Commercial Banking

Banking Defination: Accepting for the purpose of lending or investment of deposits of money from Public, Repayable on demand or otherwise and withdrawable by cheques, drafts, order, etc. A commercial bank, also called a business bank, is a financial intermediary which provides money market, checking, and savings accounts and accepts time deposits from customers. These banks are under the authority of national central banks. At present, there are over 6,500 FDIC-insured commercial banks in the United States, down from over 12,000 in 1990. They operated through some 89,170 offices and 82,641 branches in 2010. Commercial banks offer business loans, instalment loans, and other loan types, issue bank checks and bank drafts, and process payments through internet banking, EFTPOS, telegraphic transfer, or other means. In addition, commercial banks provide standby and documentary letter of credit, cash management and private equity financing. A traditional role of commercial banks has been to underwrite securities, but today’s big commercial banks have their own investment bank arms which are involved in this. Commercial banks also provide guarantees and offer performance bonds, along with safekeeping of documents. Finally, unit trusts, insurance, and brokerage are also offered by commercial banks. Commercial banks also work as retail banks and serve businesses as well as individual clients. Business entities have different needs and requirements than consumers. Some companies require that the bank accommodates a considerable volume of cash deposits and credit card payments. In general, commercial banks serve the needs of small and large businesses by providing a variety of services. These include savings and checking accounts, loans for capital and real purchases, letters of credit, and lines of credit. Other services offered to businesses are foreign exchange, lockbox services, and transaction and payment processing. Commercial banks accept deposits to corporate and personal accounts and then use the money to extend financing to businesses and individuals. This is the opposite of what investment banks do – they specialize in generating revenue through investment activities. Commercial banks extend various loans to their clients. To their individual customers, commercial banks give out loans for the purchase of homes, vehicles, and other personal property. Commercial banks also extend loans for debt consolidation and home improvements. Business entities obtain business loans for the purpose of purchasing operating supplies or financing a payroll. On the other hand, if a business aims at corporate restructuring or realignment, such business loans are more likely to be financed by an investment bank. Commercial banks offer three main types of loans – unsecured loans, secured loans, and mortgages. Unsecured loans may be available under various marketing packages, including personal loans, credit card debt, bank overdrafts, and other loans. Unsecured loans are not guaranteed with collateral unlike the secured variety. Mortgage loans are a popular debt instrument, which is used to buy real estate. Many commercial banks did not specialize in real estate loans in the past, securing their earnings mainly from consumer and commercial loans. With changes in banking policies and laws, these banks play a more active role in home financing.

In addition to these financial products, commercial banks feature a variety of savings programs. They offer interest-bearing checking accounts, savings accounts, certificates of deposit, and other financial services. Finally, commercial banks have some ancillary functions as well. These include agency and general services. Some banks deal with payment and collection of checks and buy and sell stocks. They may also offer SMS banking, online banking, advisory services, and more.

Banking Business: prodcuts and Deposits

Business of Banking : Accepting deposits, borrowing money, lending money, investing, dealing in bills, dealing in Foreign Exchange, Hiring Lockers, Opening Safe Custody Accounts, Issuing Letters of Credit, Traveller's Cheques, doing Mutual Fund business, Insurance Business, acting as Trustee or doing any other business which Central Government may notify in the official Gazette

Demand deposit is a term which refers to an account in which money has been deposited and can be withdrawn without notifying the depository entity and at any time. With this type of account, persons can withdraw their money whenever required. This is the opposite to a term deposit which is not to be freely accessed over a specified period of time. Most savings and checking accounts represent demand deposit, with funds being accessible by account holders. Checking accounts are among the most common accounts that work on the demand deposit principle. Money can be withdrawn immediately after it has been posted to the checking account. Bank money in the form of demand deposits is held in commercial banks. It is the larger part of the money supply in states, with account balances of demand deposits being money. Money supply includes demand deposits and currency. Deposited money can be used to various purposes, such as payment for services and products, settling debts, etc. During periods of financial crisis, depositors withdraw their money which results in a reduced money supply. The opposite is true for periods of stability and growth. In general, depositors can withdraw their money without making a special arrangement with their credit union or bank. Withdrawals can take place if the balance is sufficient and the procedures of the bank are followed. Depending on the regulations of the financial institution, some exceptions may exist, as is the case with demand deposits including financial instruments that have not cleared before the money is released. Restrictions may also apply to checks by foreign financial institutions. Electronic funds transfer is a kind of demand deposit which is available for withdrawal within minutes. Electronic funds transfers are bank-to-bank transfers, which are pre-qualified by the sending institution. In many cases, receiving banks immediately post the funds. Electronic transfers of this type allow recipients to withdraw the full amount just minutes after the money has been posted. In general, withdrawals can be made in several ways. One way to do that is to present a check that is written, with money deposited in the bank account. The financial institution then checks the available balance and if money is sufficient, the check is being cashed for the client. Using a debit card is another way to withdraw money from a demand deposit. Some restrictions may apply, for example, there may be a limit on the amount that can be withdrawn within a 24-hour period. A third way to withdraw money is by transferring it from one account to another. Sometimes demand deposits are made into checking accounts. Clients may decide to transfer some or all of the money into a savings account. This can be done online, by phone, or at the local branch of one’s bank. Basically, any account from which funds can be withdrawn on demand is a demand deposit. Money market accounts fall into this category. In contrast, certificates of deposit do not allow accountholders

to withdraw their money until maturity. If money is withdrawn before that, the holder risks incurring fees and interest penalties. Money market accounts and savings accounts are both demand deposits
FIXED OR TIME DEPOSITS

Time deposits are deposits accepted by banks for a specified period of time. In terms of RBI directives the minimum period for which term deposits can be accepted is 15 days. The banks generally do not accept deposits for periods longer than 10 years.

1> Banks pay interest on term deposits based on the period of deposits and normally pay higher interest for longer term deposits. 2> Banks have full discretion to fix their interest rates on deposits and these rates are varied from time to time depending on market conditions. 3> Changes made in interest rates from time to time do not alter the interest paid on the existing deposits. 4> When banks quote a certain percentage of interest per annum for a given period it is understood that interest payments are made on a quarterly basis (see IBA Master Charts). 5> The depositor can collect interest on every quarter or its discounted value at monthly rests or avail quarterly compounding benefits and receive principal and interest on maturity. 6> RBI has now permitted banks to quote a higher rate of interest for individual deposits more than Rs.15 lacs. 7> Banks are allowed to levy a penalty for premature encashment of deposits at their discretion. Banks generally pay interest on such deposits as applicable for the period which deposit has been kept with the bank (less penalty if levied). 8> Bank allow loans against the fixed deposits on demand. Margin retained over the deposit outstanding and interest rate charged thereon are decided by the bank and may vary from bank to bank.

overdraft Overdrafts occur when bank customers withdraw cash from their account, with the balance going below zero. An overdraft is basically a form of credit extended by a creditor when the account balance reaches zero. Overdrafts allow bank clients to withdraw money even when there are no funds in the account. In other words, banks allow their clients to borrow certain amount of money. With overdraft accounts, financial institutions cover checks to prevent them from bouncing. Given that overdrafts are a type of loan, bank clients pay interest on the overdraft’s loan balance. On the other hand, the interest rate is often lower compared to credit cards.

Overdrafts may occur for various reasons, among which not maintaining proper account register, merchant error, unexpected electronic withdrawals, and more. When the accountholder fails to maintain his account register well, overspending is due to negligence. Another reason for overdraft is, in fact, the possibility to overdraw money using an ATM. Some ATMs and banks allow withdrawals even when cash is insufficient in the account. ATMs are sometimes unable to communicate with the bank of the accountholder, with this resulting in automatic authorization of withdrawals. With temporary deposit holds, banks can put on hold a deposit that has been made to an account. Bank policies or Regulation CC may be responsible for that. Given that money is

not immediately available, this will result in overdraft fees. Unexpected electronic withdrawals are yet another reason for overdrafts. This may occur when the trial period of some recurring service ends. Overdrafts may also occur due to direct deposit chargeback, recovering overpayment, or wage garnishment. Finally, overdraft may occur due to merchant error, with a merchant wrongly debiting a client’s account.

On the other hand, it can be said that an overdraft acts like a safety net on one’s account. Clients are allowed to borrow up to a specified limit whenever they do not have money in the account. This is useful in covering short-term financial problems. Keep in mind that some bank accounts come with an overdraft facility, but this is not necessarily true for all accounts. If your account doesn’t, you need to ask your banking institution for an overdraft facility. The bank’s decision will depend on the client’s record, and he may be required to pay a fee for setting it up. You will not have to use it unless you need an overdraft. Moreover, you will not be required to pay additional charges in case of accidentally overdrawing. Naturally, clients have to pay the overdraft and interest charges. Rates depend on the bank and can be variable and fixed. In addition, a monthly charge and arrangement fee may apply. If you don’t have the bank’s authorization to overdraw, the charges may be quite high. Your financial institution may not pay direct debits, bounce checks, and charge a fee for all refused transactions. Administration fees may be set in place as well.

Demat Account : Demat Account concept has revolutionized the capital market of India. When a depository company takes paper shares from an investor and converts them in electronic form through the concerned company, it is called Dematerialization of Shares. These converted Share Certificates in Electronic form are kept in a Demat Account by the Depository Company, like a bank keeps money in a deposit account. Investor can withdraw the shares or purchase more shares through this demat Account.

Bancassurance : Bancassurance refers to the distribution of insurance products and the insurance policies of insurance companies which may be life policies or non-life policies like home insurance - car insurance, medi-policies and others, by banks as corporate agents through their branches located in different parts of the country by charging a fee.

Factoring : Business of buying trade debts at a discount and making a profit when debt is realized and also taking over collection of trade debts at agreed prices.

Forfaiting : In International Trade when an exporter finds it difficult to realize money from the importer, he sells the right to receive money at a discount to a forfaiter, who undertakes inherent political and commercial risks to finance the exporter, of course with assumption of a profit in the venture.

Banking Evolution,Reforms and progress:
In 1975, the Government of India had appointed the Talwar Committee on customer service in banks. In 1990, RBI appointed the Goiporia Committee on customer service in banks. In 2004, the Tarapore Committee recommendations led to formation of Board level committees for monitoring customer service in banks. In 2006, Reserve Bank of India appointed a Working Group to formulate a scheme to ensure reasonableness of bank service charges under the chairmanship of Shri. N. Sadasivan. The recommendations of the various Committees / Working Groups reflected the need of the time in which the Committees / Working Groups were set-up. For instance, the Goiporia Committee broadly covered the following aspects:
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Causes of the persistence of below par customer service in banks. Areas of deficiencies in customer service in banks. Measures for improvement in work culture. Steps for inculcation of greater customer orientation among bank employees. Identification of structural and operational rigidities and inadequacies which adversely affect the working of banks. Upgradation of technology to ensure prompt and efficient customer service.

In addition to the guidelines framed based on the recommendations of the Committees, RBI had been giving instructions to banks as and when required. Over the years, the customer service in banks has improved considerably with the introduction of technology based products:
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ATM (this has facilitated customer to access cash withdrawal/deposits/ account querying/transfer of funds/payment of utilities/purchase of air/train tickets – 24 X 7). Internet Banking. Debit Cards (dispensed the need for carrying cash for making purchases). Mobile Banking (stage wise implementation) and the youngsters accessing banking services.

Further, the banking sector has undergone a sea-change from the time when the previous Customer Service Committees were appointed. There has been a huge proliferation of bank branches. Further, de-regulation has brought in its wake numerous banking services, niche products etc. Widespread use of technology also enhanced the customer expectations, specifically on the aspects of speed and quality of service delivery. In addition, technology implementation has made branch banking redundant on many aspects, redefined several of the existing services and raised customer expectations regarding reasonableness of service charges. While the bankers hold a view that the introduction of core banking solution entailed huge cost and the passing of benefit will take some more time till substantial portion of customers start using technology based products. The economy is also experiencing demographic dividend, thereby the number of youngsters accessing banking service is on the increase with the resultant pressure on providing technology based services.

Evaluation of Narsimham Committee Reports

The Committee was first set up in 1991 under the chairmanship of Mr. M. Narasimham who was 13th governor of RBI. Only a few of its recommendations became banking reforms of India and others were not at all considered. Because of this a second committee was again set up in 1998.

As far as recommendations regarding bank restructuring, management freedom, strengthening the regulation are concerned, the RBI has to play a major role. If the major recommendations of this committee are accepted, it will prove to be fruitful in making Indian banks more profitable and efficient

Problems Identified By The Narasimham Committee

Directed Investment Programme : The committee objected to the system of maintaining high liquid assets by commercial banks in the form of cash, gold and unencumbered government securities. It is also known as the statutory liquidity Ratio (SLR). In those days, in India, the SLR was as high as 38.5 percent. According to the M. Narasimham's Committee it was one of the reasons for the poor profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was as high as 15 percent. Taken together, banks needed to maintain 53.5 percent of their resources idle with the RBI.

Directed Credit Programme : Since nationalization the government has encouraged the lending to agriculture and small-scale industries at a confessional rate of interest. It is known as the directed credit programme. The committee opined that these sectors have matured and thus do not need such financial support. This directed credit programme was successful from the government's point of view but it affected commercial banks in a bad manner. Basically it deteriorated the quality of loan, resulted in a shift from the security oriented loan to purpose oriented. Banks were given a huge target of priority sector lending, etc. ultimately leading to profit erosion of banks.

Interest Rate Structure : The committee found that the interest rate structure and rate of interest in India are highly regulated and controlled by the government. They also found that government used bank funds at a cheap rate under the SLR. At the same time the government advocated the philosophy of subsidized lending to certain sectors. The committee felt that there was no need for interest subsidy. It made banks handicapped in terms of building main strength and expanding credit supply.

Additional Suggestions : Committee also suggested that the determination of interest rate should be on grounds of market forces. It further suggested minimizing the slabs of interest.

