Banking System and Structure in India

Jai Sri Gurudev
ADICHUNCHANAGIRI UNIVERSITY
BGS Institute of Technology
PG Department of Management Studies
Banking- Theory and Practices

(18MBAFM31)
Course Material
Course Faculty
Shashwathi B S MBA-KSET, (M.Com)
Assistant Professor
PG Department of Management Studies
BGS Institute of Technology
Adichunchanagiri University
BG Nagara
Course: Principles & Practices of

Total No. of Lecture Hours: 52
Banking
Course Code: 18MBAFM31 University Examination: 60
Credits: 4 Internal Assessment: 40
Course Objectives
1. To understand the structure and functions of central and commercial banking in India.
2. To discuss the structure and system of Banking in India
3. To discuss the features of Negotiable Instrument Act of 1881.
4. To familiarize with roles, importance, usage and implications of modern banking
structure and tools in present business scenario
Unit 1 (10 Hours)

Banking system and structure in India- Evolution of Indian Banks-Types of banks –Public
Sector, Regional Banks, Performance of Public Sector banks, Private Sector Banks.
Commercial banking: Structure, Functions - Primary & secondary function, Role of commercial
banks in socio economic development, Services rendered. Credit creation and Deployment of
Funds.-Role of Reserve Bank and GOI as regulator of banking system – Provisions of Banking
Regulation Act & Reserve Bank of India Act
Unit 2 (10 Hours)

Banker and customer – Types of relationship between banker and customer – Bankers
obligations to customers – Right of lean, setoff, appropriation–Bankers legal duty of
disclosure and related matters Customers` accounts with banks – Opening- operation – KYC
norms and operation – Types of accounts and customers – Nomination – Settlement of death
claims
Unit 3 (8 Hours)
The Negotiable Instruments Act 1881-Features of Negotiable instruments-Important
concepts and explanations under the Negotiable Instruments Act- The Paying Banker-
Dishonor of cheque-Negotiation-Endorsement- The Collecting Banker-Negligence-Bills of
exchange and promissory note-Discharge of Negotiable instruments-Hundis.
Unit 4 (8 Hours)
Core banking solutions - Concept of Universal Banking, Home banking, ATMs, Internet
banking – Mobile banking– Debit, Credit, and Smart cards – Electronic Payment systems-
MICR- Cheque Truncation-ECS- EFT – NEFT-RTGS
Unit 5 (8 Hours)
International banking – International Banking: Exchange rates and Forex Business,
Correspondent banking and NRI Accounts, Letters of Credit, Foreign currency Loans,
Facilities for Exporters and Importers, Role of ECGC, RBI and EXIM Bank
Shashwathi B S
Asst. Professor, PG Dept of Mgt Studies, BGSIT, ACU Page 2
Unit 6 (8 Hours)
Banker as lender – Types of loans – Overdraft facilities – Discounting of bills – Financing
book debts and supply bills- Charging of Security bills- pledge – mortgage – assignment.
Recommended Books
 Principles and practices of Banking - IIBF, 2/e, Macmillan, New Delhi.
 Elements of Banking & Insurance – JyothsnaSethi & Nishwan Bhatia, PHI, 2009.
 Bank Management - Koch W, Timothy, & S. Scott, Cengage Learning, New Delhi. 28
 Management of Banking and Financial Services, Padmalatha Suresh and Justin Paul,
Second edition, Pearson, 2011
 Banking Theory and Practice, K.C. Shekhar and LekshmyShekhar, Vikas Publishing
House,2011.
 Modern Banking: Theory and Practice, Muraleedharan D, PHI, 2013.
Reference Books
 Banking Theory, Law and practice - Sunderaram and Varshney, Sultan Chand & Sons,
New Delhi.
 Banking and Financial System - Prasad K, Nirmala, Chandradas J. Himalaya Publishing
House, Mumbai.
 Banking and Financial services- Sharma, Mukund, 1st edition, Himalaya Publishing
House, Mumbai.
Course Outcomes
At the end of the course
1. The student will be able to understand in detail the present banking system in India and related
legal aspects.
2. The student will be able to know the nature of banker – customer relationship and various services
transacted between them.
3. The student will be able to make use of negotiable instruments practically.
4. The student will be able to have familiarity in using banking technologies like Internet banking,
Mobile banking, NEFT, ECS, ATM, Cards etc.
5. The student will be able to understand the concept of international banking and analyse its
implications.
Shashwathi B S
Unit 1: (10 Hours)

Banking system and structure in India- Evolution of Indian Banks-Types of banks –Public
Sector, Regional Banks, Performance of Public Sector banks, Private Sector Banks.
Commercial banking: Structure, Functions - Primary & secondary function, Role of commercial
banks in socio economic development, Services rendered. Credit creation and Deployment of
Funds.-Role of Reserve Bank and GOI as regulator of banking system – Provisions of Banking
Regulation Act & Reserve Bank of India Act
Introduction
Banks are among the main participants of the financial system in India. Banking offers
several facilities and opportunities. Since the nationalization of banks, the public sector
banks owned by the government have acquired place of prominence and have witnessed
tremendous growth. The need to become highly customer focused has forced the slow moving
public sector banks to adapt fast track approach.
Indian Banking has worked up to the competitive dynamics of the new Indian market and is
addressing the relevant issues to take on the multifarious challenges of the globalization.
Banks that employ IT solutions have been perceived as futuristic and proactive players
capable of meeting the varied requirements of the large customer base. Private Banks have
been fast on uptake and reorienting their strategies using the internet medium. The internet
has been emerged as a new and challenging frontier of marketing with the physical world like
any other marketing medium.
The Indian Banking has come along a long way from being a sleepy business institution to
highly proactive and dynamic entity. This transformation has been brought by the large dose
of liberalisation and economic reforms that allowed banks to explore new business
opportunities. The banking in India is highly fragmented and nationalized banks continue to
be major leader in the economy due to their sheer size and network which assures them high
deposit mobilization.
Meaning and Definition of Banking
According to section 5(b) of the Banking Regulation Act of 1949, “Banking means the
accepting for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawble by cheque, draft, order or otherwise”.
Banking Company means any company which transacts the business of banking in India. No
company can carry on the business of banking in India unless it uses as part of its name at
least one of the words bank, banker or banking.
Shashwathi B S
Banking can be defined as the business activity of accepting and safeguarding money owned
by other individuals and entities, and then lending out this money in order to earn a profit.
However, with the passage of time, the activities covered by banking business have widened
and now various other services are also offered by banks. The banking services these days
include issuance of debit and credit cards, providing safe custody of valuable items, lockers,
ATM services and online transfer of funds across the country.
Evolution of Indian Banks
The first bank in India, though conservative was established in 1786. From then till
today,the evolution of Indian banking can be categorised into three distinct phases,
1. The Pre-Independence Phase i.e., before 1947,

2. From 1947 to 1991 and
3. From 1991-92 and beyond.
Phase 1
 Presence of large number of banks more than 600.

 Most of them were small in size and suffering from high rate of failures.
 As a result, the confidence of public in banks was low and deposit mobilisation was
very slow.
 It was highly believed that savings bank facility provided by the Post Office was
comparatively safer.
 Funds were majorly provided to the traders.
 List of Banks-
 The General Bank of India (1786)
 Bank of Hindustan
 Bengal Bank
 Bank of Bengal (1806), Bank of Bombay (1840) and Bank of Madras (1843) were
established by East India Company and were called as Presidency Banks. These
three were amalgamated (1921) and Imperial Bank of India was established.
 Allahabad Bank (1865) – exclusively setup by Indians
 Punjab National Bank (1894)
 Between 1885 to 1913 – Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank and Bank of Mysore were setup
 Reserve Bank of India (1935)
Phase 2
 With the introduction of economic planning an attempt was made for aligning monetary
and banking activities with the requirements of planning.
Shashwathi B S
 This phase was characterised by nationalisation.

 The State Bank of India Act, 1955 was passed and Imperial Bank was renamed as
State Bank of India (SBI).
 Nationalisation-
1960 7 subsidiaries of SBI
1969 14 major banks
1980 8 more banks
 The flow of agricultural and industrial credit was widened and deepened after
nationalisation.
 The Deposit Insurance Corporation was formed to insure deposits of small depositors.
 The weak banks were compulsorily merged with bigger financially viable banks.
Phase 3
 The post-1991 saw a remarkable transition in the banking sector as capital base of
banks were strengthened.
 This phase introduced many more products and facilities in the banking sector in its
reform measure.
 In 1991, under the Chairmanship of M Narasimhan, a committee was setup by his name
which worked for the liberalisation of the banking practices.
 Prudential norms were introduced in line with international standards, interest rates
were de-regularised, new private sector banks were opened and other initiatives were
taken to enhance productivity and competitiveness of this sector.
 The country is flooded with foreign banks and ATMs. Phone banking and net banking
have been introduced. The entire system has become more swift and convenient.
Types of Banks
1. Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system
of a country is known as its Central Bank. They do not deal with the general public. They
act as Government‟s and Banker‟s Bank. The RBI is the central bank of our country.
2. Savings Bank
These banks function with the intention of cultivating savings habit in the people,
especially salaried and low income group. The deposit money is invested in securities,
bonds etc. These days, many commercial banks perform the dual function of savings bank.
Postal Department can be quoted as an example here.
Shashwathi B S
3. Commercial Banks
They are the banking institutions that accept deposits and grant loans and advances to
their customers. They function to help the entrepreneurs and businesses. They also
provide varied financial services to their customers.
The commercial banks can be further classified as follows,
i. Public Sector Banks
Public sector banks are owned and operated by the government, who has a major share
in them. The major focus of these banks is to serve the people rather earn profits. In
other words, Public sectors banks are those in which the government has a major
stake and they usually need to emphasize on social objectives than on profitability.
Some examples of these banks include State Bank of India, Punjab National Bank, Bank
of Maharashtra.
ii. Private Sector Banks
Private sector banks are owned and operated by private institutions. They are free to
operate and are controlled by market forces. In other words, Private sector banks are
owned, managed and controlled by private promoters and they are free to operate as
per market forces. A greater share is held by private players and not the government.
For example- Axis Bank, Kotak Mahindra Bank.
iii. Regional Rural Banks
Regional Rural Banks were brought into operation with the objective of providing
credit to the rural and agricultural regions and were brought into effect in 1975 by
RRB Act. These banks are restricted to operate only in the areas specified by
government of India. These banks are owned by State Government and a sponsor bank.
This sponsorship was to be done by a nationalized bank and a State Cooperative bank.
Some of the examples include, Krishna Grameena Bank, Tungabhadra Grameena Bank,
Sahayadri Grameena Bank and so on.
iv. Foreign Banks
These banks are based in the foreign country but they have several branches in India.
Some examples include, HSBC, Standard Chartered Bank and so on.
4. Co-operative Banks
People who come together to jointly serve their common interest often form a Co-
operative Society and such society engaging in the banking business is called as a Co-
operative Bank. They have to obtain the license from RBI and will be regulated by the
same.
There are three types of Co-operative banks operating in our country organised at three
levels; Village or town level, District level and State level.
i. Primary Credit Societies
These are formed at the village or town levels with members residing in the same
locality. The operations are restricted to a small area so that members know each
other and are able to watch over the activities thus preventing fraudulent activities.
Shashwathi B S
ii. Central Co-operative Banks

