KNOW YOUR CUSTOMER (KYC)

 KYC means “Know Your Customer”. It is a process by which banks

obtain information about the identity and address of the customers.
 This process helps to ensure that banks’ services are not misused.
The KYC procedure is to be completed by the banks while opening
accounts.
 Banks are also required to periodically update their customers’
KYC details.
 KYC guidelines were introduced in year 2002 by RBI and all banks
were asked to make all accounts KYC compliant by 31 December
2005.
 These guidelines are issued under Section 35 A of the Banking
Regulation Act, 1949.

Types of KYC
Electronic know-your customer
(e-KYC)
It could be defined as a procedure that would enable a customer to walk in to
the bank with an Aadhaar number and open an account by only by getting his
fingerprint scanned. With the help of Unique Identification Authority of
India (UIDAI), bank’s system will pull out all data of the customer that is
stored online which includes name, address, age and other relevant data
necessary and it will also save a copy of the KYC document that remain
stored in UIDAI’ servers. The bank will only print out the account opening
form with all the details of the customers already in it.

 C-KYC
It stands for Central KYC. With uniform norms and inter-usability, central
KYC registry across all financial sectors has been set up as a depository
for KYC records. This new process, without asking customers to provide
multiple KYC undertakings will help banks, mutual funds, brokerage firms
and depository participants offer services. After complying with the new
CKYC norms, a unified customer identification code is generated, and it
will be used whenever KYC will be required. This initiative has been
started for the purpose of centralising and streamlining KYC process.
Duplication of KYC will be avoided after this, less scope of forgery will be
there.

Why KYC is Important for Banks?

 Customer Acceptance Policy– To ensure that explicit guidelines

are in place for acceptance of customers.
 Customer Identification Procedures– To identify the customer
and verify his/her identity by using reliable, independent source
documents, data or information.
 Monitoring of Transactions– Understand as well as observe the
normal and reasonable activity of the customer in order to identify
transactions that fall outside the regular pattern of activity.
 Risk management– Establish appropriate procedures and
ensuring their effective implementation.
 Prevent Financing of Terrorism:

One of the major objecive of KYC is to establish the identity of the

customer and understanding their business and financial dealings.
Without understanding financial dealings of customer, it is not
possible to check if there are suspicious transactions, which may
actually be going to some terrorist organization.

 Prevent Identity Theft:

Without following KYC norms, there is a risk of benami or fictitious

account being opened. Benami or fictitious accounts are those accounts
which are being opened by one person in the name of an unknown
person, who actually does not exists. These accounts are used to evade
taxes, park black money or money earned through criminal activities and
for money laundering purposes.
What are the risks involved due to KYC?
There are different types of risk involved for the banks in the proper
implementation of KYC:

1. Reputational Risk

Some instances like if a terrorist resort to identity theft and if they open a
bank account in a particular bank and later on if the public will come to
know about it then this would create a sense of insecurity among the
public and this would harm the bank’s reputation and it would be hard for
the bank to attract customers in future. Hence, banks must keep proper
care of the norms.

2. Operational Risk

This can be considered as a risk of loss due to failed internal processes of

the bank, people, and systems or also from external events.

3. The Risk that arises legally:

If some business or a bank would get involved with any illegal activity it
will attract penalties and adjudications also. If a body does not follow KYC
norm it would be subject to penalty.

4. Financial Risks:

If a bank without complying with KYC Norms, gives loan to a customer

and later the bank fails to identify the customer then it will be hard for
the bank to retrieve its money, so it will result in a financial loss.
5. Concentration Risk:

With an aim to attract more customers its usual tendency of banks to

focus more on a particular geographical area or involve in a particular
kind of business activity. It would lead to great risk if there will be any
sudden downfall in that focused area.

When does KYC Required?

 While establishing banking relationship, i.e. at the time of opening the
account
 When there are changes to signatories, mandate holders, beneficial
owners, etc.
 While carrying out financial transactions, including investments
 While opting for credit cards/smart cards/prepaid cards
 For bank lockers
 For remittances in India (of Rs 50,000 and above) and abroad
 When bank/financial institution know about the authenticity or adequacy
of customer identification data

Use of KYC in some Institutions

For Banks While opening an account

While opening a bank account customer need to present any of the 6

identification documents and approved by the government of India.

 PAN Card,
 Passport,
 Driving License,
 Voters’ Identity Card,
  Aadhaar Card issued by UIDAI,
 MGNREGA Job Card.

Any one of these documents containing address is sufficient for opening

an account.

 While taking loan:

For taking loans there are other documents that are required to be
presented for approval of loan.

For Example, in case of home loans, a bank requires identity proof,

residence proof and age proof, bank statements for the last 6 months,
salary slips of the last 3 months, certificates of educational qualifications,
and others. The requirements of these documents are different for
salaried individuals, self employed-businessmen, self employed-
professionals ornon-residentt Indians.

 For Companies or Business Entities

Business entities that want to purchase Company Credit Reports (CCR),

have to provide any of these documents in the company’s name:

1. Bank Statement,
2. Electric bill,
3. Telephone bill
Steps taken by RBI for proper
implementation of KYC Norms
When the guidelines regarding KYC were introduced in the year
2002, the proper implementation was not made possible, in order
to complete their goal RBI asked banks to adopt some measures
for the existing bank accounts also.

Some of these are

 Public Notices were published in the national newspapers.

 Identification was made compulsory for zonal customers.
 Those customers who were not complying with the norms were forwarded
with individual notices.
 Also, a final notice for ensuring proper documentation within 7 days from
that particular day in the newspapers.

To prevent banks from being used, intentionally or unintentionally,

by criminal elements for money laundering activities . KYC
procedures also enable banks to know/understand their customers
and their financial dealings better which in turn help them manage
their risks prudently.

4 key elements of KYC policies

1) Customer Acceptance Policy;

2) Customer Identification Procedures;

3) Monitoring of Transactions;

4) Risk management
 Customer Acceptance Policy
The Customer Acceptance Policy must ensure that explicit
guidelines are in place on the following aspects of customer
relationship in the bank.

 No account is opened in anonymous

 Parameters of risk perception are clearly defined.
 Documentation requirements and other information to be
collected.
 Circumstances, in which a customer is permitted to act on
behalf of another person/entity, should be clearly spelt out
 Necessary checks before opening a new account
 Not to open an account or close an existing account where
the bank is unable to apply appropriate customer due
diligence

Customer Identification Procedures

The policy approved by the Board of banks should clearly spell out
the Customer Identification Procedure to be carried out at different
stages i.e. while establishing a banking relationship. i.e. while
establishing a banking relationship;

carrying out a financial transaction or when the bank has a doubt

about the authenticity/veracity or the adequacy of the previously
obtained customer identification data.

 Identifying the customer and verifying his/ her identity by

using reliable, independent source documents, data or
information.

 Verify the legal status of the legal person or entity through proper and
significant documents
 Verify that any person declaring to act on behalf of the legal person /
entity is so authorized and identify and verify the identity of that person
 To understand the ownership and control structure of the customer and
find out who are the natural persons who ultimately control the legal
person.
Monitoring Of Transactions

Monitoring of Transactions
 Banks should pay special attention to all complex, unusually large
transactions and all unusual patterns which have no apparent
economic or visible lawful purpose.
 Banks may prescribe threshold limits for a particular category of
accounts and pay particular attention to the transactions which
exceed these limits.
 Transactions that involve large amounts of cash inconsistent with
the normal and expected activity of the customer should
particularly attract the attention of the bank.
 Very high account turnover inconsistent with the size of the
balance maintained may indicate that funds are being ‘washed’
through the account.
 Every bank should set key indicators for such accounts, taking
note of the background of the customer, such as the country of
origin, sources of funds, the type of transactions involved and
other risk factors.
 Banks should put in place a system of periodical review of risk
categorization of accounts and the need for applying enhanced
due diligence measures. Such review of risk categorization of
customers should be carried out at a periodicity of not less than
once in six months.

Risk Management
Risk Management means an established centralised process for
coordinating and promulgating policies and procedures on a
groupwide basis, as well as robust arrangements for the sharing of
information within the group. Policies and procedures should be
designed not merely to comply strictly with all relevant laws and
regulations, but more broadly to identify, monitor and mitigate
reputational, operational, legal and concentration risks. Similar to
the approach to consolidated credit, market and operational risk,
effective control of consolidated KYC risk requires banks to
coordinate their risk management activities on a groupwide basis
across the head office and all branches and subsidiaries.
The Board of Directors of the bank should ensure that an effective
KYC programme is put in place by establishing appropriate
procedures and ensuring their effective implementation.

Responsibility should be explicitly allocated within the bank for

ensuring that the bank’s policies and procedures are implemented
effectively.

Apart from the key elements the other things that a bank should
look into customer education, introduction of new technologies,
applicability to branches outside India and appointment of principal
officer.

Documents required for KYC from the

customers:
For identifying a customer, documents are very important. The
documents varies for Banks, Companies, Partnership firms, and so
on.

For Individual Accounts:

For opening an individual account, 6 documents are declared as

‘Officially Valid Documents’ by Government of India that can be
presented as proof of identity which are:

 PAN Card,
 Passport,
 Driving License,
 Voters’ Identity Card,
 Aadhaar Card issued by UIDAI,
 MGNREGA Job Card.
What is Money Laundering
When money is obtained from criminal acts such as drug trafficking or
illegal gambling, the money is considered “dirty” in that it may seem
suspicious if deposited directly into a bank or other financial
institution. Because the money’s owner needs to create financial
records ostensibly showing where the money came from, the money
must be “cleaned,” by running it through a number of legitimate
businesses before depositing it, hence the term “money laundering.”
Because the act is specifically used to hide illegally obtained money, it
too is unlawful.

Steps in Money Laundering

Money laundering is accomplished in many ways, though most include
three common steps, including
1. Obtaining the money or introducing it into the financial system in
some way
2. Transferring or concealing the source of the money through
complex or multiple transactions
3. Returning the money back into the financial world so that it
appears legitimate.

Ways Of Criminals To Avoid Detection

Large scale criminal groups may use complex money laundering
techniques in order to avoid detection. However, smaller scale
criminals or first time offenders often use simpler methods in their
attempt avoid detection. Such money laundering techniques may
include:
 Transferring money from bank to bank or from account to account
 Breaking up large amounts into smaller bank deposits
 Purchasing money orders in smaller money amounts
 Breaking the cash into small amounts and purchasing cashier’s
checks
Money Laundering Techniques
There are many forms of money laundering though some are more
common and profitable than others. Some of the more popular money
laundering techniques include:
 Bulk cash smuggling involves literally smuggling cash into another
country for deposit into offshore banks or other type of financial
institutions that honor client secrecy.
 Bank capture refers to the use of a bank owned by money
launderers or criminals, who then move funds through the bank
without fear of investigation.
 Real estate laundering occurs when someone purchases real estate
with money obtained illegally, then sells the property. This makes
it seem as if the profits are legitimate.
 Casino laundering involves an individual going into a casino with
illegally obtained money. The individual purchases chips with the
cash, plays for a while, then cashes out the chips, and claims the
money as gambling winnings.

Anti Money Laundering - AML

What is 'Anti Money Laundering - AML'
Anti-money-laundering refers to a set of procedures, laws and
regulations designed to stop the practice of generating income through
illegal actions. Though anti-money-laundering laws cover a relatively
limited number of transactions and criminal behaviors, their implications
are far-reaching. For example, AML regulations require institutions
issuing credit or allowing customers to open accounts to complete due-
diligence procedures to ensure they are not aiding in money-
laundering activities. The onus to perform these procedures is on the
institutions, not on the criminals or the government.
Anti-money laundering laws entered the
global arena soon after
How Anti-Money-Laundering Action Helps Reduce Overall
Crime?

Money-laundering investigations center on parsing financial records for

inconsistencies or suspicious activity, and these financial records often tie
perpetrators to criminal activity. In today's regulatory environment, extensive
records are kept on just about every significant financial transaction.
Therefore, when trying to uncover the identity of a criminal, few methods are
more effective than locating records of financial transactions he or she was
involved in.

Terrorists, organized criminals and drug smugglers rely extensively on money

laundering to maintain cash flow for their illegal activities. Taking away a
criminal's ability to launder money hampers the criminal operation by shutting
off cash flow. Therefore, fighting money laundering is a highly effective way to
reduce overall crime.

In cases of robbery, embezzlement or larceny, the enforcing agency can

frequently return the funds or property uncovered during money-laundering
investigations to the victims of the crime. For example, an agency discovers
money a criminal laundered to cover up embezzlement, the agency can
usually trace it back to the source of the embezzlement. While this does not
nullify the original crime, it can put the money in question back in the proper
hands.

Overview of Money Laundering Process

Money laundering has one purpose - to turn the proceeds of
crime into cash or property that looks legitimate and can be
used without suspicion. Here are some of the most common
ways this is achieved.
Sources of Illegal Money:
The common sources of illegal money or black money are
 Trafficking of drug, arms, human beings.
 Terrorism.
 Tax evasion.
 Organised Crime like kidnapping, contract killing, gambling,
prostitution, bank frauds, money paid to gangsters/ criminals for safety
of business (protection money), Money earned through adulterated
products, corruption.
 Slush funds or Black funds – Secret reserve of money by Corporates
for bribery to politicians or donation to political parties.
 Capitation fee – illegal fees sought by educational institutions.
 Money lenders who charge extremely high interest also called as loan
sharks.
 There are usually two or three phases to the
laundering:
1. Placement
2. Layering
3. Integration / Extraction

Placement –This is the movement of cash from its source. On occasion the
source can be easily disguised or misrepresented. This is followed by placing it
into circulation through financial institutions, casinos, shops, bureau de change
and other businesses, both local and abroad. The process of placement can be
carried out through many processes including:

1. Currency Smuggling – This is the physical illegal movement of currency and

monetary instruments out of a country. The various methods of transport
do not leave a discernible audit trail

2. Bank Complicity – This is when a financial institution, such as banks, is

owned or controlled by unscrupulous individuals suspected of conniving
with drug dealers and other organised crime groups. This makes the process
easy for launderers. The complete liberalisation of the financial sector
without adequate checks also provides leeway for laundering.

