BANKING ASSIGNMENT

1) Define a “Banker” and “Customer”. What are the various types of bank
customers? Give suitable examples of the same.
A customer in layman’s terms is an individual or business that purchases another
company's goods or services, but in the context of banking a customer is a person
who has got contractual relationship with the bank. A person who passes around
for a drink of tea cannot be classified as a customer because they have no creditor
debtor relationship with the bank

A banker is an individual that is employed by a banking institution and participates

in various financial transactions, which may or may not include investments, in
simpler terms, a banker is a person who accepts money for the purpose of lending
and investments.

The various types of Bank Customers are:

1) Individual Accounts-

Any person in India regardless of him being an Indian citizen or not can open an
account in a bank given the fact that he is a major. Usual documentation
procedures have to be given at the time of opening the account e.g. pan card, form
no.60/61, Aadhar card, Pass port, Driving license or Voter card.
Minors in India can also open bank accounts given the fact that they are
represented by a parent or a guardian. This is done to teach them how to save
money from a young age
These savings accounts usually carry a lower interest rate of 3.5%, these accounts
are used by the bank for the purpose of lending and other activities

2) Partnership Firms –

According to RBI (Reserve Bank of India), partnership firms cannot open savings
account because saving accounts are only for non-business purpose. Partnership
firms can open current accounts. Current bank account is opened by
businessmen who have a higher number of regular transactions with the bank.
It includes deposits, withdrawals, and contra transactions.
Note:
Current accounts are not paid interest:
• A current account being a zero-account, is generally associated with huge
transactions on a regular basis. Because of the fluidity that
these accounts offer, they don't earn any interest. These accounts can have
η number of transactions in a day and the money needs to be a stable
amount for a fixed period of time for interest to be calculated
There are many precautions involved when opening current accounts for
partnership firms
• These precautions involve verification of the partnership deed, verification
of financial statements and the photographs and other documentary
evidences can also be taken on record e.g. Pan card, Aadhar card etc.
These accounts are classified as very vulnerable accounts
• this is because disputes and petty matters between the partners and the
organization can often involve the bank in some form which is why any
change in the partnership needs to be informed to the bank as well
Death of a partner can lead to the account being closed
• This is done to avoid any complications and a new account is then formed
with the new partnership on the newly created partnership deed

3) Company Accounts
Limited companies are legal entities registered beneath the companies Act.
There are 2 types of ltd companies i.e. Private Limited Companies and Public
limited companies. Since limited companies are also a business entity, they
open current accounts as well
They're viewed as artificial persons and are entitled to enter into contracts, own
property, sue in their own name and do all acts that an individual will do. A
public Ld. ought to have a minimum of seven members, there's no maximum.
On the opposite hand, a private Ld. needs to have a least of 2 members and it
cannot have over fifty members. This doesn't include those within the
employment of the corporate throughout the period of share allotment. Banks
ought to examine the company & memorandum and articles of association to
see what it can and can't do.
The certificate of incorporation and certificate of commencement of business
ought to be examined as this offers concrete proof that the company is
incorporated and is permissible to try and do business. a private Ld. isn't
required to induce a certificate of commencement of business.
The memorandum of association is the document that details the constitution
of the company. It contains the name of the company, authorized share capital
of the company, its objects, the amount it should borrow and also the liability
of the members. The objects clause is very important as any contract entered
into contrary to the objects is unenforceable. The articles of association specify
the foundations and laws with reference to its day to day management such as
the powers of administrators.

4) Trust Accounts
Trust accounts are of two types: Private Trust and Public Trust
A public trust is created for religious and charitable purposes or for community
development. This trust cannot be used transfer wealth to your beneficiary
(children). formal deed is required for creating a public trust
A private trust is used transfer wealth to your heirs (children). These trusts have
the compulsorily created/registered and Governed under the Indian Trusts Act
1882.
In a private trust you (Settlor) can transfer your movable property such as a car
as well as immovable property such as property or land the trustee (person
withholds the property on behalf of your beneficiary/children). A formal
document or an agreement is necessary if the trust holds your immovable
property such as land or property. This agreement is not necessary for movable
property such as a car. Example of a trust accounts is Sri Balaji Educational Trust
and Balaji Seva Trust
 5) Specially Disabled Accounts
These doesn’t only include people with characteristic disabilities such as deaf and
blind people but also lunatics, and hijab (pardanishin) women. All these accounts
are different from an individual account because all these people are very
vulnerable and can be easily susceptible to fraud which is why extra precautions
need to be taken when dealing with these accounts
These precautions include presence of a guardians, verification of photograph and
Aadhaar card, verification of thumb/fingerprints.

