are marked and the intent is to hand these over if a robbery takes place. The fact that the numbers of these notes are recorded can help trace the notes to those who robbed the bank. – During the day if a teller needs more money he would either borrow the amount he requires from another teller or from the cashier.
– At the end of the day the teller should account for the cash he has in his box. – It is not unusual, at the end of the day for a teller to have a difference. A person may have been paid more or less money or the teller may have received more or less money. This is known as “unders or overs”. In some banks tellers are expected to make good any “unders”. In others no action is taken apart from a record of unders and overs. At the end of a month, the net amount is either added or deducted from cash and taken to either income or expenses as appropriate. – The practice of what should be done at the end of a day varies from bank to bank. In some banks the money is returned to the cashier whereas in others the box is not emptied every day but is replenished after taking into account the net inflow/ outflow. – At the end of the day cashiers perform a bundle check to satisfy themselves that all money held can be accounted for. – 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. Mutilated/ soiled notes • If mutilated notes are presented banks should accept them if they are not in more than two pieces and no essential feature of the note is missing. Both the pieces should be of the same note and the complete number of the note in an undivided area on each piece should be the same. • Unfit notes should not be issued to the public. These should be deposited in currency chests and periodically sent to the Reserve Bank. • Notes which are extremely brittle or badly burnt or inseparably stuck should not be accepted for exchange. Soiled/ mutilated note bearing ‘PAY/ PAID’ or ‘REJECT of any
RBI office or a bank should be rejected. No bank should issue such notes. • Notes with slogans and political messages cease to be legal tender. • Disfigured notes are not legal tender. • Deliberately cut/ mutilated notes should be rejected. • If the bank takes a badly mutilated note, it should be communicated to the client that if the Reserve Bank does not accept the note, his account will be debited • Banks should not force customers to note their names on bank notes or list note numbers on the bills submitted for payment or insist on an undertaking when depositing higher denomination notes.. 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. These may be unsecured or secured. Unsecured loans include: • Personal loans; • Some loans to professionals and self employed persons; • Some Educational Loans. Secured Loans include • Some educational loans; • Some loans to professionals and self employed persons; • Loans against shares and debentures; • Vehicle Loans; • Housing Loans. 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. Period of the loan • The loan is usually repayable between twelve to twenty four months. Rate of Interest • The rate of interest would vary from bank to bank. Security • These loans are usually unsecured. CONSUMER DURABLE LOANS 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. Period of the loan • The loan is usually repayable in a period between 12 months to 36 months. 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.
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS Nature and Eligibility Loans to professional and selfemployed persons include: • Loans for the purpose of purchasing equipment, repairing or renovating existing equipment and/or acquiring and repairing business premises or for purchasing tools and/or for working capital requirements to medical practitioners including Dentists, Chartered Accountants, Cost Accountants, Practicing Company Secretary, Lawyers or Solicitors, Engineers, Architects, Surveyors, Construction contractors or Management Consultants or to a person trained in any other art or craft who holds either a degree or diploma from any institutions established, aided, or recognized by Government or to a person who is considered by the bank as technically qualified or skilled in the field in which he is employed. • Advances to accredited Journalists and Cameramen who are freelancers, i.e. not employed by a particular newspaper/magazine for acquisition of equipment by such borrowers for their professional use. • Credits for the purpose of purchasing equipment, acquisition of premises (strictly for business) and tools to practicing company secretaries who are not in the regular employment of any employer. • Financial assistance for running Health Centre by an individual who is not a doctor, but has received some formal training about the use of various instruments of physical exercises. • Advances for setting up beauty parlors where the borrower holds qualification in the particular profession and undertakes the activity as the sole means of living/earning his/her livelihood. • Preference may be given by banks to financing professionals like doctors, etc., who are carrying on their profession in rural or semiurban areas. The term also includes firms and joint ventures of such professional and selfemployed persons. This category will include all advances granted by the bank under special schemes, if any, introduced for the purpose. • Only such professional and selfemployed persons whose borrowings (limits) do not exceed Rs. 10 lakhs of which not more than Rs. 2 lakh should be for working capital requirements, should be covered under this category. However, in the case of professionally qualified medical practitioners, setting up of practice in semiurban and rural areas, the borrowing limits should not exceed Rs. 15 lakhs with a subceiling of Rs. 3 lakhs for working capital requirements. Advances granted for purchase of one motor vehicle to professional and selfemployed persons other than qualified medical practitioners will not be included under the priority sector.