3.Currency Exchanges – In a number of transitional economies the

liberalisation of foreign exchange markets provides room for currency
movements and as such laundering schemes can benefit from such policies.

4.Securities Brokers – Brokers can facilitate the process of money

laundering through structuring large deposits of cash in a way that disguises
the original source of the funds.

5.Blending of Funds – The best place to hide cash is with a lot of other cash.
Therefore, financial institutions may be vehicles for laundering. The
alternative is to use the money from illicit activities to set up front
companies. This enables the funds from illicit activities to be obscured in
legal transactions.

6.Asset Purchase – The purchase of assets with cash is a classic money

laundering method. The major purpose is to change the form of the proceeds
from conspicuous bulk cash to some equally valuable but less conspicuous
form.

Layering – The purpose of this stage is to make it more difficult to detect

and uncover a laundering activity. It is meant to make the trailing of illegal
proceeds difficult for the law enforcement agencies. The known methods are:

1. Cash converted into Monetary Instruments – Once the placement is

successful within the financial system by way of a bank or financial
institution, the proceeds can then be converted into monetary
instruments. This involves the use of banker’s drafts and money orders.
2. Material assets bought with cash then sold – Assets that are bought
through illicit funds can be resold locally or abroad and in such a case
the assets become more difficult to trace and thus seize.

Integration – This is the movement of previously laundered money into

the economy mainly through the banking system and thus such monies appear
to be normal business earnings. This is dissimilar to layering, for in the
integration process detection and identification of laundered funds is provided
through informants. The known methods used are:

1. Property Dealing – The sale of property to integrate laundered money

back into the economy is a common practice amongst criminals. For
instance, many criminal groups use shell companies to buy property;
hence proceeds from the sale would be considered legitimate.
2. Front Companies and False Loans – Front companies that are
incorporated in countries with corporate secrecy laws, in which criminals
lend themselves their own laundered proceeds in an apparently
legitimate transaction.
3. Foreign Bank Complicity – Money laundering using known foreign banks
represents a higher order of sophistication and presents a very difficult
target for law enforcement. The willing assistance of the foreign banks is
frequently protected against law enforcement scrutiny. This is not only
through criminals, but also by banking laws and regulations of other
sovereign countries.
4. False Import/Export Invoices – The use of false invoices by import/export
companies has proven to be a very effective way of integrating illicit
proceeds back into the economy. This involves the overvaluation of
entry documents to justify the funds later deposited in domestic banks
and/or the value of funds received from exports.
Methods of Money Laundering
Loan Repayment of loans or credit cards with
Repayment illegal proceeds
Gambling Purchase of gambling chips or placing bets
on sporting events
Currency The physical movement of illegal currency or
Smuggling monetary instruments over the border
Currency Purchasing foreign money with illegal funds
Exchanges through foreign currency exchanges
Blending Using a legitimate cash focused business to
Funds co-mingle dirty funds with the day's legitimate
sales receipts

Method 1 – Use of third parties

To avoid direct involvement in the money laundering process,
criminals may seek to buy property using a third party or family
member as a legal owner. Criminals provide illicit funds to a third
party to purchase real estate on their behalf. In some cases, third
parties may be 'cleanskins' – complicit third parties who have no
criminal record.
Criminals may use a third party's bank account to deposit and
withdraw illicit funds to buy property. Alternatively, criminals may
use third parties to transact on their behalf. The use of third parties
distances criminals from the illicit funds, disguises ownership and
complicates asset confiscation efforts by authorities.

Method 2 – Use of loans and mortgages

Criminals use loans or mortgages to layer and integrate illicit funds
into high-value assets such as real estate. Loans or mortgages are
essentially taken out as a cover for laundering criminal proceeds.
Lump sum cash repayments or smaller 'structured' cash amounts
are used to repay loans or mortgages. This allows illicit funds to be
commingled with legitimate funds. 'Loan-back' schemes are an
example of this method.
Loan-back schemes involve criminals borrowing their own illicit
funds. Foreign offshore companies controlled by criminals are
used as an apparently 'arms-length' lender. The loan is then used
to buy real estate and repayments are made using illicit funds. This
process hides the true nature of the funds and gives the loan
repayments an appearance of legitimacy.

Method 3 – Manipulation of property values

Manipulation of property values involves criminals buying and
selling real estate at a price above or below market value. Buyers,
sellers and/or third parties (for example, real estate agents) collude
to under or overestimate the value of a property. The difference
between the actual and stated values is settled with undisclosed
cash payments.

Part A – Under-valuation
Under-valuation involves recording the property value on a
contract of sale which is less than the actual purchase price. The
difference between the contract price of the property and its true
worth is paid secretly by the purchaser to the vendor using illicit
funds. The criminal (purchaser) is able to claim that the amount
disclosed in the contract as having been paid is consistent with
their legitimate financial means. If the property were sold at the
market or higher value, the apparent profits would serve to
legitimise the illicit funds. This method is also used to pay less
stamp duty. The lower a property value, the less stamp duty
payable.

Part B – Over-valuation
Criminals may overvalue real estate with the aim of obtaining the
largest possible loan from a lender. The larger the loan, the greater
the amount of illicit funds that can be laundered to service the debt.
When applying for a loan, criminals may submit false
documentation about the true value of the property. The loan and
interest is then repaid, either as a lump sum payment or in
instalments, using illicit funds.
Part C – Successive sales at higher values
Criminals may further confuse the audit trail by reselling property
in quick succession. The property is sold at a higher value, either
to related or acquainted third parties, or to companies or trusts
controlled by the criminal. This gives an appearance of seemingly
legitimate profits while the criminal maintains ultimate control over
the property.

Method 4 – Structuring of cash deposits to buy

real estate
The deliberate structuring of cash deposits has been observed in
money laundering through real estate (10). Criminals deposit cash
below the AUD10,000 reporting threshold, often at different banks
or bank branches, to avoid triggering threshold transaction reports
to AUSTRAC. This method often involves high volumes of
transactions to numerous accounts to avoid detection. The funds
are then used to obtain bank cheques to buy real estate.

Method 5 – Rental income to legitimise illicit funds

Criminals lease out properties to generate rental income. In an
effort to legitimise illicit funds, criminals provide the tenant with
illicit funds to cover rent payments, either partially or in full.
Criminals can also deposit their illicit funds into an account as
'fictitious' rent which gives the appearance of legitimate rental
income. These illicit funds disguised as 'rental payments' are
deposited on a regular basis or in advance. In doing so, criminals
commingle legitimate rental income with illicit funds and
successfully integrate illicit funds into the financial sector.
Criminals may also buy property in a third party's name and pay
that third party rent using illicit funds. By 'renting' their own
property via a third party, criminals can disguise illicit funds and
ownership.

Method 6 – Purchase of real estate to facilitate

other criminal activity
Criminals may buy property using illicit funds with the intention of
conducting criminal activity at the property; for example,
cultivating cannabis or producing synthetic drugs. Funds
generated from this criminal activity may then be used to buy
additional properties. By investing illicit funds in real estate,
criminals aim to disguise the original source of the funds.

Method 7 – Renovations and improvements to

property
Criminals use illicit funds to pay for renovations, thereby
increasing the value of property. Additionally, contractors and
tradespeople may not declare cash payments received for the
renovations, to evade tax. The property is then sold at a higher
price. The use of illicit funds to pay for property renovations
enables layering and integration

Method 8 – Use of front companies, shell

companies, trust and company structures
Front companies, shell companies, trusts and company structures
established domestically or offshore are used to launder money
through real estate. Property titles held in the name of a company
or a shell company distance the criminal from ownership, with
control vested in the hands of third parties to avoid any obvious
links to criminals.

Basic precautions, banks are required to take

to prevent money laundering:
 Company with KYC Guidelines.
 Satisfy itself about sources of funds.
 Satisfy itself about the legitimacy of transactions.
 Monitor transactions and report suspicious transactions.

 Law enforcement agencies have designed strategies based on the three-

staged money laundering cycle, which is rarely used by financial
institutions to identify risks.
 The risks a bank faces during the money laundering cycle are classified
into two categories – criminal environment and product and service risk.
 Banks should overlay the relevant Anti-Money Laundering and Counter
Financing of Terrorism legislative elements once it has mapped out the
risks it faces to ensure preventive measures on illegal activity are
effective.
But the money laundering cycle is rarely used by financial institutions to
identify the risks they face from money laundering. Instead, Anti-Money
Laundering and Counter Financing of Terrorism (AML/CFT) policy and
frameworks are developed around relevant local and international laws.
Gaps in the law are easily exploited by criminals, which is why
compliance is not effective in preventing money laundering. Rather than
design policy and responses to ensure compliance with AML/CFT law; a
bank should first identify the risks it faces during each stage of the
money laundering cycle. Those risks would be classified into two
categories: (1) The criminal environment, comprising local and
international crime groups, and (2) product and service risks.
Following should alert a fraudulent Banker

 Insufficient,false or suspicious information provided by customers.

 Cash deposit not consistent with the activity of the customers.
 Purchase of DD/Pay order or EFTs not consistent with the activity or
known income of the customer.
 Receipt of wire transfers followed immediately by outward
remittance.
 Request for Loan Immediately after placing a fixed deposits.
 Regular or Frequent cash deposits immediately followed by outward
remittance.
 Frequent Cash transactions just below the threshold for reporting
(Cash /DD below Rs.50,000, cash deposits into accounts below Rs. 10
Lakhs etc.)
 Transactions that donot make apparent sense , such as circular
transfers between several accounts, inward and outward remittance
from/to the same party etc.
 Transactions that would arouse the suspicion of any person of
reasonable intelligence.
 Legal Aspects of Opening & Operation of different types of A/C
A bank opens accounts for various types of customers. While opening
the accounts, the banker has to keep in mind the various legal aspects
involved in opening and operation of these accounts, as also the
practices followed in conducting these accounts. Normally the banks
have to deal with the following types of deposit customers:
 Individuals
 Proprietorship Firms
 Partnership Firms
 Limited Companies
 Clubs and Associations
 Trusts
 Executors and Administrators
 Cooperative Societies
 Government, Local Bodies & Corporations Account etc.

Opening of Accounts:
As the banker-customer relationship is a contractual relationship, all
the essential features of a valid contract must be present when a
banker opens an account. The actual formalities will differ depending
on the type of the customer. Certain formalities are common to all.
These are:
1. The banker must ensure that the customer is competent to contract.
2. The banker should obtain an account opening form, which should
be filled in all respects by the account holder.
3. The banker should also obtain his specimen signature for
verification in future of his signature in cheques, etc., signed by
him.
4. After the formalities are over, the banker should issue a cheque
book to the customer, indicating his account number. Customers can
be supplied with Pay-in Slip books for making deposits.
5. Recent KYC guidelines require the banker to obtain the
photographs of the depositors/account holders, proof of identity like
copy of passport / driving license / voter’s ID card / employment ID
 card / ward commissioner’s certificate / U.P chairman’s certificate
and proof of residence like electricity / Telephone / Municipal bills
etc., and also transaction profile of the account holder.
Introduction:
The depositor should be properly introduced to the bank. At present,
all accounts, whether current or savings have to be introduced. The
purpose of the introduction is to identify the person for whom the
account is being opened. Introduction also serves the purpose of
obtaining legal protection under Section 131 of the N.I. Act, so that
the banker is not liable for negligence while opening the account.

Usually banks accept introductions from the following categories of

people:
 An account holder with a satisfactory account;
 A confirmed Officer/employee of the bank;
 A locally well-known person;
 Another bank – in this case the opening bank may again write directly
to the introducing bank to confirm the introduction.
Bankers may specifically ask for and obtain the period for which the
customer is known to the introducer and also for the confirmation of
the address of the customer.

Procedure for Introduction:

Normally, the introducer is expected to come to the bank to sign the
account form. In case this is not possible and the introducer either
sends a letter or the Account Opening Form signed by him, the bank,
after verifying introducer’s signature also sends a letter of thanks to
him for introducing the new customer. This serves to verify whether
the introducer actually introduced the account. A letter of thanks is
also sent to the depositor by post /courier service to verify his address.
Why Introduction / Identification?
 Protection against fraud
 Protection against inadvertent overdraft
 Protection against undercharged Bankrupt
 Protection against negligence under sec. 131 of the N.I Act.
 Protection against giving incorrect information to fellow bankers.
 Every customer, when he opens the account and signs the AOF, is
deemed to have read the rules of business and confirm in writing his
willingness to comply with rules and be bound by them.
Accounts in the Name of Individuals:
The banker should ensure that the account is opened with cash and
not with a cheque, draft payable by some other bank or branch. This is
to ensure against the possibility of the very first cheque deposited
being a stolen or forged cheque. If the bank collects such cheque or
draft, it will not have the protection of Sec. 131 if the first deposit was
not by way of cash, because the banker-customer relationship was not
established.
Mandates:
A bank account holder has a primary right to operate upon his account
maintained with the particular bank. No person other than the account
holder can order the bank to debit his account (except a competent
court).
A mandate is an authority given by the account holder in favor of a
third person to do certain acts on his behalf. This is issued by an
account holder with a direction to his banker authorizing the person to
operate the account on his behalf.
 In case a customer wants his account to be operated by another
person, a mandate in writing to that effect together with the specimen
signature of the agent who is to operate the account should be
obtained by the banker.
 Power to draw and endorse cheques does not include the power to
overdraw the account. So, if a customer wishes to allow his agent to
overdraw the account , the mandate should clearly state this.
 It is unstamped letter signed by the account holder addressed /
submitted to the bank.
 The signature of the person so authorized should be appended in the
letter of mandate and the same should be verified by the
customer/account holder.
 A letter of mandate is generally issued for a short and temporary
period.
 In case of joint account holders all the parties concerned must sign
the letter of mandate irrespective of operational instructions.
 A mandate comes to an end, on death, insanity, insolvency and
bankruptcy of the account holder.
 A mandate can be withdrawn at any time by the account holder.
 The instructions should be carefully noted in the ledger account of the
account holder and also in the specimen signature card/sheet.
 The mandate letter should be properly filed and securely kept. There
should be an updated index.