6) Small accounts
These accounts are essentially opened for people who don’t have the required
documents to open a full-service account such as student or small-scale farmers.
These accounts allow these people to take advantage of their local banking
services but they have their limits i.e. the restrictions in terms of loan (a maximum
of Rs 1 lakh a year), withdrawals (not more than Rs 10,000 a month) and maximum
balance (Rs 50,000 at any point of time).
And these accounts can only function for a year during which the account holder is
supposed to apply for the required documents to open a full-service account,
proof of application also allows the account holder to get an extension of
12months to continue using banking services
7) Joint account:
A joint account is an account which is opened by two or more persons jointly. It’s
simply a joint debt such an account is opened by them for the convenience of the
operation of the account as well as for the withdrawal of money after the death of
any one of them.
8) GOVERNMENT COMPANY
"Government company" means any company in which not less than fifty-one per
cent. of the paid-up share capital is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a company which is a
subsidiary company of such a Government company.
 9) Illiterate Person:
Illiterate persons cannot sign their names and hence the bankers take their thumb
impression as a substitute for signature and a copy of their recent photograph. The
application form and photograph should be attested by an approved witness. For
withdrawing money, he must attend personally and affix his thumb impression in
the presence of an official of the bank for identification.

10) Clubs, Societies and Charitable Institutions

While clubs, societies and charitable institution open accounts with banks it must
be ensured that they are incorporated These organizations are directed by their
byelaws or its constitution which will specify how they are to operate. To open a
bank account a resolution of the managing committee is required. It should detail
who are the signatories and the manner in which the account should be operated
Before permitting a society or club to borrow the bank should be ensured the
borrowing is permitted
2) Explain the concept of AML – (Anti Money Laundering) with examples. Why
Banks has to be alert and careful with reference to large accounts with rare
operations, which are suspicious in nature?

Anti-money laundering (AML) refers to the laws, regulations and procedures

intended to prevent criminals from disguising illegally obtained funds as
legitimate income. There’re 4 types of money laundering activities

• Trade Based money laundering

Moving criminal funds through trade transactions (import/export of goods) to
disguise their origins is known as trade-based money laundering (TBML). Some
criminals carry out TBML by over- or under-invoicing for shipments.

• Crypto/virtual currency and money laundering

Crypto and virtual currencies have opened the door to new methods of
laundering funds. For example, bitcoin ATMs can have “holes” with their AML
compliance methods. And the degree of regulatory compliance by online
cryptocurrency trading markets (exchanges) varies.
 • Drug trafficking and money laundering

The illicit drug trade funds large, powerful and often violent criminal
organizations. Drug traffickers must launder money to hide its origins, hide their
identity, and prevent confiscation. Illegal drug transactions are sometimes done
through avenues like dark web marketplaces. Some of the tactics drug traffickers
use involve bulk cash smuggling, structured deposits, and money service
businesses and currency exchanges.

• Terrorist financing

Terrorists financing their acts raise money and clean it through various methods.
They hide the funds by preying on weaknesses in the financial system. Spotting
these funds is challenging, unless a known terrorist or organization opens an
account. Banks that spot an unusual or suspicious transaction are advised to file a
report with the financial intelligence unit, which then undertakes a money
laundering investigation.

In order to explain why banks, have to be careful about such large accounts, we
need to look the money laundering process in more detail

Money laundering is the illegal process of concealing the origins of money

obtained illegally by passing it through a complex sequence of banking transfers
or commercial transactions.

The basic definition of money laundering tells us how banks are an integral part of
the money laundering process

This is how money laundering works:

Placement
The launderer inserts the dirty money into a legitimate financial institution such
as a bank

This is the first step of money laundering if banks are alert during this stage, then
the trace of the money can be still investigated. Most of the time managers aren’t
aware such high value transactions are being made, it is the job of the bank to
report to RBI who is dealing with such heavy cash.

Layering:
this involves sending money through various financial transactions to change its
form, the form being purchase of assets i.e. property, diamonds, changing the
currency, investments. Once money is already transferred, it is very difficult to
trace it back to its source because money has already changed its form.