• Advances granted by banks to professional and selfemployed persons for acquiring personal computers for their professional use, may be classified in this category, provided the ceiling of total borrowings of Rs. 10 lakhs of which working capital should not be more than Rs. 2 lakh per borrower, is complied with in each case for the entire credit inclusive of credit provided for purchase of personal computer. However, home computers should not be treated on par with personal computers and excluded from priority sector lending. 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. Period of the loan • The period is usually between 36 months and 60 months. 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 Vehicle loans are advanced to enable individuals: • Purchase new twowheeler / motorcar of any make for private use or professional or business use. • Purchase second hand / used twowheeler / motorcar of not more than 5 years old. 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. Expenses considered for loan : • Fee payable to college/ school/ hostel. • Examination/ Library/ Laboratory fee. • Purchase of books/ equipments/ instruments/ uniforms.
• Caution deposit/ building fund/ refundable deposit supported by Institution bills/ receipts. • Travel expenses/ passage money for studies abroad. • Purchase of computers essential for completion of the course. • Any other expense required to complete the course like study tours, project work, thesis, etc. The amount of loan: Need based finance subject to repaying capacity of the parents/ students with margin and the following ceilings. Studies in India Maximum Rs.7.50 lakhs. Studies abroad Maximum Rs.15 lakhs. 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 yeartoyear basis as and when disbursements are made on a prorata 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 coobligation 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 57 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. • 12% 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 precondition 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. Priority Sector Advance • Educational loans upto the limits stipulated will be considered priority sector advances/ LOANS AGAINST SHARES AND DEBENTURES 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/nonconvertible 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. Advances against Units of mutual funds • While granting advances against Units of mutual funds, banks should follow the guidelines given below. i. The Units should be listed in the Stock Exchanges or repurchase facility for the Units of mutual fund should be available at the time of lending. ii. The Units should have completed the minimum lockinperiod stipulated in the relevant scheme. iii. The amount of advances should be linked to the Net Asset Value (NAV) /repurchase price or the market value, whichever is less and not to the face value. iv. The advance would attract the quantum and margin requirements as applicable to advance against shares and debentures wherever stipulated. The margin should be calculated on the NAV/repurchase price or market value, whichever is less. v. The advances should be purposeoriented, taking into account the credit requirement of the investor. Advances should not be granted for subscribing to or boosting up the sales of another scheme of the mutual funds or for the purchase of shares/debentures/bonds. 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 followup. 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 intercorporate 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 backup 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 Housing Finance refers to finance provided to individuals or groups of individuals including cooperative societies. 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. Indirect housing finance • Banks must ensure that their indirect housing finance is channeled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc., primarily for augmenting the supply of serviced land and constructed units. It should also be ensured that the supply of plots/houses is time bound and public agencies do not utilize the bank loans merely for acquisition of land. Similarly, serviced plots should be sold by these agencies to cooperative societies, professional developers and individuals with a stipulation that the houses should be constructed thereon within a reasonable time, not exceeding three years. For this purpose, the banks may take advantage of various guidelines issued by NHB for augmenting the supply of serviced land and constructed units. 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. Term of the loan • The term is dependant on the age of the buyer – the intent being that it should be repaid before the person retires. • Most loans are for 15 to 25 years. Loans to selfemployed people are sometimes for a shorter duration. 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. RETAIL CREDIT ANALYSIS • Retail credit analysis relates to the determination of the credit worthiness of an individual before a loan is disbursed. It is different from lending to companies as the amounts involved are much smaller and are given to support a lifestyle as opposed to run a business. • Lending is fraught with risk as the loan may not get repaid. The cost of a bad loan is