Along with these major problem areas M. Narasimham's Committee also found various inconsistencies regarding the banking system in India. In order to remove them and make it more vibrant and efficient, it has given the following recommendations.

Narasimham Committee Report I - 1991
The Narsimham Committee was set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution. The committee has given the following major recommendations:-

Reduction in the SLR and CRR : The committee recommended the reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve Ratio 'CRR'. Both of these ratios were very high at that time. The SLR then was 38.5% and CRR was 15%. This high amount of SLR and CRR meant locking the bank resources for government uses. It was hindrance in the productivity of the bank thus the committee recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and CRR from 15% to 3 to 5%.

Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted by the government. The committee recommended phasing out of this programme. This programme compelled banks to earmark then financial resources for the needy and poor sectors at confessional rates of interest. It was reducing the profitability of banks and thus the committee recommended the stopping of this programme.

Interest Rate Determination : The committee felt that the interest rates in India are regulated and controlled by the authorities. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund. Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector.

Structural Reorganizations of the Banking sector : The committee recommended that the actual numbers of public sector banks need to be reduced. Three to four big banks including SBI should be developed as international banks. Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services. Local banks should concentrate on region specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on agriculture and rural financing. They recommended that the government should assure that henceforth there won't be any nationalization and private and foreign banks should be allowed liberal entry in India.

Establishment of the ARF Tribunal : The proportion of bad debts and Non-performing asset (NPA) of the public sector Banks and Development Financial Institute was very alarming in those days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes. It would help banks to get rid of bad debts.

Removal of Dual control : Those days banks were under the dual control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The committee recommended the stepping of this system. It considered and recommended that the RBI should be the only main agency to regulate banking in India.

Banking Autonomy : The committee recommended that the public sector banks should be free and autonomous. In order to pursue competitiveness and efficiency, banks must enjoy autonomy so that they can reform the work culture and banking technology upgradation will thus be easy.

Some of these recommendations were later accepted by the Government of India and became banking reforms.

Narasimham Committee Report II - 1998
In 1998 the government appointed yet another committee under the chairmanship of Mr. Narsimham. It is better known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. The committee focused on various areas such as capital adequacy, bank mergers, bank legislation, etc. It submitted its report to the Government in April 1998 with the following recommendations.

Strengthening Banks in India : The committee considered the stronger banking system in the context of the Current Account Convertibility 'CAC'. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the merger of strong banks which will have 'multiplier effect' on the industry.

Narrow Banking : Those days many public sector banks were facing a problem of the Nonperforming assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks will be allowed to place their funds only in short term and risk free assets.

Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This will further improve their absorption capacity also. Currently the capital adequacy ration for Indian banks is at 9 percent.

Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy.

Review of banking laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking

Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This upgradation will bring them in line with the present needs of the banking sector in India. Apart from these major recommendations, the committee has also recommended faster computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc

Damodaran Committee
RBI constituted a Committee (through a Board Memorandum dated May 26, 2010) under the chairmanship of Shri M. Damodaran, former Chairman, SEBI (Securities and Exchange Board of India) to look into the customer service aspects. the Committee has made its recommendations on the following sections:
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Customer Service in Banks. Grievance Redressal System in Banks. Banking Ombudsman Scheme. Customer Service and Technology. Role of Boards of Banks in Customer Service.

A. CUSTOMER SERVICE IN BANKS A.1. DEPOSIT ACCOUNTS (i) Bundling of Products - The customers had expressed a desire to pay only for the product they use, would prefer plain vanilla products and are distinctly unhappy paying for an entire bundle, most of which, they feel they would never use. The Banks should be in a position to design products suiting their requirements rather than forcing upon the bundled products on the customers. (ii) Passbooks / Account Statements a. The Pass Book / Statement of Accounts should indicate the account number, name, address and ID of the customer, MICR Code, IFSC Code, Toll free Customer Care number and Ombudsman contact details etc. b. Digitally signed e-mail statements should be sent to the customers on their request and these should be accepted by the various Government Authorities. c. The Passbook should be a mirror of the summary of transactions as appearing in the bank’s books. It should be readable with appropriate font size (Arial, 12) and define all the acronyms used. d. The name of the payee as well as instrument number in case of debit entries and the name of payee bank / drawer of instrument as well as instrument number in case of credit entries should be provided by the banks in the Passbooks / Statement of accounts.

e. Instead of recording separately gross interest credited and TDS debited, some banks record only one figure of net interest credited. Details such as gross interest credited and TDS debited should be explicitly mentioned in the TDS Statement. (iii) Inoperative Account - Before marking the account as inoperative, the banks must intimate the account holder by SMS. If the account holder is not traceable, banks must make efforts to trace the whereabouts of the account holder or his legal-heirs in case the account holder is deceased. (iv) Minimum Account Balance - Banks should inform the customer immediately on the balance in the account breaching minimum balance and the applicable penal charges for not maintaining the balance by SMS/e-mail/letter. Further, the penal charges levied should be in proportion to the shortfall observed. (v) Basic Savings Account - Bank should offer a basic bank account with certain privileges like certain number of transactions (say three per month), cheque facility, ATM Card, etc., without any prescription of minimum balance. This would be a regular account with full KYC and the bank should clearly indicate the transaction charge for each type of transaction above the permissible number of transactions. Banks may then prescribe Average Quarterly Balance of various slabs with offer of higher privileges and facilities. (vi) Annualised Interest Yield on Deposits - All Fixed Deposit Receipts should prominently indicate the annualised interest yield to facilitate informed customer decisions. Interest rate distortions on retail deposits of varying or odd maturities which confuse the customers should be monitored by RBI as to their relevance vis-à-vis the other financial parameters of the bank. (vii) Uniform Account Opening Forms a. As customer relocation is possible and common these days, IBA should standardise the Account Opening Form (AOF) common to all banks, similar to formats available for loans & advances. b. Additional information required for individual banks may be obtained in the annexure to AOF which should contain detailed checklist of documents to be submitted by the customer and this checklist should also be available in the websites of IBA, RBI and all Banks. c. Account Number Portability - Customer should also be allowed to maintain the same account number in a bank even when he/she moves to another city or shifts his account to another branch in the same city. (viii) KYC Norms a.KYC for additional accounts opened in the same bank should have relaxed conditions and there should not be a repeated exercise. b. IBA may consider setting up a trusted third party KYC Data bank which can be relied upon for KYC purposes and perhaps hosted under the UID number of the customer.

c. Unique Identification No. (UID) as KYC for Opening No Frills Account - With introduction of Unique Identification (UID), it is recommended that for opening of No Frills Accounts, UID may suffice as KYC. Till the full implementation of UID project, self-attested photograph and address proof should be treated as sufficient KYC to open no frills account. (ix) Linking Terms and Conditions of various Products to CBS - All products like PPF or any future products introduced for specific segments, say senior citizens, which are provided on an agency basis by banks should have all their terms and conditions properly integrated into the CBS. (x) Renewal Notices for Term Deposits - The term deposit renewal notices should be sent to customers preferably in electronic form to enable them to decide the renewal terms. Statement of all deposit accounts in summary form giving details like principal amount, maturity value, maturity dates, rate of interest, annualised interest yield etc. should also be provided by banks. Further, the banks should not auto-renew the deposit accounts without customer consent in writing. (xi) Service Charges 

Charges for Basic Service - There was no uniformity in the charges across the banks. The Regulatory prescription that ‘Charges should be reasonable’ had not achieved its purpose and proper pricing of these basic banking services, especially for lower category of customers, had not been addressed. The service charges for select aspects should be prescribed/ implemented in the same way as the charges for NEFT usage have been prescribed. Charges on Non-Home Branch Transactions - Such charges are not justified under CBS environment. Further, routine services like pass book updation which are of informative nature should be made available to the customers free of charge. Banks can rope in services of BCs for delivery of such services through Information Kiosks in offbranch locations. Intersol Charges - There is a practice of levying intersol charges on third party banking transactions at non-home branches. In CBS environment, banks should not levy Intersol charges on self / local cheques. Further, for intercity transactions, the Intersol charges should not exceed intercity collection charges.

(xii) TDS certificate - TDS remittance details such as BSR Code, Acknowledgement Number, Challan Number and date should be made available in the TDS certificate. Similarly, aspects such as interest details in respect of Sweep In / Sweep Out Accounts, Term Deposit Account number for which interest was paid also should be available. (xiii) A Single Form 15G/H linked to a customer ID should serve the requirement of Income Tax Authorities for all the deposits maintained by a customer in a bank during a particular financial year instead of taking a separate form for each deposit. A.2. REMITTANCES (i) Small Remittances - Customer has to pay high DD charges for a DD of a very small amount. Banks should consider having a tear away draft of definite denomination or make electronic

transfer of draft amount and issue a tear away receipt which would reduce time and cost for the user and the bank. In the mean time, there should be prepaid instruments of pre-determined value available to the customers at a reasonable price. (ii) Prepaid Instruments - Availability of prepaid instruments of higher value would find favour with frequent travellers/ tourists. The banks should be permitted to issue such ‘all purpose prepaid cards’ with a maximum withdrawal limit of ` 50,000/- per day. (iii) Online Payments - The Users (utilities, airlines, railways etc.) of electronic bank platforms for making collections may offer small discounts to their customers to favour electronic payments. This would result in substantial savings to them in cash management. (iv) Travel VISA Fee payable at Banks - The guidelines and documents required for securing drafts for getting visa of major countries like USA, UK, Australia etc. should be clearly spelt by banks on their websites and the facility should be extended from more branches. (v) Penalty for Returned Clearing Cheques - While there is a broad based consensus on the need for reasonable penalty on the drawer of the cheque to both the presenting and the issuing banks, the presenting party (Payee) should be exempt from penalties. Customers should be compensated for wrong returns on the lines similar to penalty for returns imposed on the customers. (vi) Automatic Cheque Deposit Facility - Cheque Drop Box should provide receipt/ acknowledgement along with the image of the cheque. (vii) Cheque Truncation from the point of deposit in the automatic deposit machine should be allowed, thereby preventing further flow of physical cheque to Clearing Department. Cheque Deposit Machine should be installed in branches where daily cheque deposit is more than 300. (viii) CBS should provide for matching the salary paid account through ECS with the name provided by the Organisation/Employer before entertaining the ECS mandate. A.3. LOANS AND ADVANCES (i) Pricing and Non-pricing Terms and Conditions of Loans - All pricing and non-pricing terms and conditions of loans should be in strict conformity with the Regulatory Guidelines and correctly capture the risks involved and the rating of the borrowers concerned individually or as a class. Regulation should ensure that customers clearly understand the pricing policies of banks and the Supervision should ensure strict compliance of a bank with the Regulatory Guidelines regarding pricing and non-pricing terms governing all loans. (ii) The CBS Software should be so enabled so as to provide the following:
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Provision to apply for retail loan should be available in bank’s portal and Internet Banking. Tracking of loan proposal status should also be made available. Reason for penal interest on loan accounts, rate of interest charged in loan accounts, etc. should be mentioned in Passbook/Statement of Account.

Housing Loan Interest Certificate / Education Loan Interest Certificates are required for Income Tax purpose by the borrowers every year. CBS Software should be enabled to generate / issue such certificates in respect of all housing loan and educational loan customers in the month of April every year.

(iii) Time Schedule for Disposing of Loan Application - Banks should inform upfront the time schedule for disposal of loan applications to the borrower and take responsibility for not disposing of the loan application within that time limit. (iv) Loan Statement - Banks must ensure that loan statements are issued to the borrowers periodically giving details of loan disbursed, demands and repayments effected along with interest and details of charges. (v) Loan Documents - Borrower should be made aware upfront about various documents required to be produced for processing of loan application, instead of in piecemeal. (vi) Small Loans - The delay in getting small loans from banks was diverting poor people to private money lenders. Banks should provide timely, adequate and cost effective loans to the poor. (vii) Reporting to Credit Information Bureau - Banks should be doubly careful while reporting a borrower as defaulter to Credit Information Bureau. Banks should ensure that any representation from the customer in this matter is processed expeditiously. In case of any adverse remark in Credit Report, the bank may inform the customer for necessary clarification upfront so that errors, if any, can be corrected. (viii) Rules of the Credit Information Bureau should clearly differentiate settlements done at a huge loss to the bank from the routine settlements, where customers dispute on fees, commissions etc and accordingly create suitable flag in the Credit Report. (ix) Home Loans  

All home loans must have MITC clearly stating the terms and conditions of the loan. This should also be available in the local language and in a bigger font, preferably size 12. In a floating interest rate scenario, when an entire class of borrowers has the same characteristic and risk level, the point of entry in time (old customers and new customers) should not create discrimination in interest rate offered to the customers. In such cases, the Spread over the base rate should not vary when individual risk rating for loans is absent, as is usually the case in Retail Loans. Housing Loan Foreclosure Charges - Banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that customer is not denied of opportunity to enhance his economic welfare by making choices such as switching to other banks/ financial entities to enjoy the benefits conferred by market competition. Further, measures to stop practices of discriminating between new and old customers with identical risk profiles on the basis of interest rate offers, must also be initiated.

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Banks should automatically provide Annual Account Statement to home loan customers without request from them. Such Statements must contain details of payments made towards principal and interest including principal outstanding. All home loans should permit a switchover between fixed to floating or viceversa at least once during the loan tenure at an appropriate and reasonable fee. Home loans backed by insurance products, in any eventuality, should be automatically settled by the insurance amount with minimum inconvenience to the nominees and heirs. The procedure should be explained upfront to the customers.