This is the 2nd step of money laundering process, if the banks were alert during
this stage and even though it is very difficult since this money is transferred to
different accounts in different names in different places., the layering stage
involves several banks to banks transactions so a trace of the money could still be
established through the bank transactions

Integration:
This is where the money reenters the mainstream economy in a legitimate form
no longer being black/dirty money

This is the 3rd step of the money laundering process and once it has reached this
process, its somewhat impossible to trace the money which is banks need to be
alert and careful with reference to large accounts with rare operations in the
previous stages

Other reasons why banks need to be alert are:

• Shell companies
it is possible that an account that the bank is managing belongs to a shell
company. These companies have no reason to exist apart from money laundering.
They exist to take in money from money launderers as investments which is then
returned back to the launderers from its dirty to clean form

• Money laundering can have serious legal implications for the bank
Money laundering is a crucial activity for drug trafficking and terrorist activities.
Many innocent lives are lost when such activities are being funded which is why
agencies and institutions like the drug enforcement agency (DEA) often
investigates money laundering and other financial structures

• Money laundering doesn’t only affect the economy but banks as well
when large amounts of money raised from illegal activities is pooled into various
goods and services, this creates an influx of demand in the economy which is
shown as a rise in money supply, leading to inflation(rise in prices), inflation
doesn’t only discourage customers from buying goods and services but also
discourages them to take loans which badly affects the performance of the banks

The consequences of money laundering are:

Economic Distortions
Money laundering impairs the development of the legitimate private sector
through the supply of products priced below production cost, making it therefore
difficult for legitimate activities to compete. Criminals may also turn enterprises
which were initially productive into sterile ones to launder their funds leading
ultimately to a decrease in the overall productivity of the economy. Furthermore,
the laundering of money can also cause unpredictable changes in money demand
as well as great volatility in international capital flows and exchange rates.

Erosion of Financial Sector

While the financial sector is an essential constituent in the financing of the
legitimate economy, it can be a low-cost vehicle for criminals wishing to launder
their funds. Consequently, the flows of large sums of laundered funds poured in
or out of financial institutions might undermine the stability of financial markets.
In addition, money laundering may damage the reputation of financial institutions
involved in the scheming resulting to a loss in trust and goodwill with
stakeholders. In worst case scenarios, money laundering may also result in bank
failures and financial crises.
Reduction in Government Revenue
Money laundering also reduces tax revenue as it becomes difficult for the
government to collect revenue from related transactions which frequently take
place in the underground economy.

Socioeconomic Costs
The socio-economic effects of money laundering are various because as dirty
money generated from criminal activities are laundered into legitimate funds;
they are used to expand existing criminal operations and finance new ones.
Further to that money laundering may lead to the transfer of economic power
from the market, the government and the citizens to criminals, abetting therefore
crimes and corruption.
3) Narrate various types of deposits accounts opened by banks. Explain the need
and purpose of opening different types of accounts. Are long term deposits paid
higher rate interest in India? If so, what is the purpose? Are short term deposits
insignificant? What is its purpose? State with examples.

Traditionally banks in India have four types of deposit accounts, namely Current
Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed Deposits,
Demat accounts, NRI accounts