Opening & Operation of a Minor’s Account:

The banker can open a savings account. It will not be advisable to
open a current account of a minor since in case of an overdraft the
minor does not have any liability. The savings account may be opened
in any of the following ways:
a. In the name of minor himself, if he has attained at the age of 10
years and can sign uniformly.
b. In the joint names of minor & his/her guardian.
c. In the name of guardian like as ‘X natural guardian of Y’.

Precautions to be taken:
 The banker should record the date of birth of the minor properly.
 The guardian should not be allowed to operate the account
after attaining a majority or after the minor’s death.
 In case the guardian dies before the minor attains having a joint
account or to be operated by the guardian only, the money should be
paid by the bank to the minor on attaining majority or to some person
appointed by the court as his guardian.
 If the minor dies, the amount of his/her credit balance is to be paid to
his/her next kin on the production of a succession letter or a letter of
administration.
 In case a banker is compelled to grant a loan to a minor he must see
that
a) it is granted either for the necessaries for his/her life against
sufficient securities, or
b) against a joint promissory note in which one of the parties is an
adult or
c) against an indemnity bond given by the adult.
 Some privileges of a Minor guaranteed by Law:
 A contract entered into by a minor is void and that is not enforceable.
 Even if he borrows money by falsely representing himself as an adult,
he cannot be compelled to repay the loan since the contract is a void
one.
 An adult, who gives a bill of exchange for the debt contracted during
the period of his infancy, can not be sued.
 A minor has the right to get back the securities pledged for the
purpose of securing a loan even without repaying the loan.
 A minor can never be appointed as a trustee.
 A minor can enjoy the benefits of a partnership firm, but he is not
liable for the debts of the partnership firm.
 A minor can act as an agent of an adult who has given the necessary
authority to him.
 Section 26 of the Negotiable Instrument Act.1881 permits a minor to
draw and endorse any Cheque, bill or promissory note. It will be valid
against all parties excepting a minor.
 A minor can be appointed as an executor, but he can commence his
work only after his coming of age.
 A guarantee given by a minor is not valid.
 A minor cannot be adjudged as an insolvent either on his own petition
or of others.
Law protects the minor because he is not matured enough to form a
rational
judgment to things and some unscrupulous persons may take
advantage of
his immaturity.
Lunatic Person:
As per Section-12 of the Contract Act 1872, persons of unsound
mind are disqualified from entering into a valid contract. Although he
can enter into valid contracts during lucid intervals.
However, no banker knowingly opens an account in a lunatic’s name.
But if an existing customer becomes insane, banker must immediately
stop the operation of the account till it receives a proof of his/her
sanity or gets an order of the court to the effect.
 However, the banker will not be responsible if it honors a cheque or
bill duly drawn, accepted or endorsed by the lunatic unless it is
proved that the bank knew his/her lunacy at the time of honoring or
discounting. Usually the court appoints a receiver when a customer
becomes insane and the banker can safely deal with that receiver.
Illiterate Person:
An illiterate person can open an account with the bank
subject to following conditions:
 Thumb impression should be obtained on the AOF & SS card in
presence of an authorized official.
 Two attested copies of recent photographs should be obtained &
attached with AOF & SS card.
 One or two identification marks should be noted on the AOF & SS
card with the proper authentication, and
 Finally a letter of undertaking shall be obtained from him to the effect
that he will not operate on the account unless he personally comes to
the bank & put his thumb impression on the cheque in presence of the
bank manager/ officer in charge.
Married Women:
 There is no bar and a banker may open even a current account in the
name of a married woman.
 But in case of allowing any overdraft in such account, banker must
ensure whether she has any separate estate or property in her own
name.
 Woman’s husband cannot he made liable for any debt incurred by
her unless:
 She acts as agent of her husband.
 Personal guarantee is given by her husband.
 The debt has been incurred for purchasing some articles of her
necessities which the husband has not provided to her.
Pardansheen Women:
Since the identity of a pardansheen lady is not possible, bank may
open such account after being sure about her identity and observing
certain formalities. But it is always advisable not to entertain such
request to open a/c in the name of a pardansheen lady. A contract with
pardanasheen lady is presumed to have been induced by undue
 influence and therefore, a banker has to be extra cautious while
dealing with her.

Joint Accounts:
 A joint account is an account opened by two or more persons.
 The account opening form should be signed by all the joint account
holders.
 The names, addresses and other details of all of them should also be
obtained on the account opening form.
 The account holders should also indicate how the account is to be
operated – the banker should obtain specific directions as to one or
more of them will operate on the account.
 When a joint account is in the name of two persons, the operations
may be by:
• Both jointly or by the survivor
• Both jointly
• Either or survivor
• Former or survivor
A joint account in the name of more than two persons may be
operated upon by:
• All of them jointly or by survivors of them jointly or by the last
survivor
• Any one of them or by more than one of them jointly or by one or
more of the survivors of them or by the last survivor.
Sole Proprietorship Firm:
• Account should be opened in the name of the proprietorship firm
and to be operated by the proprietor concerned or by any other person
as per mandate in absence of the proprietor.
• In case of the death of the proprietor the balance of the account
be payable to the nominee and in the absence of the nominee, to the
successor(s) on production of the succession certificate from the
court.
 While opening of the account the owner of the sole
proprietorship concern is required to produce the following
documents:
 Valid trade license
 Tax Identification Number (TIN)
 Mandate, if necessary
 Photograph
 Transaction profile
Partnership Account:
• Partnership firm’s account cannot be opened in the name of an
individual partner.
• A banker should get a written request from all the partners for
jointly opening an account.
• Banker should go through the partnership deed and carefully
study the objects, capital, borrowing power etc. The banker should see
that the firm is a registered one and business, names and addresses of
all the partners.
• The partners should give clear instruction as to the operation of
the accounts of the firm.
• Any partner has the right to stop payment of a cheque issued by
any of the partners.
• If there is any dispute among the partners regarding the operation
of the account, the operations should be stopped and fresh instructions
obtained.
• A partner has no authority to give a guarantee on behalf of the
firm.
Company's A/c:
While opening A/c’s of companies banker should obtain & examine
the following documents:
• Certificate of Incorporation
• Certificate of Commencement of business (In case of Public
Limited Co.)
• Memorandum & Article of Association
• List & address of all Directors
• Board's Resolution to open the account & the names of the person
authorized to operate the account. The chairman of the Board of
Directors should sign the resolution.
• Balance Sheet.
Mandate:
Along with resolution the banker must call for a mandate from the
company which will contain the following points:
• The names of persons authorized to operate the account and their
specimen signature must be specifically given. It is essential that the
signature on the Cheque must be expressed to be on behalf of
the company. Otherwise, the company may not be liable, only the
directors will be liable personally.
• The nature and the extent of the powers delegated to the
authorized persons must
be laid down in the mandate. The banker should see weather the
authority given is extended to the transaction, advances, securities
and safe custody as well.
• Whenever the company wants to introduce any change in the
operation in the account, fresh resolution and mandate be given.

Trust Account:
• According to the Trusts Act, 1882, a ‘Trust’ is an equitable
obligation annexed to the ownership of property, and arising out of a
confidence reposed in and accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the
owner.
• The person who reposes the confidence is called the author of the
trust. Trustee is the person in whom the confidence is reposed. The
person for whose benefit the trust is formed is called the beneficiary.
• A trust is usually formed by means of a document called the
‘Trust Deed’.
• While opening an account in the names of persons in their
capacity as trustees the banker should take the following precautions:
 The banker should thoroughly examine the Trust Deed appointing the
applicants as the trustees. The Trust Deed contains the names of the
trustees, power vested in them for administering the trust property and
other terms and conditions.
 The trustees are authorized to act jointly and are not competent to
delegate their powers unless the Trust Deed authorizes them to do so.
 The banker should examine the trust deed to ascertain the powers and
functions of the trustees.
• In case of two or more trustees, the banker should ask for clear
instruction regarding the person or persons who shall operate the
account.
• In the absence of such instruction all the trustees must sign the
cheques, etc., because the estate is placed under their joint charge.
• If one or more of the trustees dies or retires, the authority vested
in the remaining trustees depends upon the provisions of the Trust
Deed.
• When all the trustees are dead , new trustees may be appointed by
the court.
• The insolvency of a trustee does not affect the Trust property and
the creditor of the trustee cannot recover their claims from such
property.
Papers to be required to open Trust Account:
 Trust Deed copy for scrutiny of the rules regarding the opening and
operation of deposit account.
 Resolution for opening account by trustee Board stating Bank’s
name.
 List of Trustees & signed Mandate.
 Resolution regarding operation of account.
 Account opening Form (AOF), Specimen signature card (SSC),
Cheque Requisition Form properly filled in.
Special Features of Trust Account:
 Trustee can open the account in the name of the trust or in the name of
the Trustees.
 Trust property to be controlled for the benefit of the beneficiary.
 Violation of Trust Deed/Rules by the Trustees is called Breach of
trust.
 A/C will be operated as per delegation laid down in the trust Deed.
 No Trustee can delegate his power to 3rd party.

Executors and Administrators Account:

Executors and administrators are persons who are appointed to
conduct the affairs of a person after his death. When a person known
as testator (person making the will) appoints another person to
 administer the estate of testator in the event of his death through a
‘Will’ is known as an executor.
 Any alteration or addition in the original will might have been
made in a separate instrument called ‘codicil’ which also forms a part
of the will.
 When an Executor is not named in the ‘will’ or if the person
appointed as executor dies or refuses to act or is incapable of acting,
the court appoints a person for the purpose. He is known as
administrator.
 Both the executor and the administrator perform the same duties,
i.e., to realise the assets of the deceased and to pay off his debts.
 The executor is appointed by the will. His powers and authority
are vested therein. He has to act according to the directions given in
the will, but he is required to obtain a probate (official confirmation of
the will) from the court.
 The administrator is appointed by the court through a letter of
administration and is directed, in the absence of the will, to settle the
affairs according to the provision of the law.
The administrator derives his power from the letter of administration.
This letter may give full/limited power to deal with the estate.
 The banker should take the following precautions while dealing
with the executors and administrators:
 On the death of a customer, the banker must stop payments from his
account. The executor should be permitted to operate the account of
the deceased after he has obtained the probate from the court.

Executors Account opening and operation:

a) Account may be opened after H.O approval.
b) Must produce grant of probate certified copy for scrutiny the name
and address of executors.
c) Identity of Executors to be ensured.
d) List of executors name with signature and account will be opened
in official capacity.
e) Executor’s power to open & operation of Banks account.
f) AOF/SSC/ Photo properly filled in.
g) Not to mix with personal account.
h) Mode of operation – jointly or all to sign.
i) After death/ retirement /lunacy new executors will be appointed as
per probate.

Administrators Account opening and operation:

 Account may be opened after H.O approval.
 Certified copy of letter of Administration will be obtained.
 Request letter for opening bank account.
 Account opening and operation as per letter of administration.
Administrator can only operate upon account.
 Mode of operation should be joint in case of several
administrators.
 AOF/SSC/ Photo properly filled in.
 Not to mix with personal account.
 Administrator can not delegate his power to third party.
When an administrator becomes insolvent or lunatic his appointment
stands terminated. A new Administrator is appointed under fresh
letter of Administration. On the death of administrator Court will
appoint the new one.
Government ,Local Bodies & corporations Account:
Every wing of govt. authority and Local authority shall make
arrangement for the proper administration of their financial affairs
and shall secure that one of their officers has responsibility for the
administration of those affairs. Officers deal these financial affairs
through the opening of a bank account.
Opening and Operation:
 Before opening the account any Govt. or semi Govt. or local body a
certified copy of the STATUTE will be taken.
 Or, certified copy of any other Law/Regulations by which the body is
created and governed.
 Request letter for opening bank account.
 Copy of resolution is passed by the local authority authorizing an
officer to open bank account with the bank name and branch.
 Branch manager specially satisfies himself as regards the provision
about the dealings with the fund, opening, operation of the bank
account in the ‘Statute’.
 Name, style, and nature of account must be stated in the statute or
resolution.
 Any Govt. account will be opened and operated as per official
capacity, subject to the permission from the competent authority.
 Account of Regimental fund (Army account) should be opened and
operated as per the letter of authority from the ‘Controller of Military
Account’.
 Operation of account in contravention of ‘Statute’ will not be
allowed.
 Cash transaction should be done cautiously. Pre advice should be
taken in case of cheque drawings.
 In case of changing officer or office bearer new
authorization letter will be taken issued by competent authority.
 Monthly statement of account & quarterly balance confirmation to be
served.