(x) The title deeds should be returned to the customers within a period of 15 days after the loan closure and the Boards of banks should put in place a suitable compensatory policy to compensate the customer for delayed return of title deeds or where there is a loss of title deeds in the custody of the banks. (xi) Most Important Terms and Conditions (MITC) - The banks must develop MITCs for all the important products and services focusing on the 5 - 10 items that are of critical importance to the consumers. All MITCs should be in Arial font and size 12, which would be easily readable to the customers. (xii) Educational Loans - The banks should ensure through Government subsidy or insurance that the educational loans are properly priced so that no bright student would be denied an educational loan. The criteria for giving such loans should be well publicised through website or advertisements to ensure transparency and non-discrimination in sanction. The Board Approved Policy for educational loans should indicate the minimum percentage in value or number of such loans which will be disbursed to students from rural areas. (xiii) Switch Over to Base Rate - Banks may bring the possibility of switch over to Base Rate to the notice of all concerned borrowers as envisaged in RBI Circular in this matter and also explain the benefits of switchover. A.4. SPECIAL CUSTOMERS (i) Pensioners and Senior Citizens    

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There should be prioritised service to senior citizens, physically handicapped persons by effective crowd / people management available at all branches. Provision of SMS alerts service about balance in the account at periodic intervals and about due dates for submission of important documents should be introduced. Automatic updation of the customers to the senior citizen category based on date of birth. Pensioner may be allowed to submit the annual life certificate at any of the (linked) branches and not necessarily at the home branch. All the life certificates may be maintained in a centralised database. The data relating to individual pensioners, the monthly certificates etc., that pensioners would desire should be available in a secure domain for immediate retrieval and usage. In line with the RBI Guidelines and Board approved Policies, there must be hassle-free settlement of amount dues to the nominee/legal heir, as and when required. There should be uniformity among the banks as to the age for consideration of the longevity based on which pensioner’s loan is calculated.

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Banks should create awareness about Reverse Mortgage Scheme among pensioners / senior citizens. On demise of the pensioner, the existing ‘Either or Survivor’ pension account should become a single account in the name of the ‘Survivor’ and the family pension should automatically be credited to such accounts. Similarly, all joint accounts with ‘Either or Survivor’ clause should become single accounts of the ’Survivor’ after the demise of the other joint account holder. Banks should streamline and fine-tune the functioning of their Centralised Pension Processing Centres to ensure timely disbursal of pension, commencement of family pension on time and error-free calculation of pension. Banks should make arrangements to disburse pension to sick and disabled pensioners at their door steps. Banks may make use of Business Correspondents for this purpose.

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Banks should ensure proper currency exchange facilities and also the quality of notes in circulation in rural areas. Branches should be made functioning at a time convenient to the customers (agricultural laborers, workers, artisans, etc.) i.e., morning hours and late evening hours. It should be ensured that the branches are opened as per the schedule times and operating them for the full hours.

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SHG members should not be forced to take insurance products. Multiplicity of loans to the same borrowers through MFIs should be avoided as the same results in poor recovery by SHGs. Banks can provide loans to SHGs in tranches. However, the same should take into account the business requirements of the SHG rather than depending solely on the repayment made by the SHGs. SHG representatives should also be given presence in the SLBC forum.

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The business correspondent / facilitator model should be completely used for improving the banking facilities in the tribal areas. Banks should ensure that at least one of the staff members in the branches in tribal areas is conversant with local language. Financial education material in pictorial form and audio presentations in local dialect should be used in Tribal areas. The RBI may follow up with Government of India and the State Governments in the region for implementing the branch expansion plan that envisages coverage of all the habitats with population of 2000 or more by end of March 2012. The banks must pro-actively engage with the Local Governments to open more and more banking access points. Prominent citizens belonging to important Tribes of the region could also be considered for appointment as BC.

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RBI may take up the issue of poor VSAT based connectivity in the region with Government of India for BSNL to do the needful at the earliest. The banks may explore the Cash at PoS avenue, may be by trying to tie up with oil marketing companies (petrol pumps, etc) on a pilot basis. The KYC norms and related tax issues may be viewed from the region - specific requirements and may be on a relaxed basis for a period of five years or till such time that the average population per branch reaches the national average. The RBI and Government must look at providing positive impetus to staff transfers and postings to the region so that achievement of banking/ financial inclusion becomes a reality. Further, the staff so selected and posted must also focus on local talent building and development. The SHGs could go a long way in furthering the cause of financial inclusion in the region. The banks should facilitate the same opening of accounts for the SHGs in the region. Improvement is required in provision of RTGS / NEFT facility to the customers from the region. Banks must recognise the socio-economic importance of funding the projects, while playing by the rules and not harshly interpret and implement the sectoral exposure caps. The banks may not apply their internal All India norms for deciding on the permissible bank finance in the north east which requires special dispensation owing to its location and other infra-structural constraints. RBI may consider opening its Representative Offices/Cells in each of the States in the North East.

(v) Standardisation of Product Packages for Defense Personnel - There is a need to have uniformity in the packages developed for defence personnel across the banks. (vi) Disabled Persons  

Disability Audit should form a part of the internal audit to ensure compliance with the provisions of Disabilities Act, 1999. Banks may consider channelising funds to disabled persons through their All India bodies.

A. 5. INSTITUTIONAL ARRANGEMENTS a. The awareness about the BCSBI Codes even after five years since the incorporation of BCSBI has not penetrated to the desired level and banks need to make every effort in that direction. A full and proper implementation of the Codes is an important and urgent requirement to fulfill the commitment made to the bank customers. b. Failure to discharge what is expressly stated in the Compensation Policy of a bank should have an Automatic Penalty which will enhance the compliance thereof. c. In transactions involving frauds where banks allege negligence by the customer as a reason for the fraud, the onus of proving negligence should be with the bank. d. The banks should train and familiarise all the staff in following and implementing the Codes.

e. A commitment and close monitoring by the CEOs as well as the Board of Directors of all banks should be ensured for proper and effective implementation of provisions of Codes in letter and in spirit at the grass root level. f. RBI should examine the reasonableness of the banks’ Stand / Products / Pricing in the areas that have been deregulated or left to the discretion of the bank. There should be a Regulatory Prescription similar to that of administered charges for remittance transactions (NEFT/RTGS) on pricing by fixing an upper cap for small transactions to ensure that such transactions are not discouraged by high thresholds. g. Regulation should plug all anomalies which create doubts about fairness regarding pricing which should be transparent, non-discriminatory and also objective. There should be explicit Regulatory Prescriptions and a closer Regulatory Oversight of such actions by banks which raise customer issues clogging the Grievance Redressal Mechanisms. h. Every bank Board should evolve a policy which ensures fair treatment to customers in all their dealings with the banks. i. Every bank (Public, Private, Foreign, Scheduled Urban Co-operative Banks, RRBs) should prepare a fresh “Bank Customers’ Charter” incorporating all the aspects of RBI Guidelines, Principles of Citizens’ Charter and Codes of BCSBI. This Charter should be displayed on the bank’s website/notice board of every branch. A. 6. CUSTOMER EDUCATION (i) Special efforts are required to educate the customers in the use of technology in banking. Banks should make use of Print media, Television, All India Radio for this purpose. Short training programmes at the branch level can also be arranged for the customers. (ii) Banks should ensure full transparency to the customer in levying of various fees/ service charges and penalties. (iii) Banks should establish a proper Customer Grievance / Assistance Centre which works in an integrated manner across channels like – branches, call centres, IVR, internet and mobile. The personnel in the Call centres who receive the grievances should be empowered to make decisions. (iv) Use of various technology channels for customer education and gathering suggestion for improving service should be made. (v) All banks should implement a relevant Customer Relationship Management system to capture and track customer issues and complaints. (vi) Branches should be provided with dedicated phones / computers with internet connection so that customers can avail themselves of the facilities such as Call Centre, Internet Banking and Phone Banking at the branch itself.

(vii) For imparting customer education participation from all the concerned players is necessary. In this regard, Lead banks should involve customer associations, consumer organisations in revisiting/ evolving strategy for imparting customer education. (viii) Call Center - IBA should consider a toll free Common Call Center number (like Dial 100) for all banks. A customer would ring that number and thereafter get diverted to the bank concerned. A.7. COMPREHENSIVE BANKING REGULATION - A new comprehensive banking legislation suitable to technology driven modern day banking may be enacted to eliminate interpretation issues of varied existing laws. A.8. OTHER ASPECTS

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The banks must have a well defined policy that sets out their approach to Customer Care. This also must take into account the human resources angle starting from the recruitment process to take care of attitudinal aspects. The staff manning positions in Customer Service Departments in banks should receive specialised training so that customer complaints are professionally handled and there is no cause of customer dissatisfaction. Banks should put in place an effective mechanism to ensure that rude Relationship Managers do not expose the bank and the customers to undesirable risks. Banks should put in place a suitable mechanism to ensure that all branches dealing forex matters as also the forex customers of the banks have access to proper advice either online or through phone. Branch network in North-East region needs expansion as many areas are still unbanked. RBI may have to play a developmental role and pursue the issue with the State Governments, wherever necessary. Banks in North Eastern region may explore a possibility of ensuring backup of alternate sources of energy for supply of power for ATM machines so as to ensure continuous service to the customers. The BC concept has been largely limited to payment of Government benefits to the beneficiaries. Banks need to invest in the capacity building of the BCs so as to ensure that they perform the role of bankers. Banks may consider using BCs for manning the kiosks for making small payments, pension and MGNREGS payments, updating pass books, giving pension information, giving drafts of small value or sending remittances etc. Standardisation of the basic stationery for use of the customers of the banks is necessary. The banks should ensure availability of stationery for the use of customers like account opening forms, loan application forms, passbooks, challans and printer cartridges in semiurban and rural branches. BCSBI should be asked to rate the banks on customer service and also come out with a minimum benchmarking of banking services. The deposit insurance cover should be raised to ` 5,00,000/- so as to encourage individuals to keep all their deposits in a bank. A possibility may be explored to enable full insurance cover for bank deposits by making necessary amendments in the relevant Acts.

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In case of sick banks where the accounts are frozen, a possibility to enable customer to immediately avail a part of their insured deposit before the final fate of a sick bank is decided may be explored. The layout of the branch premises and the people manning it play an important role in motivating a customer with positive thoughts. The needs of the senior citizens and the physically challenged persons must also be an important input in deciding on the branch locale and its access. The ‘May I Help You’ counters at branches should be invariably manned. There must be specific and proper queue management system at branches where there is heavy crowd, with basic facilities of seating arrangements, drinking water etc. There must be a completely transparent process in the allocation of locker facility. RBI may revisit the guidelines in this regard to ensure that the activity itself is not disincentivised, the customers continue to have availability of lockers at an affordable charge and the customers are not forced to buy other products of the bank which they may not need. IBA should examine the possibility of pooling the information on fraudulent accounts and making it available to banks. Banks have to reconcile certain issues regarding ‘one-man’ branches by putting in place proper safeguards which ensure ‘four eyes’ principle, safety of cash and also continuity of services in case of leave, etc. The Bank Guarantees should not be cancelled without the consent of the customers. On expiry of the Bank Guarantees, banks must release the margin money and securities held against the Guarantee immediately after the expiry of the no-claim period. For the period of delay in refund of margin money beyond no-claim period, the banks may pay interest at fixed deposit rate. There should be an auto-closure of Guarantees after a month of expiry of the Guarantee which would facilitate automatic release of the margin money. Auto closure notice should also be sent to the beneficiary. In case of frauds in the accounts of the customers, the banks should implement the RBI Guidelines that require immediate provision of credit to the customers after obtaining due affidavit to ensure that customers are not out of funds. Exchange facilities for soiled/torn notes is a right of every citizen using such facilities and RBI, through its agents, should ensure that no holder of sovereign currency note is turned away at a bank counter when exchange facility is desired, irrespective of the person tendering the note is a customer or not. All banks should implement the Citizens' Charter on exchange facilities of notes and coins adopted by the Department of Currency Management, RBI. The quality of currency notes, especially of lower denominations be made more durable by adopting international practices in this regard to ensure a longer life without compromising on the quality. No bank should refuse to accept small denomination notes and coins tendered at the counters for transactions. All exchange facilities of notes and coins should be extended free of charge. All branches with large cash transactions should provide Cash Counting Machines at the counters for the customers. Clean Note Policy of RBI should be scrupulously followed by all banks to ensure supply of clean currency notes to the general public.