These banks act at the district level having some of the Primary Credit Societies as
its members. These banks provide loans to their members and function as a link
between Primary Credit Societies and State Co-operative Banks.
iii. State Co-operative Banks
These are the apex co-operative banks in all the states of the country. They mobilise
funds and help in its proper channelization among various sectors.
5. Investment banks/ Development Banks
An investment bank (IB) is a financial intermediary that performs a variety of services.
Most Investment banks specialize in large and complex financial transactions, such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and other corporate reorganizations and acting as a broker or
financial adviser for institutional clients.
Major investment banks include JPMorgan Chase, Morgan Stanley, Citigroup, Bank of
America and Deutsche Bank. Some investment banks specialize in particular industry
sectors. Many investment banks also have retail operations that serve small, individual
customers.
6. Specialised Banks
There are some banks, which cater to the requirements and provide overall support for
setting up of business in certain areas of activity. These provide unique services to their
customers. Some such banks include foreign exchange banks, industrial banks, export
import banks and so on. EXIM Bank, SIDBI and NABARD are examples of such kind. They
engage in some specific area or activity and thus called specialised banks.
Performance of Public Sector Banks
They are the major lenders in the economy due to their sheer size and network. Most people
rely on these banks as they are backed by the government. They provide adequate credit to
agricultural and rural sector, small industries, exports, entrepreneurs and women. They have
professionalised bank management through adequate training of bank staff. Being faced the
stiff competition with the private sector and foreign banks, the public sector banks have
reinvented themselves and have markedly improved their services and operational results.
Commercial Banking
 A financial institution that provides services, such as accepting deposits, giving

business loans and auto loans, mortgage lending, and basic investment products like
savings accounts and certificates of deposit.
 The traditional commercial bank is a brick and mortar institution with tellers, safe
deposit boxes, vaults and ATMs.
Shashwathi B S
 However, some commercial banks do not have any physical branches and require
consumers to complete all transactions by phone or Internet.
 In exchange, they generally pay higher interest rates on investments and deposits, and
charge lower fees.
Structure of Banks in India
State Bank
of India
Public Sector Nationalised

Banks Banks
Reserve Regional
Bank of Rural Banks
India
Indian
Private Banks
Private
Sector Banks
Foreign
Banks
Functions of Commercial Banks
Commercial bank being the financial institution performs diverse types of functions. It
satisfies the financial needs of the sectors such as agriculture, industry, trade,
communication, etc. That means they play very significant role in a process of fulfilling
economic-social needs. The functions performed by banks are changing according to change
in time and recently they are becoming customer centric and widening their functions.
Generally the functions of commercial banks are divided into two categories viz. primary
functions and the secondary functions.
1. Primary functions
a. Acceptance of deposits
b. Advancing loans
c. Creation of credit
d. Usage of cheque system and plastic cards.
e. Financing trade
f. Remittance of funds
2. Secondary functions
a. Agency Services
Shashwathi B S
b. General Utility Services
1. Primary Functions
a. Acceptance of deposits
An important function of a commercial bank is to attract deposits from the public.
Deposits are of various types. They are usually classified as follows,
 Demand or Current deposits,
 Savings deposits and
 Fixed deposits.
b. Advancing loans
The second major function of a commercial bank is to make loans and advances out of
deposits of the public. The common ways of bank lending are as follows,
 Overdraft facilities,
 Cash credit,
 Discounting Bills of Exchange,
 Money at call,
 Term loans,
 Consumer credit,
 Miscellaneous advances and so on.
c. Creation of credit
A unique function of the bank is to create credit. Banks supply money to traders and
manufacturers. They also create or manufacture money. Bank deposits are regarded
as money. They are as good as cash. The reason is they can be used for the purchase
of goods and services and also in payment of debts. When a bank grants a loan to its
customer, it does not pay cash. It simply credits the account of the borrower. He can
withdraw the amount whenever he wants by a cheque. In this case, bank has created a
deposit without receiving cash. That is, banks are said to have created credit. Sayers
says “banks are not merely purveyors of money, but also in an important sense,
manufacturers of money.”
d. Usage of cheque system and plastic cards
The commercial banks render an important service by providing to their customers a
cheap medium of exchange like cheques. It is found much more convenient to settle
debts through cheques. Cheques are the most developed type of credit instrument in
the money market. In recent times usage of plastic cards are getting extensive which
are also based on the bank deposits.
e. Financing trade
Banks are the one who finance the internal and foreign trade through discounting of
exchange bills. Sometimes, the bank gives short-term loans to traders on the security
of commercial papers. This discounting business greatly facilitates the movement of
internal and external trade.
Shashwathi B S
f. Remittance of funds
Commercial banks, on account of their network of branches throughout the country,
also provide facilities to remit funds from one place to another for their customers by
issuing bank drafts, mail transfers or telegraphic transfers on nominal commission
charges. As compared to the postal money orders or other instruments, bank drafts
have proved to be a much cheaper mode of transferring money and have helped the
business community considerably.
2. Secondary Functions
a. Agency services
Banks also perform certain agency functions for and on behalf of their customers. The
agency services are of immense value to the people at large. The various agency
services rendered by banks are as follows:
 Collection and Payment of Credit Instruments
 Purchase and Sale of Securities
 Collection of Dividends on Shares
 Acts as Correspondent
 Income-tax Consultancy
 Execution of Standing Orders
 Acts as Trustee and Executor
b. General utility services
Besides agency services, commercial banks perform many general utility services also.
Banks render these services not only to their customers but also to the general public.
The following are some of the important general utility services.
 Undertake foreign exchange transactions.
 Enables foreign trade by issuing letter of credit.
 Bankers accept bills on behalf of customers.
 Underwrite the issue of shares and debentures.
 Provides safe custody of valuables.
 The income tax assesses can pay their income tax through banks.
 Provide various data which are in general interest.
 Help companies to mobilize funds in foreign market through the sale of global
deposit receipt.
 Undertake factoring and leasing finance.
 Execution of standing orders.
 Issuing travellers‟ cheques.
 Acting as referees.
 Giving trade information.
 Providing ATM facility.
 Issuing of cards.
Shashwathi B S
 Issuing gift cheques.

 Advising on financial matters.
 Merchant banking.
Role of Commercial Banks in Socio-Economic Development
The nationalized banks in India have framed special innovative schemes of credit to help
small agriculturists, village and cottage industries, retailers, artisans, the self employed
persons through loans and advances at concessional rates of interest. The nationalized banks
in India advance loans to persons belonging to scheduled tribes, tailors, rickshaw-walas,
shoe-makers at the concessional rate. Banking is, thus, being used to sub serve the national
policy objectives of reducing inequalities of income and wealth, removal of poverty and
elimination of unemployment in the country.
1. Accelerating the rate of capital formation.
2. Provision of finance and credit.
3. Monetization of economy.
4. Innovations.
5. Implementation of monetary policy.
6. Encouragement to right type of industries.
7. Development of agriculture.
8. Regional development.
9. Promote industrial development.
10. Promote commercial virtues.
Credit creation in Banks
Credit creation can be defined as the process of expansion of bank deposits through the
process of more loans and advances and investments. The power of commercial banks to
expand deposits through expanding their loans and advances is known as credit creation. As
every bank loan creates an equivalent deposit, credit creation by banks implies multiplication
of bank deposits. It is true that banks cannot lend more than what it has got. But, it is
equally true that what is lent out by banks comes back to the banks by the way of new
deposits which may be again lent out and so on.
The basis of credit money is the bank deposits
 Primary Deposits: Primary deposits arise or formed when cash or cheque is deposited
by customers. When a person deposits money or cheque, the bank will credit his
account. The customer is free to withdraw the amount whenever he wants by cheques.
These deposits are called “primary deposits” or “cash deposits”.
Shashwathi B S
 Derivative Deposits: Bank deposits also arise when a loan is granted or when a bank
discounts a bill or purchase government securities. Deposits which arise on account of
granting loan or purchase of assets by a bank are called “derivative deposits.”
Limitations of credit creation

i. Amount of cash held.
ii. Ratio of cash reserves.
iii. Public‟s desire to hold cash.
iv. Nature of business conditions in the country.
v. Leakages in credit creation.
vi. Monetary policy of the central bank.
vii. Lack of collateral securities.
Deployment of funds
Factors influencing deployment of funds,

1. Liquidity.
2. Profitability.
3. Security.
4. Diversity.
5. Saleability of securities.
6. Stability in the value of investments.
7. Principles of tax exemption of investments.
Role of RBI as a regulator of Banking System
RESERVE BANK OF INDIA
The Reserve Bank of India, the central bank of our country, was established in 1935 under
the aegis of RBI Act, 1934. It was a private shareholders institution till January 1949, after
which it became a state-owned institution under the RBI Act, 1948. It is the oldest central
bank among the developing countries. As the apex bank, it has been guiding, monitoring,
regulating and promoting the destiny of the Indian financial system.
Functions of Reserve Bank of India in Indian Banking System

1. Monetary authority.
2. The issuer of currency.
3. The issuer of banking license.
4. Banker‟s to the government.
5. Banker‟s bank.
6. Lender of last resort.
7. Debt manager of government.
Shashwathi B S
8. Money supply and controller of credit.