Club, Societies Etc. : Bye laws, Resolution of the managing

Committee, Registration certificate, etc. and other usual formalities.
School, College, Madrasa etc.: Approved list of the managing
committee, Resolution of the managing committee to open account in
a bank etc.
Closing of a Bank Account:
The relationship between banker and customer is a
contractual relationship. Like any other contract, therefore, it may be
terminated as and when the parties so desire. Moreover, the banker is
under certain legislative provisions. The position of banker regarding
closing of customer’s account may be summed-up as follows:
 Customer’s Request
 Unclaimed Deposit Account
 Death of customer
 Insanity of the customer
 Insolvency of the customer
 Undesirable customer
 Attachment order issued by the income Tax authorities
 On receipt of Garnishee Order
Garnishee Order:
 Garnishee order refers to the order issued by a court attaching the
funds of the judgment debtor (i.e., the customer) in the hands of a
third party (i.e., the banker.)
 The term ‘garnishee’ refers to the person who has been served with the
order.

Time Deposits
When money is deposited with a “tenure” , it cannot be
withdrawn before its maturity fixed at a particular time. Such
deposits are called “Time deposits” or “Term deposits”. The
most common example of Time deposits is “Fixed Deposit”.
All time deposits are eligible for interest payments. Interest
rate depends upon the tenure and amount of deposit. This rate
varies from bank to bank. The interest rate is generally higher
for time deposits of longer tenure. On the basis of their nature,
time deposits may be of three types as follows:

Fixed Deposit A/c

Fixed deposits are investment instruments offered by banks and non-
banking financial companies, where you can deposit money for a
higher rate of interest than savings accounts. You can deposit a lump
sum of money in fixed deposits for a specific period, ranging from 7
days to 10 years.

Once the money is invested with a reliable financier, it starts earning

an interest based on the duration of the deposit. Usually, the defining
criteria for FD is that the money cannot be withdrawn before
maturity, but you may withdraw them after paying a penalty.
Features of Fixed Deposits
• Fixed deposits enable investors to earn higher interest on their
surplus funds
• You can deposit money in a fixed deposit account only once, but to
deposit more money, you need to create another account
• Though liquidity in fixed deposits is lesser, you can look for higher
rates of interests, which are higher in case of company fixed deposits
• Fixed deposits can be easily renewed
• Tax is deducted at source, from interest on Fixed Deposits as
applicable, as per the Income Tax Act, 1961.
Benefits of Fixed Deposits

There are several advantages of fixed deposit investments, some of

which have been given below:
• They are the safest investment instruments, and offer greater
stability
• Returns on fixed deposits are assured, and there is no risk of loss of
principal
• You can opt for periodic interest payouts, to help you manage your
monthly expenses
• There is no effect of market fluctuations on your fixed deposits,
which ensures greater safety of your investment capital
• You can benefit from higher interest rates offered by company fixed
deposits
• Some financiers also offer greater returns for senior citizens
Disadvantages

 Not surprisingly, FD as an investment is less risky then this aspect is

the reason why its returns are lower compared to other investment
options.

 Then there is an issue of liquidity, while your money is locked up with

the bank, it is not easy to withdraw at a moment's notice.

 In fact if you withdraw before the agreed duration, you will be

penalised. Also, there is no tax benefit in this investment, unlike the
infrastructure bonds or the National Savings Certificate (NSC).

 So, even from a taxation point this is not the best of investment
options.

 Some banks charge as much as 1 per cent, if you beak the deposit
early, which means you need to either make sure that you invest in
multiple deposits of small amounts.


 Recurring Deposit
Recurring Deposit Meaning:
In banking terminology, the term recurring deposit refers to the periodic
placement of a fixed sum of funds with a bank or financial institution into
a special term account, with a specified tenure, generally between one
and five years. At the end of the tenure, the funds are typically
withdrawn by the depositor with accrued interest.

Recurring Deposit Example:

For example, a recurring deposit plan is most commonly used by people
with a regular income to set a portion of their income aside each month
in order to make a large purchase in the future. When the Recurring
Deposit account is opened, the maturity date and monthly installments
are agreed upon between the depositor and the financial institution. If
any installment is missed or delayed, interest payments towards the
account are deducted as a penalty, which is generally specified when
the account is opened. The rate of interest on recurring deposit accounts
is generally comparable to that of fixed deposit accounts.

Features of Recurring Deposit

RD offers you a fixed interest on the invested amount at a specific frequency till
the pre-determined term or up on maturity. At the end of the term, the amount
upon maturity(which is your invested capital) along with remaining or
accumulated interest is paid.
The main features of Recurring Deposit account are as follows:
 Recurring Deposit schemes aim to inculcate a regular habit of saving among
the public.
 Minimum amount that can be deposited varies from bank to bank. It can be an
amount as small as Rs.10.
 The minimum period of deposit starts at six months and the maximum period
of deposit is ten years.
 The rate of interest is equal to that offered for a Fixed Deposit and is hence
higher than any other Savings scheme.
 Premature and mid term withdrawals are not allowed. However, the bank may
allow to close the account before the maturity period, sometimes with a
penalty for premature withdrawal.
  RD offers the additional benefit of taking loan against the deposit, i.e., by
using the deposit as a collateral. About 80 to 90% of the deposit value can be
given as loan to the account holder.
 The Recurring Deposit can be funded periodically through Standing
Instructions which are the instructions given by the customer to the bank to
credit the Recurring Deposit account every month from his/her Savings or
Current account.
Pros
1. For a much smaller investment per month, get interest rates
equal to that of regular Fixed Deposits.
2. An investment as small as Rs. 500 (and in multiples of Rs. 100
thereafter) or as large as Rs. 14,99,900 or more per month. In
post office its minimum Rs 10.
3. TDS is not applicable on the Interest earned by Recurring
Deposits as per current income tax rules.
4. Availing nomination facility while booking deposit online.
5. Grace Days Facility upto 1 week {more or less}. If the
installment is paid in due grace period of the installment due
date, the customer will not be charged any penalty.
6. One can avail loans against the collateral of Recurring deposit
up to 80 to 90% of the deposit value.
7. Interest is compounded on quarterly basis in recurring
deposits.
8. A minimum tenure of 6 months (and in multiples of 3 months
thereafter) up to a maximum tenure of 10 years.

Cons :

 Interest Rates are low when compared to Fixed Deposit. Customers

get an interest rate of up to 9% for Fixed Deposits whereas the interest
varies from 7.5% to 8% for Recurring deposits.
 Recurring Deposits give guaranteed but low returns when compared
to other popular investment schemes like Mutual Funds and SIPs.
 A TDS of 10% will be deducted from the interest under section 194A
if the interest amount is more than Rs. 10, 000 a year.
 Withdrawals from a Recurring Deposit Account before the end of
tenure may attract penalty or lower the interest. Also, instant
withdrawals may not be possible in case of a financial emergency.
 In case the RD is not flexible, the customer will not be able to change
the monthly investment amount.
The Recurring Deposit Accounts may be of the following
types:

1. Home Safe Account or Money Box Scheme: For regular

savings, the bank provides a safe or box (Gullak) to the
depositor. The safe or box cannot be opened by the depositor,
who can put money in it regularly, which is collected by the
bank’s representative at intervals and the amount is credited to
the depositor’s account. The deposits carry a nominal rate of
interest.
2. Cumulative-cum-Sickness deposit Account: A certain fixed
sum is deposited at regular intervals in this account. The
accumulated deposits over time along with interest can be used
for payment of medical expenses, hospital charges, etc.
3. Home Construction deposit Scheme/Saving Account: In this
account, we can deposit the money regularly either for the
purchase or construction of a flat or house in future. The rate
of interest offered on the deposit, in this case, is relatively
higher than in other recurring deposit accounts.
Demand deposits
If the funds deposited can be withdrawn by the customer (depositor / account
holder) at any time without any advanced notice to banks; it is called demand
deposit. One can withdraw the funds from these accounts any time by issuing
cheque, using ATM or withdrawal forms at the bank branches. The money as
demand deposit is liquid and can be encashed at any time. The ownership of
demand deposits can be transferred from one person to another via cheques or
electronic transfers. There is no fixed term to maturity for Demand Deposits.
The demand deposits may or may not pay interest to the depositor. For
example, while we get an interest on savings accounts; no interest is paid on
current accounts.
As mentioned above, there are two types of demand deposits viz. savings
accounts and current accounts.
Savings Bank Account
As the name suggests this type of account is suitable for people who
have a definite income and are looking to save money. For example, the
people who get salaries or the people who work as labourers. This type
of account can be opened with a minimum initial deposit that varies
from bank to bank. Money can be deposited any time in this account.

Withdrawals can be made either by signing a withdrawal form or by

issuing a cheque or by using ATM card. Normally banks put some
restriction on the number of withdrawal from this account. Interest is
allowed on the balance of deposit in the account. The rate of interest on
savings bank account varies from bank to bank and also changes from
time to time. A minimum balance has to be maintained in the account
as prescribed by the bank.

Advantages of a Savings Account

1. Savings accounts will usually accrue interest over time.

Although interest rates have been extremely low since 2007, with many
savings accounts having an interest rate below 1%, you will still accrue
interest over time with an account. That means you have more earning
potential with your money compared to keeping it in a safe at home.

2. Savings accounts in the United States are insured.

When you open a savings account at a financial institution in the US, look
for it to say that it is insured by the FDIC or NCUA. This will protect your
savings to the maximum amount that is allowed by law. Standard deposit
insurance is limited to $250,000 per depositor, per insurance financial
institution, per each ownership category.

3. Your funds are still readily available.

With most banks and credit unions, you have online access to your funds
24 hours per day. All you need to have is a data connection or access to
the internet. Many institutions will allow you to link your savings account
to other accounts you may have, like a checking account, which can help
you to avoid costly overdraw fees. This also allows you to quickly transfer
funds from one account to another, even outside of regular banking
hours.

4. Your money is kept safe.

Because your money is being held by a third-party, it increases your
personal safety. Not only does storing cash on your property make you a
target for a potential robbery, but losses like that are not always covered
by a homeowner’s or renter’s insurance policy. If there was a fire in your
home or some other natural disaster, you could lose your cash as well.
Keeping your cash in a savings account keeps you and your money safer.

5. You can open an account with very little money.

Many savings accounts can be started for just $25. Some institutions may
have an even lower limit, sometimes allowing an account to be opened for
as little as $1. This gives you an opportunity to begin saving your money,
even if you don’t have much to save at the start.

6. Savings accounts can provide automated bill payments.

Many financial institutions allow bills to be paid automatically out of a
savings account without being subjected to the withdrawal and transfer
laws. This allows you to save time because you don’t need to manually
pay every bill each month and you’re less likely to experience late fees
because you missed or forgot a payment. Of course, you’ll need to have
money in the account to pay the bill, but if you do, you’ll be able to
maintain a better credit score over time.

7. You receive security.

A savings account gives you the opportunity to put away cash in case you
have an emergency situation. If you lose your job, for example, you’d be
able to draw upon your savings account for your monthly expenses. Or if
your water heater goes out, you could tap into your savings to purchase a
new one. Think of a savings account as a small insurance policy that can
help you maintain your current standard of living if something unfortunate
occurs.

Disadvantages of a Savings Account

1. Interest is often compounded monthly, or even annually, by

most financial institutions.
There are online banks that will compound your interest on a daily basis,
but most traditional banks or credit unions will only compound your
interest monthly. This means the full potential of your money isn’t always
realized, especially when compared to other investment opportunities.

2. There are withdrawal limits on a savings account.

You can easily transfer money from one account to another with
regularity, but in the United States, there are Federal limits on the
number and the types of withdrawals you can make per statement cycle.
This law is called “Regulation D” and limits you to no more than 6
transfers or withdrawals from each savings or money market account
during a calendar month. Checking accounts are exempt from this.
Additional transactions are often subject to an “excessive transaction” fee.

3. Some financial institutions charge fees for their savings

accounts.
There may be monthly fees charged to your savings account for it to be
maintained. To avoid this disadvantage, look for fee-free options at local
banks or credit unions for the best results.

4. There are insurance limits.

For the average American, who has less than $5,000 in savings right now,
the idea of an insurance limit is not much of a disadvantage. If you do
have more than $250,000 in net worth, however, you’ll need to be
conscious of where you put your cash to save it so that the account will
be fully covered. Insurance on a savings account is nice, but it does have
a cap on it.

5. Easy access to money means more temptations to spend it.

It’s a lot easier to spend your money when you have high levels of
accessibility to it. For this reason, many choose to use other savings
products, such as a Certificate of Deposit, to avoid the temptation of
spending it. CDs are a good option because they offer a higher interest
rate, but you also lose immediate access to your money unless you’re
willing to pay an early withdrawal penalty.

6. You may be required to carry a minimum amount.

If your savings account is a money market account, then many
institutions may require you to have a minimum of $2,500 in it at any
given time. Some institutions require a minimum monthly balance to
maintain the account. If your savings falls below this amount, then high
fees may be charged on a monthly basis until you restore the required
minimum balance.

The advantages and disadvantages of a savings account involve cash

access, long-term capitalization, and safety. Consider each key point and
you’ll be able to determine if starting a savings account or continuing to
maintain the one you have is the right decision for you.

Current Deposit Account

Big businessmen, companies and institutions such as schools,
colleges, and hospitals have to make payment through their
bank accounts. Since there are restrictions on the number of
withdrawals from savings bank account, that type of account is
not suitable for them. They need to have an account from
which withdrawal can be made any number of times.
 Banks open a current account for them. Like savings bank
account, this account also
requires a certain minimum amount of deposit while opening
the account. On this deposit, the bank does not pay any interest
on the balances. Rather the account holder pays a certain
amount each year as an operational charge.

These accounts also have what we call the overdraft

facility. For the convenience of the accountholders banks also
allow withdrawal of amounts in excess of the balance of the
deposit. This facility is known as an overdraft facility. It is
allowed to some specific customers and up to a certain limit
subject to previous agreement with the bank concerned.

