Introduction To Banking

Introduction to Banking
Part I
Basics, Savings, Current, CCOD, Remittance, Cash
Version 1.0
TATA Consultancy Services

March 2002
Mumbai
Introduction to Banking Part I
Version 1.0
Table of Contents
1.
ABOUT THIS DOCUMENT...................................................................................................... 2

1.1
1.2
2.
WHAT IS BANKING ? ............................................................................................................. 3

2.1
2.2
2.3
2.4
3.
CONCEPTS ....................................................................................................................42
PROCESSING OF FINANCIAL TRANSACTIONS ...................................................................44
INTEREST CALCULATION ................................................................................................45
DEFICIENCIES / LIMITATIONS OF THE MANUAL SYSTEM .....................................................46
ALPM OPERATIONS .....................................................................................................46
INLAND REMITTANCES....................................................................................................... 47
7.1
7.2
7.3
7.4
7.5
8.
CONCEPTS ....................................................................................................................39
DEFICIENCIES / LIMITATIONS OF THE MANUAL SYSTEM .....................................................41
CASH CREDIT/OVERDRAFT ACCOUNT ............................................................................ 42

6.1
6.2
6.3
6.4
6.5
7.
CONCEPTS ....................................................................................................................23
INTEREST CALCULATION ................................................................................................33
PPF ACCOUNT..............................................................................................................35
PENSION ACCOUNT .......................................................................................................36
COLLECTION OF GOVT. ACCOUNT ..................................................................................36
DEFICIENCIES OF THE MANUAL SYSTEM ..........................................................................37
UNDERSTANDING THE ACCOUNTING ENTRIES .................................................................38
CURRENT ACCOUNT........................................................................................................... 39
5.1
5.2
5.3
6.
COMPONENTS OF ACCOUNTING .......................................................................................9

SYSTEMS OF ACCOUNTING ............................................................................................11
FIXED ASSETS ...............................................................................................................16
CHART OF ACCOUNT .....................................................................................................17
SUMMARY .....................................................................................................................21
SAVINGS ACCOUNT ............................................................................................................ 23

4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
5.
INTRODUCTION ................................................................................................................3
THE BUSINESS OF BANKING .............................................................................................3
RELATIONSHIP BETWEEN A BANKER AND A CUSTOMER ......................................................5
BANKING SYSTEM IN INDIA ...............................................................................................6
ACCOUNTING CONCEPTS .................................................................................................... 9

3.1
3.2
3.3
3.4
3.5
4.
PURPOSE ........................................................................................................................2
ORGANISATION OF THIS DOCUMENT .................................................................................2
NEED FOR REMITTANCE FACILITY ...................................................................................47

MODES OF REMITTANCE ................................................................................................47
RECONCILIAITION OF ACCOUNTS BETWEEN BRANCHES ....................................................48
PROCEDURE RELATED TO INLAND REMITTANCES .............................................................48
DEFICIENCIES / HANDICAPS OF THE MANUAL OPERATIONS...............................................51
CASH DEPARTMENT PROCEDURE ................................................................................... 52

8.1
8.2
8.3
8.4
8.5
8.6
INTRODUCTION ..............................................................................................................52
OPERATION ON THE CURRENCY CHEST ..........................................................................52
PROCEDURE FOR OBTAINING CASH FROM THE CASH OFFICER .........................................52
RECORD OF CASH TRANSACTIONS .................................................................................52
PROCEDURE FOR TURNING IN AND BALANCING OF CASH...................................................53
CUSTODY OF KEYS ........................................................................................................53
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1. ABOUT THIS DOCUMENT

1.1
Purpose
The objective of this document is to provide a basic understanding of the various operations in
a bank / branch and familiarise the reader with the various banking terminology, the functions
and operations performed by the various departments in a branch. The focus in on the manual
processes preformed at a branch as this will help in understanding the operations from a
bankers perspective. Computerisation has changed the way in which some of these
operations are performed today. However, once the reader has the understanding of the
manual procedures, it will be easy for him/her to map it on to the automated processes.
This document is a part of the training material for fresh entrants into the banking group. Also,
the persons responsible for the implementation of Banking solutions could also use this as a
reference material. It is recommended that the reading is taken up in the order specified.
1.2
Organisation of this Document
This document is organized based on the various functions performed at the branch. It also
provides a very basic tutorial on the accounting concepts as is applicable to the banking
industry. This document is organised in three parts for sake of convenience. It is advisable for
beginners to read this document in the order it has been presented.
Part I
What is Banking
Accounting Concepts
Savings Account
Current Account
Cash Credit / Overdraft Accounts
Inland Remittances
Cash Department Procedures
Part II
Time Deposits
Loans
Bills
Letter of Credit
Guarantees
Part III
Introduction to Foreign Exchange

Exports
Imports
Foreign Remittances
Forward contracts
This is the first part (Part I) of the Introduction to Banking.
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2. WHAT IS BANKING ?
2.1
Introduction
Banking is defined as Accepting of deposits of money from public for the purpose of Lending
or Investment, repayable on demand or otherwise and withdrawable by cheque, draft, or
otherwise
A banking company must perform both of the essential functions
accepting of deposits
lending or investing the deposits
and such a company is called a Bank.
Alternately, an institution (person or body, corporate or otherwise) cannot be a bank if it does
not Take deposit accounts
Take current accounts
Issue and pay cheques
Collect cheques crossed and uncrossed for his customers
If the purpose of accepting of deposits is not to lend or invest, then the business will not be
called as a banking business.
2.2
The Business of Banking
When the bank accepts deposits, it pays interest on the deposit to the customer. When the
bank lends money, it charges interest on the money lent to the customer. Also, the bank
provides certain services to its customers for a fee.
Thus, the business of a bank is based on this principle of
The difference in interest received on the amount lent and the interest paid on the deposits
collected. This difference between interest earned and paid is also called Spread.
Income received by means of fees for the services rendered
In very simple terms, the business model of a bank can be summarised as follows Profit = ( IR IP ) (OC + OE) + FI
Where,
IR
IP
OC
OE
FI
2.2.1
Interest Received on Advances

Interest Paid on Deposits
Operating Costs
Operating Expenses
Fee based Income
Deposits
When a bank accepts money from the public, it is called as a Deposit. Accepting deposits of
money from the public is one of the essential functions of a bank. Deposits are one of the
basic resources for the banking industry. The relationship between a banker and a customer is
established with the opening of an account by the customer with a deposit of money.
Deposits can be classified as !
!
Demand Deposits
Time Deposits
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2.2.1.1 Demand Deposit

As the name suggests, these deposits are repayable on Demand. The customer can demand
the deposit back from the bank at his discretion and the bank has to oblige.
Examples Savings account, Current Account. We shall look at the details of this later in the
document.
2.2.1.2 Time Deposits
In this type of deposits, the bank and the customer enter into a contract over the amount of
money to be deposited, the duration and the interest rate applicable. Here, the money is
repaid to the customer as per the contracted date. However, there are provisions available for
the customer to take his money back without fulfilling the contract, in which case, there will be
a monetary penalty levied.
Examples Term Deposits, Recurring deposits, etc. We shall look at the details of this later in
the document.
2.2.2
Advances
Banks mobilise deposits for the purpose of lending and investment in order to earn profits from
such operations. Funds are lent at an interest that will obviously be higher than the interest
paid by the bank on deposits. Advance is another term used for lending of funds.
Advances can be broadly classified as !
!
Loans
Overdrafts
2.2.2.1 Loans
It is a disbursal of an amount towards a specific purpose for a pre-determined period and is
normally repaid in pre-determined installments. Interest is charged by the bank on the amount
lent to the customer. Interest charged could be simple or compound, based on daily or monthly
balance, depending on agreed terms.
Examples Housing loan, Vehicle loan, Loan for household items, etc.
2.2.2.2 Overdrafts
This is a facility, where a limit in terms of amount is defined for a customer account. The
customer can withdraw the amount upto a maximum of the specified limit as and when he
needs and can repay it by means of deposits in his account. Interest is charged on the amount
overdrawn and for the period of its actual utilisation.
Advances can either be secured of unsecured.
2.2.2.3 Secured Advances
These are advances given to customers against some security such as Shares, Property, etc.
2.2.2.4 Unsecured Advances
These are advances given to customers without any security. These are essentially short-term
arrangements based on the customers standing or reputation
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Resources (Funds) Management
Of all the resources of the bank, deposits form the most important part since banking functions
essentially consist of accepting deposits and lending the deposits for productive purposes.
Deposits have a high cost as the bank has to meet in turn its obligations to the depositors.
This apart, the bank has to carry a certain amount of liquidity to meet its day-to-day
obligations. Keeping idle cash may mean forfeiting the opportunity to earn interest. It is
therefore, imperative that the costly resources are employed in such a way as to yield
maximum return to the bank.
Bank deposits do not convert themselves into resource unless they are available to the bank
for effective deployment. Branches advise their deposits figures to their controlling authority on
a weekly basis. These are collated and made available to the Central Office. It is only when
the Central Office is able to plan for the investment of such deposits in time on the basis of the
weekly statements, can these deposits be termed as real resources of the bank.
2.2.3.1 Cash Reserve Ratio (CRR)
One of the statutory obligations of the bank is to maintain a prescribed percentage of its
Demand and Time deposits in the form of Cash with RBI. The current prescribed percentage is
7% and this keeps varying. Every scheduled bank maintains this amount as a Current Account
with RBI and all inter-bank transactions are routed through this account. Hence, the balance in
this account will be fluctuating. RBI will consider the average balance maintained by the bank
over the last 15 days for monitoring the CRR.
The bank does not receive any interest on the CRR maintained by them with RBI.
2.2.3.2 Statutory Liquidity Reserve (SLR)
The bank has to utilise a part of its resource to comply with yet another requirement namely
the SLR. A specified percentage of the banks total Demand and Time liabilities have to be
maintained by way of investments in approved securities, cash in hand, gold or excess
balance with the RBI over the CRR. The maximum percentage that RBI can specify is 40%.
Currently the SLR percentage is 25%. The objective of this is to force the banks to keep a
significant proportion of their deposits in liquid assets.
These statutory requirements are also tools in the hand of the Government to regulate money
supply in the economy.
Resources are available for lending purposes, after CRR and SLR requirements are met. Even
out of the remaining balance, certain percentages are specified for advances towards priority
sectors.
2.3
Relationship between a Banker and a Customer
A person from whom the bank has accepted money or to whom bank has lent money is
termed as a Customer of the bank. In very loose terms, the relationship between a bank and
a customer is established by means of an Account.
Relationship of a Debtor and Creditor (Banker as Debtor)
When a customer deposits money with a bank, he lends it to the banker. Thus, the depositor
becomes the creditor and the banker a debtor.
Relationship of a Creditor and Debtor
When a bank lends money to a customer, the banker becomes the creditor and the customer
a debtor.
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Banker as a Trustee
The bank can act as a trustee for customers money, where they perform certain functions for
the benefit of some other person called the beneficiary.
Banker as an Agent
In some cases the banker acts as an agent for a customer, where he buys or sells securities
on behalf of his customer, collects cheques on his behalf and makes payments of various
dues, like payment of insurance premium.
Banker as a Consultant
Some banks have separate departments to give consultancy to their customers in areas of
payment of taxes, making investments, etc.
Banker as a Bailee
Bankers also provide service of safe custody to their customers, where they act not only as a
trustees but also as bankers. In this capacity the customer deposits valuables with the bank for
safe custody. Hence in case of a loss, Banker is liable as a bailee and the customer is a bailor.
Lessor and Lessee (Banker as a Lessor)
The banker provides Safe Deposit Lockers to its customers on lease for depositing their
valuables. Here the banker is the Lessor and the customer is the Lessee.
2.4
Banking System in India
2.4.1
Evolution
The Indian Govt. established three Presidency banks in India
Bank of Calcutta (Bank of Bengal) - 1806/1809

Bank of Bombay - 1840
Bank of Madras - 1843
These three Presidency banks were subsequently amalgamated into the Imperial Bank of
India in 1921 which is now State Bank of India.
The Imperial Bank of India was allowed to hold Government Funds and to manage public debt
and clearing houses, till the establishment of the Reserve Bank of India in 1935.
The State Bank of India Act was passed in 1955 and the function of the Imperial Bank was
taken over by the newly constituted State Bank of India.
th
th
Towards the end of 19 century and the beginning of 20 century, some joint stock banks
came on the scene. Some of these banks were Allahabad Bank Ltd. Punjab National Bank
Ltd., Bank of India Ltd., Canara Bank Ltd., Indian Bank Ltd., Bank of Baroda Ltd. These banks
along with the other major banks were nationalised in 1969 and 1980.
2.4.2
Reserve Bank of India (RBI)
RBI started functioning as the central bank of the country from 1935 onwards. Originally RBI
was established as a private sector bank with its capital contributed by shareholders. Shortly
after its establishment, RBI took over the function of currency issue from the Govt. of India and
the power to control credit of the country.
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Thus RBI is the Central bank of the country and performs the traditional functions of a central
bank and a variety of development and promotional functions. RBI is also responsible for
granting permission for setting up of new banks or branches.
2.4.2.1 Role of RBI
Some of the important functions of RBI are Issue and Regulation of Currency It is the sole authority for issue of currency in the
country. It issues and regulates the issue of currency and ensures that the country has
adequate supply of currency for the smooth functioning of the economy.
Maintain Currency Chests The currency notes have to be equitably distributed in all parts
of the country. For this purpose, RBI has made adequate administrative arrangements by
opening offices of its issue department in important cities. |
Banker to the Central and State Governments All money belonging to Govt. of India are
kept with RBI. It looks after the current financial transactions of the Govt. and also manages
the public debt of the Govt.
Bankers Bank All commercial banks keep and maintain their accounts with RBI
Regulation of Bank Credit RBI exercises its control over the volume of credit generated by
commercial banks in the economy in order to control the inflationary tendencies.
Custodian of Foreign Exchange Reserves It acts as the custodian of foreign exchange
reserves of the country and focuses on building up the necessary level of foreign exchange
reserves that is essential for interaction with foreign trade and commerce.
Maintaining the external value of the currency It has the responsibility of maintaining the
external value of the Indian rupee. The foreign exchange market has been de-regulated and
the market forces determine the exchange rate. However, RBI intervenes under exceptional
circumstances if the rupee starts sliding.
Control of Economy
As the banks have to maintain around 30 - 35 % of the Demand and time liabilities with RBI by
way of CRR and SLR, RBI plays a role in controlling the countrys economy. Also RBI keeps
changing the CRR and SLR percentages depending on the movement of the economy.
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2.4.3
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Banking Structure in India
Reserve Bank of India
Dev. Fin. Inst.
IFCI
SIDBI
IDBI
NABARD
ICICI
NHB
IRBI
Reg. Rural Banks
EXIM
State Lvl.
Fin. Inst.
Comm. Banks
Public Sector
State Bank
Group
Banks
Nationalized
Bank
Land Dvlp. Banks
State Co-op.
Banks
Pvt. Sector
Indian
Banks
Co-op. Banks
Foreign
Banks
Central District
Co-op. Banks
Primary Credit
Societies
SBI
Associated
Banks of SBI
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3. ACCOUNTING CONCEPTS
3.1
Components of Accounting
Accounting is the process of recording the monetary transactions of business entities.