i. Current accounts
Current Accounts are basically meant for businessmen and are never used for the
purpose of investment or savings. These deposits are the most liquid deposits
and there are no limits for number of transactions or the amount of transactions
in a day. Most of the current account are opened in the names of firm / company
accounts. Cheque book facility is provided and the account holder can deposit all
types of the cheques and drafts in their name or endorsed in their favor by third
parties. No interest is paid by banks on these accounts. On the other hand, banks
charges certain service charges, on such accounts. Examples of businesses that
use current accounts are limited companies i.e. private and public, partnership,
sole traders etc.
ii. Savings bank account
These deposits accounts are one of the most popular deposits for individual
accounts. These accounts not only provide cheque facility but also have lot of
flexibility for deposits and withdrawal of funds from the account. Most of the
banks have rules for the maximum number of withdrawals in a period and the
maximum amount of withdrawal, but hardly any bank enforces these. However,
banks have every right to enforce such restrictions if it is felt that the account is
being misused as a current account. Under directions of RBI, now banks are also
required to open no frill accounts (this term is used for accounts which do not
have any minimum balance requirements). Although Public Sector Banks still pay
only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay
between 6% and 7% on such deposits. From the FY 2012-13, interest earned up
to Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax.
There’re 6 types of saving account:
1) Regular Savings Account
These are opened on basic terms and conditions. The regular savings accounts
do not see regular deposits of consistent amounts, and are the equivalent of a
safe house where money is kept for safe keeping.
2) Salary-based Savings Account
These accounts are opened by banks on the request of companies which require a
platform for payment disbursal. Banks offer preferential rates and terms for these
kinds of accounts. When the date of payment disbursal arrives, the bank
withdraws money from the company account and disburses the money. One must
note that almost most salary accounts will not have a minimum balance
requirement. If salary is not credited for 3 consecutive months, the accounts will
be converted into a regular savings account.
3) Senior Citizens Savings Accounts
A senior citizen savings account is created for senior citizens who have specific
functionality and benefits. The accounts function in the very same way like
regular savings accounts, but it offers much higher rates of interest and banking
privileges for senior citizens. These accounts will be linked to other senior citizen
savings schemes for remitting the funds from their retirement accounts or
pension funds, and consolidate all the funds under one single bank account.
4) Minors’ Savings Accounts
These accounts do not have a minimum balance requirement. A minor’s saving
account has been curated for educating children about banking facilities and
savings accounts. This kind of account can be opened and operated under the
supervision of the legal guardian until the child reaches 10 years old. After
crossing 10 years old, the child is allowed to operate the account on their own.
Once the child reaches 18 years old, the account will be converted into a regular
savings account.
 5) Zero Balance Savings Account
This account merges the features of a savings account and a current account.
While there are limits on withdrawal amounts, you will not charge penalties if the
balance falls below the prescribed minimum.
6) Women’s Savings Account
These kinds of accounts come with special features to benefit the account holder.
These benefits include discounts on certain purchases, low interest rates on loans,
and a waiver on demat account charges.
iii. Recurring deposit accounts
These are popularly known as RD accounts and are special kind of Term Deposits
and are suitable for people who do not have lump sum amount of savings, but are
ready to save a small amount every month. Normally, such deposits earn
interest on the amount already deposited (through monthly installments) at the
same rates as are applicable for Fixed Deposits / Term Deposits.
Under these types of deposits, the person has to usually deposit a fixed amount
of money every month (usually a minimum of Rs,100/- p.m.). Any default in
payment within the month attracts a small penalty. However, some Banks
besides offering a fixed installment RD, have also introduced a flexible / variable
RD. Under these flexible RDs the person is allowed to deposit even higher number
of installments, with an upper limit fixed for the same e.g. 10 times of the
minimum amount agreed upon.
These accounts can be funded by giving Standing Instructions by which bank
withdraws a fixed amount on a fixed date of the month from the saving bank of
the customer (as per his mandate), and the same is credited to RD account.
Recurring Deposit accounts are normally allowed for maturities ranging from 6
months to 120 months. A Pass book is usually issued wherein the person can get
the entries for all the deposits made by him / her and the interest earned. Banks
also indicate the maturity value of the RD assuming that the monthly installments
will be paid regularly on due dates. In case instalment is delayed, the interest
payable in the account will be reduced and some nominal penalty charged for
default in regular payments. Premature withdrawal of accumulated amount
permitted is usually allowed (however, penalty may be imposed for early
withdrawals). These accounts can be opened in single or joint names.
Nomination facility is also available.
The RD interest rates paid by banks in India are usually the same as payable on
Fixed Deposits, except when specific rates on FDs are paid for particular number
of days e.g. 500 days, 555 days, 1111 days etc. i.e. these are not ending in a
quarter.
Examples of reasons to keep a recurring deposit account are:
• High interest rate
• Some banks no longer offer penalties if you miss a month
• Can be started with even as low as Rs 2000 a month
• The documentation required is simple
• Best for short term goals such as kids’ education, furnishing and renovation,
dream vacation