Pros of Opening a Current Account

 Capable of handling large volumes of receipts and/or payments dexterously, a

current account carries out all business transactions promptly and properly.
 It enables limitless withdrawals in line with the levied cash transaction fees, if
any.
 No restrictions are applied on the deposits made into the current accounts
opened at the bank’s home branch. Additionally, account holders may also
deposit cash at other branches upon paying small fees as applicable.
 Cheques, pay-orders, or demand-drafts can be issued via a current account
for making direct payments to creditors.
 It enables banks to collect receipts on behalf of customers and credit the
same into the customer’s current account.
 Current account holder can enjoy overdraft (or short-term borrowing) facilities.
 The credit-worthiness information of account holders is freely available to
creditors via inter-bank connections.
 With facilities like mobile-banking and internet-banking to its credit, a current
account allows for easy and quick business transactions.
 From multi-location funds transfers to electronic funds transfers and more, it
provides for enhanced flexibility and user experiences.
 Account holders may download their bank statements (monthly, quarterly,
yearly or historical) via emails or in helpful formats such as ‘.TXT’, ‘XLS’,
‘.PDF’, etc.
 The presence of small interest earnings on account balance makes a current
account all the more attractive for its users.
 Cons of Opening a Current Account

 The applicable rate of interest earned on the available balance is really low.
 Most package accounts offer services at additional costs, thereby increasing
the overall operational burden.
 The involved paperwork and fine print serves to be lengthy and confusing.
 Corporate business transactions usually attract huge fees.
 There is a limit on the amount of funds that can be withdrawn in a day.
 Current accounts may have higher balance maintenace requirements than
savings accounts.
 Current accounts, generally do not provide interest. And, those current
accounts that do provide interest / profit (in case of Islamic accounts)
usually have high maintenance balance requirements.
 Current accounts may have higher service charges associated with them.
 Unlimited ATM withdrawals may not always be available with all current
accounts. For instance, HSBC’s Basic Current Account offers 8 free ATM
withdrawals a month.
 If there has been no transaction on your account for 7 years, the account will
be classified as unclaimed moneys under the Unclaimed Moneys Act (1965)
and the funds in the account will be transferred to the Registrar of
Unclaimed Moneys after sending you due notice(s). You can recover the
money from the Registrar by submitting requisite documents.
 Your bank may close your account if you regularly issue dishonoured
cheques or if your account is inactive (dormant account) after sufficient
notice(s) in writing have been issued.

Key Differences Between Savings Account and

Current (Checking) Account
The difference between savings account and current (checking) account
can be drawn clearly on the following grounds:

1. Savings account refers to an account that is meant for people who

keep their saving to fulfil their financial requirements in future.
Current (Checking) account is an active account which is meant for
day to day monetary transactions.
2. Savings account aims at encouraging savings of the general public
whereas current account supports frequent and regular
transactions of the account holder.
3. Saving Account is appropriate for salaried people and the group of
people like the club, trust, an association of persons, etc. for
regular savings. Conversely, Current Account is perfect for
 business entities, government departments, societies, institutions,
etc. because they have to deal with daily money transactions
4. There is a restriction on the number of daily and monthly
transactions, in the case of a savings account, i.e. if the transaction
limit exceeds the specified limit charges may apply. There is no
such cap for a Current Account, in essence, there is no restriction
on the number and amount of transaction.
5. The current account is non-interest bearing, but a saving bank
account earns interest, which is normally 4-8%.
6. Passbook is provided by banks on the savings bank account which
lists the number of debits and credits to.from the account datewise.
On the account, no passbook is issued by the bank to the current
account holders.
7. Bank overdraft facility is provided to the current account only and
not n the savings account.
8. The opening balance required to start a savings account is very
less. In contrast, current account requires high amount as the
opening balance, to start the account.

BASIS FOR
SAVING ACCOUNT CURRENT ACCOUNT
DIFFERENCE

Meaning Saving bank account is an Current account refers to a

account meant for individuals running account, in which
who like to save for meeting there is no limit on the
their future financial operation, during a working
requirements. day.

Objective To encourage savings of a To support frequent and

person. regular transactions.

Suitable for Individual Businessman or company

Interest Paid Not paid

Withdrawals Limited Unlimited

Passbook Provided by banks Not issued by banks.

Overdraft Not allowed Allowed

Opening balance Less amount is required to High amount is required for

open a savings bank account. opening a current account.

CASA Deposits
CASA Deposits refers to Current Account Saving Account Deposits. As an
aggregate the CASA deposits are low interest deposits for the Banks
compared to other types of the deposits. So banks tend to increase the
CASA deposits and for this they offer various services such as salary
accounts to companies, and encouraging merchants to open current
accounts, and use their cash-management facilities. The Bank is High
CASA ratio (CASA deposits as % of total deposits) are in a more
comfortable position than the Banks with low CASA ratios , which are
more dependent on term deposits for their funding, and are vulnerable to
interest rate shocks in the economy, plus lower spread they earn.
NRO, NE(E)RA and FCNA(A) Accounts
There are several kinds of accounts available for non resident Indians ,
Persons of Indian Origin and Overseas Citizens of India. They are as
follows:
Non Resident Ordinary Accounts: (NRO):
Any person resident outside of India can open this account. Normally,
when a resident becomes a non resident, his domestic rupee account gets
converted into the NRO account. This helps the NRI to get his credits
which accrue in India, for example rent or interest from investments.
Non-Resident (External) Rupee Account: (NR(E)RA
This account was introduced as NRE scheme in 1970. It’s a Rupee account
and the NRI can remit money to India from the funds abroad. This means
that depositor is exposed to the Currency rates risk.
Foreign Currency Non-Resident Account: (FCNR)
Foreign Currency Non-Resident Account Bank or FCNR (B) was first
introduced in 1993. It replaced the existing FCNR (A) scheme. This
account is opened by the NRIs in 6 designated currencies as follows:
1. US Dollar (USD)
2. Great Britain Pound (GBP)
3. Euro (EUR)
4. Japanese Yen (JPY)
5. Canadian Dollar (CAD)
6. Australian Dollar (AUD)
Credit Facility
What is a 'Credit Facility'
A credit facility is a type of loan made in a business or corporate finance
context, including revolving credit, term loans, committed facilities, letters
of credit and most retail credit accounts. Companies frequently
implement a credit facility in conjunction with closing a round of equity
financing or raising money by selling shares of its stock. A key
consideration for any company is how it will incorporate debt in its capital
structure while considering the parameters of its equity financing.
All types of credit facilities may broadly be classified into two groups on
the basis of Funding – 1. Fund Base Credit 2. Non Fund Base Credit

. Fund Base Credit is the any credit facility which involves direct
outflow of Bank’s fund to the borrower. Various types of it are as follows

BANK LOANS

The most common type of long-term credit facility is a term loan,

which is defined by a specific amount, tenor (that may vary from 1-10
years) and a specified repayment schedule. These loans could be
secured (usually for higher risk borrowers) or unsecured (for
investment-grade borrowers), and are generally at floating rates (i.e a
spread over LIBOR or EURIBOR). Before lending a long-term facility,
a bank performs extensive due diligence in order to address the credit
risk that they are asked to assume given the long-term tenor. With the
 heightened diligence, term loans have the lowest cost among other
long-term debt.

 Cash Credit: – It refers to credit facility in which borrower can borrow

any time with in the agreed limit for certain period for their working
capital need. It secured by way of Hypothecation of Stock(goods) and
Debtors and all other current Assets of the business generated during
the course of business. Cash credit can also be secured by way of
mortgage of immovable properties (as collateral security).
 Over Draft: – An overdraft allows a current account holder to withdraw
in excess of their credit balance up to a sanctioned limit. It secured by
way of Mortgage of immovable properties and pledge of F.D., Bonds,
Shares securities , Gold & silver and any physical asset and
Hypothecation of Stock and Debtors and all other current Assets of the
business generated during the course of business.
 Packing Credit: – It is a credit facility which sanctioned to an exporter
in the Pre-Shipment stage. Such credit facilitates the exporter to
purchase raw materials at competitive rates and manufacture or
produce goods according to the requirement of the buyer and organize
to have it packed for onward export. It secured by way of
Hypothecation of Stock of goods and Debtors and all other current
Assets of the business generated during the course of business.
 Some other fund based credit facilities are Bill Discounted , Bill
Purchased , Advance against hypothecation of Vehicles ( Transport
Loan) , House Building Loan , Consumer Loan , Agriculture Loan -
Farming -Non Farming , Consortium Loan , Lease Financing , Hire
Purchase , Import Financing – Loan Against Imported Merchandise
(LIM) – Payment Against Document (PAD) .

Personal Overdraft
A personal overdraft is an unsecured loan (up to an agreed limit)
that forms part of your everyday Westpac Choice bank account that
can help cover some of life’s unexpected financial emergencies.

 Overdraft loans - from $250 to $25,000

 Only pay interest on funds used (when fees and charges are paid on
time)
 Being linked to your Westpac Choice bank account means you have
multiple ways to access funds including with a Westpac Debit
Mastercard®
 Overdraft interest rate – 12.09% p.a. variable
 No security required for a personal overdraft
 $0 establishment fee; and $6 monthly service fee (other fees may
apply).
Retail Loan
A retail loan is similar to a mortgage loan acquired to buy a real estate
property. The primary difference is that mortgage loan secures a
residence, whereas a retail loan secures a commercial retail property.
Banks and private investors can supply funding for a retail location, such
as a stand-alone retail store or a strip mall. Various details play a role in
the approval process, and lenders use numerous factors to determine
the interest rate on a commercial retail loan.
Credit Card
A credit card is a card issued by a financial company which enables the
cardholder to borrow funds. The funds may be used as payment for goods
and services. Issuance of credit cards has the condition that the cardholder
will pay back the original, borrowed amount plus any additional agreed-upon
charges. The credit company provider may also grant a line of credit (LOC) to
the cardholder which allows the holder to borrow money in the form of a cash
advance. The issuer pre-sets borrowing limits which have a basis on the
individual's credit rating.

(2) Non Fund Base credit is a credit facility where there is no

involvement of direct outflow of Bank’s fund on account of borrower
rather the outflow of Bank’s fund on account of Third party on behalf of
borrower. Types of it are as follow:
(i) Letter Of Credit: – When a buyer or importer wants to purchase goods
from an unknown seller or exporter. He can take assistance of bank in such
buying or importing transactions.
Bank issues a LETTER OF CREDIT in addressed to the supplier or exporter
after it, supplier or exporter will supply the goods to such unknown buyer or
importer. A signed Invoice with Letter Of Credit is presented to the bank of
buyer/importer and the payment is made to the seller/exporter DIRECTLY by
the bank.
(ii) Bank Guarantee: – It is a guarantee issued by a banker that, in case of
an occurrence or non-occurrence of a particular event, the bank guarantees to
fulfilled the loss of money as stipulated in the contact. It may of various types
like Financial Guarantees, Performance Guarantees and Deferred Payment
Guarantee.
(iii) Buyer Credit: – It is the credit availed by an Importer from overseas
lenders (i.e. Banks & Financial Institutions) for payment against his imports.
The overseas bank usually lends the Importer based on letter of credit, bank
guarantee issued by the importer bank.
(iv) Suppliers Credit: – Under such credit facility an exporter extends credit
to a foreign importer to finance his purchase. Usually the importer pays a
portion of the contact value in cash and issues a Promissory note as evidence
of his obligation to pay the balance over a period of time. The exporter thus
accepts a deferred payment from the importer and may be able to obtain cash
payment by discounting or selling such promissory note created with his bank.

Payment and Remittance Services and Products

Let’s start at the beginning. What exactly is a remittance? The Merriam-
Webster dictionary says the following:

To remit - to send (money) to a person or place especially in payment of

a demand, account, or draft

In other words, a remittance is the sum of money being sent, generally

to someplace abroad. In common usage, the word can refer to moving
money by any method - a wire transfer, online transfer, by mail or using
a credit or debit card to move the money. The payment could be to settle
an invoice from a supplier, to pay an employee, or to support family back
home.

What is a Cheque – Definition, Types of Cheque and

Features

Meaning of Cheque – Different Types of Cheque : Cheque is a

negotiable instrument used to make payment in day to day business
transaction minimizing the risk and possibility of loss. It is used by
individuals, businesses, corporate and others to transact for making and
receiving payment.
Definition of Cheque – What is a Cheque?

As per negotiable instrument act 1881, A “cheque” is a bill of

exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.

There are three parties in Cheque Transaction – Drawer, Drawee and

Payee.

 Drawer (Maker of Cheque) – The person who issue the cheque or

hold the account with bank.
 Drawee – The Person who is directed to make the payment against
cheque. In case of cheque, it is bank.
 Payee – A person whose name is mentioned in the cheque or to whom
the drawee makes payment. If drawer has drawn the cheque in favour
of self then drawer is payee.

Payment by Cheque is safest way to conduct business transactions as it

helps to maintain record in account statement to whom the payment is
made by whom payment is received. So it becomes easier to track the
transactions through bank account statement.

Different Types of Cheque

There may be different types of Cheques depending on how the drawer
has issued the Cheque.

 Open / Bearer Cheque

 Order Cheque
 Crossed Cheque
 Anti Dated Cheque
 Post Dated Cheque
 Stale Cheque
 Mutilated Cheque

Here we will discuss about different types of cheque with their features
in detail :

Order Cheque:

A cheque which is payable to a particular person or his order is called an order

cheque.
  This is a cheque whereby the printed word “Bearer” on the cheque is
cancelled. The cancellation of the word “Bearer” automatically makes
the cheque an “order” cheque.
 An order cheque can be paid to the named payee across the bank’s
account if so presented.
 Identification must be insisted on by the bank when encashing the
order cheque for the presenter. The ID number and the named payee’s
signature will be asked for on the back of the cheque.
Bearer Cheque :
A cheque which is payable to a person whosoever bears, is called bearer
cheque.