9. Act as clearing house.
10. Manager of foreign exchange.
11. Managing government securities.
12. Regulator of economy.
13. Regulator and supervisor of payment and settlement systems.
14. Developmental role.
15. Publisher of monetary data and other data.
16. Exchange manager and controller.
17. Banking ombudsman scheme.
18. Banking codes and standards board of India.
19. Fair practices codes for lenders.
Banking Regulation Act of 1949
The Banking Regulation Act, 1949 is legislation in India that regulates all banking firms in
India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and
changed to Banking Regulation Act 1949 from 1 March 1966. The Act provides a framework
using which commercial banking in India is supervised and regulated. The Act supplements
the Companies Act, 1956.
Important Provisions of Banking Regulation Act, 1949-

1. Use of words „bank‟, „banker‟, „banking‟ or „banking company‟ (sec.7)
2. Prohibition of trading (sec. 8)
3. Disposal of banking assets (sec. 9)
4. Management (sec. 10)
5. Requirements as to minimum paid-up capital and reserves (sec. 11)
6. Regulation of capital and voting rights of shareholders (sec. 12)
7. Restriction on commission, brokerage, discount etc. On sale of shares (sec. 13)
8. Prohibition of charges on unpaid capital (sec. 14)
9. Restriction on payment of dividend (sec. 15)
10. Reserve
11. Fund/statutory reserve (sec. 17)
12. Cash reserve (sec. 18)
13. Liquidity norms or Statutory Liquidity Ratio (SLR) (sec. 24)
14. Restrictions on loans and advances (sec. 20)
15. Accounts and audit (secs. 29 to 34A)
Shashwathi B S
The Reserve Bank of India Act, 1934
Reserve Bank of India Act, 1934 is the legislative act under which the Reserve Bank of
India was formed. This act was meant to provide a framework for the supervision of banking
firms in India.
The following are the salient features of the Reserve Bank of India Act of 1934
1. The issue of currency notes.
2. Monetary stability in the country.
3. Lender of last resort- Bankers bank.
4. Banker to the government.
***
Shashwathi B S
Unit 2 (10 Hours)

Banker and customer – Types of relationship between banker and customer – Bankers
obligations to customers – Right of lean, setoff, appropriation–Bankers legal duty of
disclosure and related matters Customers` accounts with banks – Opening- operation – KYC
norms and operation – Types of accounts and customers – Nomination – Settlement of death
claims
Banker
The basic function of a banker is accepting of money from the public by the way of deposits
and deploying the same by means of loans and investments. Bankers also render variety of
services apart from the above.
Customer
To constitute a customer the following essential requisites must be fulfilled,
 A bank account- Savings, Current or Fixed deposit- must be opened in his name by
making necessary deposit of money and
 The dealing between the customer and banker must be of the nature of banking
business.
Banker and customer relationship
The relationship between a banker and a customer depends upon the nature of services
provided by the banker. Apart from the core business of acceptance of deposits and lending
and/or investing a banker provides various other services as stated earlier as such
relationships is based on services rendered.
Types of relationship between banker and customer

A. General relationship
1. Debtor- Creditor
2. Creditor- Debtor
B. Special relationship
1. Bank as a trustee
2. Bailee- Bailor
3. Lessor-Lessee
4. Agent- Principal
5. As a Custodian
6. As a Guarantor
Shashwathi B S
Transaction Bank Customer
Deposit in bank Debtor Creditor
Loan from bank Creditor Debtor
Safe custody Bailee Bailor
Locker Lessor Lessee
Collection of cheque Agent Principal
Purchase of a draft Debtor Creditor
Payee of a draft Trustee Beneficiary
Pledge Pawner Pawnee
Mortgage Mortgagee Mortgager
Standing instruction Agent Principal
Sale/purchase of securities on behalf of customer Agent Principal
Articles left by mistake Trustee Beneficiary
Shares given for sale Agent Principal
Hypothecation Hypothecatee Hypothecator
Termination of relationship between a banker and a customer
The relationship between a bank and a customer ceases on:

1. The death, insolvency, lunacy of the customer.
2. The customer closing the account i.e. Voluntary termination.
3. Liquidation of the company.
4. The closing of the account by the bank after giving due notice.
5. The completion of the contract or the specific transaction.
Bankers obligations to customers
The following are the additional obligations of a banker,

1. The obligation to honour the cheques
2. The obligation to maintain the secrecy of the customer accounts
Shashwathi B S
1. The obligation to honour the cheques

The deposit accepted by a banker is his liabilities repayable on demand or otherwise. The
banker is therefore under a statutory obligation to honour his customer‟s cheque in the
usual course.
According to section 31 of the Negotiable Instruments Act 1881 the banker is bound to
honour his customer‟s cheque provided by following conditions are fulfilled:
 Availability of sufficient fund of the customer.
 The correctness of the cheque.
 Proper presentation of the cheque.
 A reasonable time for collection.
 Proper drawing of the cheque.
2. The obligation to maintain the secrecy of the customer accounts

The banker is an obligation to take utmost care in keeping secrecy about the account of
his customer.
By keeping secrecy is that the account books of the bank will not be thrown open to the
public or government, officials if the following reasonable situation does not occur,
a. Disclosure of information required by law.
 Under Income Tax Act, 1961
 Under the Companies Act, 1956
 By the order of the court under the Banker‟s Book Evidence Act, 1891
 Under the Reserve Bank of India Act, 1934
 Under the Banking Regulation Act, 1949
 Under the Gift Tax Act, 1958
 Disclosure to the Police
 Under the Foreign Exchange Management Act, 1999, u/s 10.
 Under the Credit Information Companies Act, 2005.
 RTI Act, 2005.
b. Disclosure permitted by bankers practice and wages.
These permit disclosure of certain information under the following circumstances.
 With express or implied consent of the customer.
 The Banker may disclose the state of his customer‟s account in order to legally
protect his own interest.
 Banker‟s reference.
c. Duty to the public to disclose
 When a bank is asked for the information by the Government officials
concerning the commission of a crime and the bank has reasonable cause to
believe that a crime has been committed and that the information in the bank‟s
possession may lead to the apprehension of the culprit.
Shashwathi B S
 Where the bank considers that the customer is involved in activities prejudicial
to the interest of the country.
 Where the bank‟s book reveal that the customer is contravening the provisions
of any law.
 Where sizable funds are received from foreign countries by a constituent.
Rights of a Banker
1. Appropriation of payments or Right of appropriation

2. Right of general lien
3. Right of set-off
4. Right to charge interest and other incidental charges
1. Appropriation of payments or Right of appropriation
Appropriation of payments or Right of appropriation in the normal course of business, a

banker accepts payments from customers. If the customers have more than one account
or he/she has taken more than one loan, the customer has the right to direct his banker
against which debt the payment should be appropriated/settled. If the customer does
not direct the banker and there is more than one debt outstanding in his/her name, the
bank can exercise its right of appropriation and apply it in payment of any debt. The
banker can apply it against time barred debts also. Once an appropriation has been made
it cannot be reversed.
2. Right of general lien
Lien is the right of the banker to retain possession of the goods and securities owned by
the debtor until the debt due from the latter is paid. Banker‟s lien is an implied pledge.
Areas of applications-
i. To sell.
ii. To a specific person.
iii. Against the customer.
Exceptions-
 Safe custody articles.
 Documents deposited for specific purposes.
 Articles left negligibly in the bank premises.
 Immature debts.
 Securities lodged with banker for securing a loan before the actual granting of
loan.
 Securities held in trust.
 On money deposited- only the right of set off can be executed.
Shashwathi B S
3. Right of set off

The right of set-off enables banker to adjust a debit balance in customer‟s accounts, with
any balance outstanding to his credit in the books of the bank. The banker can adjust his
claim from the amount that is payable to the customer.
Conditions-
 The accounts must be in the same name in the same right.
 The right can be exercised in respects of debts due only not in respects of future
debts or contingent debts.
 The number of debts must be certain.
 The banker may exercise that right at his discretion.
4. Right to charge interest and incidental charges

As a creditor, a banker has the implied right to charge interest on the advances granted
to the customer. Bankers usually follow the practice of debiting the customer‟s account
periodically with the amount due from the customer. The agreement between the banker
and the customer may on the other hand stipulate interest may be charged at compound
rate also.
Bankers legal duty of disclosure and related matters
The account of the customer in the books of the banker records all of his financial dealings
with the latter and depicts the true state of his financial position. If any of these facts is
made known to others, the customer‟s reputation may suffer and he may incur losses also.
The banker is thus under an obligation not to disclose deliberately or intentionally – any
information regarding his customer‟s accounts to a third party and also to take all necessary
precautions and care to ensure that no such information leaks out of the account books.
Section 13 of the Banking Companies Act, 1970, specifically requires them to “observe,
except as otherwise required by law, the practices and usages customary amongst bankers
and in particular not to divulge any information relating to the affairs of the constituents
except in circumstances in which they are, in accordance with law or practices and usages
customary among bankers, necessary or appropriate for them to divulge such information.”
Thus, the general rule about the secrecy of customer‟s accounts may be dispensed with in
the following circumstances,
 When the law requires such disclosure to be made;