B. TECHNOLOGY AND CUSTOMER SERVICE B.1. INTERNET BANKING

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There should be a secure total protection policy / zero-liability against loss for any customer induced transaction utilising technology through ATMs/ PoS/Online banking etc.A customer should not be made to be out of funds when any loss is suffered on account of Net/ATM banking transactions. All the rules in respect of internet banking should be so designed as to encourage consumers to feel safe about electronic transactions. In all the above scenarios, an immediate temporary credit, pending investigation, should be afforded. Banks have to necessarily ensure that all internet banking is made failsafe by putting in place robust and dynamic fraud detection and prevention systems. Computerised / network delivery channels have enhanced customer ease of operations and reduced costs for banks.Banks have to put in place fail-safe security systems for access / transactions to increase the confidence of the bank customers to enable migration to electronic medium from conventional banking.The banks must ensure that the customers have the confidence in the systems that are being offered to them. Banks may introduce mechanisms whereby a customer has a choice of restricting account to account transfers to be done only from particular IP addresses or a choice of addresses. A customer should also have the option of requesting blocking the transaction if the IP address is from a different country. In fact, this should be the default option. Any change of option should be possible with ease through the Call centre or Online. Banks may introduce systems whereby fund transfer facilities can be activated by the Call centre on a need basis and deactivated once the transfer is completed. The facility should also be auto-closed (deactivation) after certain time (say 30 minutes). Banks in their systems should have facility of customer behaviour/purchase pattern analysis and any attempt from an unknown address / suspicious outlier debit transaction should be first blocked and then informed over SMS to the customer (Provision of dynamic scoring models with inbuilt processes and controls to trigger transactions which are not normal). The transaction should be allowed only after the customer authorises the transaction. Banks should put in place secure systems like Multi-factor Authentication to minimise the fraud instances. There must be multi-lateral arrangements amongst banks to deal with on-line banking frauds. Presently, there is lack of such an arrangement amongst banks and the customer is required to interact with different banks / organisations when more than one bank / organisation is involved. IBA could provide such type of arrangements for all the banks. Banks may restrict the amounts that can be transferred online by way of prescribing a day cap or by way of prescribing a ceiling amount per transfer.Additional factors of authentication should be taken and higher amounts should also be permitted for online transfers. It was felt that additional factors of authentication should be taken and higher amounts should also be permitted for online transfers as the present limits are seen to be restrictive for encouraging online money transfers. Banks should create customer access to banking for withdrawal of cash and for transactions by creating a chain of human ATM network of business correspondents of

banks which will help enhance banking access all over the country. This is possible by hand-held devices and mobile phones working online/offline with CBS systems of banks. Compensation

The international best practices regarding Cash not delivered at ATMs, withdrawal through cloned cards, Credit card debits not authorised by customers, Internet banking frauds etc., should be followed and the customer should be afforded a temporary credit immediately, after taking a suitable undertaking. Further, the banks should facilitate early reporting of the above, by prescribing appropriate rules that will allow/ provide a temporary credit which refunds the full amount pending detailed investigation. The reporting timelines can also be linked with an amount which would act as the maximum customer liability. For instance, the maximum loss that a customer can suffer for a transaction reported within two working days should be capped at say, ` 10,000/-. This would mean that if a customer has been automatically credited the full amount on reporting a disputed transaction, after investigation into the matter has concluded, the maximum liability on the customer should not exceed ` 10,000/-. To cover the damages on refunds etc., banks should have insurance in place so that customer refunds are done in a hasslefree manner without fear of losses.The Electronic Platforms have significantly reduced the operating costs for the banks and hence putting in place an appropriate insurance mechanism should be possible.The international best practices in this regard usually limit customer liability to a nominal amount if the issue is referred to within 60 days after occurrence. Frauds involving Cloned cards, unauthorised online transactions, ATM transactions not done by the customer etc. cannot be valid transactions as they are not authorised by the customers. Instead of the bank putting the onus on the customer to prove that he has not done the transaction or caused it to happen, the onus should be on the bank to prove that the customer has done the transaction. Negligence, if any, on the part of the customer does not deprive him of customer / consumer rights.

B.2. ATM / DEBIT CARD TRANSACTIONS:

Issue of Photo Based Cards - To avoid identity issues, all credit and debit cards (including Chip cards) should be Photo Cards with the scanned signatures laminated on the Card. Banks should also include the address of the Cardholder in the laminated portion to serve as a tool for KYC compliance for any other bank product. When UID is introduced, the Cards issued thereafter should include the UID number also. Unique ID for Every ATM - Every ATM should have a unique ID for reference. This would facilitate easy identification of the ATM when redressing the grievance. The ATM ID should appear on the transaction slip and also on the bank statement. Blocking of ATM Card - If an ATM card has been misused by another person, on receipt of SMS about use of the Card, the customer should be able to immediately send return SMS to block the Card (if he observes misuse) with a single word like ‘BLOCK’ to prevent further withdrawals (the SMS is being received from the mobile number registered with the bank). It is observed that considerable time is lost in locating the numbers of accounts, phone numbers etc., which gives the fraudsters more time to commit fraud.

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The transaction in such cases should be automatically reversed and the amount should be credited back to the account (temporary credit). Even if auto-reversal does not happen, banks should pro-actively identify such cases and give charge–back. In case of doubt about the success / failure of an ATM transaction, the copy of the JP log is called for from an acquiring bank. The preceding and succeeding transactions should also be included in the copy. Further, in case of a lost Card, hot listing should be allowed online / over phone. However, a fresh debit card should not be issued online / over phone by banks. Chip Based Card (EMV) - Banks should in a phased manner switch over to the use of Chip based card (EMV) instead of the current magnetic strip based ones, in order to prevent skimming and damage / erosion of data due to wear and tear and misuse. This would accordingly entail necessary changes at all the front end machines like ATMs/PoS etc. As the switch over to Chip based card would happen over a period of time, till the switch over is complete, the Chip Cards should, as at present, have a magnetic strip to enable transactions in the ATMs which have not switched over to Chip Cards. Merchant Discount/ Fee for Debit Cards – To encourage acceptance of debit cards by the Merchant Establishments and thereby support electronic payments, Card service providers and banks should follow a differential merchant fee policy in favour of debit cards which will over a period of time reduce the dependence on cash for payments. Biometric ATM Cards - Illiterate customers and senior citizens generally find it difficult to remember ATM PIN. Banks may issue Biometric ATM cards to senior citizens and illiterate customers who are not at ease while using ordinary ATM cards. The necessary hardware changes at the front end devices may be made accordingly. ATM cards may be issued at the option of the customers on written request. Customers not desiring technology facilitation should not be forced to do so. Camera Placement in ATMs - ATM cameras should be so placed as to take a clear picture of the person doing the ATM operations and the lighting inside the ATM booth should facilitate the same. An additional small camera should take a snapshot of the customer picking up the money from the bin so as to assist customers when cash disbursement does not take place. Whenever a complaint on ATM withdrawal is received, the bank should ensure to preserve the CCTV recordings till the grievance is fully redressed. The Cash bin in ATMs may be so designed that the cash withdrawn falls into a bin which the customer picks up and this act should be recorded by the small camera. PIN Based Authorisation - For debit / credit card transactions at the PoS, instead of signature based authorisation, PIN based authorisation should be made mandatory without any looping.There should be a phased withdrawal of non-pin based PoS machines. Two-Factor Authentication for Internet Banking and Debit card transactions at PoS should be introduced. This will provide one additional layer of security. Additional Factors like Grids etc. should not be printed on the back of the Card but given separately so that a photocopy of the card does not give away all the information required for making an online payment. Mobile Banking - Tiered security for different parameters: Transaction Value, Destination of transaction (two level authorisation for non-routine destinations), security based on hand-sets, frequency of payments should be introduced.

All grievances of mobile banking should be addressed by the banks only, without referring the customer to the service providers. The agreements of the banks with the telecom service providers should incorporate suitable provisions to address mobile banking grievances. Mobile banking coupled with digitisation of records can revolutionise everyday life for the vast majority. Economically weaker section shall be brought into the banking system by combining No Frills Account / Micro Finance / Government subsidies and payments. At present, there is better penetration of post office and mobile telephony in rural areas. In immediate future, post offices accounts should be linked with modern communication networks which can act as a platform for interoperability of service providers like banks / MFIs, Mobile Network Operators and Mobile Application Providers. The ATM / PoS withdrawal using applications involving mobile phones is a more secure mode compared to withdrawal through bearer cheque as in this case both the parties viz. the account holder and the mobile owner are already subjected to full KYC and complete audit trail is available at both the ends. Hence, such transactions could be encouraged both at ATM as well as PoS up to the ceiling for withdrawal applicable for ATM and PoS respectively. Over the Limit Charges - The facility of ‘Over the limit’ for Credit card customers and that of simple overdraft for ATM card holders may be given on choice, the extent of ‘Over the limit/Overdraft’ may be informed to the customer in advance and the charges for the same should not exceed the actual excess drawn. Personalisation of Accounts - Banks should design online programmes on their websites enabling customers to automate money transfers, maintain balance levels and get nonstandard account statements and a host of other such facilities which would improve their information levels and make cash management more efficient. Self Personalisation of Cards – Call centres as well as the online systems through net banking should enable a customer to:

- Fix individual transaction limits for debit/credit card use. - Debar or fix limits for purchase of electronic or jewellery items - Manipulate the limits for add on cards - Activate/deactivate use of card internationally. - Limit the use of card to any particular state or a defined area. The above processes should be similar to electronic locking of STD or ISD facilities in telephone system and akin to international roaming in cell-phones.

Banks should encourage formation of user communities to get feedback on the banks and also to enhance the efficiency of their products and design new products.

B.3. SMS / E-MAIL ALERTS

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Free SMS / e-mail alerts should be sent for every transaction such as date of maturity of deposit, ECS credit received, credit of pension, credit / receipt of money through RTGS etc. SMS alert to be sent for all cheques returned irrespective of the amount or amount fixed at account level. Account Statement in PDF format should be sent by e-mail, if customer requests so (password encrypted document). Current account holders with high transactions should be sent e-mail giving the balance position at agreed periodicity viz., daily, weekly, fortnightly etc. SMS alerts on card usage should be sent allowing the customer to reply back in case card is not used. SMS or e-mail alert informing the change in interest rate on loan availed due to change in base rate etc.

B.4. COMPENSATION IN-BUILT IN CBS
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The compensation that can be allowed for transaction deficiencies should be in-built into the CBS software and not left to the discretion of the branch staff. Systems should be in place to ensure automatic credit and there should be provision for double the credit in case a complaint is received.

B.5. ECS MANDATE MANAGEMENT SYSTEM - Bank should ensure that ECS Mandate Management System is working effectively to comply with the mandate given by the customer in respect of limit of debit amount, expiry date, withdrawal of mandate, etc. Withdrawal of mandate for any ECS debit payment should not be left to the mercy of the beneficiary. B.6. MOVING TOWARDS PAPERLESS FUND TRANSFERS - Customers may be encouraged and given incentives to reduce cheque based transfers and migrate to other channels of fund transfers like NEFT, RTGS, ECS (debit/credit), Internet Banking and Mobile Banking. For the residual cheques in the system, cheque truncation should be implemented all over the country. B.7 BUSINESS PROCESS RE-ENGINEERING Banks should ensure that the CBS addresses the following major issues which were not integrated into CBS at its inception.
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Automatic updation of age records and then conferring senior citizen benefits wherever applicable once a customer becomes a senior citizen. Minor customer turning a major. Cheques not being collected and honoured for the second account holder System not allowing the survivor to continue an ‘Either or Survivor’ joint account after demise of one of the account holders. System not allowing conversion of a single account to a joint account. Specialised Government Scheme accounts like PPF, Senior Citizen Special Deposit Schemes etc., not being updated in the system resulting in fresh deposits being collected even after expiry of Schemes.

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Tax deducted at source not being communicated to the IT department for appropriate credit to the assesse’s accounts. Registering and issuance of acknowledgements to the account holders in respect of nominees. Diarisation for receipt and reminder for submission of Life Certificate by pensioners.

C. INTERNAL GRIEVANCE REDRESSAL SYSTEM IN BANKS

Online Grievance Redressal System - Bank should provide for online registration of grievance in its website. The Online Grievance System should provide access to the customer also for recording the complaint, complaint status tracking and receiving response from the bank. Customer Service during Internal Audit - The bank / branch inspection should review also the systemic ways of complaint resolution rather than looking at the mere number of cases resolved. Time frame for Grievance Redressal - The time frame for redressal of different types of grievances in terms of the intensity and nature should be displayed on the notice board of every branch. Escalation of Complaints - Banks must ensure that minor complaints that could be resolved at the branch level itself are not escalated to the next level. There must be a clear segregation of grievances in terms of the ones that need to be escalated and the others that must necessarily be resolved at branch level. There is also a need for proper monitoring of internal redressal mechanism so that a minimum number of complaints are escalated to BO Office. This would help in strengthening customer confidence in the Internal Redressal Mechanism. Appealing to Higher Fora - Where policy issues are not involved, banks should carefully weigh the cost aspects before appealing against the decision of lower legal fora like a Consumer Court/ Lower level Civil Court.

D. BANKING OMBUDSMAN SCHEME D.1. THE POSITION OF THE BANKING OMBUDSMAN IN THE INTERNAL GRIEVANCE REDRESSAL SET UP

There is a need for the banks in developing their Internal Grievance Redressal Mechanism to ensure only the minimum number of cases get escalated to the Banking Ombudsman and the Scheme is strictly utilised only as an appellate mechanism. The above can be made possible by having an official within the bank in the form of an internal Ombudsman which is in vogue in some countries like Canada and France. The Boards of banks should appoint a Chief Customer Service Officer (CCSO) not less than the rank of a retired General Manager of a Scheduled Commercial bank preferably from outside the bank (under advice to RBI). The person so appointed should have necessary exposure in working of operational side of banking. The Audit Committee of the Board would have an oversight over the CCSO. He should be reporting directly to the Chairman/CMD/CEO of the bank. The initial term of appointment may be kept for 2-3 years and necessary extension may be granted as per suitability criteria. A person aggrieved with a banking service as hitherto will first complain to the bank and if within a month does not receive a reply or is unsatisfied with the reply will appeal to

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the CCSO of the bank. In view of CBS environment and latest technology available in communication it is expected that bank’s CCSO would resolve the grievance within 30 days of the receipt of complaint including the period required for conciliation meeting etc. On failure to get a reply within a month from the CCSO or if unsatisfied with the reply of the CCSO, the complainant can appeal to the Banking Ombudsman of the relevant jurisdiction. The decision of the BO shall be final and no further appeal will be allowed. The appeal to the BO may be made only on banking services on which complaints are presently entertained under the BO Scheme. Once the appointment of the CCSO is cleared and stabilised, the role of Banking Ombudsman would be that of an Appellate Authority.The above arrangement would also ensure that the RBI Top Management is not involved with individual complaints / decisions. The nodal administrative department at the RBI Central Office level, viz: the Customer Service Department should ensure uniformity of decision making among the Banking Ombudsmen by active consultation and exchange of information. Thus, a customer aggrieved with the decision of BO can go to the formal fora like Consumer Courts, Civil Courts etc. The banks aggrieved with a BO decision may seek the advice of the Customer Service Department before approaching the Courts. Moreover, before challenging any such award or decision in higher Court every bank must examine the cost implications of such a decision from the bank’s perspective. Further, any decision or Award given by BO or any Grievance Redressal Forum must be internally examined by the bank concerned for initiating possible Class Action in the branch/bank.