An account is an element in the accounting system that is used to classify and summarize
money measurements of business activity. The accounting involves recording, classifying and
summarizing of past events and transactions of financial nature. Every account will be
classified as an Asset or a Liability.
3.1.1
Assets
Assets are things of value owned by the bank. In other words Assets of a bank are what others
owe the bank.
For example, when Bank gives a loan to a customer, the customer owes money to the bank.
The loan disbursed to a customer is to be repaid by the customer. Thus Loan advanced by the
bank will be an asset for the bank. Other examples of Assets will be the premises owned by
the bank, Cash at the bank/branch, Interest to be received, etc.
Assets can be classified as :
3.1.1.1 Fixed Assets
These are assets like land, buildings, vehicles, furniture which are used for business
operations over a relatively long period of time. These Assets are not consumed in the course
of operations within an accounting period.
3.1.1.2 Current Assets
These are assets, which are usually converted into cash within the accounting period. In other
words, these assets can be converted into cash quickly.
3.1.2
Liability
Liabilities are amounts or balances that a Bank owes others.

For example, the claim of the depositors constitutes the liability of the bank. The money
deposited by a customer in the Savings account can be withdrawn by him at his discretion.
Thus from the point of view of the branch, the money deposited in a Savings Bank Account is
a liability to be paid on demand i.e. Demand Liability. All customer deposit accounts with the
bank are Liability accounts.
Liabilities may be classified as :
3.1.2.1 Long-Term
These are liabilities that may be repayable beyond a one-year horizon.
3.1.2.2 Current Liability
Current Liabilities are all those accounts and claims on the bank which have to be settled
within a relatively short period of time, normally within a year.
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3.1.2.3 Contingent Liability

A contingent liability is a possible future liability (are those which do not exist at that particular
time but which may arise in future), which may arise as a result of past circumstances or
actions a possible future event. Examples are payment against Letter of Credit, invocation of
Guarantee, etc.
3.1.3
Fundamental Accounting Equation
Total Assets = Total Liabilities

This means that at any given point of time what is owned by the bank will be equal to what is
owed by the bank.
3.1.4
Business Entity Concept
The legal entity of a Bank is distinct from the entity of its owners (shareholders). Similarly, the
accounting entity of a bank is also distinct from its owners (shareholders). Thus when the
shareholders bring in capital into the bank, the bank in turn is deemed to owe the capital back
to the shareholders. This concept is called as the Business Entity Concept.
Illustration 1
In order to understand this equation clearly, let us consider a new branch, which is about to
start operations. The Head Office (HO) shall provide the finance for acquiring the premises,
furnitures, fixtures etc., as well as the initial capital to start banking operations.
Stage I :
Let us assume that the HO contributes Rs. 50,00,000/- of which,
Rs. 25,00,000/- is used towards acquiring the premises,
Rs. 10,00,000/- is used towards acquiring the furnitures/fixtures
Rs. 15,00,000/- is held by the branch in cash.
The financial position of the branch at this stage will be as shown below :
Liabilities
Head Office
50,00,000.00
Total
Assets
Premises
Furniture & Fixtures
Cash
50,00,000.00
Table 1
25,00,000.00
10,00,000.00
15,00,000.00
50,00,000.00
Financial Position at the beginning of 1st day of operation
The branch owes Rs. 50,00,000 back to its Head Office. Hence it is shown in the Liabilities
side.
Stage II :
Let us assume that the operations performed on the first day of operation are as follows :
-
A customer opens Savings A/C with an initial deposit of Rs. 2000/Another customer is given a loan in cash of Rs. 10000/-.
The financial position of the branch at this stage will be as shown below :
Liabilities
Assets
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50,00,000.00
Savings Accounts
Premises
Furniture & Fixtures
Cash
2,000.00
Total
Loans
50,02,000.00
Table 2
25,00,000.00
10,00,000.00
14,92000.00
10,000.00
50,02,000.00
Financial Position at the end of 1st day of operation
This position has been achieved after taking into effect the two transactions mentioned above.
The transaction for the Savings Account will have the following effect :
- The liability under Savings Accounts will go up by Rs. 2000.
- The Cash balance will go up by Rs. 2000.
The transaction for the Loan Disbursement will have the following effect :
-
The Loans advanced will go up by Rs. 10000

The Cash balance will reduce by Rs. 10000
Thus the net effect will be as follows :

Head Office
Premises
Furnitures & Fixtures
Savings Account
Loans
Cash
=
=
=
=
=
=
5000000/2500000/1000000/0 + 2000 = 2000

0 + 10000 = 10000
1500000 + 2000 - 10000 = 1492000.00
One can see from the above illustration that, all the assets of the bank branch are due to be
paid back either to the depositors or to the HO (owner of the branch) thus establishing the
fundamental equation of accounting.
We noticed in the above example that every transaction involved two entries. The deposit into
the Savings A/C increases the Liability in the Savings A/C by Rs. 2000 and also increases the
Cash balance by Rs. 2000. Similarly the disbursement of the loan of Rs. 10000 increased the
Loans Advanced by Rs. 10000 and decreased the Cash balance by Rs. 10000. This form of
accounting is referred to as the Double Entry System.
3.2
3.2.1
Systems of Accounting
Types of account
There are three types of accounts:

Personal Account It deals with accounts of individuals like account holders, depositors, etc.
It shows the balance due to these individuals or due from these individuals on a particular date
Real Account It represents assets like Cash, Premises, Furniture & fixtures, land, etc. As on
a particular date, this account shows the worth of the asset.
Nominal Account It consists of different types of expenses or incomes or profit or loss.
These accounts shows the amount of income earned or expense incurred for a particular
period. Examples are interest to be paid to depositors, interest received on loans/advances,
commission received, etc.
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Double Entry System
The basic attributes of an account are title of the account, opening balance, closing balance
and the transaction in the account. Every business transaction will have an impact on one or
more accounts and will effect the balance of the accounts. Every business transaction will
have two effects and this system of recording both the accounting effects is known as Double
Entry System of Book Keeping. The two effects of a business transaction are known as Debit
and Credit.
Debit Represents
Outflow of Resources
!
!
Expenses : For example - Salaries, Rent for the premises, Interest Paid, etc.
Assets : For example - Land, Building, Cash, etc. (Outflow of resources result in
increase of Assets)
All those who owe money to the bank : For example - Debtors, Customers who have taken
a loan from the bank
Credit Represents
Inflow of Resources
!
!
Income : For example - Interest received, Commission received, etc.

Liabilities : For example - Deposit Accounts, Savings Account, etc. (Inflow of
resources result in the increase of Liability)
All those whom the bank owes money : For example Saving account holders, Deposit
Account holders, etc.
Whether an Account is to be debited or credited is decided by the rules indicated in the

following tables :
Debit
Credit
Increase in
Decrease in
Balances
Personal Accounts
The receiver
The giver
Assets
Debit
Credit
Debit
Real Accounts
What comes in
What goes out
Liabilities
Credit
Debit
Credit
Income
Credit
Debit
Credit
Nominal Accounts
All expenses and losses
All incomes and gains
Expenses
Debit
Credit
Debit
Example
The example below will emphasise the concepts explained above regarding the accounts,
transactions and the effect of a transaction on various accounts.
Business Transaction :
Mr. Shah Deposits Rs. 2000 in his Savings Account
Accounts Impacted
Mr. Shahs Savings Account, Cash Account
Transactions
1) Debit Cash Account (Real Account)

2) Credit Shahs Savings Account (Personal Account)
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Next we will discuss the concept of natural sign associated with the GL accounts. The natural
sign associated with the different GL account types and transactions are as listed below :
LIABILITY
ASSET
+
-
All the Liability accounts have positive balance and all the Asset accounts have negative
balance.
A Debits transaction is negative and a Credit transaction is positive.
When there is a debit transaction in an Asset account, the absolute balance increases by the
amount of the transaction. When there is a credit transaction in an Asset Account the absolute
balance decreases by the amount of the transaction.
When there is a Credit transaction in an Liability account, the absolute balance increases by
the amount of the transaction. When there is a debit transaction in a Liability Account the
absolute balance decreases by the amount of the transaction.
3.2.3
Books of Accounts in a Bank
In accounting, every transaction creates a source document, which is any written or printed
evidence of a business transaction that describes the essential facts of the transaction.
Examples are cheques, withdrawal slips, deposit slips, document created by the banker.
These are referred to as vouchers.
3.2.3.1 Voucher
Before a transaction is recorded or entered in books of account, it is written down on a form
(usually pre-printed on banks stationery) known as a voucher form, and when this form is filled
in and completed it is known as a voucher. This form, even though filled in either by customer
or banks internal staff, does not become a voucher till it is authorised (signed) by the banks
authorised personnel.
Generally, a voucher is first prepared by a clerk or a customer, checked by a senior person
and then the transactions are entered in appropriate books.
The vouchers, being loose forms, are usually distributed among different persons for various
purposes such as making entries in different books, writing intimations of transactions for the
parties concerned, checking the entries in books etc. A cheque issued by a customer or
paying-in slip deposited along with cash become a voucher after it has been passed and
entered into books of account of the bank.
Vouchers also help as valuable records of transactions, and as such banks carefully preserve
them for many years.
There are three types of Vouchers
Debit Vouchers
Credit Vouchers
Transfer Voucher
3.2.3.2 Transactions
In banking scenario, the transactions are categorized as Cash, Clearing and Transfer.
Cash transaction When one of the accounts affected in a business transaction is Cash, it is
referred to as a Cash transaction.
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For example, let us consider a business transaction : Vinod deposits Rs. 2000.00 in his
Savings account.
The accounting transactions for the above is Cr. Savings a/c. of Vinod and Dr. Cash a/c. by
Rs. 2000. This transaction in entirety, comprising the Debit and Credit is treated as a Cash
transaction.
Clearing transaction When one of the accounts affected in a business transaction relates
to Clearing or Service branch account, it is referred to as a Clearing transaction. It involves
transaction between two banks.
For example, let us consider a business transaction : Paresh deposits a Cheque of Rs.
5000.00 of Indian Bank in his Savings account, which is maintained at Dena bank.
The accounting transactions for the above at Dena bank is
- Dr. Outward clearing by Rs. 5000.00
- Cr. Saving Bank a/c. of Paresh by Rs. 5000.00.
This transaction in entirety, comprising the Debit and Credit is treated as a Clearing
transaction.
Transfer Transactions When the accounts effected in a business transaction are internal to
the bank, it is referred to as the Transfer transaction.
For example, Interest is credited to a Savings account or transfer of funds from one savings
account to another in the same bank (could be across different branches).
Consider the business transaction : Interest of Rs. 20 is credited to Shahs Term Deposit
Account.
The accounting transactions for this :
- Dr. Interest A/c by Rs. 20
- Cr. Shahs Term Deposit A/c. by Rs. 20.
3.2.3.3 Day book/Cash Book
Since for every business transaction debit and credit entry has to match, at the end of the
business day bank needs to confirm the same. This is achieved by summarizing the debits
and credits transactions grouping under cash, clearing and transfer heads for the various GL
heads.
These summarised transactions under the GL heads are then posted to the respective GL
accounts at the end of the day.
nd
The day book at the end of the day (2 February 2002) for the transactions given in the
examples above under Cash, Clearing and Transfer is :
Debit
Total
Clrng.
20.00
2000.00
5000.00
5000.00
7020.00
5000.00
Credit
Trfr.
Cash
20.00
2000.00
20.00
2000.00
GL Head
Savings
Deposit
Interest
Cash
HO-A/c
(Clearing)
Total
Cash
Trfr.
2000.00
Clrng.
Total
5000.00
7000.00
20.00
5000.00
7020.00
20.00
2000.00
20.00
3.2.3.4 General Ledger
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The General Ledger is a ledger / book maintained by the branch for maintaining the all GL
accounts. The General Ledger is updated on a daily basis to record the transactions for the GL
accounts affected during the day. The General Ledger would show for each of the accounts
the opening balance , the consolidated transactions and also the closing balance for the day.
nd
The General Ledger for the affected accounts at the end of the day (2 February 2002) is :
GL Head : Savings (Liability A/c.)
Date
Debit
01-02-2002
02-02-2002
Credit
7000.00
GL Head : Deposits (Liability A/c.)

Date
Debit
01-02-2002
02-02-2002
Credit
20.00
GL Head : Interest Payable (Liability A/c.)

Date
Debit
01-02-2002
02-02-2002
20.00
GL Head : Cash (Asset A/c.)
Date
Debit
01-02-2002
02-02-2002
Balance
50,000.00
50,020.00
Credit
Balance
1000.00
980.00
Credit
Balance
-1,40,000.00
-1,42,000.00
Credit
Balance
-11,000.00
-16,000.00
2000.00
GL Head : HO A/c (Clearing) (Asset A/c.)