 And when the practices and usages amongst the bankers permit such disclosure.
Shashwathi B S
Customers’ accounts with banks

1. Savings deposits accounts.
2. Fixed deposits accounts.
3. Recurring or Cumulative deposits accounts.
4. Current accounts.
1. Savings deposits accounts

In today‟s world, hard cash in a gunny sack isn‟t the safest or smartest way to manage
your finances. Today, we stash our money with banks, which have enabled us to track our
balances, transactions, etc. through a variety of means – both in print and online. When an
individual approaches a bank with some money and requires the bank to provide a secure
place to store that money, the bank will offer the individual its most basic product –
a savings bank account.
Savings bank account is the most common operating account for individuals and others for
non-commercial transactions. A Savings account helps people to put through day-to-day
banking transactions besides earning some return on the savings made. Banks generally
put some ceilings on the total number of withdrawals permitted during specific time
periods. Banks also stipulate certain minimum balance to be maintained in savings
accounts. Banks as a rule do not give overdraft facility in a saving account, but allow
occasional overdrawing to meet contingencies.
Features of Savings deposits accounts
a. Most savings bank accounts in India require the account holder to maintain
a minimum account balance of a certain amount, failing which, the bank reserves
the right to charge maintenance fees.
b. Savings bank accounts generally offer an interest rate slightly higher than the rate
of inflation, in order to keep the real value of money stable throughout the years.
c. Modern savings accounts are feature packed and offer quick links to pay bills, make
quick transactions, etc. to the account holder as soon as he / she logs in to the
account.
d. Savings accounts have daily withdrawal limits so that they aren‟t used as current
accounts.
e. Savings accounts are generally not zero-balance accounts.
f. Savings accounts offer an excellent amount (if not as much as current accounts)
of liquidity of funds.
g. Savings accounts are usually opened by salaried individuals, as business people
usually prefer to maintain current accounts that offer less interest but more
liquidity and generally have no minimum balance requirements.
h. Banks customize savings accounts depending on the general type of usage the
account witnesses in its lifetime.
Different types of Savings deposits account
i. Regular savings accounts.
Shashwathi B S
ii. Salary based savings accounts.

iii. Savings Accounts for Senior Citizens.
iv. Savings Accounts for Children and Minors.
v. Exclusive Benefits Accounts for Women.
vi. Zero Balance Savings Account.
vii. Linked Savings Account.
Eligibility criteria to open a Savings bank account
In order to set up and operate a savings bank account from any of the major banks in
India, applicants must meet the following eligibility criteria,
 Savings bank accounts can be opened by resident Indians, non-resident Indians
(NRIs), and foreign nationals.
 Age: Generally, banks allow only those who are 18+ to open an account on their own.
However, savings accounts can be opened for minors by their parents / guardians.
 Restrictions: Unlike other banking or financial products, there are almost no
restrictions on who can open a savings bank account.
Documents required opening a Savings bank account
 Given below is a list of the documents that the customer needs to submit along with
his / her application in order to have a savings bank account opened:
 Proof of age and identity
 Photographs
 Proof of address
 Senior Citizen Card
 Proof of income
 Depending on the applicant and the type of account being opened, the bank could ask
for a few more proofs of identification, age, address, employment, etc. as required.
2. Fixed deposits accounts

A fixed deposit account is a financial instrument which offers an interest rate higher
than that of a savings account. Investors can fix their deposits for a period ranging from
a few days to 10 years and earn higher returns. Fixed deposit account expires at the end
of the agreed tenure for which your deposits have been fixed. Penalty charges will be
levied by the banks for premature closure of a fixed deposit account. The rate of
interest of a fixed deposit account may vary from one bank to another and it generally
depends on the amount deposited, tenure, and prevailing market rates.
Features of Fixed deposits
a. Fixed deposits enable investors to earn higher interest on their surplus funds.
b. One can deposit money in a fixed deposit account only once, but to deposit more
money, they need to create another account.
c. Though liquidity in fixed deposits is lesser, there are higher rates of interests.
d. Fixed deposits can be easily renewed.
Shashwathi B S
e. Tax is deducted at source, from interest on Fixed Deposits as applicable, as per the
Income Tax Act, 1961.
Benefits of Fixed deposits

 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.
 One can opt for periodic interest payouts, to help you manage monthly expenses.
 There is no effect of market fluctuations on fixed deposits, which ensures greater
safety of investment capital.
 Benefit of higher interest rates. Some financiers also offer greater returns for
senior citizens.
3. Recurring or Cumulative deposits accounts

It‟s a type of deposit account provided by banks to people with a regular income. It is an
investment tool which permits those with an ability to make regular deposits earn decent
returns on their investment. Basically consisting of regular deposits and an interest
component, a Recurring Deposits provides flexibility and ease of use to individuals.
Account holders can choose to invest a particular amount each month, ensuring that they
have sufficient income for an emergency, with the RD earning decent interest on the
amount. Given the fact that FDs are rigid and are not ideal for short terms, a Recurring
Deposit is an ideal investment cum savings option.
Almost all major banks in India offer a Recurring Deposit Account, with the term
typically ranging between 6 months and 10 years, providing individuals an opportunity to
choose a term as per their needs. Competition among banks to attract new customers has
ensured that interest rates are competitive, helping an investor earn a good amount on
maturity. The interest rate, once determined, does not change during the tenure, with
the Reserve Bank of India ensuring that strict guidelines are followed. On maturity, the
individual will be paid a lump sum amount which includes the regular, periodic investments
and the interest earned on them.
Features of Recurring deposits accounts
a. Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.
b. Minimum amount that can be deposited varies from bank to bank. It can be an amount
as small as Rs.10.
c. The minimum period of deposit starts at six months and the maximum period of
deposit are ten years.
d. The rate of interest is equal to that offered for a Fixed Deposit and is hence higher
than any other Savings scheme.
e. Premature and midterm withdrawals are not allowed. However, the bank may allow
closing the account before the maturity period, sometimes with a penalty for
premature withdrawal. RD offers the additional benefit of taking loan against the
Shashwathi B S
deposit, i.e., by using the deposit as collateral. About 80 to 90% of the deposit value
can be given as loan to the account holder.
f. The Recurring Deposit can be funded periodically through Standing Instructions, the
instructions given by the customer to the bank to credit the Recurring Deposit
account every month from his/her Savings or Current account.
Benefits of investing in Recurring deposit

 A simple financial product to invest in.
 Guaranteed returns.
 Tenure and minimum amount to be deposited.
 Anytime withdrawal.
 Loan against deposit.
 Flexible recurring deposits.
4. Current accounts
A current account, also known as financial account is a type of deposit account maintained
by individuals who carry out significantly higher number of transactions with banks on a
regular basis especially for the business purposes. Current accounts relate to liquid
deposits and it offers a broad range of customized options to aid financial dealings.
Current accounts also allow making payments to creditors through the cheque facility
offered by the bank.
Generally, current accounts do not provide interests and requires a higher minimum
balance when compared to savings account. However, the greatest advantage of current
bank account is that, account holders can easily avail overdraft facility up to an agreed
limit.
Features of a Current account
a. A current account allows transactions beyond the scope of a savings account.
b. Compared to savings account, a current account requires a higher minimum balance.
c. It is designed to facilitate frequent transactions – transfer funds, receive cheques,
cash, etc.
d. A current account can be operated by individuals, proprietary concerns, public and
private companies, associations, trusts, etc.
e. No restriction on the number of transactions in a day.
f. Non-maintenance of the minimum balance can attract penalty charges.
g. Just like savings account, KYC guidelines are to be followed even for current accounts.
h. For a single business, there cannot be multiple current accounts.
i. The prime objective of current account is to facilitate smooth transactions for
businesses.
j. Nowadays, some banks offer interest rates on current accounts as well.
k. Current accounts charge interests on short-term funds the account holder has
borrowed from the bank.
Shashwathi B S
Benefits of a Current account

 Allows for prompt business transactions.
 No limit on withdrawals.
 No limit on deposits in the home branch.
 Enables businessmen to make direct payments using cheques, demand drafts, or pay
orders.
 Provides overdraft facility.
 Provides internet banking and mobile banking facilities.
Documents required opening a Current account
 PAN card.
 Address proof.
 Companies or trusts must submit a certificate of incorporation and memorandum of
association.
 Partnership agreement in case of partnership firms.
 ID and residence proof of all partners.
 A colour photograph of the applicant(s).
 Cheque from existing savings account for account opening.
 Businesses should provide address of communication.
Difference between Current account and Savings account