D.2. PUBLIC AWARENESS ON THE SCHEME - RBI and BO Offices are trying to educate the public about the BO Scheme through awareness campaigns, outreach programmes, publicity through print media, All India Radio and Doordarshan. However, these efforts need to be complemented by the banking industry. All the communications sent by the banks should have an insert on the Banking Ombudsman Scheme and its applicability. D.3. STAFF HANDLING COMPLAINTS 

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The base-level dealing Officers of the Banking Ombudsman Office (other than the BO, Secretary to the Scheme and the sub-staff), should be staffed by the Officers of commercial banks in the region preferably from the three largest banks in the region. The cost of deputation of such Officers should be suitably reimbursed to the banks by RBI. To ensure quality of the Officers deputed by the banks, suitable monetary incentives, similar to those given to members of faculty of the RBI’s training colleges, should be given. It should also be ensured that no staff of a BO office shall handle a complaint pertaining to his/her parent bank.

D.4. TYPES OF CUSTOMERS APPROACHING THE BANKING OMBUDSMEN - The ambit and scope of the Scheme should be restricted to common individuals, retail customers, small borrowers and Micro and Small Enterprises (as per the Government of India definition) only.

D.5. LOCATION OF BO OFFICES - Presently there are 15 Banking Ombudsman Offices in major State Capitals having jurisdiction over the entire country. Several States do not have a BO office. The bank customers in Jammu and Kashmir and the North- Eastern States have stated that it was not possible to interact with the far away BO offices in New Delhi and Guwahati respectively. RBI should therefore ensure that there is an office of Banking Ombudsman in the State of Jammu and Kashmir and a representative BO office of a lower level in each of the other States of the country. D.6. OTHER RECOMMENDATIONS

An appeal / complaint under BO Scheme should pertain to a transaction which has occurred within two years of the date of appeal as it is very difficult to resolve very old disputes on the basis of records which at times are difficult to trace. Thus, complaints which are older but redressal delayed in correspondence with a bank cannot be referred to BO citing the last reply received from the bank. Thus, the Clause 9 (3) (b) which reads ‘The complaint is made not later than one year after the complainant has received the reply of the bank to his representation or where no reply is received, not later than one year and one month after the date of the representation to the bank’ is required to be amended as ‘The complaint is made not later than two years after the occurrence of the transaction which has resulted in the complaint’. The Clause 12 (5) of BOS 2006 reads ‘Notwithstanding anything contained in sub Clause (4), the Banking Ombudsman shall not have the power to pass an award directing payment of an amount which is more than the actual loss suffered by the complainant as a direct consequence of the act of omission or commission of the bank, or ten lakh rupees whichever is lower’ is required to be amended as “Notwithstanding anything contained in sub Clause (4), the Banking Ombudsman shall not have the power to pass an award directing payment of an amount which is more than the actual loss suffered by the complainant as a direct consequence of the act of omission or commission of the bank, or ten lakh (excluding the amount of dispute) rupees whichever is lower.” Further, the compensation allowed should be restricted to actual loss only as the Banking Ombudsman not being a Judicial Forum; he may not give compensation for any mental harassment which cannot be easily computed. The Scheme should be limited to banking transactions taking place in India only including internet transactions. Transactions initiated/taken place abroad need not be covered in the scheme. Nodal Officer is an important liaison officer between the bank and the BO office. He is responsible for supplying desired information to BO Office quickly. Nodal Officer should be competent and equipped to take decisions during the conciliatory meetings. Certain instances where Nodal Officers were not found to be competent enough were observed during the interaction with the Banking Ombudsmen. In case of On-line complaints, the Complaint Tracking Software used in BO Offices should be modified suitably to divert the first resort complaint to the respective bank site online by developing link with the bank’s complaint site. The applicability of the Scheme is limited to Commercial Banks/RRBs/ Scheduled Urban Banks. As customers of Co- Operative banks all over the country expressed the need for such a scheme for the Co- Operative sector, RBI may take up suitably with NABARD for evolving an Ombudsman Scheme suitable for redressing the grievances of the customers of the Co- Operative banking institutions not covered under RBI scheme.

E. ROLE OF BOARDS OF BANKS IN CUSTOMER SERVICE E.1. The Board of Directors should play a proactive role in implementing all the customer service guidelines and instructions. Root cause analysis of the top five types of complaints of a quarter should be placed before the Customer Service Committee of the Board held in the subsequent quarter. A brief note on the discussions held on the same should be placed before the Board in its subsequent meeting. The actionable points that emanate out of such deliberations should be closed only after placing the compliance status in the subsequent meetings of the Customer Service Committee / Board (as the case may be). E.2. An agenda should be placed before the Customer Service Committee every quarter on the level of implementation of the Bank’s Code of Commitments to Customers. The agenda should also correlate between the Code implementation and the complaints received. E.3. Another agenda to be placed in the Customer Service Committee every quarter is an ‘Overview on the Grievance Redressal Mechanism in the Bank’. The aspects such as the number of complaints received and redressed, use of grievance redressal initiatives like access through toll free numbers, help-line, mails, online complaints, SMS responses and the position of complaints against the bank with the Banking Ombudsman offices/ Consumer Courts/Courts. The agenda should spell out the reasons for emanation of such complaints to the Banking Ombudsman rather than getting resolved by the bank itself. E.4. The Board should ensure that the following policies are in place:
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A comprehensive policy for Customer Acceptance, Customer Care and Customer Severance. The policies should clearly lay out approach to Customer Care taking into account the geographic spread of branches, segments of customers, needs of special sections like senior citizens, widows, physically challenged persons etc. This policy must also clearly define and distinguish the features for different products and services and must indicate the target customer group. The policy should show sensitivity for the small customers by ensuring that the pricing (bank charges) does not act as a deterrent for the small person to do banking transactions. The Bank’s approach to Financial Education aspects are also required to be documented through a policy framework. Customer Centricity - The bank’s approach to develop ‘Client First Attitude’ by its employees needs to be documented and the same may include aspects such as positive attitudinal change, behavior and practices, the skill gaps of employees, the process of reengineering the recruitment of staff for the purpose etc. Bank Boards should evolve Human Resources policies which will recruit for attitude and train for skills. The bank’s policy framed to ensure the prescribed response time for every type of grievance should be approved by the Top Management of the bank. Banks should codify annually all its policies/operational guidelines as that would help the front-line staff to serve the customers better. The internal inspection / audit reports of banks should adequately focus on customer service and the Audit Rating should appropriately reflect the importance of customer service.

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Customer service and grievance redressal should be included as a mandatory parameter in the Performance Appraisal Report of all employees. Banks may consider reward, recognition and motivation programme for front-line Officers who have shown exemplary character in ensuring quality customer service. Nonmonetary rewards such as being invited for lunch/ dinner with the Board/CMD, a presentation to the Board etc. may be considered.

E.5. The Branch Level Customer Committee meetings may be replaced with a meeting of customers of all banks of that area (say district-wise, block-wise) and be held in the presence of representatives of banks at periodic interval (monthly/quarterly). The responsibility of organizing such meetings may be entrusted to eminent Consumer Organisations in the region and expenses of such meeting can be shared by the bankers of that jurisdiction. The proceedings of the meetings should be recorded (CCTV) for the purpose of review of the same in higher fora.

Central Bank (RBI) and it’s function
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following:    To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining threefifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system Banker to Government The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. Controller of Credit The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. Custodian of Foreign Reserves The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Promotional functions With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. Classification of RBIs functions The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.

Policy rates and reserve ratios
Policy rates, Reserve ratios, lending, and deposit rates as of 13th February, 2012 Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Base Rate Reserve Bank Rate Deposit Rate 9.50% 8.50% 7.50% 5.5% 24.0% 10.00%–10.75% 4% 8.50%–9.25%

Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet
depositor’s demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 13 Feb, 2012 the bank rate was 9.5%.

Cash Reserve Ratio (CRR): Every commercial bank has to keep certain minimum cash reserves
with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 5.5%.

Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required to maintain liquid assets
in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. In well-developed economies, central banks use open market operations—buying and selling of eligible securities by central bank in the money market—to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years. Generally RBI uses three kinds of selective credit controls: 1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances. Direct credit controls in India are of three types: 1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatory required to keep 24% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances

Money Supply
The Money Supply is the sum of all money in particular country. Before going into details we need to define what is money. For thousands of years the mankind has been using commodity money, most notably silver and gold. However most world countries use fiat currencies now. The fiat money supply includes paper bills, coins, and demand deposits. Money supply is measured in several different ways depending on what exactly is considered to be money.

Money Aggregates
Every country has its own ways to measure money supply, but in general there are several money aggregates used throughout the world. In our example we'll use the US monetary aggregates. M1 – M1 is the narrowest measure of money, which includes physical currency and demand deposits. M2 – M2 is a broader measure of money, which everything already included in M1 plus time deposits, savings deposits, non-institutional money-market funds and small CODs. M3 – M3 is even broader measure of money, which includes M2 plus large savings and time deposits (over $100K) and institutional money-market mutual funds.

Money Supply Control
In a fractional-reserve banking system the money supply is controlled through managing short-term interest rates. The interest rates are usually managed by the country's central bank. When the central bank increases interest rates, it becomes more expensive to borrow, and less money is created through loans, which in turn slows the growth in money supply or decreases it (the money supply shrinks when more loans funds are repaid, than borrowed). The opposite is also true – when interest rates trend down, borrowing increases, and new money created through loans are added to the economy.

Fractional Reserve Banking
A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties Fractional Reserve Banking refers to a banking system which requires the commercial banks to keep only portion of the money deposited with them as reserves. The bank pays interest on all deposits made by its customers and uses the deposited money to make new loans. In order to understand how fractional reserve banking works, let's look at the following example. Somebody deposits Rs1,000 with Bank A. Bank A is obligated by law to keep 10% of the deposited money as a reserve, that's why the bank keeps Rs.100 and lends out Rs.900. Somewhere down the road the Rs.900 loan is deposited in another chequing account (it might or might not be with the same bank). This second bank also wants to make money by giving out loans, that's why it keeps the required Rs.90 and lends Rs.810. Fast forward to a deposit with a fourth bank and you'll get the following:

Bank

Deposit

Reserve

Loan Rs.900 Rs.810 Rs.729 Rs.0

Bank #1 Rs.1,000 Rs.100 Bank #2 Rs.900 Bank #3 Rs.810 Bank #4 Rs.729 Total Rs.90 Rs.81 Rs.729

Rs.3,439 Rs.1,000 Rs 2,439

As you can see from the table above, the banks created Rs.2,439 based on the first Rs.1,000 deposited. The fractional reserve banking works, because the total amount of withdrawals is offset by deposits made at the same time. While the depositors are confident at the fractional-reserve banking system, a very small part of all deposits is withdrawn at the same time allowing the banks to handle the withdrawals through their reserves. However when there's economic crisis and confidence is shaken, the entire banking and financial system can be at risk

Monetary policy
The Monetary Policy of a country is a money supply management strategy designed and used to impact the economy. The monetary policies in most countries of the world are carried out by the central bank of the country. The monetary policy of a country is all about managing the money supply. Depending on the economic situation a monetary policy can be expansionary or contractionary. An expansionary monetary policy aims to expand the money supply in order to combat recession and unemployment. In contrast the goal of a contractionary monetary policy is to decrease the money supply, in order to fight inflationary pressures. The central banks responsible for the monetary policy implement their policies using several tools. The central banks buy/sell government bonds (this is known as open market operations), and thus decrease or increase the money circulating in the economy. The central banks are also responsible for managing interest rates and by doing so they control the money supply. Higher interest rates

discourage borrowing, which decreases the money supply by decreasing money created through loans. Lower interest rates entice borrowers to borrow more, which creates more bank money through loans.

What are the Open Market Operations (OMOs)?
OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

What is Liquidity Adjustment Facility (LAF)?
LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities. Basically LAF enables liquidity management on a day to day basis. The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos –with RBI being the counter-party to all the transactions. The interest rate in LAF is fixed by the RBI from time to time. Currently the rate of interest on repo under LAF (borrowing by the participants) is 6.25% and that of reverse repo (placing funds with RBI) is 5.25%. LAF is an important tool of monetary policy and enables RBI to transmit interest rate signals to the market. Liquidity Adjustment Facility (LAF) was introduced by RBI during June, 2000 in phases, to ensure smooth transition and keeping pace with technological upgradation. On recommendations of an RBI’s Internal Group RBI has revised the LAF scheme on March 25, 2004. Further revision has been carried wef Oct 29, 2004. The revised LAF scheme has the following features: Objective : The funds under LAF are used by the banks for their day-to-day mismatches in liquidity. Tenor :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions (for injection of liquidity) are conducted on a daily basis (except Saturdays). 7-days and 14-days Repo operations have been discontinued wef Nov 01, 2004. Eligibility : All commercial banks (except RRBs) and PDs having current account and SGL account with RBI. Minimum bid Size : Rs. 5 cr and in multiple of Rs.5 cr Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated securities and treasury bills. Rate of Interest : The reverse repo rate will be fixed by RBI from time to time (presently 5.25%). The repo rate (presently 6.25% wef Oct 26, 2005) will continue to be linked to the reverse repo rate and the spread between the repo rate and the reverse repo rate which was reduced to 150 basis points with effect from March 29, 2004 has been reduced further to 100 basis points. Discretion to RBI : Under the revised Scheme, RBI will continue to have the discretion to conduct overnight reverse repo or longer term reverse repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. RBI will also have the discretion to change the spread between the repo rate and the reverse repo rate as and when appropriate. (As per an IMF 1997 publication, “the sale and repurchase transactions (reverse repo), are sales of assets by the central bank under a contract providing for their repurchase at a specified price on a given future date; they are used to absorb liquidity”. On the contrary, prior to above change, in the Indian context, “repo” denotes liquidity absorption by the Reserve Bank and “reverse repo” denotes liquidity injection).