Date
Debit
01-02-2002
02-02-2002
5000.00
Balance
100,000.00
107000.00
3.2.3.5 Trial Balance

Since the individual transactions have been matched to ensure that Total Debits = Total
Credits, it is also essential to confirm that the Total Assets = Total Liabilities. This is
achieved by creating a statement called Trial Balance.
nd
The trial balance for 2 February 2002 is :
GL Head
Savings
Deposits
Interest Payable
Liability
Balance
1,07,000.00
50,020.00
980.00
GL Head
Cash
HO-A/c. (Clearing)
1,58,000.00
Asset
Balance
1,42,000.00
16,000.00
1,58,000.00
3.2.3.6 Balance Sheet

Balance sheet is a statement, which reflects the financial position of the bank as on a
particular date. The trail balance forms the basis for the preparation of the balance sheet.
Apart from the Assets and Liabilities in the Trial balance as of a date, the bank/branch will
need to pass certain adjustment entries in order to arrive at the balance sheet thereby
reflecting the exact position of Assets and Liabilities as of a particular date.
For example, the interest payable account as appearing in the Trial balance is Rs. 980.00.
While preparing a balance sheet based on this trial balance, an entry will have to be passed
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debiting the interest payable by the interest amount that is due to be paid on the savings
account till that date and crediting the individual Saving A/c. For reasons like this, the balance
sheet is typically prepared on the closing date (half year ends, Years).
Now, with the advent of Computerisation of the branch operations, it is possible to
arrive at a balance sheet as of any day.
3.2.3.7 Profit and Loss Statement
There are certain Accounts which will be classified as either Income or Expense head.
Income
All kinds of earnings of a bank are termed as income. For example, Interest earned on Loans,
Commissions, exchange margins, etc. would form part of the Income of the bank.
Expense
All expenditure incurred by the bank are termed as expenses. For example, Items like interest
paid to the depositors, depreciation on furniture, salaries, sundry expenses, etc. would form
part of the Expense of the bank.
The natural sign associated with the Income and Expense account are as listed below :
Income
Expense
+
-
All the Income accounts have positive balance and all the Expense accounts have negative
balance.
The P/L statement (also referred to as the Income and Expense Statement) is a statement that
lists of all Income and Expense heads. The difference between Income and Expense accounts
determines the Profit or Loss of the bank. The excess of income over expense is the profit and
excess of expense over the income is the loss.
Again, the Profit or Loss can be classified under Liability or Assets.
Bank owes the profit to the shareholders and hence is classified as a Liability. Loss is
classified as an Asset.
This figure of Profit or Loss is taken into the Balance Sheet / Trial balance under the P/L GL
account head.
3.3
Fixed Assets
Fixed assets are what a bank owns for the purpose of business like land, buildings, furniture,
etc. and are normally not available for sale. They are essentially of a permanent nature and
are in constant use to carry on the business.
3.3.1
Depreciation
All fixed assets except land, do get used up in business over a long period of time. This fact
is reflected through the process of charging depreciation on the fixed assets, so that each year
the fixed assets are shown at a lesser value in the balance sheet than what they were shown
at in the balance sheet of the previous year.
When an Asset other the conventional fixed assets are written-off over a period of time, the
process is known as amortization rather than depreciation.
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Depreciation is the accounting process adopted for the gradual conversion of asset costs into
expense.
The basis of depreciation is quite simple. It is the diminution in value caused by the inevitable
wear and tear through constant use. It thus becomes essential for the bank to set aside each
year sums of money for the eventual replacement of aging and inefficient assets. There has to
be a charge for depreciation each year against profits. The annual depreciation charge is
shown in the Profit and Loss account as an item of expenditure representing the cost of using
the fixed assets during the year. It is not an actual outgo of cash.
There are two basic commonly used method by companies to compute their annual
depreciation :
3.3.1.1 Straight-Line Method
In this method, a certain fixed percentage of the original cost of assets is written off each year.
The depreciation percentage depends on the type of asset and is decided based on the
assumed life of the asset.
Example
Let us consider an asset worth Rs. 1,00,000.. For this example consider a depreciation
th
percentage of 20%. In this method, at the end of 5 year the value of the asset will be zero.
This asset will be depreciated by Rs. 20,000 (Rs.100,000 x 20%) every year.
3.3.1.2 Written Down Value (WDV) Method or Reducing/Diminishing Balance
Method
In this method, a fixed percentage of the reduced or written down value of the asset is
charged to the profit and loss account every year. Since the value of the asset goes on
diminishing year after year, the annual depreciation charge likewise goes on diminishing.
Example
Let us consider an asset worth Rs. 1,00,000.. For this example consider a depreciation
percentage of 20%. In this method, the value of the asset will never be zero.
st
1 Year Depreciation is Rs. 20,000 (Rs.100,000 x 20%)

nd
2 Year The value of the asset is now Rs. 80,000 (Rs. 1,00,000 Rs. 20,000). Hence
Depreciation charged is on Rs. 80,000., i.e. Rs. 80,000 x 20 % = Rs. 16,000
rd
3 Year The value of the asset is now Rs. 64,000 (Rs. 80,000 Rs. 16,000). Hence
Depreciation charged is on Rs. 64,000., i.e. Rs. 64,000 x 20 % = Rs. 12,800
Note that in this method the Asset value goes on diminishing and also the depreciation.
3.4
Chart of Account
The chart of accounts is basically a list of the categories of financial transactions for a
particular business. In other words, this is a comprehensive listing of all the GL heads, which
will be impacted by any banking transaction. General Ledger is the ultimate destination for all
transactions. These GL heads can be categorized or grouped as:
Asset Account
Liability Account
Income Account
Expense Account
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All the GL heads under the Asset and Liability heads affect the Balance Sheet and the GL
heads under the Income and Expense account affect the Profit and Loss Statement.
The level of detail, that is, the number of accounts, required in each classification depends on
a variety of factors including the following:
regulatory reporting requirements,

internal management reporting requirements,
level of automation
Products and services offered by the bank.
A bank may modify its chart of accounts to accommodate its particular needs at any given
time; therefore it may be useful to review in order to determine current and past activities in
which the bank may have engaged. The chart of accounts may use a numbering scheme
which permits flexibility to add accounts to appropriate categories without renumbering the
entire chart.
Example
GL Head :
Savings (Liability)
GL Sub Head :
NRE
NRO
Normal
Trust
The balances of Savings account will be maintained at the Sub Head Level. A bank can
define more sub categories or sub head as the need may be.
GL Head :
Term Deposit (Liability)
GL Sub Head :
Fixed Deposit (FD)

Recurring Deposit (RD)
Cumulative Deposit (CD)
Similarly, the balances of Term Deposits account will be maintained at the Sub Head Level of
FD, RD, CD. The bank can define more sub head or categories as required.
GL Head :
Cash (Asset)
GL Sub Head :
Cash on Hand
Current Account with other banks
The balance in Cash account will be maintained at the Sub Head Level of Cash on hand and
CA with other banks. The bank can define more sub head or categories as required.
3.4.1
Control Accounts
These are also termed as sensitive accounts. Every transaction affecting these heads has to
be authorized and these accounts are monitored periodically. Amount-wise and Age-wise
analysis is done and submitted to the controlling authorities.
3.4.1.1 Suspense
This is a General Ledger account used for making payments to either staff or suppliers for
which the final settlement will be done at a later date. This originating entry is squared off
when the payment is settled and the amount is debited to the appropriate GL head. The
originating entry will always be a debit entry.
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Example 1
Payment of medical advance of Rs. 50,000/- to a staff member.
Debit GL Suspense Rs. 50,000/Credit Staff Account Rs. 50,000/When the actual bill of Rs. 70,000/- is submitted by the staff
Debit P&L Staff Welfare Account Rs. 70,000/Credit Suspense Rs. 50,000/Credit Staff Account Rs. 20,000/Example 2
Pension is paid to the customers from GL Suspense account because unlike banks staff
members it can not be debited to any PL account. These pension claims are sent to respective
treasuries for payment. The suspense entry is squared off after getting the respective
payments. If the entry is outstanding i.e. not squared off, the unique reference number for a
transaction facilitates to follow it up with respective department / person.
When pension is paid
Debit GL Suspense Railways Pension a/c Rs. 10,00,000/Credit various pension account holders a/c Rs. 10,00,000/After claim is received
Debit GL Bankers Cheque a/c Rs. 10,00,000/Credit GL Suspense Railways Pension a/c Rs. 10,00,000/There is a unique reference number generated for each originating transaction for later
reconciliation and settlement.
3.4.1.2 Sundry
Opposite to suspense account, originating entry is sundry account is always a credit. This GL
head is generally used to account for any entry for which no right claimant is found. Just like
suspense, all the entries in the sundry account are identified with a unique reference number,
used later on for tracking and squaring off purpose.
Example 1
If a customer has deposited some money and inadvertently filled in the paying-in slip with
wrong information i.e. correct account number but wrong name OR correct name but wrong
account number, in that case bank can not account for this entry. Since customer has already
left the bank premises and he can not come immediately and correct the slip, Bank deposits
this amount into sundry account.
Entries passed for aforesaid example are:
Debit Cash a/c Rs. 10,000/Credit GL Sundry a/c Rs. 10,000/When the customer comes back to bank for correction of the above entries:
Debit GL Sundry a/c Rs. 10,000/Credit Customer a/c Rs. 10,000/-
3.4.2
Contra Accounts
It is a pair of accounts, where the balances are equal and opposite. i.e. One account will be an
Asset and the other corresponding account will be a Liability. When an entry is passed in one
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of the contra accounts, a corresponding entry of the same amount has to be passed in the
other contra account.
Generally, Bank requires to pass Contra Entries to take care of Contingent Liabilities (like
payment against Letter of Credit, invocation of Guarantee, etc.), Remittances in transit,
Outstation Cheques in Clearing, etc.
Example 1
If a Performance Guarantee has been issued for Rs. 10,00,000/- in favour of Govt. of India at
the request of a customer, then bank charges a commission and passes contra entries in
Assets and Liabilities for this amount. In case of invocation of this Guarantee due to non
performance, these contra entries are reversed and the money is paid to the Govt. to the debit
of the customers account.
Example 2
When a customer deposits an outstation cheque of Rs. 1000 into his Savings account in Dena
bank, assume that it takes 7 days for the cheque to get cleared. Till that time, the balance of
the customer is not affected. However, Dena bank has to account for this to know the extent of
liability.
CONTRA ACCOUNTS
Liability
Asset
Customers Liability
Banks Liability
On Depositing the cheque

On Realization
Bank is liable to pay this to

the customer
Other bank is liable to pay

Dena bank. i.e. money is
owed to Dena bank
Cr. Rs. 1000

Dr. Rs. 1000
Dr. 1000
Cr. 1000
Now the actual transactions are passed

Dr. HO account - Rs. 1000
Cr. Savings Account - Rs. 1000
3.4.3
Head Office Account
Head Office Account is a GL account maintained by all the branches of the bank for reflecting
all transactions with its Head Office or with other branches (inter-branch transactions).
All deposits and loans that happen in a branch are reflected in the HO Account. The HO
account of a branch conveys the position of the branch to the Head Office. If the HO account
is having a Dr. balance, it reflects that the branch is having more deposits than loans. If the
HO account is having a Cr. balance, it reflects that the branch is having more loans than
deposits. The Head Office has to take funds from the branches that have more deposits and
forward it to the branches that have more loans. This is basically a balancing function that the
HO performs between the branches that are heavy in deposits and loans.
Typically, the H.O. A/c is affecting in all the types of transactions Cash, Clearing, Transfer :
Cash
Cr. H.O. A/c

Dr. H.O. A/c
Dr. Cash
Cr. Cash
- If the branch has a deficit

- If the branch has excess
Clearing
Cr. Customer A/c

Dr. Customer A/c
Dr. H.O. A/c

Cr. H.O. A/c
- Outward Clearing
- Inward Clearing
Transfer
Dr. Customer A/c
Cr. H.O. A/c
- Sending Branch
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Dr. H.O. A/c
- Receiving Branch
Example 1
Dena bank, Andheri branch issues a DD for Rs. 5000.00 payable at Ashram Road branch.
Entries at Andheri Branch
Dr. DD Payable / Customer Account
Cr. Head Office Account
Entries at Ashram Road Branch
Dr. Head Office Account
Cr. DD Payable / Customer Account
Basically, the transaction between adjustment between the Andheri and Ashram Road branch
is handled through the Head Office account.
Example 2
Profit Payable by the branch to Head Office during Half Year end or Year-End is transferred
through Head Office Account maintained at the branch.
Dr. P/L Appropriation
Cr. Head Office Account
3.5
Summary
At the time of starting operations the chart of accounts containing all the accounts to be
maintained in the branch general ledger, is to be prepared. In the case of bank branches
the chart of accounts as defined by the Head Office will be maintained.
After completion of the days work, the various departments of the branch like Savings,
Current, Cash, Clearing etc. shall prepare consolidated credit and debit vouchers for the
GL accounts affected as a result of transactions originating from the department.
The Officer at the branch responsible for the maintenance of the General Ledger shall
collect the vouchers from all the departments, and verify that the total credit is equal to the
total debit.
The vouchers shall be sorted and the day-book will be prepared. As mentioned earlier,
the day-book will contain a listing of the GL accounts affected during the day, along with
the consolidated transaction for each account.
The officer shall verify that the day-book is tallied i.e.