Savings Account Current Account
A savings accounts are deposit accounts A current account on the other hand is meant
which do not allow unlimited transactions for daily financial transactions
Savings accounts are best suited for Current accounts are ideal for individuals and
salaried employees or people with a monthly firms that need to carry out monetary
income transactions on a day-to-day basis
Savings accounts earn interests which is Current accounts are non-interest bearing
normally in the range of 4% to 8% deposit accounts
Banks do not provide overdraft facility on
Overdraft facility is provided
savings account
The minimum balance required to open a The minimum balance for opening a current
savings account is very low account is comparatively much higher
The main purpose of a savings account is to The main purpose of a current account is to
encourage people towards savings help individuals with multiple transactions
KYC Norms
KYC is an acronym for “Know your Customer” a term used for Customer identification
process. It involves making reasonable efforts to determine, the true identity and beneficial
ownership of accounts, source of funds, the nature of customer‟s business, reasonableness of
operations in the account in relation to the customer‟s business, etc which in turn helps the
Shashwathi B S
banks to manage their risks prudently. The objective of the KYC guidelines is to prevent
banks being used, intentionally or unintentionally by criminal elements for money laundering
and financial terrorism.
Under KYC banks are advised to follow certain customer identification procedure for opening
of accounts and monitoring transactions of a suspicious nature for the purpose of reporting
it to appropriate authority. Reserve Bank of India has advised banks to make the Know Your
Customer (KYC) procedures mandatory while opening and operating the accounts and has
issued the KYC guidelines under Section 35 (A) of the Banking Regulation Act, 1949. Any
contravention of the same will attract penalties under the relevant provisions of the Act.
Thus, the Bank has to be fully compliant with the provisions of the KYC procedures.
When do the KYC Norms apply?
 Opening a new account.
 In respect of accounts where documents as per current KYC standards have not been
submitted while opening the initial account.
 Opening a Locker Facility where these documents are not available with the Bank for all
the Locker facility holders.
 When the Bank feels it necessary to obtain additional information from existing
customers based on conduct of account.
 When there are changes to signatories, mandate holders, beneficial owners etc.
 For non-account holders approaching the Bank for high value one-off transactions like
Drafts, Remittances etc.
Types of customers
1. Minor
2. Married woman
3. Illiterate persons
4. Lunatics
5. Drunkards
6. Trusts
7. Executors and administrators
8. Joint accounts
9. Joint Hindu Family
10. Partnership firm
11. Joint Stock Companies
Shashwathi B S
12. Clubs, Societies and Charitable Institutions
1. Minor
Under section 3 of the Indian majority act, 1875, a minor is a person who has not
completed the age of 18 years. A savings /fixed / recurring bank deposit account can be
opened by a minor of any age through his/her natural or legally appointed guardian.
Minors above the age of 10 years may be allowed to open and operate savings bank
accounts independently, if they so desire. Banks are free to offer additional banking
facilities like internet banking, ATM/ debit card, cheque book facility etc., subject to the
safeguards that minor accounts are not allowed to be overdrawn and that these always
remain in credit.
2. Married woman
The law that exists today in India doesn‟t make any distinction between the contractual
capacity of a man or an unmarried lady and a married woman. So, a married woman enjoys
the same contractual capacity as a man or an unmarried lady. The banker may therefore
open an account in the name of a married woman without any restrictions.
3. Illiterate persons
An illiterate person may open an account with a bank. The banker should take the
following steps:
a. Thumb impression
b. Identification mark
c. Photograph.
Normally, no chequebook is issued to the account holder. The account holder has to come
to the bank for operating the account.
4. Lunatics
A lunatic is a person of unsound mind. The positions of lunatics under Indian law, Under
Indian contract Act, a contract with or by a lunatic are void. The reason being the lunatic
being of unsound mind is not competent to comprehend a contract. If the banker without
knowing that the person is lunatic opens an account and enters into a contract acting in
good faith is protected. But when once he gets a notice of lunacy of a person, he should
not entertain any contract either existing or new.
5. Drunkards
Intoxicated person cannot take a rational judgment about his interest. State of
intoxication renders a person incapable of understanding the nature of his action.
Therefore, the law provides that all the contracts made by a person in a drunken state
are void. When a drunkard approaches the branch of a bank for opening an account, the
Shashwathi B S
branch if satisfied that the person is incapable of entering into a contract refuses to
open the account as a precautionary measure. In case of an existing account, payment of a
cheque to a drunkard is done after taking proper witness.
6. Trusts
Trusts are created by the settler through executing a Trust Deed. A trust account can
be opened after obtaining and scrutinising the trust deed. The Trust account has to be
operated by all the trustees jointly unless provided in the trust deed. A banker must be
cautious in opening/operating a trust account as the trustees are responsible for public
money. A cheque favouring the Trust shall not be credited to the personal account of the
Trustee.
7. Executors and administrators

Executors and Administrators are the persons who are appointed to conduct the affairs
of the person after his death. Executors and Administrators are allowed to open bank
account. Formalities are to be observed while opening the account in the name of
executor/administrator.
8. Joint accounts
When two or more persons open an account jointly, it is called a joint account. It can be
operated by one or by all the persons according to the instructions. These instructions
can be changed accordingly. The joint account holders need not be trustees or partners in
business.
The following precautions should be taken by the banker,
 The banker must get clear instructions about who can withdraw money from the
account.
 Special care must be taken in cases of Over Draft facility, Death, Insolvency of
account holder, Suspension or Termination of account, Personal liability of
individual joint account holders.
9. Joint Hindu Family

A Joint Hindu Family possesses ancestral property and carries on ancestral business. The
ownership of such property passes on to the members of the family according to the
Hindu law. These are governed according to the Hindu Succession Act of 1956 and the
banker needs to act according to this. The account is opened in the name of the Karta and
family business. The operations in the account are normally restricted to Karta of the
family. The Karta can appoint any of the adult coparceners to operate the bank account as
'Manager' if HUF carries out business at various places through its branches.
Shashwathi B S
10. Partnership firm

Partnership is created by oral or written agreement. It is the relation between persons to
share the profits of the business. Partnership may be carried on by all the members or by
a single on behalf of the others. If partnership deed is not clear then it is settled
according the partnership Act 1932.
While opening the partnership account following precautions must be taken by the banker:
 The account must be opened in the name of firm.
 Partnership deed and changes made in it time to time must be studied carefully by
the banker.
 It is necessary that all the partners should sign on all the documents.
 All the instructions about the operation of the account must be signed by all the
partners.
 The specimen signatures on cards must be taken from the partners and authorized
person who will operate the accounts.
 In case of advancing loan and execution of guarantee deed the banker will obtain
the signatures of all the partners.
 A banker must observe the various provisions of Partnership Act in case of death,
entry or withdrawal of any partner.
 A declaration and consent must be taken by the banker from all the partners in
regard to the drawing and disbursement.
11. Joint Stock Companies

It is an association of individuals for the purpose of profit. The members contribute
capital. This common capital is divided into shares. Each member is a shareholder. These
shares are transferable.
While opening such account the banker should be very careful and he should adopt the
following precautions:
 Checking of documents.
 Checking of resolution.
 Directors account in the same bank.
 Checking of limit.
 Winding up case.
 Charges within the prescribed limit.
12. Clubs, Societies and Charitable Institutions

Clubs, societies, charitable and religious institutions, libraries, schools, colleges etc., not
engaged in trading activities maintain their accounts with banks.
The following are the precautions that should be taken by the banker,
 Incorporation details.
 Rules and By-laws.
Shashwathi B S
 Resolutions of the managing committee.

 Borrowing powers.
 Death or resignations.
 Care to be exercised in personal accounts.
Nomination
 Banks ask their account holders to make nominations which mean that they should
nominate persons to whom the money lying in their accounts should go in the event of
their death.
 Nomination can be made in account opening form itself or on a separate form indicating
the name and address of the nominee.
 The account holders can change the nomination any time.
Settlement of death claims in bank accounts
 When Nomination is registered with the bank, the nominee can apply to the Bank, giving
full details of the accounts of the deceased depositor.
 On receipt of the claim from the nominee, the branch will verify the documents and do
the needful action.
 The important documents necessary for settlement of claim are,
 Death certificate
 Claim application forms
 Probate of WILL
 Succession certificate
***
Shashwathi B S
Unit 3 (8 Hours)
The Negotiable Instruments Act 1881-Features of Negotiable instruments-Important
concepts and explanations under the Negotiable Instruments Act- The Paying Banker-
Dishonor of cheque-Negotiation-Endorsement- The Collecting Banker-Negligence-Bills of
exchange and promissory note-Discharge of Negotiable instruments-Hundis.
Introduction
The Negotiable Instrument Act was enacted, in India in 1881. Prior to its enactment, the
provision of the English Negotiable Instrument Act with certain modifications were
applicable in India. It extends to whole of India. The Act operates subject to the provisions
of Section 31 and 32 of the RBI Act, 1934. Section 31 of the Reserve Bank of India Act
provides that no person in India other than the Bank or as expressly authorized by this Act,
the Central Government shall draw, accept, make or issue any bill of exchange, hundi,
promissory note or engagement for the payment of money payable to bearer on demand. This
section further provides that no one except the RBI or the Central Government can make or
issue a promissory note expressed to be payable or demand after certain time.
The Negotiable Instruments Act 1881
Negotiability means transfer of an instrument from a person / entity to another person /

entity. The transfer should be without restriction and in good faith.
As per section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means a
promissory note, bill of exchange or a cheque, payable either to order or to bearer, whether
the word „order‟ or „bearer‟ appears on the instrument or not.
Thus, the term Negotiable Instruments means a written document which creates a right in
favor of some person and which is freely transferrable. Although the act mentions only
three instruments (promissory note, bill of exchange or cheque) it does not include the
possibility of adding any other instrument which satisfies the following conditions of
negotiability,
1. The instrument should be freely transferrable (by delivery or by endorsement and

delivery) by the custom of the trade and
2. The person who obtains it in good faith and for value should get it free from all
defects, and be entitled to recover the money of the instrument in his own name.
Shashwathi B S
Features of Negotiable Instruments
1. Negotiability- It means transferability. It can be transferred without any formality.
2. Property- The possessor of negotiable instrument is presumed to be the owner of the

property contained therein.
3. Equivalent to cash- Even though is a document it is as good as cash.
4. Recovery- The transferee of the negotiable instrument can sue in his own name, in case of
dishonour for the recovery of the amount without giving notice to the debtor.
5. Contract- A negotiable instrument is a contract to pay money.
6. Prompt payment-A negotiable instrument enables the holder of the instrument to expect
prompt payment.
7. A negotiable instrument can be transferred any number of times till it is at maturity and
the holder of the instrument need not give any notice of transfer to the debtor.
Certain important concepts and explanations
1. Ambiguous Instrument (Section 17)