Priority Sector Advances : consist of loans and advances to Agriculture, Small Scale Industry, Small Road and Water Transport Operators, Retail Trade, Small Business with limits on

investment in equipments, professional and self-employed persons, state sponsored organisations for lending to SC/ST, Educational Loans, Housing Finance up to certain limits, self-help groups and consumption loans.

KYC and AML 1. What is KYC?
KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc which in turn helps the banks to manage their risks prudently. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering. KYC has two components - Identity and Address. While identity remains the same, the address may change and hence the banks are required to periodically update their records. The KYC policy of a bank should incorporate the following four elements: a) Customer Acceptance Policy; b) Customer Identification Procedures; c) Monitoring of Transactions; and d) Risk Management

2. Is there any legal backing for verifying identity of clients?
Yes. Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or noncompliance shall attract penalties under Banking Regulation Act.

procedure specified for Customer Identification?
Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. Banks have been advised to lay down 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. The detailed list of the documents that the bank can ask is given below.

Features Accounts of Individuals Legal name and any other names used

Documents
(i) Passport (ii) PAN card (iii) Voter's Identity Card (iv) Driving licence (v) Identity card (subject to the bank's satisfaction) (vi) Letter from a recognized public authority or public

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Correct permanent address

servant verifying the identity and residence of the customer to the satisfaction of bank (i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi) Letter from employer (subject to satisfaction of the bank) (any one document which provides customer information to the satisfaction of the bank will suffice) (i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill

Accounts of Companies Name of the company Principal place of business Mailing address of the company Telephone / Fax Number

Accounts of Partnership Firms Legal name (i) Registration certificate, if registered (ii) Partnership deed Address (iii) Power of Attorney granted to a partner or an Names of all employee of the firm to transact business on its behalf partners and their addresses Telephone numbers of the firm and partners (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm / partners

Accounts of Trusts & Foundations Names of (i) Certificate of registration, if registered trustees, settlers, beneficiaries and signatories Names and addresses of the founder, the managers / directors and the beneficiaries Telephone / fax numbers

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(ii) Power of Attorney granted to transact business on its behalf (iii) Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders / managers / directors and their addresses (iv) Resolution of the managing body of the foundation / association (v) Telephone bill

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Accounts of Proprietorship Concerns Proof of the * Registration certificate (in the case of a registered name, address and activity of the concern

concern) * Certificate / licence issued by the Municipal authorities under Shop & Establishment Act, * Sales and income tax returns * CST / VAT certificate * Certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities * Registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department. * IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of bank account. * Licence issued by the Registering authority like

Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc. Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

What is Money Laundering?
As per the Prevention of Money Laundering Act 2002, the offence of Money Laundering is defined as: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering. "proceeds of crime" means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. Money laundering is the process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds. The proceeds of crime laundered by criminals often are generated in very heinous crimes like drug trafficking, trafficking in women and children, child pornography, extortion, murder, etc.

DICGC Q1 Which banks are insured by the DICGC?
Commercial Banks: All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC. Cooperative Banks: All State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories which have amended the local Cooperative Societies Act empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank are covered under the Deposit Insurance System. At present all co-operative banks other than those from the States of Meghalaya, and the Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli are covered under the deposit insurance system of DICGC. Primary cooperative societies are not insured by the DICGC.

Q 2 What does the DICGC insure?
In the event of a bank failure, DICGC protects bank deposits that are payable in India. The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits. (i) Deposits of foreign Governments; (ii) Deposits of Central/State Governments; (iii)Inter-bank deposits; (iv) Deposits of the State Land Development Banks with the State co-operative bank; (v) Any amount due on account of any deposit received outside India (vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.

Q 3 What is the maximum deposit amount insured by the DICGC?
Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

What is the ceiling on amount of Insured deposits kept by one person in different branches of a bank?
The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount upto Rupees one lakh is paid.

Q 6 Does the DICGC insure just the principal on an account or both principal and accrued interest?
The DICGC insures principal and interest upto a maximum amount of Rs. One lakh. For example, if an inpidual had an account with a principal amount of Rs.95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs.99,000. If, however, the principal amount in that account was Rs. One lakh, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit.

Q 7 Can deposit insurance be increased by depositing funds into several different accounts all at the same bank?
All funds held in the same type of ownership at the same bank are added together before deposit insurance is determined. If the funds are in different types of ownership or are deposited into separate banks they would then be separately insured.

Q 8 What is a single ownership account?
A single (or individual) ownership account is an account owned by one person. Such accounts include those in the owner’s name; those established for the benefit of the owner by agents, nominees, guardians, custodians, or conservators; and those established by a business that is a sole proprietorship.

Q 9 Are deposits in different banks separately insured?
Yes. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.

Q 10 If I have my funds on deposit at two different banks, and those two banks are closed on the same day, are my funds added together, or insured separately?
Your funds from each bank would be insured separately, regardless of the date of closure.

Q 11 What is the meaning of deposits held in the same capacity and same right; and deposits held in different capacity and different right?
If an inpidual opens more than one deposit account in one or more branches of a bank, e.g. Shri S. K. Pandit opens one or more savings/current account and one or more fixed/recurring deposit accounts etc., all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and maximum insurance cover is available upto rupees one lakh. If Shri S. K. Pandit holds other deposit accounts in his capacity as a partner of a firm or guardian of a minor or director of a company or trustee of a Trust or a joint account, say with his wife Smt. S. K. Pandit, in one or more branches of the bank then such accounts are considered as held in different capacity and different right. Accordingly, such deposits accounts will also enjoy the insurance cover upto rupees one lakh separately. It is further clarified that the deposit held in the name of the proprietary concern where a depositor is the sole proprietor and the deposit held in his inpidual capacity are aggregated and insurance cover is available upto rupees one lakh in maximum.

Deposits held in joint accounts (revised w.e.f. April 26, 2007)
If more than one deposit accounts (Savings, Current, Recurring or Fixed deposit) are jointly held by inpiduals in one or more branches of a Bank say three inpiduals A, B & C hold more than one joint deposit accounts in which their names appear in the same order then all these accounts are considered as held in the same capacity and in the same right. Accordingly, balances held in all these accounts will be aggregated for the purpose of determining the insured amount within the limit of Rs.1 lakh. However, if inpiduals open more than one joint accounts in which their names are not in the same order for example, A, B and C; C, B and A; C, A and B; A, C and B; or group of persons

are different say A, B and C and A, B and D etc. then, the deposits held in this joint accounts are considered as held in the different capacity and different right. Accordingly, insurance cover will be available separately upto rupees one lakh to every such joint account where the names appear in different order or names are different

When is the DICGC liable to pay? If a bank goes into liquidation: The DICGC is liable to pay to each depositor through the
liquidator, the amount of his deposit upto Rupees one lakh within two months from the date of receipt of claim list from the liquidator.

If a bank is reconstructed or amalgamated / merged with another bank: Where in
respect of an insured bank a scheme of compromise or arrangement or of reconstruction or amalgamation has been sanctioned by any competent authority and the said scheme provides for each depositor being paid or credited with, on the date on which the scheme comes into force, an amount which is less than the original amount and also the specified amount, the Corporation shall be liable to pay to every such depositor in accordance with the provisions of section 18 of DICGC Act an amount equivalent to the difference between the amount so paid or credited and the original amount, or the difference between the amount so paid or credited and the specified amount, whichever is less: Provided that where any such scheme also provides that any payment made to a depositor before the coming into force of the scheme shall be reckoned towards the payment due to him under that scheme, then the scheme shall be deemed to have provided for that payment being made on the date of its coming into force. Bank Ombudsman : Bank Ombudsman is the authority to look into complaints against Banks in the main areas of collection of cheque / bills, issue of demand drafts, non-adherence to prescribed hours of working, failure to honour guarantee / letter of credit commitments, operations in deposit accounts and also in the areas of loans and advances where banks flout directions / instructions of RBI. This Scheme was announced in 1995 and is functioning with Banking Operations and Process Nomination Mandate and Power of Attorney Mandate : Written authority issued by a customer to another person to act on his behalf, to sign cheques or to operate a bank account Power of Attorney : It is a document executed by one person - Donor or Principal, in favour of another person , Donee or Agent - to act on behalf of the former, strictly as per authority given in the document

Garnishee Order : When a Court directs a bank to attach the funds to the credit of customer's account under provisions of Section 60 of the Code of Civil Procedure, 1908.two types Nisi – when there is a fixed amount that needs to be attached Absolute – when there is total freeze in the account

Bankers Right Right of Appropriation : As per Section 59 of the Indian Contract Act, 1972 while making the payment, a debtor has the right to direct his creditor to appropriate such amount against discharge of some particular debt. If the debtor does not do so, the banker can appropriate the payment to any debt of his customer. Right of Set-Off : When a banker combines two accounts in the name of the same customer and adjusts the debit balance in one account with the credit balance in other account, it is called right of set-off. For example, debit balance of Rs.50,000/- in overdraft account can be set off against credit balance of Rs.75,000/- in the Savings Bank Account of the same customer, leaving a balance of Rs.25,000/credit in the savings account. General Lien : A right of the creditors to retain possession of all goods given in security to him by the debtor for any outstanding debt. Banker's Lien : Bankers lien is a special right of lien exercised by the bankers, who can retain goods bailed to them as a security for general balance of account. Bankers can have this right in the absence of a contract to the contrary.

Clearing and Settlement
Clearing stands for mutual settlement of claims made in among member banks at an agreed time and place in respect of instruments drawn on each other. Clearing House is an arrangement under which member banks agree to meet, through their representatives, at the appointed time and place to deliver instruments drawn on the other and in exchange to receive instruments drawn on them. The net amount payable or receivable as the case may be is settled through an account kept with the controlling bank After receiving, instruments should be crossed with the bank’s “Crossing Stamp” immediately. When preliminary checking is over and stamping of the instruments done. Clearing department deals with the cheques, drafts & other instruments and its collection & payment process. Instrument intended for the clearing house should be branded with Bank’s Clearing Stamp. If the deposits are made at a time when it is too late for those to be presented to the drawee banks on the same day stamp. “Too late for today’s clearing” should be affixed on the counterfoil of the deposit slips. Types of Clearing: Outward Clearing: When a particular branch receives instruments drawn on the other bank within the clearing zone and sends those instruments for collection through the clearing arrangement is considered as Outward Clearing for that particular branch. This branch is known as collecting branch.Which means that Your Customrs got cheques to be credited in their account.So O/W clearing will increase the Funds with bank. In case of Outward clearing, the Bank gets the proceeds since it acts as a collecting agent on behalf of its customers who have tendered the instruments for credit of their accounts Inward Clearing: When a particular branch receives instruments, which are on themselves and sent by other member bank for collection are treated as Inward Clearing of that branch. This branch is known as paying branch.It means your customers have isued cheques to outer world.In this clearing the bank’s funds go down. Inward clearing is a process whereby the Bank receives various types of negotiable instruments that are drawn on it by its customers and parts the resultant proceeds to the presenter of the instruments. Procedures of Outward Clearing: Flow sequence Collecting Branch: 1. 2. The instrument is received duly entered in the pay-in-slip or voucher. The instrument is checked for any apparent discrepancy and is compared with the particular noted in the pay-in-slip. 3. Stamping: Special Crossing: On the instrument

Clearing Stamp: Both on instrument & Pay-in-slip. Endorsement: Back of the instrument. 6. Duly signed and return of counterfoil to the customer. 7. The particulars of the instrument and voucher are entered in the Outward Clearing zone. Inward Clearing: First tire: Clearing House () 1. The instruments are drawn on our bank are received from other banks in the clearinghouse. 2. The amount and number of instruments received are entered in the house book from the main schedule of respective branches. 3. The amount of instruments delivered, received & the differences are written on a figure, slip provided in the clearing house. 4. The instruments are sent to respective branches with the slip showing total amount and number of instruments. 5. The instrument sent to the banks concerned for clearance. After the process the account gets net effect of Dr or Cr with Clearing house, conseidering the returns Types of Returns: Outward Return: Clearing returns (outward) include those cheques that are presented to us by other banks but we have to return them unpaid to the collecting banks due to various reasons. Inward Return: Clearing returns (inward) consists of those instruments which are presented by us to other banks for payment but have been returned and unpaid by them due to specified reason through the clearinghouse. The chqs (inward Clearing Instr.) have to be retunred with a return Memo Attched to it with folowing reason(s) · Insufficient Fund · Amount in figure and word differs · Cheque out of date/post dated (New RBI Guideline: the duration is 3 months for stale chq) · Drawer’s signature differs · Payment stopped by drawer · Crossed cheque to be presented through a bank.(Special Crossing)

· Payee’s endorsement required · Refer to drawer · Not arranged for · Effects not yet cleared, Please present again · Funds Expected present again

What is a Cheque? 1> A cheque is a written instruction you give to your banker to make payment by debit to your account on demand. 2> Cheque is a valid payment instrument from the date shown on the face of it. By banking practice six months is treated as normal validity of a cheque. 3> A Bearer cheque is payable to the holder. An Order cheque is payable to the person on whose favour it is drawn or subsequent endorsees. So banks seek identification of the person receiving payment of an order cheque. 4> Banks verify the signature on the cheque with your specimen signature on record before making payment. Crossing of Cheques : Crossing refers to drawing two parallel lines across the face of the cheque.A crossed cheque cannot be paid in cash across the counter, and is to be paid through a bank either by transfer, collection or clearing.A general crossing means that cheque can be paid through any bank and a special crossing, where the name of a bank is indicated on the cheque, can be paid only through the named bank. Endorsement : When a Negotiable Instrument contains, on the back of the instrument an endorsement, signed by the holder or payee of an order instrument, transferring the title to the other person, it is called endorsement.
Types of accounts SAVINGS BANK ACCOUNT

What is a Savings Account ? A Savings bank account is the most common operating account for individuals and others for non-commercial transactions. A Savings account helps people to put through day-to-day banking transactions besides earning some return on the savings made. Banks generally put some ceilings on the total number of withdrawals permitted during specific time periods. Banks also stipulate certain minimum balance to be maintained in savings accounts. Normally a higher minimum balance is stipulated in cheque operated accounts as compared to non-cheque operated accounts. Banks as a rule do not give overdraft facility in a saving account, but allow occassional overdrawings to meet contingencies.
Who can open a Savings Account ?