!
!
the total credits are equal to the total debits

the total cash, clearing and transfer figures match the figures obtained from the
respective departments
The above two checks would ensure that all the transactions carried out during the day,
have been effected into the General Ledger, and also that the total credits match the total
debits.
After the day-book is tallied the General Ledger will be updated to reflect the latest
position.
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The Trial Balance shall be prepared and it will be verified that the total assets is equal to
the total liability i.e.
Total (Asset + Expense)
Total (Liability + Income)
Since the Trial Balance has been tallied for the previous day, and the day-book for the
current GL processing day has been tallied, the Trial Balance for the day also has to tally.
At the end of the financial year (31st March) the net total of the income and expense
accounts will be transferred to the Profit & Loss account (Liability or Asset depending on
whether the bank has made Profit or loss.
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SAVINGS ACCOUNT
Concepts
Savings Bank deposits are Demand Deposits meaning that they are repayable on demand.
Money can be deposited into and withdrawn from this account at the customers discretion
barring a few exceptions like number of withdrawals, amount of withdrawals, etc. depending
upon type / product and regulatory requirements.
These accounts have facility for withdrawal by cheque, withdrawal slip, simple letter with
exceptions relating to the type of constituents who can open such accounts and certain
restrictions with regards to withdrawal. This deposit carries a nominal rate of interest.
The need for keeping cash reserves against such deposits by the bank is comparatively larger
vis--vis the fixed deposits but smaller as against the current deposits because on the
restrictions on the number of withdrawals. The restriction of withdrawal is generally set to
refrain savings account being utilised for business purpose. Therefore, bank levies service
charges if the number of withdrawal exceed the specified limits. However, the bank does not
stop a customer from making more withdrawals.
Some of the basic definitions, rules governing Savings accounts are as listed below :
A Savings Bank Account is an unfixed running deposit account
The Savings account is a running account, and the customer has total flexibility w.r.t. deposit /
withdrawal of funds. The customer is free to deposit money into his account at any point of
time, and also withdraw money from his account anytime subject to satisfying the minimum
balance norm. The balances maintained in the savings accounts are reflected under Demand
Liabilities in the banks Balance Sheet.
A Savings Account may be opened by,
!
!
!
Indian Nationals (both resident and non-resident)

Societies, Associations, Trusts, Clubs
Minors (but operated jointly with a guardian)
Note : A Savings Account may not be opened by companies.
Requirements for opening a Savings Account
A customer wishing to open a Savings Account has to approach the officer concerned. After
filling the account opening card and the signature card, an account number and customer
number, if not an existing customer, is assigned to the customer. The customer has to deposit
cash into the account, and produce the stamped cash deposit slip to the officer, and collect his
passbook and chequebook. Bank generally asks for an introduction also, which could be from
any other account holder or staff of bank or any renowned person, which is acceptable to the
bank.
As per a recent notification, customers are also supposed to submit two copies of photograph.
This is to check fictitious accounts.
Mode of Operation of Savings Accounts
Mode of operation governs how and by whom the account is going to be operated. The Mode
of Operation of the account is to be specified by the customer in the Account Opening form.
The Mode of Operation for a Savings Account may be specified as
! Self
! Either or Survivor
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!
!
Authorised Signatories
Minor Account Operated by Guardian
Classification of Savings Accounts
!
!
!
Resident
Non Resident
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Savings Account are classified based on the customer categories, schemes for operational
convenience. The terms and conditions governing the operation of Non Resident accounts are
different from those governing normal resident accounts. Thus it will be convenient
operationally, to classify the account separately. Also the balance under the various categories
of Savings accounts are to be reflected separately in the General Ledger.
Savings Accounts can be with / without cheque book
A customer may or may not choose to avail of the cheque book facility. The minimum balance
to be maintained is higher for a cheque book account. Though it is not prevalent in India as on
date, it could happen that accounts without chequebook might earn more interest.
Nomination Facility is available for Savings Accounts
At the time of account opening or subsequently, the account holder can specify a nominee,
who in the event of the death of the account holder, will be permitted to operate the account. In
the event that a nominee is not specified, then upon the death of the account holder, the bank
will allow the legal heir to operate the account, only after he produces the necessary legal
papers. The nomination facility has been provided, to avoid such unnecessary inconvenience
to the heir.
Upto 60 withdrawals are permitted in a Savings Account per year.
If the number of withdrawals exceeds 60, then the bank branch may levy additional service
charge. This however varies from time to time and from bank to bank.
Dormant Account
All accounts in which there was no operations for the last 12 months will be branded as
Dormant. For this purpose the Ledger will be scrutinized once a month to identify the Dormant
accounts. These are interest bearing accounts. However, some banks charge a specific fee on
these accounts and the customer is intimated about this accordingly.
In-operative accounts
Accounts in which there have been no operations during the past 24 months are treated as inoperative accounts. There are 2 types of such accounts
!
!
Interest bearing
Non Interest Bearing
This is dependent based on whether the account is maintaining the minimum stipulated
balance.
4.2
Processing of Financial Transactions
Financial transactions pertaining to Savings Accounts can be broadly classified as Cash,

Clearing and Transfer transactions.
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We will study the operational procedure followed by the bank branch for executing each of
these types of transactions. Before going onto the details of each of the above transaction
types, we will study certain general details required for understanding the procedures followed.
4.2.1
Ledger Maintenance
Any financial transaction to an account results in the flow of money in or out of the account
and thereby affect the account balance. It is essential to correctly record the transactions
affecting an account, and also have a reliable control and checking mechanism, to ensure that
the transactions are recorded correctly. Failure to record a transaction or recording it
incorrectly can have severe implications.
The procedure below pertains to a situation where the branch operations are carried out
manually. In an automated environment the ledgers can be generated automatically
based on the banking transactions.
The Ledger Book is the primary tool used by the bank branch to keep track of the financial
position of an account. At the bank branch, the Ledger Books are kept with personnel at the
front counters. Each front counter will be able to handle accounts belonging to around 10
ledger books. The bank personnel at the front counters maintain the ledgers, and hence are
also referred to as the ledger keepers.
The Ledger Book has one page for each account and is sorted according to the account
number. The top portion of the page is used to maintain certain static information related to the
account, like names of the account holders, mode of operation, special instructions etc. The
rest of the page can be likened to a Savings bank passbook, with columns for recording details
of the transactions, like date of transaction, transaction particulars, the transaction amount
(deposits and withdrawals are recorded in separate columns), account balance after executing
the transaction, initials of the official making the ledger entry etc.
At the time of account opening, a new page is opened in the Savings ledger book, and the
static information as well as details of the initial deposit is recorded in the ledger book. All
subsequent financial transactions are recorded meticulously in the ledger book so that the up
to date financial position of each account is available in the ledger book. The ledger books are
kept under lock after office hours to prevent any tampering of the figures.
4.2.2
Cash Deposit Transaction
Two systems are followed by banks for handling cash deposits. These are Scroll System and
Receipt system. The bank branches follow the system as per the directives from the Head
Office. We will discuss these two systems, along with their relative merits and demerits.
4.2.2.1 Scroll System
Under the Scroll System a cash deposit into an account will involve the following sequence of
steps : (Again the process described below is specific to manual operations)
!
The customer will have to fill in a scroll slip for cash deposit containing details including
account number, amount with denominations, and give it to the scroll clerk / officer.
The scroll clerk will record the details from the scroll slip in the Cash Scroll Register, and
hand over the scroll slip to the customer.
The customer will then hand-over the cash together with the scroll slip to the receiving
cashier. The receiving cashier shall validate that the details given in the scroll slip are
consistent with the physical cash being deposited. After receiving cashier counts the cash
tendered by customer and if it is in order, he will stamp the scroll slip, and handover the
counterfoil of the scroll slip to the customer. The stamped scroll slip is an
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acknowledgement of the cash deposit. The main voucher is then released for making entry
in respective account / ledger
!
The receiving cashier will retain the scroll slip, and at the end of the day he shall verify that
the physical cash with him, is consistent with the figure arrived at based on the total of the
scroll slips.
The ledger keeper will enter the cash deposit entry in the ledger. The scroll slip will then
be clubbed with the rest of the vouchers for the days transactions, and stored safely for
future reference.
The Scroll System provides a control mechanism to ensure that the receiving cashier reports
all the cash receipt correctly, and the scope of any fraud is checked. This is achieved by
checking the total cash deposit figure from the scroll register against the physical cash deposit
reported by the receiving cashier. This also helps in checking any compensatory mistakes
either at the cashier or ledger keeper level, i.e. if any one has wrongly entered the amount, it
can be traced at the end of the day. In the absence of the scroll register, the receiving cashier
may throw away a scroll slip, and pocket the money himself by not reporting the receipt.
Unless the customer comes back and reports that the amount has not been credited to his
account, the fraud may not be detected.
4.2.2.2 Receipt System
Under the Receipt System, the customer will approach the receiving cashier directly without
going to the scroll clerk. In fact there will be no scroll clerk, and the customer will hand over the
scroll slip along with the cash to the receiving cashier. The subsequent procedure will be
identical to that for a scroll system, except for the fact that there will be no end of day checking
against the figures from the scroll register.
Receipt System is more convenient for the customer, and reduces the service time.
4.2.3
Cash Payment
Customer wishing to withdraw cash from his account has two alternatives viz. Teller Payment
and Token Payment. Teller Payment facility is not available at all the branches. The Teller
Payment facility may be offered based on the size of the branch and the number of cash
payments. In small branches with low transaction volumes, it may not be necessary to have
Teller Payment. The operational procedure followed for both the cash payment systems are
described below.
4.2.3.1 Teller System
Under the Teller System a customer can draw money upto a certain limit (say Rs. 5000/-) as
decided by the bank, directly from the Teller Counter without authorisation from the second
level. The Teller has a list of accounts with low balances, and he checks against this list before
he makes any payment. Under the Teller System, payment is made primarily on trust without
checking either the balance or the signature. In an automated environment, the teller can
query on the account and verify the balance and signature of the customer account
before making the payment.
The Teller puts his initials on the instrument, and writes the payment details including account
number, amount and denominations in the Cash Payment Register. (The cash payment
register need not be maintained in an automated environment, where the details of cash
payment are directly entered in to the system and cash payment register is generated at
the end of day for verification).
Teller Payments are usually not made against a withdrawal slip (even if the pass-book is also
furnished). Most banks permit Teller Payments only against cheque. If a customer does not
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have his chequebook with him, then he can collect a loose leaf cheque from the officer; but
even against this loose leaf cheque, payment is permitted only through token issue.
The Teller retains the cheques until the end of the days work. After tallying his physical cash
against the total figure extracted from the Cash Payment Register, he releases the instruments
to the ledger keepers for entry into the ledger.
The Teller System has been introduced to offer faster service to the customers, and in the
process the bank is taking a risk to a certain extent.
4.2.3.2 Token System
The Teller Payment that we saw earlier is permitted only for amounts upto a certain limit. For
payments beyond the Teller Limit, the customer has to collect a token from the Savings
Account counter against his cheque, and collect the payment from the Paying Cashier against
his token. The stages involved in token payment are as follows : (These processes specific
to branches where the operations are performed manually)
!
The customer hands over the cheque to the Savings Account Counter corresponding to
his account number. The counter clerk gives a token to the customer acknowledging the
receipt of the cheque, and writes the token number on the cheque. He makes the entry in
the Ledger Book after checking for existence of sufficient balance in the account. He then
passes on the cheque to the officer for authorisation. (In an automated environment, the
clerk keys in the details of the payment request into the system. After basic
validation like balance, signature, etc., this transaction goes to the officer for
authorisation on the system itself. The physical cheque is also sent to the officer for
verification.)
The officer after checking the signature, the mode of operation instruction , stop payment
instruction if any, and the account balance, will authorise or reject the cheque. If he
authorises the cheque, then the cheque is passed on to the Paying Cashier for payment,
otherwise it is returned to the customer giving appropriate reasons for the rejection.
The paying cashier, on receiving the cheque for payment will either call out the number or
display the token number on the Token Number Display Board. The paying cashier will
make the payment to the customer against the token and enter the details in the Cash
Payment Register. The customer has to countersign at the back of cheque as
acknowledgement of receiving the cash. The cheque will be retained by the cashier till the
end of the days operation, and will release it to the ledger keepers only after tallying his
physical cash position with the cash payment register figures. He then releases the
cheques to be kept together with the other transaction vouchers for the day.
The Token Payment System is more time consuming, but is very essential for large payments
to be properly validated and authorized by the officer.
4.2.4
Cheque Clearing System
Clearing is an arrangement through which a bank exchanges cheques drawn on other banks
for those drawn on it. In the absence of such an arrangement, each bank will have to present
cheques to each of the other banks for receiving payment of cheques over which they have a
claim. The cheque clearing system provides a easy, systematic, efficient and cost-effective
method of clearing cheques.
Vinod Shah deposits a cheque into his account, at Dadar Branch of Bank of Baroda. This
cheque has been given to him by Paresh Modi who has an account with Andheri Branch of
Dena Bank. The processing of this cheque deposit transaction involves the debit of Pareshs
account at Andheri Branch of Dena Bank, and credit Vinods account at Dadar Branch of Bank
of Baroda. The activities involved in carrying out this transaction are as follows :
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The cheque has to be sent to Andheri Branch of Dena Bank, so that they can carry out the
validations, and debit Pareshs account in their branch.
Andheri Branch of Dena Bank has to then debit the account in their branch and send the
credit to Dadar Branch of Bank of Baroda.
On getting the credit from Andheri Branch of Dena Bank, Dadar Branch of Bank of Baroda
will in turn credit Vinods account in their branch.
This activity becomes a complex task as every day individuals all over the country are sending
cheques drawn on their account at one bank to people who bank with other banks. There wll
be a continual stream into each bank, of cheques drawn on each of the other banks. Such
exchange of cheques therefore takes place in a Clearing House.
4.2.4.1 Service Branch
Service Branch is a specialised branch of a bank for handling clearing of cheques, payment
towards Demand Drafts, Pay Orders an collection of outstation cheques. Its basic objective is
to facilitate the clearing process. Generally, banks have one Service branch in major cities.
Wherever it is not feasible to operate an exclusive service branch, an existing branch acts as a
nodal branch and carries out functions of service branch.
4.2.4.2 Clearing House
The primary objective of the clearing house is to facilitate the speedy and economic way of
collecting cheques, bills and other documents payable or deliverable at or through offices of
the members and sub-members of the house situated in that town by a system of systems of
clearing.
In general, RBI undertakes the management of the clearing house. In the absence of this, one
of the public sector banks in that centre, which may be specified by RBI shall be managing the
Clearing house.
Clearing houses are established in all the cities, towns and even large villages where the
volume of cheques is large and number of banks in the area are more than 2. This results in
considerable saving of time and cost. Clearing houses are autonomous institutions having
uniform regulations and rules regarding the conduct of operations.
4.2.4.3 Settlement
This is explained with the help of an example.
Central Bank of India presents cheques drawn on other banks which were deposited by its
customers. The instruments are grouped by Central Bank of India bank-wise and the amount
due from each bank is shown therein. The aggregate of these amounts represents the total
amount to be received by Central Bank of India from all other banks. The instruments are
presented to the respective bank alongwith a memo in a clearing house.
Likewise Central Bank of India also received cheques presented by other banks. The
aggregate of the totals of such instruments delivered by other banks represents the total
amount of cheques drawn on Central Bank of India and payable by it. The difference between
the two amounts is the net debit or credit to Central Bank of India. The Central Bank of India
as well as other member banks keep an account with the presiding bank-branch which
manages the clearing house, through which these debits/credits are passed.
4.2.4.4 Magnetic Ink Character Recognition
This is a technology for mechanised cheque processing for clearing. It is the technique of
using ink containing magnetised particles to print characters of cheques, drafts, travelers
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cheques and other clearing instruments, which can be translated to machine language by a
device that senses magnetisation. The imprint in magnetic ink appears in a coded but optically
readable form. When the magnetised portion of the instrument is placed below the electrical
field, the magnetisation generates a certain wave pattern which is readable by the computer.
MICR processing requires standardisation of the sizes of cheques, paper quality, specified font
type, magnetic ink, printing position, location of the magnetic fields of information and the
number of digits in the information, etc.
MICR cheques contain a white band at the bottom where information about the cheque is
recorded in a coded form. The code appearing in the MICR band denotes the following :
First 6 digits
Next 9 digits
999
999
999
Next 6 digits
Next 2 digits
Next 13 digits
Cheque Serial Number