The holder may at his election treat it as either and the instrument shall be
thenceforward treated accordingly.
2. Where amount is stated differently in figures and words (Section 18)
The amount stated in words shall be the amount undertaken or ordered to be paid.
3. Inchoate Instruments (Section 18)
It means the instrument that is incomplete in certain respects,
 Where one person signs and delivers to another person a duly stamped negotiable
instruments and however that negotiable instrument is either wholly blank or
having written thereon. Such an instrument is incomplete (inchoate).
 The maker of the instrument has thereby prima facie authorises the holder
thereof to make or complete, for any amount therein but not exceeding the amount
covered by the stamp.
4. Lost or stolen instruments (Section 58)
In such instances, the possessor or endorsee that has found or had obtained the
instrument by fraud shall not be entitled to receive the amount due thereon from such
maker of the lost instrument [Exception- when the later (finder) person is holder in due
course].
5. Forged instruments
As a general rule, a forged signature does not confer a good title. Even the holder in due
course cannot claim payment on a forged instrument.
Shashwathi B S
Presumptions with regard to Negotiable Instruments
Section 118 and 119 of the Negotiable Instruments Act lay down certain presumptions which
the court presumes in regard to negotiable instruments. In other words, these presumptions
need not be proved as they exist in every negotiable instrument. Until the contrary is proved
the following presumptions shall be made in case of all negotiable instruments:
1. Consideration
It shall be presumed that every negotiable instrument was made drawn, accepted or
endorsed for consideration. It is presumed that, consideration is present in every single
instrument until the contrary is presumed. The presumption of consideration, however
may be rebutted by proof that the instrument had been obtained from, its lawful owners
by means of fraud or undue influence
2. Date
Where a negotiable instrument is dated, the presumption is that it has been made or
drawn on such date, unless the contrary is proved.
3. Time of acceptance
Unless the contrary is proved, every accepted bill of exchange is presumed to have been
accepted within a reasonable time after its issue and before its maturity. The
presumption only applies when the acceptance is not dated; if the acceptance bears a
date, it will prima facie taken as evidence of the date on which it was made.
4. Time of transfer
Unless the contrary is presumed, it shall be presumed that every transfer of a negotiable
instrument was made before its maturity.
5. Order of endorsement
Until the contrary is proved it shall be presumed that the endorsements appearing upon
negotiable instruments were made in the order in which they appear thereon.
6. Stamp
Unless the contrary is proved, it shall be presumed that a lost promissory note, bills of
exchange or cheque was duly stamped.
7. Holder in the due course
Until the contrary is proved, it shall be presumed that the holder of negotiable
instrument is holder in due course. Every holder of a negotiable instrument is presumed
to have paid consideration for it and to have taken in good faith.
8. Proof of protest
Section 119 lays down that in a suit upon an instrument which has been dishonoured, the
court shall on proof the protest, presume the fact of dishonour, unless and until such fact
is disproved.
Shashwathi B S
The Paying Banker
The bank on which a cheque is drawn (the bank whose name is printed on the cheque) and
which pays the amount for which the cheque is written and deducts that sum from the
customer's account. A Banker who holds the account of the drawer of the cheque and is
obliged to make payment, if the funds of the customer are sufficient to cover the amount of
the cheque drawn or if overdrawing facility is given to the customer.
Conditions for honouring customer’s cheques
1. The cheque must be in proper form.

2. Drawer‟s signature must correspond with the specimen signature.
3. The cheque must not be stale or post dated.
4. The amount must be expressed in words, or in words and figures which should agree.
5. The banker should be careful when mutilated cheques are presented for payment.
6. Material alterations must be confirmed by the drawer.
7. The cheque must be properly endorsed.
8. The paying banker must not pay a cheque in a manner inconsistent with the directions
contained in crossing.
9. Legal restrictions; In the case of death, insolvency etc.
Payment in due course
Payment in due course means payment of a negotiable instrument at or after its date of
maturity, made to its holder in good faith and without notice of any defect in his title.
In the terms of Section 10 of the Negotiable Instruments Act, “Payment in due course
means payment in accordance with the apparent tenor of the instrument, in good faith and
without negligence to any person in possession thereof under circumstances which do not
afford a reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned.”
Thus, in order to constitute „payment in due course‟, the paying banker must see the following
conditions are fulfilled,
1. Payment must be in accordance with the apparent tenor of the instrument.

2. Payment must be in good faith and without negligence.
3. Payment must be made under circumstances which do not afford a reasonable ground for
believing that the person presenting cheque is not entitled to receive payment of the
amount therein mentioned.
Shashwathi B S
Statutory protection given to a Paying Banker
Order cheque
In case of an order cheque, Section -85(1) provides statutory protection to the paying
banker as follows: "Where a cheque payable to order purports to be endorsed by or on
behalf of the payee, the drawee is discharged by payment in due course". However, two
conditions must be fulfilled to avail of such protection.
a) Endorsement must be regular: To avail of the statutory protection, the banker must
confirm that the endorsement is regular.
b) Payment must be made in Due Course: The paying banker must make payment in due
course. If not, the paying banker will be deprived of statutory protection.
Bearer cheque
Section -85(2) provides protection to the paying banker in respect of bearer cheques as
follows: "Where a cheque is originally expressed to be payable to bearer, the drawee is
discharged by payment in due course to the bearer thereof, notwithstanding any
endorsement whether in full or blank appearing thereon and notwithstanding that any such
endorsement purports to restrict or exclude further negotiation". This section implies that a
cheque originally issued as a bearer cheque remains always bearer. In other words it retains
its bearer character irrespective of whether it bears endorsement in full or in blank or
whether any endorsement restricts further negotiation or not. So the banks are not
required to verify the regularity of the endorsement on bearer cheque, even if the
instrument bears endorsement in full. The banker shall free from any liability (discharged) if
he makes payment of an uncrossed bearer cheque to the bearer in due course. If such
cheque is a stolen one and the banker makes its payment without the knowledge of such
theft, he will be discharged of his obligation and will be protected under Section -85(2).
Crossed cheques
The paying banker has to make payment of the crossed cheques as per the instruction of the
drawer reflected through the crossing. If it is done, he is protected by Section -128. This
section states "Where the banker on whom a crossed cheque is drawn has paid the same in
due course, the banker paying the cheque and (in case such cheque has come to the hands of
the payee) the drawer thereof shall respectively be entitled to the same rights, and be
placed in if the amount of the cheque had been paid to and received by the true owner
thereof".
It is clear that the banker who makes payment of a crossed cheque is by the Section -128
given protection if he fulfils two requirements (a) That he has made payment in due course
under Section -10 i.e. in good faith and without negligence and according to the apparent
Shashwathi B S
tenor of the cheque, and (b)That the payment has been made in accordance with the
requirement of crossing (Section -126), i.e. through any banker in case of general crossing
and through the specified banker in case of special crossing.
Thus, the paying banker is free from any liability on a crossed cheque even if the payment
was received by the collecting banker on behalf of a person who was not a true owner. For
example, a cheque in favour of X is stolen by Y. He endorses it in his own favour by forging
the signature of X and deposits it in his bank for collection. In this case, the paying banker
shall be discharged if he makes payment as mentioned above and shall not be liable to pay
the same to X, the true owner of the cheque.
The drawer of the cheque is also discharged since protection is also granted to him under
this Section. There is, however, one limitation to the protection granted under this Section.
If the banker cannot avail of the protection granted by other Section of the Act, the
protection under Section -128 shall not be available to him.
For example, if the paying banker makes payment of a cheque crossed with (a) Irregular
endorsement or (b) A material alteration or (c) Forged signature of the drawer, he loses
statutory protection granted to him under the Act for these lapses on his part. Hence he
cannot avail of the statutory protection under Section -1289, even if he pays the cheque in
accordance with the crossing.
Demand Drafts
Section 85A of the NI Act states that, Drafts drawn by one branch of a bank on another
payable to order where any draft, that is an order to pay money, drawn by one office of a
bank upon another office of the same bank for a sum of money payable to order on demand,
purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in
due course.
Dishonour of cheques
Circumstances under which a banker is justified in refusing a payment of a cheque drawn on

him
1. Notice from the customer to stop payment (counter demanding payment).