 The cheque sometimes can be made payable to “Cash” or bearer or

made payable to a specific name, for example, “bujji sekhar or
Bearer”.
 This cheque is payable by the drawee bank over the counter to the
Bearer or presenter of the cheque.
 A Bearer cheque can be negotiated or pass to another person by mere
delivery. In other words, the holder (or the Transferer), when giving it
to another person need not endorse the cheque.
 No identification is needed when a bearer cheque is presented for
encashment. However, in normal banking practice, where the amount
of the cheque is substantial, the identity of the encasher is insisted on.
 A bearer cheque can be collected by the bank for the credit of anyone’s
account
 In banking practice, the need for the encasher’s signature on the back
of the cheque is merely to evidence that the encasher has received the
money from the bank.
Blank Cheque:

A cheque on which the drawer puts his signature and leaves all other columns
blank is called a blank cheque.

1. A check that is signed by the payer but with no specific amount

indicated, leaving this determination up to the drawee.
2. More generally, a term used for any situation in which an usually high
level of trust is afforded by one party to another.
“ My wife must have a high level of trust for her sister, because when she
asked to borrow some money my wife gave her a blank check. ”

Counter cheque:

Blank cheque was also commonly used as a synonym for counter cheque.
requiring that cheque be MICR encoded in order to be handled by their
clearing houses, it was fairly common for banks, especially in small towns, to
issue cheque to customers which were not personalized other than the name of
the bank.
Businesses would have pads of counter cheque which did not even have the
bank specified on them – the customer had to not only fill in the value of the
cheque, the date, and their signature, but also had to designate the bank on
which funds were to be drawn.

Stale Cheque:

Check presented at the paying bank after a certain period (typically six
months) of its payment date. A stale check is not an invalid check, but it may
be deemed an ‘irregular’ bill of exchange. A bank may refuse to honor it unless
its drawer reconfirms it payment either by inserting a new payment date or by
issuing a new check. Also called stale dated check.

*NOW __The cheque which is more than three months old is a stale cheque.

Eg. If Mr.CooL issues cheque to Miss. Bujji, if Mr. CooL has issued cheque
from his SBI A/c then SBI is a drawee bank.

The banking regulation Act has not define specific period after which the
instrument (cheque) becomes stale. Some of the banks write specific
instruction on the cheque where the validity period is mentioned. In such case
the cheque will become stale after expiry of the period from the date of issue
(date on the instrument)

Mutilated Cheque:

If a cheque is torn into two or more pieces such cheque is Mutilated Cheque. If
it presented for payment, such a cheque the bank will not make payment
against such a cheque without getting confirmation of the drawer. In case, if a
cheque is torn at the corners and no material fact is erased or cancelled, the
bank may make payment against such a cheque.

If the payee is clear, signature and the MICR line intact – they can process it.
There are sealable plastic carriers used to put such cheques through the high
speed transports used in Clearing.

Post Dated Cheque:

If a cheque bears a date later than the date of issue, it is termed as post dated
cheque.

Any check or draft that has a future date written upon it by the user. The
amount of the check will not be drawn from the account until the date written
on the check. For example, a check written on the 14th of the month but dated
for the 28th will not be cashed for another two weeks.
Open Cheque:

 A cheque that is not a crossed cheque. The person whose name

appears on the cheque can write the name of another person on it,
and the money will be paid to them.
 An open cheque is a cheque that is not crossed on the left corner and
payable at the drawee bank on presentation of the cheque.
 The words ‘OPEN’ should not be struck off and the person issuing the
cheque should sign on the reverse of the cheque also before giving it to
another person; otherwise the bank may refuse payment. The latter
can collect the money from any branch of the bank nowadays,
depending on the bank. S/he should also sign at the back of the
cheque while receiving the amount.
Crossed Cheque

A crossed cheque is one which has two short parallel lines marked across its
face.

 A cheque which carries too parallel transverse lines across the face of
the cheque with or without the words “I and co”, is said to be crossed.
 Crossed cheques are of two types. By simply crossing a cheque or with
the words ” & Co”, by the payer, the payee can either deposit it in
his/her account or endorse it in favour of another person on the
reverse. This practice is nowadays not accepted by the banks.
 The advantage of crossing is that it reduces the danger of
unauthorised persons getting possession of a cheque and cashing it. A
crossed cheque can only be cashed through a bank of which the payee
of the cheque is a customer.
 A cheque crossed generally will be paid to any bank through which it
is presented.
 A cheque crossed specially will be paid only when it is presented for
collection by the bank named between the parallel lines. Such crossing
affords a greater measure of protection against loss.
Gift Cheques

Gift cheque, it is a cheque forirted in decorative form issued for a small extra
charge by the banks for use by customers who wish to give presents of money
on special occasions.

Gift cheques may be purchased in unlimited numbers from every branch of the
‘X’ Bank.

Gift cheques may be used to give presents of money as

 Birthday Gift
 Wedding Gift
 Honour Gift
 EASI SMART Gift
Gift cheques are used for offering presentations on occasions like birthday,
weddings and such other situations. It is available in various denominations.

Features and Benefits

 Convenient
 Pre-denominated
 Elegant – Improve promotional impact with packaging customization
and personalization options
 Flexible – Provide redemption flexibility by offering the reward with
no expiration date
 Replaceable – Protect your investment and offer Reward Earners
increased security and peace of mind with lost and stolen Cheque
protection
 Simple – Order and administer rewards easily for timely
reinforcement
 Reliable – Feel at ease with the American Express brand name — it
conveys reliability, security and prestige
Traveller’s Cheques:

It is an instrument issued by a bank for remittance of money from one place to

another.

Travelers Cheques are accepted almost everywhere and are available in many
denominations. Plus, the no-expiration feature allows you to cash in leftover
cheques or retain them for the next time you travel.

Benefits

 Convenience : Easy to use. Secured to protect your money when on

the move.
 Choice : Available in United States Dollars (USD), Great Britain
Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD)
and Canadian dollars (CAD).
 Acceptance : Accepted worldwide in over 400,000 locations spread
across 200 countries. TCs can be encashed or used at Exchange
bureaus, Banks, Hotels Shops, Restaurants and other establishments.
 Security : Signature based security. If your cheques are lost or stolen,
the 24 hour Call Centre is just a phone call away. Replacement of lost
TCs is attended to on priority across the world.
 Buy-Back : When you return back to India, you can encash any
unused TCs issued by us, at any of the Axis Bank Branches.
 Expiry : Valid forever! You can save any unused Travellers Cheques
for future trips.
Self cheques:

A self cheque is written by the account holder as pay self to receive the money
in the physical form from the branch where he holds his account.
If your friend wants to pay YOU the amount of 10000/-, he/she should have
written YOUR NAME in the space provided for PAYEEon the cheque. If
he/she has written SELF in that area, it is supposed to be used by him (or the
bearer as written on the cheque) and whoever possess that cheque can go to
the same branch and bank of the account holder to cash the cheque.

Some banks may honour cheques in their other branches than the account
holder branch. However, this cannot be encashed in any other BANK.

You can either encash it by visitng the bank and the branch of your friend’s
account or should return or tear this cheque off (If lost, the person who finds it
can get it cashed from the bank and branch mentioned on the cheque) and ask
for another cheque in your name that you can deposit in your account.

Bankers Cheque:

The banker’s cheque is an instrument issued by the bank on behalf of

customer containing an order to pay a certain sum to a specified person within
the city. The validity period of the Banker’s cheque is 3 months, however it can
be re-validated subject to some legal formalities.

 In Banker’s cheque the chances of dishonor is not possible because it

is always prepaid. It is always pre-printed with the words ‘not
negotiable’ which means it cannot be further negotiated.
 Banker’s Cheque or Payment Order is a cheque issued for making
payments within the same city.
 Banker’s cheque is valid up to 3 months from the date of issue.
 All banker’s cheque are pre-printed with “NOT NEGOTIABLE”.
 It can be cleared in any branch of the same city.
Outstanding cheque:

A cheque which has been written and therefore has been entered in the
company’s ledgers, but which has not been presented for payment and so has
not been debited from the company’s bank account .

Pay Order
Pay order is also called as banker’s cheque. Pay order is not a Negotiable
Instrument. A negociable instrument is a document that guarantees the
payment of a specific amount of money from one person to another. It is
a transferable, signed document that promises the payment of the amout on
demand or at a specific time.

A pay order is payable on the issuing bank, that is they are applicable for
payment within the city and if it is once made, a person cannot cancel the pay
order if the party is in any other city. It is basically issued for local use and is
payable only in that particular town.
The definition of pay order is a “document which instructs a bank to pay a
certain sum to a third party. Such orders are normally acknowledged by the
bank which provides a guarantee that the payment will be made.”

Demand Draft

a demand draft is an instrument used for transfer of money in a particular

place. It is a Negotiable Instrument. Demand draft is issued by a bank and is
drawn by one branch of a bank on another branch of the same bank. In a
demand draft, both the drawer and the drawee are the same persons from the
same bank. A Demand Draft has not precisely defined in the Negotiable
Instrument Act. A demand draft cannot be dishonored. There is a certainty of
the payment in the case of a demand draft. The payment of the demand draft
cannot be stopped if once it is sent. A demand draft is always payable in order
for a certain purpose.

Demand Draft, also known as DD, is prepared by a banker and it is signed by

a banker, so the chances of default are not there. It is not mandatory that one
should have a bank account in the bank from where he is preparing the
demand draft.

There are times if someone wants to send money to the party who is out of
station, so he needs to get a demand draft made in his favor. Let’s use the
example of Ben. Ben needs to submit money in the college as soon as
possible for appearing for an exam; the college requires a small amount of
money through demand draft. Why do they insist for a demand draft? The
reason is simple, firstly college may not have time to wait for Ben’s cheque to
clear and secondly, there is no assurance that Ben's cheque will get cleared
or not.

Thus, in pay order and in demand draft, the advantage is that these
instruments are prepaid. It can be paid by depositing it in the bank, or the
amount is reduced from your bank in favor of the third party for the desired
amount.

The key differences are listed in the table below:

Basis
Pay Order Demand Draft

Document which instructs A signed, written order by

Definition
a bank to pay a certain which one party (the
sum to a third party. Such drawer) instructs another
 orders are normally party (the drawee) to pay
acknowledged by the a specified sum to a third
bank which provides a party (the payee), at sight
guarantee that the or at a specific date.
payment will be made.

Negotiable Not Negotiable Instrument Negotiable Instrument

Is payable on the issuing Is payable to same bank

Payable
branch with other branch

Payment Is not mode of payment Is mode of payment

In one place to another

Payment made Locally
place

Multi city cheque

A Multi city cheque is the type of cheque which is written
directly by the customer which can be payable in every branch
of that particular branch . This is only done for the genuine
transaction . For the issue of cheque there are charges that are
debited from the account.

While the normal cheque is issued by the bank on your

demand . when you give the money to the bank they issue .the
cheque also known as banker's cheque. It is actually the
banker's draft

Reserve Bank of India in October, 2007 had asked the CBS-enable

banks to give the facility of ‘payable at par/multi-city’ cheques to all
eligible and requesting customers. Customers maintaining
the saving bank account, Current account & cash credit account
are eligible to apply for this cheque book.
 WHAT IS PORTFOLIO AND PORTFOLIO
MANAGEMENT ?

The portfolio is a collection of investment instruments like shares,

mutual funds, bonds, fixed deposits and other cash equivalents
etc. Portfolio management is the art of selecting the right
investment tools in the right proportion to generate optimum
returns from the investment made.

In other words, a portfolio is a group of assets. If compared,

generally it is found that the risk attached to an asset is more than
the risk of a portfolio. This is because portfolio gives an
opportunity to diversify risk. Diversification of risk does not mean
that risk will be eliminated. With every asset, two types of risk are
attached, diversifiable risk and market risk. Even an optimum
portfolio cannot eliminate market risk, but can only reduce or
eliminate the diversifiable risk. As soon as risk reduces, the
variability of return reduces leading to better and assured returns.
Best portfolio management practice runs on the principle of
minimum risk and maximum return within a given time frame. A
portfolio is built based on investor’s income, investment budget
and risk appetite keeping the expected rate of return in mind.

Portfolio management is the key skill

required for effective investment management whether it for an
individual or a big MNC. Different attributes of investment
alternatives are analyzed and the objective of investment guides
where and how much money to allocate to each of the alternatives.
Investing in more and more assets, with different attributes,
diversifies the risk of a portfolio and thereby increases reasonable
assurance of the returns.
OBJECTIVES OF PORTFOLIO MANAGEMENT
When a portfolio is built, following objectives are to be kept in mind
by the portfolio manager based on an individual’s expectation. The
choice of one or more of these depends on the investor’s personal
preference.

1. Capital Growth
2. Security of Principal Amount Invested
3. Liquidity
4. Marketability of Securities Invested in
5. Diversification of Risk
6. Consistent Returns
7. Tax Planning
Investors hire portfolio managers and avail professional services
for the management of portfolio by as paying a pre-decided fee for
these services. Let us understanding who is a portfolio manager
and tasks involved in the management of a portfolio.

WHY IS PORTFOLIO MANAGEMENT

IMPORTANT?
It is important due to the following reasons:

1. PM is a perfect way to select the “Best Investment Strategy” based on

age, income, risk taking the capacity of the individual and
investment budget.
2. It helps to keep a gauge on the risk taken as the process of PM
keeps “Risk Minimization” as the focus.
3. “Customization” is possible because individual’s needs and choices
are kept in mind i.e. when the person needs the return, how much
return expectation a person has and how much investment period
an individual selects.