is a collection of three codes of three digits each as follows the city where the branch is located
the bank to which the branch belongs
the code allotted to the branch itself
Account number
Transaction type (10 Savings, 11 Current, 13 Cash Credit, )
Amount
The code for account number may or may not be pre-printed. The code for amount is not preprinted; it is printed by the electronic Encoder machine where necessary. The electronic
machines called Reader Sorters will be used at the clearing house to sort the cheques
branch/bank wise
4.2.4.5 Procedure for Cheque Clearing
We will describe below the stages involved in cheque clearing. This is the process followed
when the cheque that has been deposited is drawn on a bank that is in the same city. This is
referred to as Local Clearing.
The timings indicated are not uniformly applicable across all branches, but are quoted for
better understanding. The various stages involved in the clearing of cheques are as follows :
!
Let us say that on any day around 500 cheques are deposited by the customers at Mahim
Branch of Bank of Baroda. The branch would collect the cheques upto a fixed time say
3.00 p.m. Cheques deposited after 3.00 p.m. will be sent for clearing on the next working
day only.
After collecting all the cheques, a clerk in the clearing department would enter the details
of all these cheques in an Outward Clearing Register. The cheque amounts will then be
totaled using an adding machine. The listing from the adding machine will be attached to
the bundle of cheques, and sent to the Service Branch of the bank. The cheques are
collected upto 3.00 p.m., and are sent out of the branch to the banks Service Branch at
around 4.00 p.m.
As per RBI guidelines, each clearing cheque bundle or lot should contain at most 300
cheques.
This activity at Bank of Baroda where the cheques drawn on different banks that
have been deposited by the customers are collected and sent to Service branch is
referred to as Outward clearing.
The Service branch of a bank receives cheques from all the branches of that bank in that
city. These cheques would be of different banks. At the Service branch, the cheques are
sorted bank-wise and encoded using the encoding machines. Encoding of the cheques
involves the printing of the cheque amount, city code, bank code and branch code on the
MICR line (at the bottom of the cheque). After encoding, the Service branch bundles the
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cheques bank-wise with control information on the number of cheques and the total
amount for each bank.
!
The cheques from the Service Branch are then sent to the Clearing House which is
generally managed by RBI or nominated bank.
Once the Clearing House receives the encoded cheques from the various banks (through
their Service Branches), these cheques are processed during the night by the reader
sorter machines. These machines read the encoded information from the MICR line, which
contains details such as the bank branch where the cheque was issued, the bank branch
where the cheque has been sent for clearing, and the cheque amount.
The clearing of cheques involves transfer of funds from one bank to another, i.e.
settlement. At the Clearing House, each bank has to maintain an account with the
managing bank. The inter-bank transfer of funds required in the course of cheque clearing,
is effected by debiting and crediting the accounts of the respective banks accounts with
RBI. Each bank in turn will credit or debit the account of the branch with the Head Office.
Simultaneously, the cheques are sorted based on the bank branch where the cheque was
issued.
Next day, the personnel from the Service branch of each bank, would collect the cheques
issued from its own branches, from the Clearing House. The Service branch sorts the
cheques branch-wise. Each branch will send a person to the Service branch of the bank
early in the morning, to collect the cheques issued from their branches, which have come
through clearing. These cheques reach the branch at around 11.00 a.m. If there are any
cheques which are to be returned due to insufficient balance or any other reason, then
these have to be sent out of the branch by 3.00 p.m.
In case any cheque is returned, then the cheque is sent by the branch to the Service
branch from where it is forwarded to the Clearing House who will return it to the bank
where the cheque was deposited. If a bank branch does not receive any cheque return
advice, then it treats the cheque as cleared. If a cheque return advice is received, then the
account is debited.
Thus the Dena Bank (Andheri Branch) cheques deposited at Bank of Baroda (Mahim
Branch) reaches Dena Bank (Andheri Branch) at around 11.00 a.m. on the following
working day. These Cheques are posted to the respective customer accounts. Incase of
returns that might arise due to insufficient balance, signature mismatch, etc. the cheque
has to be sent back from the branch at around 3.00 p.m. These return cheques will reach
rd
rd
branch Bank of Baroda (Mahim Branch) early in the morning on the 3 day. On the 3 day
morning all the cheques except the ones returned will be treated as cleared.
This activity at Dena Bank branch, where the cheques drawn on Dena Bank that
have been deposited at various other banks are received from the Clearing House
and processed is referred to as Inward clearing.
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Following is a representation of the Clearing Cycle. Consider the Cheques of Dena Bank that
have been deposited at Bank of Baroda:
Clearing House
2
Outward Cheques
and Returns
Service Branch
Dena Bank
1
Outward Cheques
and Returns
7
Inward
Cheques and
Returns
3
Inward Cheques
and Returns
6
Returns and
Outward
Cheques
8
Inward Cheques and
Returns
Bank of Baroda
Service Branch
Bank of Baroda
5
Returns and
Outward
Cheques
4
Inward Cheques
and Returns
Dena Bank
In this whole cycle the operations performed at the branch Bank of Baroda are referred to as
the Outward Clearing operations, since the cheque is going out of this branch. The operations
at the branch of Dena Bank are referred to as Inward Clearing Operations.
In the course of the cheque clearing the flow of funds will be as follows :
!
!
!
the customer who has drawn the cheque gets debited

funds are transferred between the two banks involved
the customer who deposits the cheques gets a credit in his account
Now a branch can decide to credit the customers account by the cheque amount on the day it
was cleared or for the benefit of customer can decide to credit the account on the day it was
deposited. In the latter case, the balance to the extent of cheque amount will be remain
uncleared till it gets cleared on the third day.
Through the above discussion on the Clearing System, we have seen the processing of
cheques deposited, as well as the processing of cheques issued which come through clearing
for withdrawal from the accounts.
We have based our discussion assuming that the cheques are MICR cheques. However, in
small towns non-MICR cheques are still in use. The non-MICR cheques take a longer time for
processing, since they have to be processed manually. Also the clearing need not be always
through the RBI Clearing House. In small towns where RBI does not have its Clearing House,
banks have their own Inter-bank Clearing House.
High Value Clearing
All the high value cheques (Value more than Rs. 1,00,000 this amount is bank specific)
deposited in the bank in the first one hour of operation (this period again varies from bank to
bank) are collected and sent for clearing immediately. These cheques goes through the
process of normal clearing, however, there is a separate cycle for these high value cheques at
the clearing house and hence these gets processed faster. In effect, the customer gets the
credit against his cheque the same day evening / next day morning.
This facility is available in all the metro cities, at the branches that are geographically closer to
the Clearing house, e.g. within 3-5 k.m.
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Outstation Cheque Clearing

If the cheque deposited has been drawn on a bank branch that is not in the same city, then
this cheque is sent for Collection.
A cheque of Bank of Baroda Chennai branch is deposited in Indian Bank at Nariman Point
branch. This cheque will not go in the outward clearing of Indian Bank. Instead Indian Bank
Nariman Point branch will send this cheque to and Indian Bank branch in Chennai. From there
it will follow the Local Clearing process and the Chennai branch of Indian Bank will receive the
credit. Chennai branch will then forward the credit to the Nariman Point branch of Indian Bank.
Accounting Entries at Indian Bank on the receipt of Cheque
- Dr. Contra Account Outward Collection Pool A/c.
- Cr. Customer Contra Account
Accounting Entries at Indian Bank on realisation or return of Cheque
- Dr. Customer Contra Account
- Cr. Contra Account Outward Collection Pool A/c.
- Dr. Clearing Account
- Cr. Customer Account
- Dr. Customer Account for Charges
- Cr. Income Account
4.2.5
Transfer
Transfer transactions refer to the flow of funds from one account to another within a branch.
Transfer of money from Savings account to a Loan account towards payment of installments,
Transfer of interest from deposit account into Savings account, transfer of money from one
Savings account to another are some of the transfer transactions that take place regularly are
few examples of transfer transactions.
Every logical transfer transaction must have a credit as well as a debit transaction, and the
total credit must be equal to the total debit.
Example
Upon maturity of a fixed deposit receipt, the deposit amount as well as interest may be
transferred to the Savings account of the customer. This involves the transfer of funds from a
deposit account to the Savings account. The transactions involved are a credit transfer to the
Savings account and two debit transfers to the deposit account.
The operational procedure followed at the bank branch to execute transfer transactions is as
follows :
!
The department which initiates the transfer transaction will prepare the credit and the debit
vouchers. The credit vouchers will contain all the credit transfer transactions, and the debit
vouchers will contain all the debit transfer transactions. Separate vouchers will be
prepared for transactions belonging to other departments, so that these vouchers may be
forwarded to the other departments for processing. As a practice, the department which
originates the debit transaction initiate transfer transactions.
Vouchers affecting accounts in the same department will be processed and the other
vouchers will be released to the other departments to be processed there.
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At the end of the day, all the transfer vouchers will be collected and entered into the
Transfer Register. The Transfer Register has separate columns for credits and debits.
After entering all the transfer transactions into the transfer register, it will be checked that
the credit total is same as the debit total. Thus it is ensured that for transfer transactions
both the credit and debit must be effected, and one leg of the transaction should not go
through without the other.
4.3
Interest Calculation
Interest is paid to Savings account holder every half-year or once a year, depending upon the
banks rule. Interest is calculated based on the minimum balance in the account between the
th
th
10 and the end of the month. The balance as of 10 end of day is considered. The financial
st
st
th
year for the banks is from 1 April to 31 March. Thus the half-year endings will be on 30
st
September and 31 March. Since these days coincide with half-yearly / yearly closing, most of
th
st
the banks stagger the savings bank interest application, i.e. either on 30 June and 31
December or other six monthly frequency, to distribute work load.
The interest percentage varies from bank to bank and is usually around 4.5%. The bank staff
members have a differential interest rate that is marginally higher than that offered to the
public.
Illustration 1
Suppose that the balance in an Savings accounts is as follows :
Period / Date
st
rd
1 3
th
4
th
th
5 7
th
8
th
10
th
th
11 16
th
th
17 18
th
st
19 31
Balance
10,500.00
7,800.00
8,000.00
4,000.00
15,000.00
18,000.00
9,000.00
10,000.00
The interest for this account for this month will be ( 9000 x 0.04 ) / 12 = Rs. 30.00, where 9000
th
is the minimum balance between the 10 and end of the month.
However, in actual practice, the bank applies interest half-yearly or yearly. Let us take an
example, where the bank applies interest half-yearly. Every month the bank computes the
th
balance on which the interest is to be paid (minimum balance between 10 and end of the
month) for every account. This is called as the Product and interest calculation is done base
on this product.
Consider an account having the minimum balance as follows ;
Month
April
May
Dates
st
rd
1 3
th
4
th
th
5 7
th
8
th
10
th
th
11 16
th
th
17 18
th
th
19 30
th
9
th
th
10 14
End of Day
Balances
10,500.00
7,800.00
8,000.00
4,000.00
15,000.00
18,000.00
9,000.00
10,000.00
20,000.00
12,000
Product for the

month
9,000
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th
June
July
August
September
st
15 31
th
9
th
th
10 14
th
tht
15 30
th
9
th
th
10 20
st
st
21 31
th
9
th
th
10 14
th
st
15 31
th
9
th
th
10 18
th
st
15 30
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15,000
20,000.00
8,000
7,000
6,000
20,000
10,000
20,000.00
12,000
15,000
20,000.00
5,000
15,000
12,000
7,000
10,000
12,000
5,000
55,000
Total
Interest Amount for the period April to September at 4% interest rate will be calculated as
follows :
Rs. 55,000 x (4/100) / 12 = Rs. 183.33
The other way of doing this is to take the monthly product, calculate the interest for the month
and add for the six month period :
[Rs. 9000 x (4/100) / 12] + [Rs. 12000 x (4/100) / 12] + [Rs. 7000 x (4/100) / 12] + [Rs. 10000 x
(4/100) / 12] + [Rs. 12000 x (4/100) / 12] + [Rs. 5000 x (4/100) / 12] = Rs. 183.33
Interest amount is always rounded off to either rupee or paise, therefore, depending upon
rounding off option, above interest would be either 183.35 or 183.00 or 184.00.
Overdrafts are permitted for Savings Accounts, and on these debit interest is charged to
the account. The debit interest is charged to the account as soon as the balance becomes
positive again. The only limitation is that the credit balance so occurred is able to square off
the interest portion, else overdraft (debit balance) continues till month end. The interest is
anyway charged at the month end, irrespective of whether the account has come into positive
(credit balance) or not. The debit interest is charged based on the daily debit products. i.e. the
debit interest for the month will be the summation of the debit interest for all the days on which
the account had a debit balance.
In order to understand the calculation of interest based on the daily products, let us consider
the following illustration.
Illustration 2
Suppose that the balance of a certain account during a month is as follows :
Period
st
th
1 to 5
th
th
6 to 8
th
st
9 to 21
nd
st
22 to 31
Balance
2000.00
-3500.00
7000.00
-4000
Debit Product
Penal / Debit Interest (@18% pa)
10500.00
(3 x 3500)
5.17
3 x (3500 x 0.18 / 365)
40000.00
(10 x 4000)
19.72
10 x (4000 x 0.18 / 365)
Thus the total debit product for the month is 50500.