high. If a bank lends Rs. 100,000 and the bank’s earning (rate of interest charged less cost of funds) on it is 5%, the bank would need to lend Rs. 20,00,000 for one year if the loan goes bad. • Additionally, in retail credit the risk is that the loan is usually given to an individual and often there is no information on the credit worthiness of the person easily available. In corporate lending one has balance sheets, profit and loss accounts and other data. Principles of Sound Lending The factors one should look at are: • The purpose the loan is being sought for. • The ability of the borrower to repay. • The term the loan is sought for and • The integrity of the borrower. If there is any doubt on this score, the loan should not be disbursed. Characteristics • Loan given to individuals. • Very often there is no collateral. • Given often on a gut feeling that the individual will repay. Dangers • The individual is a risk. The person may not want to repay. As a rule employed person are better risks than selfemployer/ 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. • The Depository is different from a traditional custodial service because a transfer of beneficial ownership can be done directly by a depository whereas a custodian cannot do this. The main objective of a Depository is to minimize the paper work involved with the ownership, trading and transfer of securities. Meaning of a Depository participant • A Depository Participant is one with whom an account has to be opened to trade in the electronic form. While the Depository can be compared to a Bank, a Depository Participant is like the branch of a bank with whom you can have an account. • 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. Operations of a Depository System • The Depository System operates in the lines of a banking system. A bank holds funds in its accounts and transfers funds between accounts whereas a Depository holds securities in accounts and transfers securities between accounts. In both systems, the transfer of funds or securities happens without the actual handling of funds or securities. Banks and the Depository are accountable for the safe keeping of funds and securities respectively. Benefits of having a demat account a. Shares of companies can only be traded if they are dematted. SEBI has made demat mandatory on most of the traded scrips, and therefore electronic transaction will be the only way everyone can trade. b. In the electronic form transfer of securities has no stamp duty whereas in the case of transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of shares being transferred.
c. In the case of physical certificates, many risks such as delays, loss, in transit, theft, mutilation, bad deliveries, etc. occur whereas in the electronic form these are eliminated. The depository participant on specific instructions can keep shares in the “Frozen Mode”. d. The concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. In the demat mode, market lot becomes one share. e. For providing credit facility against securities, dematerialized securities are preferred by banks and other financial institutions because they attract lower margin and lower rates of interest compared to physical securities. f. Even in the electronic mode of trading, the payment mechanism (usually through a broker) between the buyer and seller continues to be as before. Also the usual brokerage charges would have to be incurred. However, after the settlement, pay in and pay out are on the same day for scripless trading which means that there is no delay in the receipt of cash. g. Shares bought are transferred to the buyer’s name on the very next day of pay out. In case of physical shares, transfer of ownership takes 30 days or sometimes even more. h. Courier / postal charges are done away with for sending share certificates / transfer deeds. i. Dematerialization also has facility for freezing / locking of investor accounts, which enables the accountholder to make his account nonoperational. j. Dematerialization enables a borrower to pledge and hypothecate securities. k. Because of its convenience both brokers and investors prefer shares in a dematerialized form. Procedure to demat shares? • The process begins with the opening of an account with a depository participant. This is similar to the opening of a bank account. An account has to be opened with a depository participant (DP) of your choice by filling up an Account Opening Form and signing a “ParticipantClient Agreement”. The applicant is then given a unique client ID number, which must be quoted in all correspondence with the DP. • The client (registered owner) has to submit a request to the DP in the Dematerialization Request Form for Dematerialization, along with the certificates of securities to be dematerialized. Before submission, the client has to deface the certificates by writing SURRENDERED FOR DEMATERIALIZATION. • The DP verifies that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. Once the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client. • The DP will scrutinize the form and the certificates. This scrutiny involves: the