Liquidity
Liquidity of a person implies his ability to meet his current liabilities ie
expenses within a year from his current assets ie cash in hand and bank
balance.

For a bank current assets include cash in bank, balances with RBI and other
Banks. Current liabilities include deposits in current accounts and overdue
term deposit accounts.

Banks do have much liquidity with them as they get regular deposit from
public. In case of need they borrow from RBI or call money markets at a
higher rate of interests for short term requirements.

Banks' liquidity is affected if NPA increases. If NPA rises they cannot recover
their interest income as borrowers donot pay interests and instalments. So to
improve liquidity banks make regular efforts to reduce bad debt and mobilise
additional resources.
Importance of Liquidity In a Bank
Liquidity means the ability to convert the asset into cash!!! there are more
than one implications as far as banking is concerned; this refers to the banks
ability to:

 satisfy the withdrawals by the deposit customers;

 recover the loans given to its customers or convert the other assets
such as sundry debtors, bills receivable etc into cash
If I may say so, liquidity has been one of the concerns of the banks in the past,
now liquidity should be of any significance;

wrt to paying out to customers, banks were maintaining a portion of the

deposits in the form of cash at the branches, to enable the branches to pay the
customers against their withdrawals; they evolved a formula for each branch
based on the deposits (short-term) in the branch and the loans of the branch;
there is no empirical formula, as such, for arriving at the minimum quantum
of cash to be kept in the cash vault of the branch; in the present scenario of
technology based banking system, the need for cash by the customers is
coming down gradually; Now the people are keeping less and less of cash in
their pockets; thus the strain on the banks is on the decline, but with the need
to maintain cash in the ATMs, the banks often face cash crunch or liquidity
issue;

Coming to the second definition, banks need funds to lend to its customers,
that means it has to recycle their funds receivable from customer to fresh
lending; this is a major concern of the banks — they are unable to get back or
recover the loans given to segments like — the priority sector, large-scale
borrowers and others;

Let us look at the importance of liquidity for a bank:

 banks need funds for carrying out their day-to-day business and other
needs including interest payments etc
 to comply with the SLR and CDR requirements
 to manage their forex business etc
So where do the banks go for funds — to the money-market; they borrow
funds from available sources to meet their commitments but at a higher cost;

thus on one side the loans are going bad, in fact from bad to worse, and on the
other side, their business needs required to be fulfilled; finally, to cover up
their business losses, they raised their palms for funds and that is where the
govt comes in; On one side it bleeds the banks out of their funds and in the
end, provide funds to tide over their immediate financial exigencies;
Solvency
What is 'Solvency'
Solvency is the ability of a company to meet its long-term financial
obligations. Solvency is essential to staying in business as it
demonstrates a company’s ability to continue operations into the
foreseeable future. While a company also needs liquidity to thrive,
liquidity should not be confused with solvency. A company that is
insolvent must often enter bankruptcy.

BREAKING DOWN 'Solvency'

Solvency directly relates to the ability of an individual or business to pay
their long-term debts including any associated interest. To be considered
solvent, the value of an entity’s assets, whether in reference to a
company or an individual, must be greater than the sum of its debt
obligations. Various mathematical calculations can be performed to help
determine the solvency of a business or individual.

Solvency Ratios
Investors can use ratios to analyze a company's solvency. The interest
coverage ratio divides operating income by interest expense to show a
company's ability to pay the interest on its debt, with a higher result
indicating a greater solvency. The debt-to-assets ratio divides a
company's debt by the value of its assets to show whether a company
has taken on too much debt, with a lower result indicating a greater
solvency. Equity ratios demonstrate the amount of funds that remain
after the value of the assets, offset by the outstanding debt, is divided
among eligible investors.

Solvency ratios vary by industry, so it is important to understand what

constitutes a good ratio for the company before drawing conclusions
from the ratio calculations. Ratios that suggest a lower solvency than the
industry average may suggest financial problems are on the horizon.

Risks to Solvency
Certain events can create a risk to an entity’s solvency. In the case of
business, the pending expiration of a patent may pose risks to solvency
as it will allow competitors to produce the product in question, and it
results in a loss of associated royalty payments. Further, changes in
certain regulations that directly impact a company’s ability to continue
business operations can pose an additional risk. Both businesses and
individuals may experience solvency issues should a large judgment be
ordered against them after a lawsuit.

Solvency vs. Liquidity

While solvency represents a company’s ability to meet long-term
obligations, liquidity represents a company's ability to meet its short-term
obligations. In order for funds to be considered liquid, they must be
either immediately accessible or easily converted into usable funds.
Cash is considered the most liquid payment vehicle. A company that
lacks liquidity can be forced to enter bankruptcy even if solvent, if it
cannot convert its assets into funds that can be used to meet financial
obligations.

HOW DO BANKS BECOME INSOLVENT?

How do banks become insolvent and the importance
of deposit insurance
If banks can create money, then how do they become
insolvent? After all surely they can just create more money
to cover their losses? In what follows it will help to have an
understanding of how banks make loans and the
differences between the type of money created by the
central bank, and money created by commercial (or ‘high-
street’) banks.

Insolvency can be defined as the inability to pay ones

debts. This usually happens for one of two reasons. Firstly,
for some reason the bank may end up owing more than
it owns or is owed. In accounting terminology, this
means its assets are worth less than its liabilities.
Secondly, a bank may become insolvent if it cannot pay its
debts as they fall due, even though its assets may be worth
more than its liabilities. This is known as cash flow
insolvency, or a ‘lack of liquidity’.

NORMAL INSOLVENCY

The following example shows how a bank can become

insolvent due customers defaulting on their loans.

Step 1: Initially the bank is in a financially healthy position

as shown by the simplified balance sheet below. In this
balance sheet, the assets are larger than its liabilities,
which means that there is a larger buffer of ‘shareholder
equity’ (shown on the right).

Shareholder equity is simply the gap between total assets

and total liabilities that are owed to non-shareholders. It
can be calculated by asking, “If we sold all the assets of the
bank, and used the proceeds to pay off all the liabilities,
what would be left over for the shareholders?”. In other
words:

Assets – Liabilities = Shareholder Equity.

In the situation shown above, the shareholder equity is
positive, and the bank is solvent (its assets are greater than
its liabilities).

Step 2: Some of the customers the bank has granted loans

to default on their loans. Initially this is not a problem – the
bank can absorb loan defaults up to the value of its
shareholder equity without depositors suffering any losses
(although the shareholders will lose the value of their
equity). However, suppose that more and more of the
banks’ borrowers either tell the bank that they are no
longer able to repay their loans, or simply fail to pay on
time for a number of months. The bank may now decide
that these loans are ‘under-performing’ or completely
worthless and would then ‘write down’ the loans, by giving
them a new value, which may even be zero (if the bank
does not expect to get any money back from the
borrowers).

Step 3: If it becomes certain that the bad loans won’t be

repaid, they can be removed from the balance sheet, as
shown in the updated balance sheet below.
Now, with the bad loans having wiped out the shareholders
equity, the assets of the bank are now worth less than its
liabilities. This means that even if the bank sold all its
assets, it would still be unable to repay all its depositors.
The bank is now insolvent. To see the different scenarios
that may occur next click here, or keep reading to discover
how a bank may become insolvent as a result of a bank
run.

CASH FLOW INSOLVENCY / BECOMING

‘ILLIQUID’
The following example shows how a bank can become
insolvent due to a bank run.

Step 1: Initially the bank is in a financially healthy position

as shown by its balance sheet – its assets are worth more
than its liabilities. Even if some customers do default on
their loans, there is a large buffer of shareholder equity to
protect depositors from any losses.
Step 2: For whatever reason (perhaps due to a panic caused
by some news) people start to withdraw their money from
the bank. Customers can request cash withdrawals, or can
ask the banks to make a transfer on their behalf to other
banks. Banks hold a small amount of physical cash, relative
to their total deposits, so this can quickly run out. They
also hold an amount of reserves at the central bank, which
can be electronically paid across to other banks to ‘settle’ a
customer’s electronic transfer.

The effect of these cash or electronic transfers away from

the bank is to simultaneously reduce the bank’s liquid
assets and its liabilities (in the form of customer deposits).
These withdrawals can continue until the bank runs out of
cash and central bank reserves.

At this point, the bank may have some bonds, shares etc,
which it will be able to sell quickly to raise additional cash
and central bank reserves, in order to continue repaying
customers. However, once these ‘liquid assets’ have been
depleted, the bank will no longer be able to meet the
demand for withdrawals. It can no longer make cash or
electronic payments on behalf of its customers:
At this point the bank is still technically solvent; however, it
will be unable to facilitate any further withdrawals as it has
literally run out of cash (and cash’s electronic equivalent,
central bank reserves). If the bank is unable to borrow
additional cash or reserves from other banks or the Bank of
England, the only way left for it to raise funds will be to sell
off its illiquid assets, i.e. its loan book.

Herein lies the problem. The bank needs cash or central

bank reserves quickly (i.e. today). But any bank or investor
considering buying it’s illiquid assets is going to want to
know about the quality of those assets (will the loans
actually be repaid?). It takes time – weeks or even months –
to go through millions or billions of pounds-worth of loans
to assess their quality. If the bank really has to sell in a
hurry, the only way to convince the current buyer to buy a
collection of assets that the buyer hasn’t been able to asses
is to offer a significant discount. The illiquid bank will
likely be forced to settle for a fraction of its true worth.

For example, a bank may value its loan book at £1 billion.

However, it might only receive £800 million if it’s forced to
sell quickly. If share holder equity is less than £200 million
then this will make the bank insolvent:

Conflict Between Objectives

Liquidity Vs Profitability
Profitability and liquidity are two very important financial metrics to all
businesses and should be given increased emphasis to maintain them at
desirable levels.

Liquidity describes the degree to which an asset or security can be quickly

bought or sold in the market without affecting the asset’s price. This is also the
availability of cash and cash equivalents in a company. Liquidity is just as
important as profitability, sometimes even more important in the short-term.
This is because the company needs cash to run day to day business operations.
This includes:

Manufacturing and selling costs

Payment of salaries to employees

 Payments to creditors, tax authorities and interest on borrowed funds

Profitability defines as Profit can be simply referred to as the difference

between total incomes less total expenses for business. Profit maximisation is
among the top priorities of any company. Profit is categorized into various
groups according to the components considered to arrive at each profit
amount. A number of ratios are calculated using the respective profit figures to
allow comparisons with prior periods and other similar companies and to
facilitate financial decision-making.

BASIS FOR
LIQUIDITY SOLVENCY
COMPARISON

Meaning Liquidity implies the Solvency means the firm's

measure of the ability of ability of a business to have
the firm to cover its sufficient assets to meet its
immediate financial debts as they fall due for
obligations. payment.

Obligations Short term Long term

Describes How easily the assets can How well the firm sustain
be converted into cash. itself for long time.

Ratio Current ratio, acid test Debt to equity ratio, interest

ratio, quick ratio, etc. coverage ratio, etc.

Risk Low High

Profitability Vs Solvency
Profitability is the ability of a business to earn a profit. A profit is what
is left of the revenue a business generates after it pays all expenses
directly related to the generation of the revenue, such as producing a
product, and other expenses related to the conduct of the business
activities.
There are many different ways for you to analyze profitability. This
lesson will focus on profitability ratios, which are a measure of the
business's ability to generate revenue compared to the amount of
expenses it incurs. Let's look at a few of the primary analytical
approaches.

Solvency
Definition: Solvency refers to the long-term financial stability of a
company and its ability to cover its long-term obligations. In other
words, it’s the ability of a company to meet short and long-term debts
as they become due.
Both investors and creditors are concerned with the solvency of a
company. Investors want to make sure the company is in good
financial standings and can continue to grow, generate profits, and
produce dividends. Basically, investors are concerned with receiving
a return on their investment and an insolvent company that has too
much debt will not be able to generate these types of returns.

Solution
Commercial Loan Theory
The commercial loan or the real bills doctrine theory states that a
commercial bank should forward only short-term self-liquidating
productive loans to business organizations. Loans meant to finance the
production, and evolution of goods through the successive phases of
production, storage, transportation, and distribution are considered as
self-liquidating loans.

This theory also states that whenever commercial banks make short
term self-liquidating productive loans, the central bank should lend to the
banks on the security of such short-term loans. This principle assures
that the appropriate degree of liquidity for each bank and appropriate
money supply for the whole economy.

The central bank was expected to increase or erase bank reserves by

rediscounting approved loans. When business started growing and the
requirements of trade increased, banks were able to capture additional
reserves by rediscounting bills with the central banks. When business
went down and the requirements of trade declined, the volume of
rediscounting of bills would fall, the supply of bank reserves and the
amount of bank credit and money would also contract.
Shiftability Theory
This theory was proposed by H.G. Moulton who insisted that if the
commercial banks continue a substantial amount of assets that can be
moved to other banks for cash without any loss of material. In case of
requirement, there is no need to depend on maturities.

This theory states that, for an asset to be perfectly shiftable, it must be

directly transferable without any loss of capital loss when there is a need
for liquidity. This is specifically used for short term market investments,
like treasury bills and bills of exchange which can be directly sold
whenever there is a need to raise funds by banks.

But in general circumstances when all banks require liquidity, the

shiftability theory need all banks to acquire such assets which can be
shifted on to the central bank which is the lender of the last resort.

Anticipated Income Theory

This theory was proposed by H.V. Prochanow in 1944 on the basis of the
practice of extending term loans by the US commercial banks. This
theory states that irrespective of the nature and feature of a borrower’s
business, the bank plans the liquidation of the term-loan from the
expected income of the borrower. A term-loan is for a period exceeding
one year and extending to a period less than five years.