iv. Fixed deposits

All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank, ICICI Bank, Yes Bank
etc.) offer fixed deposits schemes with a wide range of tenures for periods from 7
days to 10 years. These are also popularly known as FD accounts. However, in
some other countries these are known as "Term Deposits" or even called "Bond".
The term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor.
Therefore, the depositors are supposed to continue such Fixed Deposits for the
length of time for which the depositor decides to keep the money with the bank.
However, in case of need, the depositor can ask for closing (or breaking) the fixed
deposit prematurely by paying a penalty (usually of 1%, but some banks either
charge less or no penalty). (Some banks introduced variable interest fixed
deposits. The rate of interest on such deposits keeps on varying with the
prevalent market rates i.e. it will go up if market interest rates goes and it will
come down if the market rates fall. However, such type of fixed deposits has not
been popular till date).
The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier
when the same were regulated by RBI and all banks used to have the same
interest rate structure. The present trends indicate that private sector and
foreign banks offer higher rate of interest.
The earlier trend that private sector and foreign banks offer higher rate of interest
is no more valid these days. However, now a day’s small banks are forced to offer
higher rate of interest to attract more deposits. Usually a bank FD is paid in lump
sum on the date of maturity. However, most of the banks have also facility to
pay/ credit interest in saving account at the end of every quarter. If one desires
to get interest paid every month, then the interest paid will be at a marginal
discounted rate. In the changed computerized environment, now the Interest
payable on Fixed Deposit can also be easily transferred on due dates to Savings
Bank or Current Account of the customer.
v. Demat accounts
A Demat Account or Dematerialized Account provides the facility of holding
shares and securities in an electronic format. During online trading, shares are
bought and held in a Demat Account, thus, facilitating easy trade for the users. A
Demat Account holds all the investments an individual makes in shares,
government securities, exchange-traded funds, bonds and mutual funds in one
place.
Dematerialization is the process of converting the physical share certificates into
electronic form, which is a lot easier to maintain and is accessible from anywhere
throughout the world. An investor who wants to trade online needs to open a
Demat with a Depository Participant (DP). The purpose of dematerialization is to
eliminate the need for the investor to hold physical share certificates and
facilitating a seamless tracking and monitoring of holdings. In India, depositories
such as NSDL and CDSL provide Free Demat account services. Intermediaries,
depository participants or stockbrokers—like Angel Broking—facilitate these
services.
 vi. NRI Accounts
there are three types of accounts available to NRIs in India –
• NRE stands for Non-Resident External Account,
• NRO stands for Non-Resident Ordinary Account, and
• FCNR (Foreign Currency Non-Resident) bank Account.
NRE Account
Non-Residential External or NRE Account can be opened and maintained by NRIs
with earnings originating from the respective individual’s country of residence but
shall be held in Indian rupee denominations.
For example:
Me, Mohammed Taha is employed in Dubai, UAE but my mother lives in Pune
India, I remit 10,000 Dirham every month in her NRE Account, which is deposited
in the account in Indian currency. Therefore, considering the prevailing exchange
rate in that month was 1 AED = 20 INR, my remittance of 10,000 Dirham would be
held as Rs. 204068 in her NRE Account.
NRO Account
An NRO or Non-Residential Ordinary Account can be opened with income earned
from within India and shall be held in that deposit account in INR denominations.
The source of income can either be rent, dividends, etc.
For example:
For instance, Mr. Suhail, who is an NRI residing in London, UK has a warehouse in
Mumbai which he has leased to JKR Inc. To receive rent earnings from such lease,
Suhail has to open an NRO account where a representative from JKR Inc shall
deposit the stipulated rent amount periodically.
As deposits in an NRO account are made in rupee denominations, there is no step
of currency conversion involved.
FCNR (B) Account
FCNR or Foreign Currency Non-Residential Account facilitates deposits made by
Non-Residential Indians (NRIs) or Persons of Indian Origin (POI). NRIs or POI can
make these deposits in the currency of their country of residence and shall be
held in that account in any one of the foreign currencies prescribed by RBI.
The currencies in which deposits can be held in an FCNR (B) Account are – US
Dollars (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Euro (EUR), Great
Britain Pound Sterling (GBP), Singapore Dollar (SGD), Hong Kong Dollar (HKD),
Japanese Yen (JPY) and Swiss Franc (CHF).
Hence, for instance, if an individual has earnings in any of these currencies, their
deposits in an FCNR (B) Account shall not be subject to conversion. On the other
hand, if an individual earns in any other currency, deposits made in it shall be
converted to any one of the prescribed currencies mentioned above.

Are long term deposits paid higher rate interest in India? If so, what is the
purpose? Are short term deposits insignificant? What is its purpose? State with
examples.
Yes, long term deposits are paid higher interest compared to short term deposits
because banks want to hold your deposits for an extended period of time, so
they're more likely to offer a more lucrative interest rate to attract your business.
For example,
• in SBI the interest rate of a short-term deposit of 7 days is 5.75% while the
interest rate of a long-term deposit of 10 years is 6.40%
• in Axis Bank the interest rate of a short-term deposit of 7 days is 3.50%
while the interest rate of a long-term deposit of 10 years is 6.50%.
• in ICICI the interest rate of a short-term deposit of 7 days is 4.00% while
the interest rate of a long-term deposit of 10 years is 6.50%.
• in Citibank the interest rate of a short-term deposit of 7 days is 3.00%
while the interest rate of a long-term deposit of 10 years is 5.00%.
if you observe the trend in the banks in the above example, the deposits for 7
days have a much lower interest rate than the deposits for 10 years which proves
long term deposits are paid higher interest compared to short term deposits

But this doesn’t make short term deposits insignificant, Term deposits can be set
up for a certain period of time so they serve well for investors that have specific
savings goals in mind. If you are saving for a home loan deposit, to fly to Europe,
buy a car or for your wedding, a short-term deposit will lock away your money for
a short period of time, decided by you, so you can access your money again when
you need it. Common short-term deposits are 30 days (1 month), 60 days (2
months), 90 days (3 months), 120 days (4 months), 180 days (6 months) and 12
months (1 year).

DONE BY: MOHAMMED TAHA 19030122092