2. Notice of the customer‟s death.
3. Notice of the customer‟s insanity.
4. Notice of the customer‟s bankruptcy.
5. Knowledge of any defect in the title of the person presenting the cheque.
6. Notice of an assignment by the customer of the available credit balance; on the receipt
of such notice, the customer‟s credit balance ceases to belong to him.
7. Notice of a garnishee order.
Shashwathi B S
8. In the case of trust accounts, knowledge that the customer contemplates breach of
trust.
Types of dishonour
Dishonour of cheque can be divided into two categories i.e.:
1. Rightful Dishonour
Dishonour of cheque by the drawee banker for any of the reasons specified above or for
any other rightful reason. In this case there is no remedy available against the banker
but the holder in due course has remedy both civil and criminal against the drawer.
2. Wrongful Dishonour
Dishonour of cheque by the banker due to negligence or carelessness by its employees.
The drawer may bring an action against the bank for losses suffered by him. The payee
has no action against the banker in this case.
Consequences of wrongful dishonour of Cheque
i. Wrongful dishonour of the customer's cheque makes the Bank liable to compensate
the customer on contractual obligations as well as for injury to his creditworthiness. A
return of a cheque would cause injury to the drawer‟s reputation.
ii. Quantum of Damages is not limited to the actual pecuniary loss sustained by reason of
such dishonour. When the customer is a trader he is entitled to claim substantial
damages even if he had suffered no actual pecuniary loss sustained by such dishonour,
if he can show that his creditworthiness had suffered by the dishonour of the cheque.
iii. A non-trader is not entitled to recover substantial damages unless the damage he has
suffered is alleged and proved as special damages, otherwise he would be entitled to
nominal damages.
iv. The Plaintiff's evidence on the transaction was vague, ill-defined and indeterminate
and further he had not proved any actual or special damages, unless special damages
are claimed and proved nominal damages will be awarded.
Negotiation
According to Section 14 of Negotiable Instrument Act 1881 "When a promissory note, bill of
exchange or cheque is transferred to any person, so as to constitute the person the holder
thereof, the instrument is said to be negotiated”.
It is the transfer of an instrument from one person to another in such a manner so as to

convey the title and constitute the transferee the holder thereof.
Shashwathi B S
Modes of Negotiations
Negotiation may take place in the following modes,
i. Negotiation by Delivery –
According to Section 47 Subject to the provisions of Section 58 of the Negotiable
Instrument Act, 1881 a promissory note, bill of exchange or cheque payable to bearer
is negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it
is not to take effect except in a certain event is not negotiable (except in the hands
of a holder for value without notice of the condition) unless such event happens.
ii. Negotiation by Endorsement and Delivery –
According to Section 48 of the said Act Negotiation by endorsement, Subject to the
provisions of Section 58, a Promissory Note, bill of exchange or cheque payable to
order, is negotiable by the holder by endorsement and delivery thereof
Endorsement
Endorsement is the signing of an instrument on back, face or slip annexed to it for the
purpose of negotiation. It can be endorsed by Drawer/ Maker, Holder or Payee is called
endorsement under Negotiable Instruments Act, 1881.
Person making endorsement is called „Endorser‟ and to whom endorsement is made is called
„Endorsee‟.
Types of endorsement under Negotiable Instrument Act, 1881:
1. Blank endorsement
If the endorser signs his name only, the endorsement is said to be in blank and it becomes
payable to bearer. Blank endorsement can be converted to full endorsement by writing
name of endorsee. This can be done by holder without his signatures by writing name
above the endorser‟s signatures.
2. Special or Full endorsement
If the endorser also directs to pay to a certain person or to his order, endorsement is
said to be „in full‟ or special endorsement.
For example, “Pay to Mr. Kuber or order”.
3. Conditional endorsement
The endorser puts some condition along with endorsement.
Say, pay to Miss Zira or order on her attaining the age of 21 years.
4. Restrictive endorsement
When the endorser restricts further negotiation of instrument it is called as Restrictive
Endorsement.
Shashwathi B S
For example if it is written that „Pay to Mr. Kuber only‟.

5. Partial endorsement
In case, part payment of bill has been made and a note to that effect has been given in
the instrument, it can be endorsed only for the balance unpaid amount. Otherwise, a NI
can be endorsed for full amount and not for partial amount.
6. Sans Recourse endorsement
The endorser excludes his liability and in case of dishonour, endorser will not be liable for
payment.
7. Facultative endorsement
When the endorser gives up some of his rights of the negotiable instrument it is called as
Facultative Instrument.
For example “Pay Mr. Rajiv or order, notice of dishonour waived”.
In this case the endorsee is not required to notice of dishonour in case of dishonour and
the endorser will be liable to the endorsee for the non-payment of the instrument, even if
notice of dishonour has been given to him.
The Collecting Banker
A Collecting Banker is one who undertakes to collect various types of instruments

representing money in favor of his customer or his own behalf from the drawers of these
instruments. He is called as a collecting banker as he undertakes the work of collection of cheques
and other instruments. A collecting banker acts as an agent of the customer
on crediting the account of the customer only after realising the payment from the paying banker
(drawer bank).
Duties & Responsibilities of Collecting Bankers
1. Acting as an agent.
2. Scrutinizing the instruments.
3. Checking the endorsement.
4. Presenting the instrument in due time.
5. Collecting the proceeds in the payee‟s account.
6. Notice of dishonor and returning the instruments.
7. Should assist only the customers of the bank but not any others.
Statutory protection given to Collecting Bankers
 Good Faith and Without Negligence

Statutory protection is available to a collecting banker when he receives payment in good
faith and without negligence. The phrase in “good faith” means honestly and without
notice or interest of dishonesty or fraud and does necessarily require carefulness.
Shashwathi B S
Negligence means failure to exercise reasonable care. The banker should have exercised
reasonable care and diligence.
 Collection for a Customer
Statutory protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get such
protection. A bank cannot get protection when he collects a cheque as holder for value
 Acts as an Agent
A collecting banker must act as an agent of the customer in order to get protection. He
must receive the payment as an agent of the customer and not as a holder under
independent title. The banker as a holder for value is not competent to claim protection
from liability in conversion. In case of forgery, the holder for value is liable to the true
owner of the cheque.
 Crossed Cheques
Statutory protection is available only in case of crossed cheques. It is not available in
case uncrossed or open cheques because there is no need to collect them through a
banker. Cheques, therefore, must be crossed prior to their presentment to the collecting
banker for clearance.
Negligence
 A banker, whether traditional one or one dealing in internet banking, can be held liable for
the wrongful payment of money on a forged or illegal cheque.
 Good faith forms the basis of all banking transactions. As regards negligence, the banker
may sometimes be careless in his duties which constitute an act of negligence. If
negligence is proved, the bankers will loss the statutory protection given under Sec. 85.
Types of Negotiable Instruments
1. Cheques
2. Bills of exchange
3. Promissory notes
Cheques
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise on demand. An electronic image of truncated cheque and a cheque in electronic
form can also be considered as a cheque.
According to Section 6 of NI Act, “A cheque is a bill of exchange drawn on a specified

banker and not expressed to be payable otherwise than on demand.”
Shashwathi B S
Specimen of a Cheque
Essential characteristics of a cheque

 In writing.
 Express order to pay.
 Definite and unconditional order.
 Signed by drawer.
 Order to pay certain amount.
 Payable on demand.
 Drawn on a specified banker.
Parties of a cheque
i. Drawer (One who draws the cheque-Account Holder).
ii. Drawee (Bank).
iii. Payee (To whom the payment must be made).
iv. The holder, endorser and the endorsee.
Types of Cheque
1. Open cheque
A cheque is called „open‟ when it is possible to get cash over the counter at the bank. The
holder of an open cheque can do the following,
 Receive his payment OTC at the bank
 Deposit the cheque in his account
 Pass it on to someone else by signing on the back of a cheque
Shashwathi B S
2. Crossed cheque
Since an open cheque is subject to risk of theft, it is dangerous to issue such cheques.
This risk can be avoided by issuing another type of cheque called crossed cheques. The
payment of such cheque is not made over the counter at the bank. It is only credited to
the bank account of the payee. A cheque can be crossed by drawing two transverse
parallel lines across the cheque with or without writing „Account payee‟ or „Not negotiable‟.
3. Bearer cheque
A cheque which is payable to any person who presents it to the bank counter is called
„bearer cheque‟. A bearer cheque can be transferred by mere delivery and does not
require endorsement.
4. Order cheque
An order cheque is one which is payable to a particular person. In such cases, the word
„bearer‟ may be cut and „order‟ may be written. The payee can transfer an order cheque to
someone else by signing his or her name on the back of it.
Promissory Notes
According to Section 4 of the NI Act, “A promissory note is an instrument in writing (not

being a bank note or a currency note) containing a unconditional undertaking, signed by the
maker, to pay a certain sum of money only to, or to the order of certain person, or to the
bearer of the instrument.”
Specimen of a Promissory Note
Essential features of a promissory note
 The promise must be in writing.

 Signed by the maker.
Shashwathi B S
 Unconditional.
 Undertaking to pay.
 Certain person.
 Definite amount of money.
 Payable on demand or at a fixed future date.
 Payee must be certain.
 Must bear stamp at rate prescribed by the law of the country.
Parties of a promissory note
i. Maker (person who promises to pay).

ii. Payee (person who is promised of payment).
iii. Endorser and Endorsee.
Bills of Exchange
According to Section 5 of The NI Act, “A bill of exchange is an instrument in writing

containing an unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to or to the order of, a certain person or to the bearer of the
instrument.”
A bill of exchange contains an order from the creditor to the debtor to pay a specified
amount to a person mentioned therein.
Essential features of a Bill of Exchange
 Instrument must be in writing.