following o Verification of Clients signature on the Dematerialization request with the specimen signature (the signature on the account opening form). If the signature differs, the DP should ensure the identity of the client. o Compare the names on DRF and certificates with the client account. o Paid up status o ISIN o Pari Passu Status o Lock in status o Distinctive numbers • In case the securities are not in order they are returned to the client and acknowledgment is obtained. The DP will reject the request and return the DRF and certificates in case: o a single DRF is used to dematerialize securities of more than one company. o the certificates are mutilated, or they are defaced in such a way that the material information is not readable. It may advise the client to send the certificates to the Issuer/ R&T agent and get new securities issued in lieu thereof. o part of the certificates pertaining to a single DRF is partly paidup, the DP will reject the request and return the DRF along with the certificates. The DP may advise the client to send separate requests for the fully paidup and partly paidup securities. o part of the certificates pertaining to a single DRF is lockedin, the DP will reject the request and return the DRF along with the certificates to the client. The DP may advise the client to send a separate request for the lockedin certificates. Also, certificates lockedin for different reasons should not be submitted together with a single DRF • The DP will verify the nature of the security, its pari passu status with reference to the list of ISIN codes available with it. The allotment of ISIN must be verified at a second level. Wrong allocation may result in avoidable losses to the clients. The ISIN is entered in the space provided for it in the dematerialization request form. • In case the securities are in order, the details of the request as mentioned in the form are entered in the DPM (software provided by NSDL to the DP) and a dematerialization request number ( DRN ) will be generated by the system. • The DRN so generated is entered in the space provided for the purpose in the dematerialization request form. • A person other than the person who entered the data is expected to verify details recorded for the DRN. The request is then released and forwarded electronically by the DP to DM ( Depository Module, NSDLs software system) by DPM. • The DM forwards the request to the Issuer/ R&T agent electronically. • The DP will fill the relevant portion viz., the authorization portion of the demat request form.
• The DP will punch the certificates on the company name so that it does not destroy any material information on the certificate. • The DP will then dispatch the certificates along with the request form and a covering letter to the Issuer/ R&T agent. • The Issuer/ R&T agent confirms acceptance of the request for Dematerialization in his system DPM(SHR) and the same will be forwarded to the DM. • The DM will electronically authorize the creation of appropriate credit balances in the clients account. • The DPM will credit the clients account automatically. • The DP must inform the client of the changes in the clients account following the confirmation of the request. • The issuer/ R&T may reject Dematerialization request in some cases. The issuer or its R&T Agent will send an objection memo to the DP, with or without DRF and security certificates depending upon the reason for rejection. The DP has to remove reasons for objection within 15 days of receiving the objection memo. If the DP fails to remove the objections within 15 days, the issuer or its R&T Agent may reject the request and return DRF and accompanying certificates to the DP. The DP, if the client so requires, may generate a new Dematerialization request and send the securities again to the issuer or its R&T Agent. No fresh request can be generated until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and the DP about it. Precautions: • Holdings in those securities that have not yet been admitted for Dematerialization by NSDL cannot be dematerialized. List of securities admitted for Dematerialization should be verified before defacing the securities. • Holdings in street name cannot be dematerialized. A new procedure for transfer and demat to be done together has been conceptualized. • The combination and sequence of names of holders as printed on the physical certificate should be identical with the names initiating the Dematerialization request. • Separate Dematerialization requests will have to be filled for lockedin and free holdings. • Separate Dematerialization requests will have to be filled for holdings lockedin for different reasons. • Separate Dematerialization requests will have to be filled for fully paid up and partly paidup holdings. • Separate Dematerialization requests will have to be filled for holdings in the different ISINs of a company. 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 crosssell 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 perlead 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 noncustomers (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. Role of Mutual Funds • Mutual Funds are a financial intermediary they intermediate between the source of the saving and the user of those savings and help to mobilize capital. • Mutual funds also imparts liquidity to the capital markets, since collectively, they trade much more actively than individual investors. The frequent buying and selling of Mutual Funds, based on specific information, provides the price signals that make capital markets more efficient. • Mutual funds help move companies towards higher corporate governance standards, because their large holdings give them voting clout. Major government institutions that manage Mutual Funds • Unit Trust of India • Insurance Companies: General Insurance Corporation Of India (GIC), Life Insurance Corporation of India (LIC). • Banks: State Bank of India, Bank of India, Bank of Baroda, Canara Bank, • Financial Institutions: IDBI, ICICI, IL&FS The major Private Sector Mutual Funds. Some of the prominent private sector Mutual Fund organizations are: ING Barings, Alliance Capital Fund, Birla Mutual Fund, ING Barings, Kothari Pioneer, Morgan Stanley, Templeton Mutual Fund, Sun F&C Mutual Fund, Zurich India Mutual Fund, DSP Merrill Lynch, Prudential ICICI Mutual Fund, Jardine Fleming, Reliance Mutual , Tata Mutual Fund & Kotak Mahindra Mutual Fund