It is admitted against the hypothecation (pledge as security) of

machinery, stock and even immovable property. The bank puts
limitations on the financial activities of the borrower while lending this
loan. While lending a loan, the bank considers security along with the
anticipated earnings of the borrower. So a loan by the bank gets repaid
by the future earnings of the borrower in installments, rather giving a
lump sum at the maturity of the loan.
Methods of Creating Credits through Deposits
Method # 1. Primary or Passive Deposits:
The banks create passive deposits when they open deposit
accounts in the name of the customers who bring cash or
cheques to be credited to their accounts.

From economists point of view such types of deposits are

known as passive or primary deposits.

Out of these deposits the banks make loans and advances to

their customers.

But these primary or passive deposits out of these deposits the

banks make loans and advances to their customers. But these
primary or passive deposits do not make any net addition to the
money which is in the vaults. In-fact these deposits merely
convert currency money into deposit money.

Therefore, creation of these primary or passive deposits does

not mean creation of money in the sense as written above. But
these primary deposits provide funds out of which the bank
makes loans and advances to the customers.

The bank knows by business experience that all these primary

deposits are not going to be withdrawn by the depositors at the
same time or one time. Only a small portion of these deposits
may be withdrawn by the depositors at any one particular time,
so the bank after keeping a small percentage of these deposits
in cash, uses the balances for making loans and advances to the
customers.

In this connection the normal norm of a commercial bank is

that it keeps in reserve only 10% of its deposit to meet the
demand of customers and invests 90% in giving loans and
advances, it means it utilizes 90% in credit creation.

Method # 2. Derivative or Active Deposits:

Derivative or active deposits are created by the bank by opening
a deposit account in the name of the person concerned who
contacts bank to borrow money. Then the bank plays an active
role in the creation of such deposits. This type of dealings is
known as an active deposits.

The above written facts can be explained in a better

manner by the following example:
Suppose, the bank allows a loan of Rs. 1,00,000 to its customer
against any collateral security. What the bank will do is that it
will open an account in the name of the person who has been
granted loan. The bank will credit Rs. 1, 00,000 in it. The bank
will not pay Rs. 1,00,000 in cash to the borrower.

The borrower may either withdraw from his account the entire
amount immediately or he may withdraw small amount of
money time to time according to his need and to his
requirements and the balance amounts are granted as loans to
other persons who require it. Here, it shall be noted that by
making a loan, the bank has, at the same time has created a new
deposit in its book.

This type of dealings has been called by an economists as—

”Every loan creates a deposit or loans are the children of
deposits and deposits are the children of loans.” This deposit is
also called an active deposit because it has been created actively
by the bank. Some economists called it “derivative deposit”
because it has been derived directly from the loan transaction of
the bank.

Further, the active deposits are also created by the bank when it
purchases securities or other forms of assets from the public.
For example—When the bank buys government securities or
debentures of private firms, it makes the payment to the sellers
of these assets by opening a deposit account in their names.

The bank may also create deposits when it purchases bills of

exchange by opening a deposit account in the name of the
seller. The proceeds of the exchange bills are credited or
transferred to the account of the seller.
Suppose that the maximum cash reserve ratio is maintained by
the commercial banks is 10% and a person deposits Rs.
1,00,000 in the Bank of India, A.R Colony Branch.

The balance sheet of the bank will show as follows:

As the bank is maintaining 10% of the cash reserve as minimum

balance, therefore the bank will keep Rs. 10,000 as cash reserve
requirement and will create derivative deposit to the extent of
Rs. 90,000 because this figure represents the excess reserves
with the bank. This excess reserve fund which is with the bank
may be used as giving loans and advances to its customers.

Then the balance sheet will appear as under:

Next, suppose, the borrower Mr. Rahul Kumar in the

repayment of some business outstanding gives the cheque of
Rs. 2,00,000 to Mr. Shanker Lai who has a deposit account in
the United Bank of India. The United Bank receives Rs.
2,00,000 as primary deposit. This will increase the liability of
the United Bank by Rs. 2,00,000.

The Balance Sheet of the United Bank will be as under:

By seeing the above Balance Sheet, it is clear that the deposit

liabilities of the bank have increased by Rs. 2,00,000. There is
also an equivalent increase in the cash reserve of Rs. 2,00,000.
After keeping the Reserve of 10% cash, the bank balance now
will be Rs, 1,80,000. Now, the bank is in a position to expand
its lending activity to the extent of its excess reserves of Rs.
1,80,000.

If the bank expands its loans and advances to Rs.

1,80,000, new Balance Sheet will be as under:

Credit Creation (by a Single Bank)

The process of credit creation by a single bank is almost similar to the
process of credit creation when there exists multiple banks. It can be
understood from the following example;

Let us assume that;

(i) The cash reserve ratio is 20%

(ii) A person named A made an initial deposit of Rs2,000 in a bank.

The bank , after keeping Rs400 (20% of 2000)lends

Rs1,600 to say B. In this case, a deposit account is opened in yhe
name of B.

Again keeping 20% of Rs 1600 i.e.; Rs 320,the bank lends

Rs1280(1600-320) to c and credit the same to C’s account .So a
deposit of Rs1,280 is created. From this, keeping 20% i.e.; Rs 256 it
can lend Rs1,024.This process goes on and on till the primary deposit
of Rs 2,000 becomes Rs 10,000 because;

K=1/r = 1/0.2 = 5 times.

So total credit created= RS 2,000 × 5 = Rs 10,000.

The process of credit creation is explained in the following table in
nut-shell.

Credit creation by a single Bank

Process Primary deposit Cash (Rs) Credit creation/
Deposits(Rs) Reserve (20%) Derivative
Deposits(Rs)
A 2,000(Initial deposit) 400 1,600
1,600
B 320 1,280

C 1,024 205 1,024

D 1,280 205 819

_ _ _ _
_ _ _ _
_
And so on _ _

Total 10,000 2,000 8,000

Assumptions of credit creation

Credit creation by commercial banks is possible if the following

conditions are satisfied.

1. There exists a normal business and economic activities.

2. The Reserve bank does not adopt credit control policy.

3. There is a well – developed banking system.

4. The cash reserve ratio remains constant through all the stages of
credit creation process.
5. There is no leakage in the credit creation process i.e; excess cash
reserves must be utilised to grant loans.

Limitations of Credit Creation

Commercial banks do not have unlimited power to create credit.

Their power to create credit is restricted by the following factors.

1. Volume of Primary Deposit: If the primary deposits are large ,the

volume of credit creation will be more because the derivative
deposits are created on the strength of primary
deposits.Conversly,credit creation will be less when the volume of
primary deposits is less. It may be mentioned here that the amount
of primary deposit is dependent on the volume of currency
circulation.

2. Cash Reserve Ratio: As mentioned earlier, credit creation is the

reciprocal of cash reserve ratio. If the cash reserve ratio is less , the
volume of credit creation will be more and vice-versa.Thus,the cash
reserve ratio directly affects credit creation.

3. External Drain: Credit creation assumes that a bank advances loan

by the full amount of excess cash reserves. But if the borrowers
withdraw a part of their deposit in cash, the excess cash reserves of
the bank is reduced which reduces the credit creation capacity.

4. Banking Habit of the People: If the people of a country conduct

most of their business transaction in cash instead of cheque, the
power of credit creation by commercial banks is reduced . When
there is frequent withdrawal of cash , the cash reserves of the bank is
automatically depleted their curtails the power to create credit.

5. Bank’s Reserves with Reserve Bank: As per banking law, every

commercial bank is required to certain cash as reserves with the
central bank. The central bank keeps on changing the percentage of
reserve to kept with it. When the central bank reduces the
percentage of these reserves, credit creation power of commercial
bank increases and vice-versa.

6. Statutory Liquidity Ratio: In India , the commercial banks are

required to keep (as per law) a certain percentage of their assets in
near - liquid form. At present banks are required to keep 21.5% of
their total assets in government securities, treasury bills and
approved securities which can be encased to meet the emergency
situations. Therefore, the lendable resources of the bank is reduced
and so the power of credit creation is squeezed.

7. Monetary Policy of the Central Bank: The volume of credit

creation by commercial banks is always influenced by the monetary
policy of the central bank. The central bank uses various methods of
credit control such as bank rate and open market operation for
expansion and contraction of credit by commercial banks. The
central bank declares its monetary policy from time which in turn
affects the credit creation by commercial banks.

8. Availability of Collateral Securities: Every commercial bank grants

loan against some collateral securities such as shares, stocks, bills,
bond, etc.If these securities are not available in sufficient quantity ,
the power of the banks to create credit will be restricted.

9. Cash Transactions: The amount and frequency of cash

transactions that exist in an economy also affect the volume of
credit creation. A high proportion of currency in the total money
supply reduces banks’ power of credit creation. On the other hand ,
if the ratio of currency to total money supply decreases the bank’s
power of credit creation increases.
10. Business Conditions: The prevailing business condition also
influences the amount of credit creation .For example, during the
period of prosperity people borrow more as there is a great scope of
profitable investment. Conversely, during the period of depression
the business man and industrialist are less inclined to borrow from
the banks as the scope for profitable investment is limited. Thus, the
power of credit creation by commercial banks increases during
prosperity and decreases during depression.

What is Banking
Ombudsman Scheme?

The Banking Ombudsman Scheme was implemented by the

RBI to redress the complaints of customers on certain types
of banking services provided by banks and to facilitate the
settlement of those complaints.

The scheme was introduced under the Banking Regulation

Act of 1949 by RBI with effect from 1995. Later it was legally
refined and modified through the introduction of regulations
under Banking Ombudsman Scheme 2006. The latest
revision was made in 2017.
Who is the Banking Ombudsman?

The Banking Ombudsman actually is a senior official

appointed by the RBI to redress customer complaints against
pitfalls in the stipulated banking services covered by the
Banking Ombudsman Scheme 2006 (modifications were
made in 2017).

As on end April 2018, twenty Banking Ombudsmen have

been appointed with their offices located mostly in state
capitals.

Areas of customer redressal available with the

Ombudsman mechanism

The RBI has listed around 25 areas where the customers can
raise complaints with the Banking Ombudsman. Some of
them are:

Clause 12 Grounds of Complaints

1) Complaints Pertaining to Deficiency in any of the

Banking Services such as:-

 Non-payment or delay in payment of cheques, drafts, bills, etc

 Non acceptance of small denomination notes without any reason
and also charging of commission in respect thereof
 Non issuance of drafts to customers
 Non adherence to prescribed working hours by the branches
 Failure to honour guarantee or letter of credit
 Claims in regards to fraudulent withdrawals or fraudulent
encashment of cheque or a bank draft
 Complaints for any of the accounts pertaining to delays , non
credit of proceeds to parties accounts
 Complaints for non observance of RBI’s directives applicable to
rate of interests on deposits or violation of directives on any
other matter
 Complaints from exporters for delays in receipt of export
proceeds, handling of export bills, collections of bills
 Complaints from NRI’s in regards to remittance from abroad
 Complaints pertaining to refusal to open deposit accounts
without any valid reason

2) Complaints Concerning loans & advances

 Non observance of RBI directives on interest rates
 Delays in sanction or disbursement of loan applications
 Non acceptance of loan application without any valid reason
 Non observance of any other directives by RBI.

Procedure for making complaint with Banking Ombudsman

A bank customer can file a complaint with the Banking

Ombudsman simply by writing on a plain paper or through
online. The customer can file a complaint with the Banking
Ombudsman in the following grounds:

 the bank fails to provide reply to the customer’s complaint in one month
 the bank rejects the complaint,
 the complainant is not satisfied with the reply given by the bank.

Limit on the amount of compensation

As per the present regulations, the ombudsman redressal is

allowed for complaints where the compensation amount for
any loss suffered by the complainant is limited to Rs 20 lakh.
Similarly, the Banking Ombudsman may award
compensation not exceeding Rs 1 lakh to the complainant for
mental agony and harassment. The Banking Ombudsman
will consider the loss of the complainant’s time, expenses
incurred by the complainant, harassment and mental
anguish suffered by the complainant while passing the
compensation.

Corporate Social Responsibility in

Banks
A simple definition of CSR would be how banks take the impact of
their operational activities on society into consideration. Consequently
it requires a built-in, self-regulating mechanism whereby banks would
monitor and ensure their adherence to law, ethical standards, and
international norms to produce an overall positive impact on society.

It is not surprising to see that CSR is subject to a considerable

amount of debate and criticism. Advocates argue that banks benefit in
many ways by operating with a perception broader and longer than
their own immediate, short-term profits. Opponents argue that CSR
diverts from the basic economic role of banks, others argue that it is
nothing more than superficial window-dressing.

There are obvious and real gains on hand for banks that have well-
designed and successful CSR strategies; it would:

 encourage sustainable behaviour by customers;

 support development of separate business models for various
segments;
 provide real benefits for the society as a whole;
 create higher employee motivation and superior performance
levels;
 make banks more aware of their potential role in society;
 create positive publicity and/or increased brand recognition.

Community involvement is the basis of all accomplished CSR policy

initiatives and extends far beyond the standard charitable measures.
Banks would normally introduce innovative CSR schemes such as:
  permanent learning programmes for disadvantaged sectors of
society;
 sponsorship of young entrepreneurs;
 provision of academic scholarships and research proposals;
 support environmental issues such as recycling and waste
management;
 community support programmes;
 health support programmes;
 financial support for arts and culture.

It is essential that there should be a transparent and strong

commitment to adoption of CSR practices. This can be accomplished
through explicit reference to CSR activities adopted by banks by
dedicating sections of Annual Reports to CSR matters or by
publishing Sustainability Reports and/or policy statements on CSR.