The debit interest for the month @ 18% will be 50500 * 18 / 36500 = 24.90
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The number of Savings Accounts in most of the branches (except Industrial Finance Branches
and Overseas Branches) will be very high. It is a very time consuming process to calculate
interest for Savings Accounts at the time of the half-year ending. The calculation of interest
involves going through all the ledgers, calculating the minimum balance for each month during
the half-year, and based on the minimum balances calculate the interest for the half-year.
The whole exercise of manually calculating the interest takes about 15 working days, and the
banks carry out this exercise during the month of September and March. It is not possible to
th
take into account interest for the month of September while applying interest on 30
th
September. This is because, the transactions right upto 30 September should be taken into
account while calculating the interest for September, which is not possible.
The practice commonly followed by the branches are as given below :
th
On 30 September, interest for the months between March and August are calculated,
and credited to the accounts.
On 31 March, interest for the months between September of the previous year and
February of the Current year will be calculated and credited to the account.
st
Thus on 30/9/94, interest for the period between 1/3/94 and 31/8/94, will be credited.
This is a procedure evolved by the branches for operational convenience.
However in a branch where the operations have been automated, this is not applicable.
The interest calculated and applied in September is for the period March to September
and the interest applied in March is for the period September to March.
4.4
PPF Account
Public Provident Fund Scheme is a statutory scheme of the Central Government. The
branches of SBI and its subsidiaries and nominated branches of nationalised banks have been
designated as accounts offices under this scheme. This was initially introduced to address and
encourage the small savings need of the unorganised sector. Earlier these used to be
maintained by the Post Office and SBI only.
Banks get a commission for maintaining the PPF account.
These are Government of India Accounts and RBI has no control over it. The deposits in PPF
account is remitted to the Govt. of India on the same day.
The minimum deposit amount currently is Rs. 100 and there cannot be more than one deposit
per month. Also, there is a limit on the maximum amount of deposit that can be made into this
account, which is currently Rs. 60,000. There should be atleast one deposit per year.
th
Deposit in the PPF account before 5 of a month is eligible for interest calculation. The current
interest rate is Rs. 9.5% p.a. and interest calculation will be based on monthly products and
will be applied yearly.
This account has a maturity period of 15 years. This scheme allows the customer to withdraw
the entire amount after adjustment of the dues if any to the Govt. on the completion of 15
years. The account can be transferred from any branch to any other branch office of the same
or other bank.
Loan can be taken against this account. The First loan is permitted in the third year from the
year of opening the account. If the account is opened in 1983-84, you can apply for the first
loan in 1985-86. You are entitled to 25% of the balance to your credit on 31-3-1984 by way of
loan, repayable in 24 months in convenient monthly installments. Further loans are possible
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upto the end of the fifth year, but no second loan is possible so long as the first loan has not
being fully repaid. No loan can be taken after the end of the fifth year.
Withdrawal is permissible every year after the fifth year of an amount not exceeding 50% of
the balance at the end of the fourth year or the year immediately preceding the year of
withdrawal.
The account can be renewed for another period of 5 years after the completion of 15 years.
A person cannot hold more than one PPF account. Account can be opened in the name of
Minor also and the amount is eligible for tax benefit, just like a normal individual PPF account
under Section 88. A new account can be opened after completion of tenancy and closure of
first account.
4.5
Pension Account
This is a type of Savings account, to be operated by an individual pensioner. This account

cannot have joint holders and has to be in the name of the pensioner. However, this account
can have a nominee.
Bank gets a commission on maintaining the pension accounts also because they disburse
pension on behalf of the Government / State.
Pension payment are made to the following :
Govt.
- Civil
- Defence
- Railways
State
Public Sector Units
Freedom Fighter
The process for making the pension payment is as follows:
The employer asks their employees for a Pension Account. The pensioner has to go to a
bank and open a pension account. This account detail is given to the employer.
Employer prepares Pension Payment Order (PPO) giving details of

! Pension Amount
! Date of retirement
! Commutation Amount
! Relief (similar to D.A.)
The PPO is sent to the bank. The bank has a pension cell. This cell receives the PPO from
various sources and does the computation for all the pension accounts that it has in its
branches. Processing is done centrally in order to reduce the load on the individual
branches.
Pension payment scrolls are generated and given to the branches along with the flat file.
Based on this the pension accounts are credited.
Bank has to then claim the amount from the various organisations.
4.6
Collection of Govt. Account
Bank collects the following on behalf of the Govt.

Direct Taxes Income Tax, Sales Tax
Indirect Taxes Excise
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Bonds
Utilities
The banks that offer this service have a Nodal Branch in every city. Various designated
branches of a bank in a city collect the above and remit to the Nodal Branch.
Each bank has a Link Branch at Nagpur. The Nodal Branches of a bank from various cities
send the collection to the Link Branch. The Link branch in turn hands over the collection to the
concerned Govt. department. Banks get commission on turnover in these accounts, just like
handling any other Govt. account like PPF, Pension.
4.7
Deficiencies of the manual System
Some of the deficiencies / handicaps of the manual system are as follows :
Since each counter can handle accounts of only about 10 ledgers, the following limitations
are imposed :
!
Customer can go to only one counter
Each counter can offer only particular services. Hence a customer cannot finish all his
work at a single counter
The transaction processing is mainly driven by flow of vouchers. This is time

consuming and causes a lot of delay leading to poor customer service.
Interest calculation is very laborious and monotonous, thus prone to delays and errors.
The Teller System is based on trust. However, under the manual system it is not possible
to have a more secure system without compromising on customer service.
The receiving cashiers and tellers do not release the scroll slips and cheques paid, until
they finish tallying the cash. Thus during the working hours, even if a customer has either
deposited cash, or withdrawn money in cash through the Teller counter, this is not
recorded in the Ledger Book i.e. the Ledger Books do not really reflect the up to date
balance. Thus whenever a cheque comes for payment through clearing, the ledger
keepers will have to go to the cashiers, and check if any deposit or payment has been
made against the account.
The Clearing Operation involves a lot of redundant efforts. The cheques that are deposited
at the branch, are first written into the Clearing Register, these are then totaled using the
adding machine, and then entered into the Ledger Book. Thus each instrument is handled
a number of times for various purposes. This can be avoided.
The processing of Inward Clearing cheques,involves the checking of the balance in the
Ledger Book for each instrument. This is time consuming as a lot of physical effort is
involved in retrieving the Ledger Book and getting the balance. Also the Inward Clearing
cheques have to be processed before the specified time, because if the cheques are not
returned on time, then they are treated as cleared by the other bank branch where the
cheque was deposited. Since the timing for processing of the Inward Clearing cheques
coincides with the timing for other customer transactions, the other across the counter
services get delayed.
Transfer transactions may affect accounts in different departments. In a manual system,

the transaction for the account in a different department is effected by sending the
vouchers to the other department. There is a possibility that the voucher gets lost in
transit, or even if it reaches the other department it may not get processed.
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This happens quite often, and in a manual system there is no way of ensuring that the
complete effect of a logical transfer transaction takes place simultaneously. The error will
get detected at the end of the day because in the transfer scroll register, the credits and
the debits would not match. Considerable amount of effort has to be put in to identify the
causes of the difference and make rectification.
4.8
Understanding the Accounting Entries
To understand the various transactions in a Savings account and its impact let us take the
example of a Saving account of Mr. Gokhale at the Mahim Branch of Bank of Baroda. Mr.
Gokhale also has a current account in the same branch.
Sr.
1
2.
3.
4.
5.
6.
7.
8.
Transaction
Debit
Mr. Gokhale makes a cash deposit of Rs.

10,000.00 to his SB account
Mr. Gokhale withdraws Rs. 5,000.00 from his SB
account
Mr. Gokhale issues a cheque for Rs. 2000.00 to his
friend.
Mr. Gokhale deposits a cheque for Rs. 20,000.00
in his Current account
Mr. Gokhale gives an instruction to the bank to
transfer Rs. 30,000.00 from his Savings account to
his Current account
Interest of Rs. 350.00 to be applied to Mr.
Gokhales account
Penal interest of Rs. 100.00 charged to Mr.
Gokhale for overdrawing on his Savings account
Mr. Gokhale closes his Savings account that has a
balance of Rs. 9,900.00
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Credit
Cash
Savings A/c
Savings A/c
Cash
Savings A/c
Clearing A/c
Clearing A/c
Savings A/c
Savings A/c
Current A/c
Interest Payable
Savings A/c
Savings A/c
Penal Interest
Savings A/c
Cash
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5. CURRENT ACCOUNT
5.1
Concepts
Current account deposits are Demand Deposit, meaning that they are repayable on demand.
A Current Account is a running account which forms part of the Demand Liability
The Current account is a running account on which cheques may be drawn and amounts
credited. Credits may be in cash or by cheques, drafts, remittances, etc. The customer has
total flexibility w.r.t. deposit / withdrawal of funds. This means that a customer is free to deposit
money into his account at any point of time, and also withdraw money from his account
anytime, subject to the condition that there is no overdrawing without the authorisation of the
officer. The balances maintained in the Current accounts are reflected under Demand
Liabilities in the banks Balance Sheet.
No interest is payable on Current Account credit balances. As such, these non interest bearing
deposits are a source of interest free funds for the bank. Current Accounts are usually opened
by companies, small businesses, and individuals for their day-to-day business financial
transactions.
Please note that for all practical purposes a Current account is no different from a Savings
account. In fact while Savings account holders get a nominal interest on their credit balance, a
Current account does not get any interest. However, since companies, traders etc. are not
allowed to open Savings accounts for their business transactions, they open a Current
account.
Requirements for opening a Current Account
A customer wishing to open a Current Account has to approach the officer concerned. A
customer wishing to open a Current Account has to submit the account opening form duly
filled, the specimen signature card and other documents. Other documents like Certificate of
incorporation of company, board resolution etc. may be required based on customer category.
Mode of Operation of Current Accounts
Mode of operation governs how and by whom the account is going to be operated. The Mode
of Operation of the account is to be specified by the customer in the Account Opening form.
The Mode of Operation for a Current Account may be specified as SELF, EITHER OR
SURVIVOR, AUTHORISED SIGNATORIES etc.
Temporary Overdrafts are permitted in Current accounts and debit interest is

charged on the debit balance based on the daily debit products.
Temporary overdraft may be granted for a Current account upon a written request from the
account holder. On the debit balance debit interest is charged to the account on a monthly
basis. The debit interest is charged based on the daily debit products. I.e. the debit interest for
the month will be the summation of the debit interest for all the days on which the account had
a debit balance.
In order to understand the calculation of interest based on the daily products, let us consider
the following illustration.
Illustration :
Suppose that the balance of a certain account during a month is as follows :
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Period
st
th
1 to 5
th
th
6 to 8
th
Balance
2000.00
-3500.00
st
9 to 21
nd
st
22 to 31
7000.00
-4000
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Debit Product
Debit Interest (@18% pa)
10500.00
(3 x 3500)
5.17
3 x (3500 x 0.18 / 365)
40000.00
(10 x 4000)
19.72
10 x (4000 x 0.18 / 365)
Thus the total debit product for the month is 50500.

The debit interest for the month @ 18% will be 50500 * 18 / 36500 = 24.90
There is no limit on the number of transactions in a Current account, and service

charge is levied based on the number of transactions and the average credit
balance in the account.
Current accounts are primarily maintained for companies and other businesses, to execute
financial transactions resulting out of their day-to-day business operations. The number of
transactions, therefore, are bound to be high, and no restriction in terms of number of
transactions are imposed. However, to offset the cost incurred in processing the transactions,
banks levy a service charge on Current account.
The service charge is levied based on the number of transactions and the average balance in
the account. The method for calculating the service charge (or folio charges as it is often
referred to) is as follows :
!
Each Ledger folio can accommodate 40 transactions.
Based on the average credit balance in the account, a customer is eligible for a
specified number of free folios i.e. as long as the number of folios is within the
specified number, no service charge is levied.
For every additional folio beyond the number of free folios, a customer is charged
around Rs. 25/- per folio. These charges and number of free folios varies from bank to
bank.
A sample relation between the average account balance and the number of free folios
is as given below :
Average Balance
Number of Free Folios
Upto Rs. 1500/1500 5000