Those eligible to invest in Mutual funds. • Adult individuals (or minor, holding through their parents or guardians) holding singly or jointly • Hindu Undivided Families (HUF) • Companies, corporate bodies, public sector undertakings, financial institutions, banks, partnerships, associations of persons or bodies of individuals, religious and charitable trusts and other societies registered under Societies Registration Act, 1860 • Nonresident Indians or Person of Indian Origin (PIO) residing abroad on a full repatriation basis or nonrepatriation basis. • Overseas Corporate Bodies (OCBs) firm or societies which are held directly or indirectly but ultimately to the extent of at least 60% by NRIs and Trusts in which at least 60% of the beneficial interest is similarly held irrevocably by such persons on a full repatriation or nonrepatriation basis • Foreign Institution Investors (FIIs) registered with Security Exchange Board of India (SEBI) and the Reserve Bank of India, on full repatriation basis. 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 knowhow 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. Different types of Mutual Fund Schemes. Mutual Funds are classified into the following types of schemes: • OpenEnded Schemes; • CloseEnded Schemes; • Equity Schemes; • Income Schemes; • Balanced Funds; • Money Market Funds; • Gilt Fund; • Bond Funds; • Index Funds; • Sector Funds. Openended scheme • In an Openended 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 openended scheme vary, as investors buy and sell units. • In an openend fund, there is no fixed number of units issued. • Openend schemes are not listed on the stock exchanges. Units are purchased and sold directly through the Mutual Fund. • Openended 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.
Closedended scheme • These are open only during a specified period. • The units of a closedended 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 closedend fund is listed on a stock exchange and, thereafter, investors can purchase and sell these units only through the stock exchange. • CloseEnded schemes generally trade at a discount to the NAV, but the discount narrows as the date of maturity approaches. Growth or Equity Fund • A Growth Funds objective is to provide the maximum returns through capital appreciation, over the medium to long term, by investing in equities. An equity fund may be of a diversified nature, or may be sectororiented. Equity Funds have often given excellent dividends when stock markets have risen sharply. Income scheme • This is aimed at maximizing current income (interest and dividend) of investors. It is a scheme that is typically debtoriented, 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.
Money Market Fund • Money market funds provide easy liquidity, preservation of capital and moderate income. They are low risk as they invest in safer, shortterm money market instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and InterBank Call Money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. 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 InterBank 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 nonGovernment 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 1015% 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 frontend load. • In the case of a closedend 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. Factors to check before investing
• 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 oneyear 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 LOCKERS 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 • Banks accept goods and valuables of customers for safe custody. • As these are given to the banker to keep safe, the banker cannot exercise his general lien
on them. • When items are given for safe custody they may be open or sealed. When open, the banker must make a detailed note of the items and then have that list signed by the customer preferably in front of a witness. This will stop him from later claiming that certain items handed over have been lost or stolen. When a sealed packet or envelope is given, the banker should clearly state that he has received a sealed envelope and that he does not know the contents. He must have this signed by the customer also. • When items are received for safe custody, they should be entered in a register or some other record. • When the item kept in safe custody is taken back by the client, the receipt earlier issued at the time of deposit should be discharged and be held in the bank’s possession as proof that the deposited item has been returned. • Even though the banker may not be aware of the contents (as in the case of a sealed box), the banker must take reasonable care of the articles placed in his possession. • A banker will be held liable if: o He keeps the items in an open place or at a place that is easily accessible to others and it is stolen. o The safe deposit vaults are not strong. o He hands the items kept for safe custody to some other person (conversion). o One of the bank’s employees steals the items kept under safe custody.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.