* by a person in his / her name;

* by two or more persons in their joint names payable to : - both or all of them or the survivor or survivors of them; OR - either or any more of them or the survivor or the survivors of them; OR - former / latter or survivor of a particular person during his lifetime or survivors jointly or survivor. * Certain non-profit welfare organizations are also permitted to open Savings bank accounts with banks.
What a bank asks for while opening an account ?

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

Fill nomination form while opening the account. It helps in settlement of dues in the event of death of the account holder.
What the Customer needs to know while opening a Savings Account ?

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

To suit the needs of the customers banks have introduced innovative variations in the basic time deposit format. Flexible deposit is one such innovation. In this case a given deposit is split into units of smaller amounts for accounting purposes. This enables the customer to encash any number of units prematurely at any time during the currency of the deposit and earn the contracted rate of interest on the balance amount.
CURRENT ACCOUNT

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

Banking Companies (Nomination) Rules 1985 permits banks to pay dues to nominees in the event of death of depositor(s) without asking for succession certificate or verifying claims of legal heirs. This simplifies settlement. Of course, as Trustee the nominee is accountable to legal heirs.

   

Nomination facility available for bank deposits, safe deposit lockers, safe custody articles. There can be only one Nominee for a deposit account whether held singly or jointly. There can be two nominees for a jointly held locker. A person legally empowered to operate a minor's account can file a nomination on behalf of the minor.

Minor Accounts : A minor is a person who has not attained legal age of 18 years. As per Contract Act a minor cannot enter into a contract but as per Negotiable Instrument Act, a minor can draw, negotiate, endorse, receive payment on a Negotiable Instrument so as to bind all the persons, except himself. In order to boost their deposits many banks open minor accounts with some restrictions

NRI Banking
Features of various Deposit Schemes available for Non-Resident Indians (NRIs) If a person is NRI or PIO, she/he can, without the permission from the Reserve Bank, open, hold and maintain the different types of accounts given below with an Authorised Dealer in India, i.e. a bank authorised to deal in foreign exchange. NRO Savings accounts can also be maintained with the Post Offices in India. However, individuals/ entities of Bangladesh and Pakistan require prior approval of the Reserve Bank.

Types of accounts which can be maintained by an NRI / PIO in India A. Non-Resident Ordinary Rupee Account (NRO Account)
NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed deposit accounts.

● Savings Account - Normally maintained for crediting legitimate dues /earnings / income such as dividends, interest etc. Banks are free to determine the interest rates. ● Term Deposits - Banks are free to determine the interest rates. Interest rates offered by banks on
NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.

● Account should be denominated in Indian Rupees. ● Permissible credits to NRO account are transfers from rupee accounts of non-resident banks,
remittances received in permitted currency from outside India through normal banking channels, permitted currency tendered by account holder during his temporary visit to India, legitimate dues in India of the account holder like current income like rent, dividend, pension, interest, etc., sale proceeds of assets including immovable property acquired out of rupee/foreign currency funds or by way of legacy/ inheritance.

● Eligible debits such as all local payments in rupees including payments for investments as specified
by the Reserve Bank and remittance outside India of current income like rent, dividend, pension, interest, etc., net of applicable taxes, of the account holder.

● NRI/PIO may remit from the balances held in NRO account an amount not exceeding USD one
million per financial year, subject to payment of applicable taxes.

● The limit of USD 1 million per financial year includes sale proceeds of immovable properties held by
NRIs/PIOs.

● The accounts may be held jointly with residents and / or with non-resident Indian. ● The NRO account holder may opt for nomination facility. ● NRO (current/savings) account can also be opened by a foreign national of non-Indian origin visiting
India, with funds remitted from outside India through banking channel or by sale of foreign exchange brought by him to India..

● Loans to non-resident account holders and to third parties may be granted in Rupees by Authorized
Dealer / bank against the security of fixed deposits subject to certain terms and conditions.

B. Non-Resident (External) Rupee Account (NRE Account) ● NRE account may be in the form of savings, current, recurring or fixed deposit accounts. Such
accounts can be opened only by the non-resident himself and not through the holder of the power of attorney.

● NRIs as defined in Notification No. FEMA 5/2000-RB dated May 3, 2000 may be permitted to open
NRE account with their resident close relatives (relative as defined in Section 6 of the Companies Act, 1956) on ‘former or survivor ‘ basis. The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with the extant instructions during the life time of the NRI/PIO account holder.

● Account will be maintained in Indian Rupees.
● Balances held in the NRE account are freely repatriable. ● Accrued interest income and balances held in NRE accounts are exempt from Income tax and Wealth tax, respectively. ● Authorised dealers/authorised banks may at their discretion/commercial judgement allow for a period of not more than two weeks, overdrawings in NRE savings bank accounts, up to a limit of Rs.50,000 subject to the condition that such overdrawings together with the interest payable thereon are cleared/repaid within a period of two weeks, out of inward remittances through normal banking channels or by transfer of funds from other NRE/FCNR accounts. ● Savings - Banks are free to determine the interest rates. ● Term deposits – Banks are free to determine the interest rates of term deposits of maturity of one year and above. Interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits. ● Permissible credits to NRE account are inward remittance to India in permitted currency, proceeds of account payee cheques, demand drafts / bankers' cheques, issued against encashment of foreign currency, where the instruments issued to the NRE account holder are supported by encashment certificate issued by AD Category-I / Category-II, transfers from other NRE / FCNR accounts, sale proceeds of FDI investments, interest accruing on the funds held in such accounts, interest on Government securities/dividends on units of mutual funds purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc. ● Eligible debits are local disbursements, transfer to other NRE / FCNR accounts of person eligible to open such accounts, remittance outside India, investments in shares / securities/commercial paper of an Indian company, etc. ● Loans up to Rs.100 lakh can be extended against security of funds held in NRE Account either to the depositors or third parties. ● Such accounts can be operated through power of attorney in favour of residents for the limited purpose of withdrawal of local payments or remittances through normal banking channels to the account holder himself.

C. Foreign Currency Non Resident (Bank) Account – FCNR (B) Account
● FCNR (B) accounts are only in the form of term deposits of 1 to 5 years ● All debits / credits permissible in respect of NRE accounts, including credit of sale proceeds of FDI investments, are permissible in FCNR (B) accounts also.

● Account can be in any freely convertible currency. ● Loans up to Rs.100 lakh can be extended against security of funds held in FCNR (B) deposit either to the depositors or third parties. ● The interest rates are stipulated by the Department of Banking Operations and Development, Reserve Bank of India. In respect of FCNR (B) deposits of all maturities contracted effective from the close of business in India as on November 23, 2011, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 125 basis points for the respective currency/corresponding maturities (as against LIBOR/SWAP rates plus 100 basis points effective from close of business on November 15, 2008). On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency/maturity plus 125 basis points. For floating rate deposits, the interest reset period shall be six months. ● When an account holder becomes a person resident in India, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. ● Terms and conditions as applicable to NRE accounts in respect of joint accounts, repatriation of funds, opening account during temporary visit, operation by power of attorney, loans/overdrafts against security of funds held in accounts, shall apply mutatis mutandis to FCNR (B). NRI can open joint account with a resident close relative (relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative will be eligible to operate the account as a Power of Attorney holder in accordance with extant instructions during the life time of the NRI/ PIO account holder.

Can an individual resident Indian borrow money from his close relatives outside India?
Yes, an individual resident Indian can borrow sum not exceeding USD 250,000 or its equivalent from his close relatives3 staying outside India, subject to the conditions that: i. ii. the minimum maturity period of the loan is one year; the loan is free of interest; and the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR(B) account of the NRI.

iii.

Can an individual resident lend money to his close relative NRI / PIO?
Yes, an individual resident can lend money by way of crossed cheque /electronic transfer within the overall limit of USD 200,000 per financial year under the Liberalised Remittance Scheme, to meet the borrower’s personal or business requirements in India, subject to conditions. The loan should be interest free and have a maturity of minimum one year and cannot be remitted outside India.

Can an individual resident repay loans of close relative NRIs to banks in India?
Yes, where an authorised dealer in India has granted loan to a non-resident Indian such loans may also be repaid by resident close relative (relative as defined in Section 6 of the Companies Act, 1956), of the Non-Resident Indian by crediting the borrower's loan account through the bank account of such relative.

What are the other facilities available to NRIs/PIO? A. Investment facilities for NRIs NRI may, without limit, purchase on repatriation basis:

● Government dated securities / Treasury bills
● Units of domestic mutual funds; ● Bonds issued by a public sector undertaking (PSU) in India. ● Non-convertible debentures of a company incorporated in India. ● Perpetual debt instruments and debt capital instruments issued by banks in India. ● Shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids. ● Shares and convertible debentures of Indian companies under the FDI scheme (including automatic route & FIPB), subject to the terms and conditions specified in Schedule 1 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. ● Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time.

NRI may, without limit, purchase on non-repatriation basis :
● Government dated securities / Treasury bills ● Units of domestic mutual funds ● Units of Money Market Mutual Funds ● National Plan/Savings Certificates ● Non-convertible debentures of a company incorporated in India ● Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedules 3 and 4 to the FEMA Notification No. 20/2000- RB dated May 3, 2000, as amended from time to time. ● Exchange traded derivative contracts approved by the SEBI, from time to time, out of INR funds held in India on non-repatriable basis, subject to the limits prescribed by the SE BI.

Note : NRIs are not permitted to invest in small savings or Public Provident Fund (PPF). B. Investment in Immovable Property
● NRI / PIO4 / Foreign National who is a person resident in India (citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of the Reserve Bank) may acquire immovable property in India other than agricultural land/ plantation property or a farm house out of repatriable and / or non-repatriable funds. ● The payment of purchase price, if any, should be made out of (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or

(ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank. Note : No payment of purchase price for acquisition of immovable property shall be made either by traveller’s cheque or by foreign currency notes or by other mode other than those specifically permitted as above. ● NRI may acquire any immovable property in India other than agricultural land / farm house plantation property, by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India ● NRI may acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India ● An NRI may transfer any immovable property in India to a person resident in India. ● NRI may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India. In respect of such investments, NRIs are eligible to repatriate: ● The sale proceeds of immovable property in India if the property was acquired out of foreign exchange sources i.e. remitted through normal banking channels / by debit to NRE / FCNR (B) account. ● The amount to be repatriated should not exceed the amount paid for the property in foreign exchange received through normal banking channel or by debit to NRE account (foreign currency equivalent, as on the date of payment) or debit to FCNR (B) account. ● In the event of sale of immovable property, other than agricultural land / farm house / plantation property in India, by a person resident outside India who is a citizen of India / PIO, the repatriation of sale proceeds is restricted to not more than two residential properties subject to certain conditions. ● If the property was acquired out of Rupee sources, NRI or PIO may remit an amount up to USD one million per financial year out of the balances held in the NRO account (inclusive of sale proceeds of assets acquired by way of inheritance or settlement), for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance. ● Refund of (a) application / earnest money / purchase consideration made by house-building agencies/seller on account of non-allotment of flats / plots and (b) cancellation of booking/deals for purchase of residential/commercial properties, together with interest, net of taxes, provided original payment is made out of NRE/FCNR (B) account/inward remittances.

Repayment of Housing Loan of NRI / PIOs by close relatives of the borrower in India
Housing Loan in rupees availed of by NRIs/ PIOs from ADs / Housing Financial Institutions in India can be repaid by the close relatives in India of the borrower.

C. Facilities to returning NRIs/PIOs

● Returning NRIs/PIOs may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when resident outside India ● The income and sale proceeds of assets held abroad need not be repatriated.

Foreign Currency Account
● A person resident in India who has gone abroad for studies or who is on a visit to a foreign country may open, hold and maintain a Foreign Currency Account with a bank outside India during his stay outside India, provided that on his return to India, the balance in the account is repatriated to India. However, short visits to India by the student who has gone abroad for studies, before completion of his studies, shall not be treated as his return to India. ● A person resident in India who has gone out of India to participate in an exhibition/trade fair outside India may open, hold and maintain a Foreign Currency Account with a bank outside India for crediting the sale proceeds of goods on display in the exhibition/trade fair. However, the balance in the account is repatriated to India through normal banking channels within a period of one month from the date of closure of the exhibition/trade fair.

Resident Foreign Currency Account
● Returning NRIs /PIOs may open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. ● Proceeds of assets held outside India at the time of return can be credited to RFC account. ● The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India. ● RFC accounts can be maintained in the form of current or savings or term deposit accounts, where the account holder is an individual and in the form of current or term deposits in all other cases. RFC accounts are permitted to be held jointly with the resident close relative(s) as defined in the Companies Act, 1956 as joint holder (s) in their RFC bank account on ‘former or survivor basis’. However, such resident Indian close relative, now being made eligible to become joint account holder shall not be eligible to operate the account during the life time of the resident account holder.

General facilities Can Exchange Earners Foreign Currency (EEFC) accounts be held jointly with a -resident Indian?
Yes, EEFC account of a resident individual can be held jointly with a resident close relative on a ‘former or survivor’ basis. However, such resident Indian close relative will not be eligible to operate the account during the life time of the resident account holder.

Can a resident individual holding a savings bank account include nonresident close relative as a joint account holder?
Yes, individuals resident in India are permitted to include non-resident close relative(s) as a joint holder(s) in their resident bank accounts on ‘former or survivor’ basis. However, such non- resident

Indian close relatives shall not be eligible to operate the account during the life time of the resident account holder.

Can a resident individual gift shares/securities/convertible debentures etc to NRI close relative?
Yes, a resident individual is permitted to gift shares/securities/convertible debentures etc to NRI close relative up to USD 50,000 per financial year subject to certain conditions.