5000 10000
10000 25000
Over 25000
0
3
5
10
No folio charge
The folio charges are debited to the account at the end of every half-year.
Current Accounts are also opened for Electricity Bills collection and for Share Issue
Application Form Collection.
Current Accounts are opened for maintaining the funds pertaining to applications for share
issues, and for collection of electricity bills.
In case of share issues, if the bank branch is a banker for the share issue, then an account is
opened for the particular share issues. The cash / cheque / stockinvest submitted with the
share application forms are credited to this account.
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Similarly, Current Accounts are opened in the name of the company supplying electricity. The
subscribers pay the bill by submitting the bill along with the cash / cheque to the bank branch.
The bank branch will credit the cash / cheque collected to the Current Account of the
company.
5.2
We have already studied while discussing Savings module, the operational procedure followed
at the branch for processing financial transactions. The same procedures apply to Current
account as well. The main differences are as follows :
The number of Current accounts in a branch is quite low compared to Savings accounts,
however the number of transactions will be considerably higher for Current accounts. The
number of Current accounts will be high in branches which are located in areas with
concentration of traders and other small businesses. A typical branch with a high number
of Current accounts will have about 1000 Current accounts and the number of vouchers
will be around 1000 1500.
Teller System for cash payment is not available for Current accounts (this is however
subject to each banks operational procedure).
No interest is paid on the credit balances maintained in Current accounts.
Interest on the debit balance is charged at the end of every month.
Folio charges are debited to the account at the end of each half-year.
5.3
Deficiencies / Limitations of the manual system
The deficiencies in the manual operational procedure, which we discussed with regard to
Savings module, are applicable for Current account as well. In addition, under the manual
functioning, the following additional constraints are faced by the bank branch :
Interest Calculation for Current account is done based on the daily debit balances. Thus
the user will have to go through the ledger book, and for each account identify the days on
which the account had a debit balance, and sum up the interest for all these days. This is
a time consuming process and has to be done at the end of each month.
Service charge based on the number of transactions, is debited to the Current account at
the end of each half-year. The calculation of the folio charge requires the bank personnel
to compute the average balance of the account. This is very time consuming.
The number of transactions is usually very high for Current Accounts, and the customers
frequently require account statements from the bank branch for maintaining their own
account books. Under the manual system, producing account statements frequently is
very difficult; and hence, the bank branches usually give a statement to the account
holders at the end of each month.
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6. CASH CREDIT/OVERDRAFT ACCOUNT

6.1
Concepts
We have already studied the working of Current accounts. Cash Credit and Overdraft
accounts are running accounts, which function, for all practical purposes like a Current
Account. The main difference is that under Cash Credit and Overdraft accounts, a credit limit
is sanctioned to the account against some security. This account is primarily for business
needs.
The limit is sanctioned for meeting the working capital requirement only. It is generally a
practice not to sanction 100% gap and borrower has to fund 10-25% from its own sources as
margin.
Cash Credit Accounts are usually opened by companies, small businesses, and individuals for
their day-to-day financial transactions and working capital requirements.
We shall study some of the basic definitions, rules governing CC/OD accounts.
Cash Credit is an advance given by the bank against a security in the form of
tangible assets like goods, stocks etc. to service working capital requirement.
e.g. Credit limit sanctioned to a company producing textiles, against the pledge of stock
maintained by the company is a case of Cash Credit.
Overdraft is an advance given by the bank without any security, or against

securities like shares, banks own term deposit receipt etc.
A credit limit sanctioned to an individual against the pledge of share certificates, or a clean
overdraft without any security is an example of an overdraft account.
Cash Credit / Overdraft account work as explained below :

!
The customer who wants to open a CC/OD account with the branch has to submit the
proposal along with financial statements (Balance Sheet, Profit & Loss statement) for
sanctioning of limit. After appraising the customers credit requirements, and his ability
to repay, the bank would sanction a credit limit, and open a Cash Credit Account for
the customer. The account opening formalities are similar to a current account.
The limit sanctioned for a Cash Credit account is a secured advance. Overdrafts
sanctioned may be secured or unsecured. The bank will sanction the limit against
security. The bank has to be given the charge of the security, through appropriate
documents. The mode of charge could be Lien, Pledge, Hypothecation etc.
Depending on the mode of charge, the bank would collect the necessary documents
from the customer, which would facilitate the bank to dispose off the security, and
recover the dues, in the event of the customer not being able to repay the advance.
Although the credit limit is sanctioned, the customer is not obliged to withdraw the
funds immediately, and can make the withdrawal anytime he requires to do so. The
customer can withdraw money from the account, subject to the condition that the debit
balance in the account does not go beyond the credit limit sanctioned.
The customer is charged debit interest only for the period during which the credit limit
is utilised.
Interest is not paid on the credit balances maintained in CC / OD accounts. Normally,

CC/OD accounts are not expected to have credit balances.
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Cheque Book facility is available to CC/OD accounts.
Requirements for opening a CC/OD Account

A customer wishing to open a CC/OD Account has to approach the officer concerned.
Along with the account opening form additional documents like the company balance
sheet etc. may have to be submitted depending upon the size of the advance. Documents
for transfer of possession of the security may have to be submitted to the bank after being
duly filled up, and obtaining the signatures of the authorised signatories.
Mode of Operation of CC/OD Accounts

Mode of operation governs how and by whom the account is going to be operated. The
Mode of Operation of the account is to be specified by the customer in the Account
Opening form. The Mode of Operation for a CC/OD Account may be specified as SELF,
EITHER OR SURVIVOR, AUTHORISED SIGNATORIES etc.
There is no limit on the number of transactions in a CC/OD account, and service

charge is levied based on the number of transactions, and the average balance in
the account.
CC/OD accounts are primarily for companies and other businesses, to execute financial
transactions resulting out of their day-to-day business operations, and also to meet their
working capital needs. The number of transactions are quite high, and no restriction in are
imposed on the number of transactions. However, to offset the cost incurred in processing
the transactions, banks levy a service charge on CC/OD account.
The service charge is levied based on the number of transactions, and the average
balance in the account. The method for calculating the folio charge is as follows :
!
Each Ledger folio can accommodate 40 transactions.
Based on the average balance in the account, a customer is eligible for a specified
number of free folios i.e. as long as the number of folios is within the specified number,
no service charge is levied.
For every additional folio beyond the number of free folios, a customer is charged
around Rs. 25/- per folio.
The sample relation between the average account balance and the number of free
folios is as given below :
Average Balance
Number of Free Folios
Upto Rs. 1500/1500 5000

5000 10000
10000 25000
Over 25000
0
3
5
10
No folio charge
The folio charges are debited to the account at the end of every half-year (this may
vary between banks).
The bank branches have to keep track of documents / securities due for renewal,
and statements due to be submitted by the customer periodically.
A number of securities and documents are submitted by the customers while opening an
account. These documents and securities have an expiry date i.e. beyond the expiry date
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the documents are not valid. The bank personnel are required to keep track of these
documents which are expiring, and renew the document at the appropriate time.
Also in some cases, the customer is expected to submit stock statement periodically. If a
customer does not submit the statement on time, then the account status is to be set to
overdue. The officer concerned has to keep track of the statements due, and take
appropriate action if a statement is not submitted.
Consider the following illustration:
A Demand Promissory Note is valid for a period of 3 years only as per the Indian Limitation
Act. Thus if a CC/OD account continues beyond 3 years, then a fresh Demand Promissory
Note has to be obtained from the customer. The bank branches maintain a diary to keep track
of these documents / securities due for renewal.
6.2
The procedure followed for processing financial transactions for CC/OD accounts is identical
to Current accounts. The differences between Current and CC/OD accounts are explained
below :
In the case of CC/OD accounts, a Credit Limit is sanctioned to a customer against certain
securities.
This is the limit in terms of amount upto which the customer can draw funds. Bank decides
this limit based on the working capital requirements and securities that the customer
provides. Suppose the Credit limit sanctioned for a customer is Rs. 10,00,000; this means
that the customer is eligible to overdraw upto Rs. 10,00,000 on his CCOD account.
Depending upon the mode of charge of these securities, the customer may be required to
submit statements to the bank branch periodically. If a customer does not submit the
statement on time, or if the limit expires, then the account is marked as overdue. The
officer at the branch keeps track of these events by maintaining a diary of such events.
Once an account status becomes overdue, the entire outstanding balance becomes due.
Until the outstanding amount is repaid or the account is set back to Normal again,
overdue interest will be charged to the account for the period. The overdue interest is
charged to the account along with the debit interest chargeable on the debit balance. The
charging of the debit interest as well as the overdue interest will be done at the end of
each quarter of the financial year.
Margin is the minimum contribution that the bank expects from the customer/ borrower
which is specified as a percentage of the value of the advance sought. In other words, it is
the customers stake.
For example, if the customer is providing a security of Rs. 200,000 for an advance and
bank specifies a margin of 20%. This means that the bank will contribute 80% of the value
(i.e. Rs. 160,000) and the customer will have to bear balance 20% (i.e. Rs. 40,000).
Based on the securities submitted by the customer, the bank will compute the Drawing
Power (DP). The drawing power is the amount upto which the bank will make the
disbursement to the borrower.
The computation of the drawing power for an account is linked to the security provided and
Credit limit sanctioned.
Drawing power is re-calculated at regular frequency, as per term of sanction agreed upon
at the time of sanction, based on the stock statement submitted by the customer. To
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safeguard interest of the banks money, officials do the inspection of the stocks as stated
by the customer, for the contents and value, at stipulated intervals.
The method of computation of the drawing power is as followsDrawing Power =
Amount)
Minimum (Total Credit Limit Sanctioned, Security Value Margin
Examples
1. Customer has been sanctioned a limit of Rs. 2,00,000. The customer is providing stock as
a security whose value is Rs. 400,000. The margin specified by the bank is 20. What is the
Drawing Power ?
Stock Value
= Rs. 400000
Margin
= 20% of Stock Value

= (20/100) x 400,000
= Rs. 80,000
Advance Value = Stock Value Margin Amount

= 400000 80000
= Rs. 320000
Drawing Power = Minimum (Sanctioned Limit, Advance Value)
= Minimum (200000, 320000)
= Rs. 200000
2. What is the DP if the Stock Value is Rs. 200000 ?
Advance Value = Stock Value Margin Amount
= 200000 40000
= 160000
Drawing Power = Minimum (Sanctioned Limit, Advance Value)
= Rs. 160000
6.3
Interest Calculation
There is no credit interest in this account. Debit interest is charged based on the number of
days for which advance amount has been utilized. Penal interest is charged based on the
number of days on the amount, which is overdue because of exceeding the Drawing Power or
non submission of stock statement or expiry of limit.
The sanctioned Credit Limit is Rs. 500,000. Drawing Power is Rs. 200,000. Debit Interest is
14% and Penal interest is 16%.
Date
1
EoD
Balance
1,90,000
2,10,000
10
15
24
30
Debit Product
Debit Interest
Penal Product
Penal Interest
190000
72.87
(190000 x 1 day)
18,90,000
(190000x0.14)/365
724.93
90000
39.45
(210000 x 9 days)
(1890000x0.14)/365
(210000 210000)
x 9 days
(90000x0.16)
/ 365
1,40,000
3,00,000
1,50,000
2,00,000
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1,00,000
st
th
Calculations have been illustrated for the period 1 to 10 . The remaining can be completed
on similar lines.
6.4
Deficiencies / Limitations of the manual system
The manual procedure followed for CC/OD accounts is identical to the procedure followed for
Current accounts. Thus the deficiencies / handicaps specified for Current accounts are
applicable to CC/OD accounts as well.
In addition to the handicaps mentioned under the Current module, for CC/OD accounts the
bank officers are required to keep track of the statements due from the customer, and the
securities and documents due for renewal. Under the manual system the bank branch
manages this by having some mechanism of diarisation. However, this is difficult manually.
One often finds that there are quite a number of accounts for which the credit limits sanctioned
have expired, but still the account continue to function normally without a renewal of the
sanction.
6.5
ALPM Operations
ALPM stands for Automatic Ledger Posting Machine. Basically ALPMs are PCs, PC/XT or
PC/AT on which software for maintenance of a single type of account (among Savings,
Current and CC/OD) is installed.
The ALPMs were introduced to overcome some of the deficiencies of the manual system
which we saw in the previous section.
The main benefits of the ALPMs are the following :
Interest Calculation is done automatically by the ALPM.
Each ALPM can hold master data related to a large number of accounts. In the manual
system, the number of accounts that each counter can handle is restricted by the physical
limitation on the number of ledgers that can be placed on each counter. Using an ALPM,
this limitation can be overcome.
Also answering customer queries regarding account balances is much simplified.
Customer statements can be generated using the ALPM.
Some of the limitations of ALPM are as follows:
Each ALPM can be used to handle a specific account type only. Also since the ALPMs are
standalone, each ALPM can handle a restricted set of accounts only.
Transfers between accounts maintained on separate ALPMs cannot be executed

simultaneously.
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7. INLAND REMITTANCES
In this section the basic definitions, rules governing demand drafts, pay-orders and mail
transfers are discussed.
7.1
Need for Remittance Facility
In order to understand the need for remittance facilities and the various modes of remittance
available let us first consider an illustration.
Illustration 1 :
An educational institution located in Ahmedabad will send Application Form and prospectus for
the courses offered, against payment of a certain amount. Very often the applicants to the
course will be located in remote places, and hence would want the application form to be
mailed to them against payment by cheque. However, cheques take considerable time to get
cleared (upto 21 days if the issuing branch is remotely located). The institution expects
payment immediately.
Suppose that the applicant is based in Bombay.
In such a situation the usual practice is as follows :
The institution would specify that the payment towards the Application Form may be made
through Demand Drafts drawn on a bank branch where the institution is situated, and
favouring the institution.
An applicant would approach a bank branch in Bombay and request them to issue a
Demand Draft drawn on their branch in Ahmedabad.
The bank branch would issue a Demand Draft to the customer and simultaneously send a
credit advice to the bank branch on which the DD is drawn.
The Applicant will send the DD along with the request for the Application Form to the
institution.
The institution will present the DD to the drawee branch and will be paid immediately
based on the Credit Advice from the issuing branch.
In the above illustration the Demand Draft serves the purpose of a fast realisation of funds
against instrument issued from a remote location. Thus the main requirement of the
institution i.e. early realisation of the payment is satisfied. Other modes of remittance are
also available for transfer of funds from one location to a remote location.
7.2
Modes of Remittance
Banks offer the following modes of remittance :

Demand Draft
Demand Draft is an instrument which is issued by a bank branch favoring a particular person /
organization, and will be drawn on a branch of the bank. However, small banks with thin
network of branches enter into agency arrangement with other banks having widespread
network for issuance of draft at places where small banks do not have a branch, in order to
service their customers. The bank branch will send an advice to the drawee branch, so that
payment will be made immediately when the demand draft is presented at the drawee branch.
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For example, in the illustration given above the customer may request his bank branch in
Bombay to issue a draft drawn on the Ahmedabad branch of the bank. When the institution
presents the DD at the Ahmedabad branch it will be paid immediately.
Pay Order
Pay Order or Bankers Cheque is an instrument, which is used for effecting local payments, i.e
within the same city. Pay Orders are also used by bank branches for making their own
payments.
Unlike Demand Drafts, Pay Orders have to be presented at the issuing branch for payment.
The bank branch issuing the Pay Order will hand over the instrument to the customer, who in
turn will hand it over to the beneficiary of the Pay Order. The beneficiary will deposit the Pay
Order into his account, and through clearing this instrument will come to the issuing branch for
payment.
Mail Transfer
Mail Transfer is an instrument which is used to transfer money to the account of an individual /
organisation at a remote branch. Depending on the urgency two modes of transfer are
possible viz.
!
!
Postal Transfer
Telegraphic Transfer.
In case of a Postal Transfer the bank branch issuing the Mail Transfer will send the MT
instrument along with the credit advice to the drawee branch by post. The drawee branch will
credit the account upon receipt of the advice.
In the case of Telegraphic Transfer the issuing branch will send a coded telex message to the
drawee branch advising them to execute the credit leg of the transfer. The drawee branch will
execute the transfer as soon as it receives the telex message. The MT instrument and the
credit advice will be sent later by post.
7.3
Reconciliation of Accounts between branches
In the case of Demand Drafts and MT, the issuing branch issues the draft against payment by
cash, cheque or transfer from other account. Payment against the DD / MT is made by the
Drawee branch based on the advice. Thus in the transaction, the issuing branch owes the
drawee branch an amount equivalent to the DD / MT amount. This is taken care of through the
inter-branch reconciliation (IBR) system.
When a branch issues a draft it will send a branch reconciliation advice to the Head Office.
Similarly when the drawee branch makes payment against a draft, it will send a branch
reconciliation advice to the Head Office. At the Head Office, the originating entry and the
responding entry will be matched and reconciled, and the accounts of the respective branches
with the Head Office will be credited or debited.
7.4
Procedure related to Inland Remittances
We have seen 3 modes of remittance in the previous section viz. Demand Drafts, Pay Orders
and Mail Transfers. In this sections we shall see the procedures followed at the bank branches
for operations related to the above modes of remittances.
7.4.1
Demand Drafts
The operations related to Demand Draft are as follows :
Issue of DD
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Cancellation of DD
Issue a duplicate DD
Place Stop-Payment on a DD issued
Extend the validity of a DD issued
Record advices from other branches for DDs drawn on the branch
Record and Revoke Stop Payment against DDs drawn on the branch
Make payment against DDs drawn on the branch
The bank branch maintains a register to keep track of the DDs issued.
7.4.1.1 Procedure for Issue, Cancellation, Duplicate Issue of Demand Draft
Issue of DD
The procedure followed at the bank branches for issue of a DD / PO / MT is as per the
following sequence of steps. The procedure is explained w.r.t. a DD. Similar procedure will be
followed for MT / PO.
The customer fills up the DD requisition Form. The Requisition Form contains details
regarding the drawee to whom the remittance is payable and also the place on which the
DD is to be drawn. The customer will hand-over the DD Requisition Form at the DD
counter.
The counter operator will prepare the pay-in slip for collecting the payment towards the DD
issue. The amount to be paid would include the DD amount and the commission. In case
the customer wants to make the payment in cash, then he has to get the pay-in slip
stamped by the Receiving Cashier after handing over the cash.
The counter operator will ensure that the payment towards the DD issue has been made.
If the payment is through a debit from any other account of the customer with the branch,
then vouchers will be raised to debit the customers other account.
The counter operator will then prepare the DD and make an entry in the DD Issue
Register.
The DD and the register will then be passed on to the authorised officer for obtaining his
signature. After obtaining the signature of the officer, the DD will be handed over to the
customer.
Each bank branch has a booklet containing the name and signature and an identification
number of all the authorised signatories of the bank as a whole. Thus the drawee branch
will be able to verify the signature when the draft is presented for payment.
At the end of the day, a consolidated advice will be sent to all the branches on which DDs
have been drawn and also a consolidated Branch Reconciliation Advice will be sent to the
Head Office for reconciliation purposes.
Each bank has its own mechanism for reconciliation and the procedures may vary
accordingly.
Similar procedure is followed for MT / PO. However, in the case of PO, since the PO is
payable at the issuing branch itself, there is no need for sending advices or for inter-branch
reconciliation. Also in the case of Mail Transfers, particularly Telegraphic Transfers, a coded
message is sent to the drawee branch through Telex.
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The accounting entry passed at the time of issue of a draft will be,
Dr. / Cr.
Credit
Credit
Debit
Account
DD Issued
Commission on DD Issued
Cash /
HO A/c. Clearing /
Other Account
Amount
DD Amount
Commission Amount
DD Amount + Commission
Amount
Cancellation of DD
A DD will be cancelled at the request of the customer. The Branch personnel after validating
the instrument and the customers signature will make the payment to the customer.
Cancellation charges will be recovered from the DD amount. The DD Issue Register will be
updated. The branch will send a debit advice to the drawee branch and the Zonal Office to
reverse the credit advice sent at the time of issue of the DD.
The accounting entry passed at the time of issue of cancellation of a draft will be,
Dr. / Cr.
Debit
Credit
Debit
Credit
Account
DD Issued
Cash /
Other Account
Cash /
Other Account
DD Cancellation A/c
Amount
DD Amount
DD Amount
DD Cancellation charges
DD Cancellation Charges
Issue of Duplicate DD
The customer may request the branch to issue a duplicate DD in case of loss of the original
DD. The branch will charge an additional charge and issue the DD. When a duplicate DD is
issued, a debit advice will be sent to reverse the credit advice sent at the time of issue of DD,
and a credit advice will be sent for the issue of the duplicate DD. Request of duplicate DD is
acceded only after confirming if the original has not being paid.
Similar administrative procedure for issue of DD will be followed even in case of duplicate DD
issue.
7.4.1.2 Set Stop-pay on DDs and Revoke Stop-pay
In case a customer loses a DD and if it has not already been encashed unscrupulously, the
customer may place stop-payment instruction in order to prevent encashment of the DD. The
bank branch will advice the drawee branch regarding the stop-payment. Similar stop payment
can be given for PO, provided it is outstanding in the books of the bank, i.e. not paid.
The stop payment may similarly be revoked at a later point of time if needed.
No accounting transaction is passed for the operations related to stop payment.
7.4.1.3 Revalidation of DD
This operation needs to be performed to extend the validity of a Demand Draft. Demand drafts
have a validity of 3 months. If the DD is not encashed within this time period, then it has to be
re-validated by the issuing branch. The DD becomes valid only after it has been re-validated
and can be encashed.
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7.4.1.4 Procedure for Payment towards DDs drawn on the branch

The bank branch will receive advice from any other issuing branch for DDs drawn on the
branch. These advices will be recorded in the Demand Drafts Payable Register. When the DD
is presented for payment the bank branch will validate the instrument and make the payment.
In some cases payment may be made even without the advice. This happens when the DD is
presented before the advice reaches the bank branch.
The Accounting entries passed while making payment towards DDs are the following :
Dr. / Cr.
Debit
Credit
Account
DD Payable / DPWA (Draft
Paid Without Advice)
Cash /
Other Account
Amount
DD Amount
DD Amount
In the case of Mail Transfers if details regarding the account to which the money is to be
transferred is not cleared, then the money will be temporarily parked in a Sundry account. On
a later date the Sundry account will be debited and the transferee account credited.
7.5
Deficiencies / handicaps of the Manual Operations
The main deficiencies / handicaps of the manual operations are as follows :
The time taken for issue of DDs is quite high. This is mainly due to excessive time spent in
administrative functions such as preparation of DD instruments, updating the DD Register,
Preparation of vouchers, flow of vouchers to the cashier or to the other departments etc. In
a crowded branch it takes close to an hour to get a DD issued, and the bank usually
requests the customer to collect the DD on the following day. Thus the customer service is
very bad.
Preparation of Advices to be sent to the drawee branch, Head Office takes up

considerable time.
Voucher flow between departments cannot be avoided and this, apart from causes
considerable confusion and discrepancy in the tallying of GL / Daybook at the end of the
day.
Considerable time is spent in generation of statistics, reports since this requires scanning
through the registers.
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8. CASH DEPARTMENT PROCEDURE

8.1
Introduction
Currency chests are maintained by the banks/branches, in terms of the agreement with RBI
and at the discretion of RBI. This is a reservoir of currency where RBI notes and coins are
maintained on behalf of RBI.
In a branch, this Currency chest is held in the joint custody of the Cash Officer / Chief Cashier
and the Branch Manager. Both these persons have to be present when the Cash Safe is
opened.
8.2
Operation on the Currency Chest
Cash is drawn from the Currency Chest at the beginning of the day in order to meet the needs
of the bank/branch. There are no restrictions on the number of withdrawals in a day from the
chest. The amount to be withdrawn is first entered denomination wise by the Cash Officer in
the cash officers jotting book from which entries are made in the vault register by the other
joint custodian.
Similarly at the end of the day, the Cash officer arrives at the amount to be deposited in the
currency chest and the entries for the amount to be deposited are made in the cash officers
cash jotting book and the vault register. Entries in the vault register are to be initiated by both
the joint custodians.
The difference between the days withdrawals from and the days deposits into the chest is
known as the currency transfer. In view of the free currency transfers available at the branches
maintaining Currency chests, as fine a cash balance as practicable should be worked out. The
net amount withdrawn or deposited in the chest is credited and debited respectively to the
Currency Transaction account maintained in the GL.
The currency chest book is kept in duplicate, one copy being retained in the strong room and
the other by the cash officer. Each day transaction in the currency chest takes place, the cash
officers copy is written up and balanced. Entries are checked and initialed by both the
custodians. It is then substituted for the copy in the strong room which is taken out, brought
upto date and checked and initialed by both of them.
8.3
Procedure for obtaining cash from the Cash Officer
The responsibility for the effective working of and control over the cash department is primarily
of the Cash officer. He/she has the primary control of cash. He/she distributes to and receives
cash from the cashiers, allocates duties to the cashiers and maintains Currency chest, Branch
cash balance and cash officers jotting book.
After the cash officer takes out cash from the strong room for the days operation, the cashier
obtains from the cash officer his estimated requirements of cash for the day. The Cashier
takes over the cash and gives receipt for the cash by signing the Cash receipt / Delivery
book maintained by him and the Cash officers initials against it.
At times the cashier obtains cash from another cashier. In such cases, they make necessary
entries in each others Cash receipt / Delivery book
8.4
Record of Cash Transactions
A record of all cash paid and received at the counter is maintained by the cashier in the Cash
payment register and the Cashiers Receipt Scrolls respectively. Record of Bank and govt.
transactions are maintained in separate payment registers/receipt scrolls. At the end of the
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day, the totals of payments and receipts are carried to the appropriate columns in the Cash
officers Cash jotting book.
8.5
Procedure for turning in and balancing of cash
At the end of the day, cash is taken over by the Cash Officer from various cashiers after
making suitable entries in cash receipt / delivery books maintained by them. All the days
transactions are entered cashier-wise, in the cash officers jotting book, in which the currency
transfer and closing cash balances are arrived at. The totals of various columns in the cash
officers Cash jotting book are tallied with the books maintained in the accounts department,
the cash balance book and the currency chest book.
8.6
Custody of Keys
Particulars of all important keys, including those of the cash officer are entered in a key
register. The register shows the particulars of all original and duplicate keys and where they
are to be found. Entries in respect of keys in their custody are initialed by the officials holding
them.
The box containing the duplicate keys of the branch is locked or otherwise secured and sealed
by the branch manager with the branch seal in the presence of the head cashier and other
supervising officials whose important duplicate keys are also placed inside the box duly sealed
with their personal seals. The box is labeled with the name of the branch and is signed by the
branch manager and is then deposited at the nearest branch of the bank or with the local
treasury or another bank of good standing.
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TATA Consultancy Services

Introduction to Banking Part I

ABOUT THIS DOCUMENT...................................................................................................... 2

WHAT IS BANKING ? ............................................................................................................. 3

CASH CREDIT/OVERDRAFT ACCOUNT ............................................................................ 42

COMPONENTS OF ACCOUNTING .......................................................................................9

SAVINGS ACCOUNT ............................................................................................................ 23

ACCOUNTING CONCEPTS .................................................................................................... 9

NEED FOR REMITTANCE FACILITY ...................................................................................47

CASH DEPARTMENT PROCEDURE ................................................................................... 52

Tata Consultancy Services

Introduction to Banking Part I

1. ABOUT THIS DOCUMENT

Organisation of this Document

Introduction to Foreign Exchange

This is the first part (Part I) of the Introduction to Banking.

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Introduction to Banking Part I

The Business of Banking

Interest Received on Advances

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Introduction to Banking Part I

2.2.1.1 Demand Deposit

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Introduction to Banking Part I

Resources (Funds) Management

Relationship between a Banker and a Customer

Introduction to Banking Part I

Banking System in India

The Indian Govt. established three Presidency banks in India

Bank of Calcutta (Bank of Bengal) - 1806/1809

Reserve Bank of India (RBI)

Tata Consultancy Services

Introduction to Banking Part I

Tata Consultancy Services

Introduction to Banking Part I

Banking Structure in India

Reserve Bank of India

Dev. Fin. Inst.

Reg. Rural Banks

Land Dvlp. Banks

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Introduction to Banking Part I

Accounting is the process of recording the monetary transactions of business entities.

Liabilities are amounts or balances that a Bank owes others.

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Introduction to Banking Part I

3.1.2.3 Contingent Liability

Fundamental Accounting Equation

Total Assets = Total Liabilities

Business Entity Concept

Financial Position at the beginning of 1st day of operation

Introduction to Banking Part I

Financial Position at the end of 1st day of operation

The Loans advanced will go up by Rs. 10000

Thus the net effect will be as follows :

5000000/2500000/1000000/0 + 2000 = 2000

There are three types of accounts:

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Introduction to Banking Part I

Double Entry System

Income : For example - Interest received, Commission received, etc.