Can a resident individual give rupee gifts to his visiting NRI/PIO close relatives?
Yes, a resident individual can give rupee gifts to his visiting NRI/PIO close relatives by way of crossed cheque/electronic transfer within the overall limit of USD 200,000 per financial year for the resident individual and the gifted amount should be credited to the beneficiary’s NRO account.

What types of services can be provided by a resident individual to his / her nonresident close relatives?
A resident may make payment in rupees towards meeting expenses on account of boarding, lodging and services related thereto or travel to and from and within India of a person resident outside India who is on a visit to India. Further, where the medical expenses in respect of NRI close relative are paid by a resident individual, such a payment being in the nature of a resident to resident transaction may also be covered under the term “services”.

Particulars

(1) Who can open an account

Foreign Currency (NonResident) Account (Banks) Scheme [FCNR (B) Account] (2)
NRIs (individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI)

Non-Resident (External) Rupee Account Scheme [NRE Account] (3)
NRIs (individuals / entities of Bangladesh / Pakistan nationality/ownership require prior approval of RBI)

Non-Resident Ordinary Rupee Account Scheme [NRO Account] (4)
Any person resident outside India (other than a person resident in Nepal and Bhutan). Individuals / entities of Bangladesh / Pakistan nationality / ownership as well as erstwhile Overseas Corporate Bodies2 require prior approval of the Reserve Bank. May be held jointly with residents

Joint account

In the names of two or more non-resident individuals provided all the account holders are persons of Indian nationality or origin; Resident close relative (relative as defined in Section 6 of the Companies Act, 1956) on ‘former or survivor’ basis. The resident close relative shall be eligible to operate the account as a Power of

In the names of two or more non-resident individuals provided all the account holders are persons of Indian nationality or origin; Resident close relative (relative as defined in Section 6 of the Companies Act, 1956) on ‘former or survivor’ basis. The resident close relative shall be eligible to operate the account

Attorney holder in accordance with extant instructions during the life time of the NRI/ PIO account holder.

Nomination Currency in which account is denominated Repatriablity

Permitted Any permitted currency i.e. a foreign currency which is freely convertible

as a Power of Attorney holder in accordance with extant instructions during the life time of the NRI/ PIO account holder. Permitted Indian Rupees

Permitted Indian Rupees

Repatriable

Repatriable

Type of Account Period for fixed deposits Rate of Interest

Term Deposit only For terms not less than 1 year and not more than 5 years. Deposits of all maturities contracted effective from the close of business in India as on November 23, 2011, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 125 basis points for the respective currency/corresponding maturities (as against LIBOR/SWAP rates plus 100 basis points effective from close of business on November 15, 2008). On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency/maturity plus 125 basis points. For floating rate deposits, the interest reset period shall be six months. Operations in the account in terms of Power of

Savings, Current, Recurring, Fixed Deposit At the discretion of the bank. Subject to cap as stipulated by the Department of Banking Operations and Development, Reserve Bank of India : Banks are free to determine the interest rates of saving’s and term deposits of maturity of one year and above. Interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits.

Not repatriable except for the following: i) current income ii) up to USD 1 (one) million per financial year (AprilMarch), for any bonafide purpose, out of the balances in the account, e.g., sale proceeds of assets in India acquired by way of purchase/ inheritance / legacy inclusive of assets acquired out of settlement subject to certain conditions. Savings, Current, Recurring, Fixed Deposit As applicable to resident accounts. Banks are free to determine their interest rates on savings deposits under Ordinary NonResident (NRO) Accounts. However, interest rates offered by banks on NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.

Operations by

Operations in the account in terms of

Operations in the account in terms of Power of

Power of Attorney in favour of a resident by the nonresident account holder

Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.

Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.

Attorney is restricted to withdrawals for permissible local payments in rupees, remittance of current income to the account holder outside India or remittance to the account holder himself through normal banking channels. Remittance is subject to the ceiling of USD 1 (one) million per financial year.

Loans a. In India i) to the Account holder i) to Third Parties b. Abroad i) to the Account holder
Permitted only up to Rs.100 lakhs Permitted only up to Rs.100 lakhs Permitted up to Rs.100 lakhs Permitted up to Rs.100 lakhs Permitted subject to the extant rules3

Permitted, subject to conditions4

Permitted (Provided no funds are remitted back to India and are used abroad only) Permitted (Provided no funds are remitted back to India and are used abroad only) Permitted up to Rs.100 lakhs

Permitted (Provided no funds are remitted back to India and are used abroad only) Permitted (Provided no funds are remitted back to India and are used abroad only) Not Permitted

Not Permitted

Not Permitted

ii) to Third Parties c. Foreign Currency Loans in India i) to the Account holder ii) to Third Parties Purpose of Loan a. In India i) to the Account holder

Not Permitted

Not Permitted Not Permitted

Not Permitted

i) Personal purposes or for carrying on business activities *

i) Personal purposes or for carrying on business activities.* ii) Direct investment in India on non-repatriation basis by way of contribution to the

Personal requirement and / or business purpose.*

ii) Direct investment in India on non-repatriation basis by way of

contribution to the capital of Indian firms / companies iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 9 of Schedule 2 to FEMA 5). Fund based and / or nonfund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 9 of Schedule 2 to FEMA 5). Fund based and / or nonfund based facilities for bonafide purposes.

capital of Indian firms / companies. iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 6(a) of Schedule1 to FEMA 5). Fund based and / or nonfund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 6(b) of Sch. 1 to FEMA 5) Fund based and / or nonfund based facilities for bonafide purposes.

ii) to Third Parties

Personal requirement and / or business purpose *

b. Abroad To the account holder and Third Parties

Not permitted.

Letter of Credit : A document issued by importers bank to its branch or agent abroad authorizing the payment of a specified sum to a person named in Letter of Credit (usually exporter from abroad). Letters of Credit are covered by rules framed under Uniform Customs and Practices of Documentary Credits framed by International Chamber of Commerce in Paris. Off Balance Sheet Items : Those items which affect the financial position of a business concern, but do not appear in the Balance Sheet E,g guarantees, letters of credit . The mention "off Balance Sheet items" is often found in Auditors Reports or Directors Reports.

Non-Fund Based Limits : Non-Fund Based Limits are those type of limits where banker does not part with the funds but may have to part with funds in case of default by the borrowers, like guarantees, letter of credit and acceptance facility. Pledge : A bailment of goods as security for payment of a debt or performance of a promise, e.g pledge of stock by a borrower to a banker for a credit limit. Pledge can be made in movable goods only Hypothecation : Charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. In pledge, possession of property is passed on to the lender but in hypothecation, the property remains with the borrower in trust for the lender.

Payment Systems
What is Electronic Clearing Service (ECS)?
Ans : ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in

mutual funds, insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa.

What are the variants of ECS? In what way are they different from each other?
Ans : Primarily, there are two variants of ECS - ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for instance, employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution. ECS Debit is used by an institution for raising debits to a large number of accounts (for instance, consumers of utility services, borrowers, investors in mutual funds etc.) maintained with bank branches at various locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution by large number of customers etc.

What are the advantages of the ECS Credit Scheme to the beneficiary?
Ans : ECS Credit offers many advantages to the beneficiary –

   

The beneficiary need not visit his / her bank for depositing the paper instruments which he would have otherwise received had he not opted for ECS Credit. The beneficiary need not be apprehensive of loss / theft of physical instruments or the likelihood of fraudulent encashment thereof. Cost effective. The beneficiary receives the funds right on the due date.

How does the ECS Credit Scheme benefit User Institutions?
Ans : User institutions enjoy many advantages as well. For instance,

   

Savings on administrative machinery and costs of printing, dispatch and reconciliation of paper instruments that would have been used had beneficiaries not opted for ECS Credit. Avoid chances of loss / theft of instruments in transit, likelihood of fraudulent encashment of paper instruments, etc. and subsequent correspondence / litigation. Efficient payment mode ensuring that the beneficiaries get credit on a designated date. Cost effective.

Are there any advantages of the ECS Credit Scheme to the banking system?
Ans : Yes, the banking system too benefits from ECS Credit Scheme such as –

  

Freedom from paper handling and the resultant disadvantages of handling, presenting and monitoring paper instruments presented in clearing. Ease of processing and return for the destination bank branches. Smooth process of reconciliation for the sponsor banks. Cost effective.

What are the advantages of ECS Debit Scheme to the customers?
Ans : The advantages of ECS Debit to customers are many and include,

   

ECS Debit mandates will take care of automatic debit to customer accounts on the due dates without customers having to visit bank branches / collection centres of utility service providers etc. Customers need not keep track of due date for payments. The debits to customer accounts would be monitored by the ECS Users, and the customers alerted accordingly. Cost effective.

How does the ECS Debit Scheme benefit user institutions?
Ans : User institutions enjoy many benefits from the ECS Debit Scheme like,

    

Savings on administrative machinery and costs of collecting the cheques from customers, presenting in clearing, monitoring their realisation and reconciliation. Better cash management because of realisation / recovery of dues on due dates promptly and efficiently. Avoids chances of loss / theft of instruments in transit, likelihood of fraudulent access to the paper instruments and encashment thereof. Realisation of payments on a uniform date instead of fragmented receipts spread over many days. Cost effective.

What are the advantages of ECS Debit Scheme to the banking system?
Ans : The banking system has many benefits from ECS Debit such as –

 

 

Freedom from paper handling and the resultant disadvantages of handling, receiving and monitoring paper instruments presented in clearing. Ease of processing and return for the destination bank branches. Destination bank branches can debit the customers’ accounts after matching the account number of the customer in their database and due verification of existence of valid mandate and its particulars. With core banking systems in place and straight-through-processing, this process can be completed with minimal manual intervention. Smooth process of reconciliation for the sponsor banks. Cost effective.

 

What is Cheque Truncation?
Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch. In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.

 

2. Why Cheque Truncation in India?
As explained above, Cheque Truncation speeds up the process of collection of cheques resulting in better service to customers, reduces the scope for clearing-related frauds or loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliationrelated and logistics-related problems, thus benefitting the system as a whole. With the other

major products being offered in the form of RTGS and NEFT, the Reserve Bank has created the capability to enable inter-bank and customer payments online and in near-real time. However, as cheques are still the prominent mode of payments in the country and Reserve Bank of India has decided to focus on improving the efficiency of the cheque clearing cycle, offering Cheque Truncation System (CTS) as an alternative. As highlighted earlier, CTS is a more secure system vis-a-vis the exchange of physical documents. In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource rationalisation, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc. CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by Reserve Bank in the Payments Systems area

What are the benefits of CTS to customers of banks?
The benefits are many. With the introduction of imaging and truncation, the physical movement of instruments is stopped. The electronic movement of images of cheques speeds up the process of settlement and can facilitate reduction in the clearing cycles as well. Moreover, there is no fear of loss of instruments in transit. Further, limitations of the existing clearing system in terms of geography or jurisdiction can be removed, thus enabling consolidation and integration of multiple clearing locations managed by different banks with varying service levels into a nation-wide standard clearing system with uniform processes and practices. CTS also benefits issuers of cheques. Use of images obviates the need to handle and move physical cheques at different points. The scope for frauds inherent in paper instruments is, thus, greatly reduced. The Corporates if needed can be provided with images of cheques by their bankers for internal requirements,if any. As only the images move, the time taken for receipt of paid cheques is reduced which also gives an early opportunity to the issuers of cheques to detect frauds or alterations, if any, in terms of what (and to whom it) was issued and what (by whom it) was realised. CTS brings elegance to the entire activity of cheque processing and clearing. Cheque frauds can be greatly reduced with introduction of minimum security features prescribed under CTS Standards 2010, such as embedded verifiable features such as bar-codes, encrypted codes, logos, watermarks, holograms, etc., for early interception of altered / forged instruments. Obviating the need to move the physical cheques is extremely beneficial in terms of cost and time savings.

The benefits from CTS could be summarized as follows –
      
Shorter clearing cycle Superior verification and reconciliation process No geographical restrictions as to jurisdiction Operational efficiency for banks and customers alike Reduction in operational risk and risks associated with paper clearing

NEFT and RTGS What is NEFT?

Ans: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme

Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. Such customers have to furnish full details including complete address, telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without having a bank account.

How does the NEFT system operate?
Step-1 : An individual / firm / corporate intending to originate transfer of funds through NEFT has to fill an application form providing details of the beneficiary (like name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number) and the amount to be remitted. The application form will be available at the originating bank branch. The remitter authorizes his/her bank branch to debit his account and remit the specified amount to the beneficiary. Customers enjoying net banking facility offered by their bankers can also initiate the funds transfer request online. Some banks offer the NEFT facility even through the ATMs. Walk-in customers will, however, have to give their contact details (complete address and telephone number, etc.) to the branch. This will help the branch to refund the money to the customer in case credit could not be afforded to the beneficiary’s bank account or the transaction is rejected / returned for any reason. Step-2 : The originating bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre). Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch. Step-4 : The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the destination banks(credit). Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre). Step-5 : The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.

Q.8. What is IFSC?
Ans : IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bankbranch participating in the NEFT system. This is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches Example IFSC code for Axis Bank Pune main br is UTIB0000037 or for HSBC Bund Garden Branch it is HSBC0411002

What is RTGS System?
Ans. The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time.'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.

Q2. How RTGS is different from National Electronics Funds Transfer System (NEFT)?

Ans. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.

What is the essential information that the remitting customer would have to furnish to a bank for the remittance to be effected?
Ans. The remitting customer has to furnish the following information to a bank for effecting a RTGS remittance: 1. 2. 3. 4. 5. 6. 7. Amount to be remitted Remitting customer’s account number which is to be debited Name of the beneficiary bank Name of the beneficiary customer Account number of the beneficiary customer Sender to receiver information, if any The IFSC Number of the receiving branch

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