 Unconditional.
 Amount payable must be certain.
 Payment must be made in money.
 Payable either on demand or after a specified period.
 Payable either to bearer or to the order or payee.
Distinction between Bills of Exchange and Promissory Notes

Basis of difference Bills of Exchange Promissory Notes
There are only two parties- There are three parties-
Number of parties
maker and the payee drawer, drawee and payee
Can maker and payee be
Yes No
the same person?
Nature of transaction Unconditional order Unconditional promise
Prior acceptance Must be accepted by the Can be presented for
Shashwathi B S
drawee or someone else in his payment without any prior

behalf before presenting for acceptance of the maker
payment
Liability of the maker Secondary and unconditional Primary and absolute
The drawer holds immediate The drawer holds immediate
Relation
relation with the acceptor relation with the payee
Promissory Note cannot be
Copies Bill can be drawn in copies
drawn in copies
Notice is necessary to be
Notice is not necessary to be
Dishonour given to all the parties
given to the maker
involved
Distinction between Bills of Exchange and Cheques

Basis of difference Bills of Exchange Cheques
Drawn on some person or
Drawee Drawn on a bank
firm
Must be accepted by the
drawee or someone else in Does not require any such
Prior acceptance
his behalf before presenting acceptance
for payment
Payable on demand or after
Nature of payment Payable on demand only
expiry date
Grace period 3 days No such grace period
Stamping No such requirement. Must be stamped.
Crossing Yes Cannot be done
If the cheque is dishonoured If a bill of exchange is
Noting or Protesting it cannot be noted or dishonoured it can be noted
protested or protested.
Distinction between Promissory Note and Cheques

Basis of difference Promissory Notes Cheques
Nature of transaction Unconditional written Unconditional order (May
promise involve conditions sometimes)
There are only two parties- There are three parties-
Number of parties
maker and the payee drawer, drawee and payee
Prior acceptance Not necessary before
Acceptance is necessary
presenting for payment
Drawn on some person or
Drawee Drawn on a bank
firm
Nature of payment Can be in instalments Onetime payment
Shashwathi B S
Discharge of Negotiable Instruments
An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable. This would happen when the party who is
ultimately liable on the instrument is discharged from liability. In such a case even in holder
in due course does not acquire any right under the instrument.
Modes of discharge of Negotiable Instruments
1. By payment.
2. By Debtor as a holder.
3. By express waiver- holder gives up his right.
4. By cancellation-holder may cancel the instrument.
5. By material alteration or lapse of time.
Discharge of a party or parties
1. By payment.
2. By cancellation.
3. By delay in presentment of cheque.
4. By operation of law.
5. By material alteration.
6. By taking limited acceptance.
7. By not giving notice of dishonor.
Hundis
Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and
credit transactions. They were used
 As remittance instruments (to transfer funds from one place to another),

 As credit instruments (to borrow money)
 For trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in writing made by a person directing another

to pay a certain sum of money to a person named in the order. Hundis, being a part of the
informal system have no legal status and are not covered under the Negotiable Instruments
Act, 1881. Though normally regarded as bills of exchange, they were more often used as
equivalents of cheques issued by indigenous bankers.
Shashwathi B S
Specimen of a Hundi
Types of Hundis
i. Shah-jog Hundi
This is drawn by one merchant on another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person, a man of worth and known in the
bazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who,
after reasonable enquiries, presents it to the drawee for acceptance of the payment.
ii. Darshani Hundi
This is a hundi payable at sight. It must be presented for payment within a reasonable
time after its receipt by the holder. Thus, it is similar to a demand bill.
iii. Muddati Hundi
A muddati or miadi hundi is payable after a specified period of time. This is similar to
a time bill.
There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami
hundi, Firman-jog hundi, etc.
***
Shashwathi B S
Unit 4 (8 Hours)
Core banking solutions - Concept of Universal Banking, Home banking, ATMs, Internet
banking – Mobile banking– Debit, Credit, and Smart cards – Electronic Payment systems-
MICR- Cheque Truncation-ECS- EFT – NEFT-RTGS
Introduction
Information technology is becoming a key business enabler and is being positioned as a key
differentiator. The banks have achieved significant success in leveraging IT through the
implementation of core business solutions and it has helped them in streamlining,
standardizing, and expanding their services portfolio. Information, communication and
Technology (ICT) solutions will continue to help banks in providing seamless systems to
capture customer data, ensure unique identification, and facilitate financial transaction
services using remote connectivity through mobile devices.
These systems will also ensure uninterrupted service delivery, consumer data protection,
customized products, dissemination of information on credit operations, and multiple
financial products in local languages. It is only with the help of ICT that financial
advancement can be completely achieved from an economy as well as localization perspective
at reduced costs and with greater accessibility.
Communication networks in Banking System in India
As per the recommendations of the Saraf Committee, the RBI has setup the country wide
data communication network for banks linking major centers of the country known as
INFINET (Indian Financial Network) and this network uses satellite communication with
Very Small Aperture Terminals (VSATs) as earth stations.
VSAT network is a single closed user group network for the exclusive use of banks and other
financial institutions. The VSATs are owned by the banks and the RBI. The hub is owned by
the RBI and Institute for Development and Research in Banking Technology (IDRBT).
Satellite services based on VSAT technology can establish reliable links to all sites. The
central hub monitors and controls the flow of network traffic.
Objectives of Bank Technology
1. Application standards to reduce need for additional hardware and software.

2. Shorten time to develop new application.
3. Improve ability to distribute information.
4. Reduce cost of system support and maintenance.
5. Systems that can perform under heavy network traffic.
Shashwathi B S
Functions of Bank Technology
1. To raise the productivity of the financial system.

2. To assist financial system with graphics and multimedia projects.
3. To make system more effective and efficient when performing daily activities.
4. To facilitate communication.
Advantages of Bank Technology
1. Survival and sustainable growth with positive performance and indicators of successful
financial system.
2. Helps financial system to think beyond present.
3. Financial system can update and set plans in light with the latest world finance
scenario.
4. Getting connected with the changing business and the customers pool.
5. Banks can provide enhanced customer services
6. Provides convenience to customers and helps in saving time.
7. Reduces human error and thus builds customer loyalty.
8. Benefitted customers by facilitating cashless transactions
Core Banking Solutions (CBS)
Core Banking Solution (CBS) is networking of branches, which enables customers to operate
their accounts, and avail banking services from any branch of the Bank on CBS network,
regardless of where he maintains his account. The customer is no more the customer of a
Branch; He becomes the Bank‟s Customer. Another interesting fact regarding CBS is that all
CBS branches are inter-connected with each other. Therefore, Customers of CBS branches
can avail various banking facilities from any other CBS branch located anywhere in the world.
CBS is a step towards enhancing customer convenience through anywhere and anytime
banking
Services of CBS
1. To make enquiries about the balance or debit or credit entries in the account.
2. To obtain cash payment out of his account by tendering a cheque.
3. To deposit a cheque for credit into his account.
4. To deposit cash into the account.
5. To deposit cheques/cash into account of some other person who has account in a CBS
branch.
6. To get the statement of account.
7. To transfer funds from his account to some other account – his own or of third party,
provided both accounts are in CBS branches.
Shashwathi B S
8. To obtain Demand Drafts or Banker‟s Cheques from any branch on CBS – amount shall be
online debited to his account.
Advantages of CBS
A. To the customers
i. The entire range of banking products including savings, deposit accounts etc are
available from any location
ii. Accessibility through multiple channels, including mobile banking and web
iii. Accurate, timely and actionable information about customer relations
iv. Single view between bank and customers
v. Redefining the concept of „anywhere, anytime‟ banking.
B. To the banks
i. Improved operations which address customer demands and industry consolidation.

ii. Errors due to multiple entries eradicated.
iii. Easy ability to introduce new financial products and manage changes in existing
products.
iv. Seamless merging of back office data and self-service operations.
Limitations of CBS
i. Excessive reliance on technology.

ii. Any failure in computer systems can cause entire network to go down.
iii. If data is not protected properly and if proper care is not taken, hackers can gain
access to the sensitive data.
Universal Banking
Universal banking is a banking system in which banks provide a wide variety of financial
services, including commercial and investment services. Universal banking is a system of
banking where banks undertake a blanket of financial services like investment banking,
commercial banking, development banking, insurance and other financial services including
functions of merchant banking, mutual funds, factoring, housing finance, insurance etc.
According to the World Bank, “In universal banking, large banks operate extensive network
of branches, provide many different services, holds several claims on firm (including debt
and equity), and participate directly in corporate governance of firms that rely on banks for
funding or as insurance underwriters.”
In a nutshell, a Universal Banking is a superstore for financial products under one roof. Some
of the more notable universal banks include Deutsche Bank, HSBC and ING Bank.
Shashwathi B S
Pros of Universal Banking
1. Investor‟s trust.
2. Economies of scale.
3. Resource utilisation.
4. Profit diversification.
5. Easy marketing.
6. One stop shopping.
Cons of Universal Banking
1. Different rules and regulations.

2. Effect of failure on banking system.
3. Monopoly.
4. Conflict of interest.
Electronic or Home Banking
Home banking is the practice of conducting banking transactions from home rather than at
branch locations. Home banking generally refers to either banking over the telephone or on
the internet (i.e. online banking). It is a facility to securely access funds, account
information, and other banking services through a PC over a WAN or internet.
The increasing popularity of home banking has fundamentally changed the character of the
banking industry. Many people are able to arrange their affairs so that they seldom have
need of a physical branch. The absence of brick and mortar locations allows many banks to
offer favourable interest rates, lower service charges, and many other incentives for those
willing to bank online.
Features of E-Banking
A. Transactional Features
1. Transfer of funds,
2. Payment of utility bills,
3. Apply for loan,
4. Investment sale and purchase and so on.
B. Non-Transactional Features
1. Account balance.
2. Observation and checking of account transactions for specified period.
3. Banks statements.
4. Check links, co-browsing, chat.
Shashwathi B S
5. Sending receiving mails about banking services.

6. Instructions for financial products.
Requisites of E-Banking
 A bank account in which internet banking facility is activated.

 User ID (This ID is provided by the bank after the account has been opened by the
customer).
 Bank issued password which can be altered later.
 Internet connection for accessing the Bank‟s Website.
 Internet operations can be done with the help of user ID and Password. The customers
access to internet banking services by logging on to his/her account by entering the user
ID and Password and perform banking transactions.
Benefits of E-Banking
1. It removes the traditional geographical barriers as it could reach out to customers of

different locations.
2. Its real time and gives details on customers‟ account.
3. Does not require customers to visit the bank branch and stand in queues.
4. It is easy, quick and saves time.
5. It is a secured service.
6. Unlike bank branches, internet banking sites never close, they are available round the
clock, seven days a week and are only a mouse click away.
7. Geographical freedom: If one is out of station, state or even country and are in need of
money can log on and take care of their needs.
8. In case of need all accounts of a customer can be managed through internet banking.
9. With advanced technology one can manage to use sophisticated tools, including account
aggregation, stock quotes, rate alerts, portfolio management etc.
A. To banks
1. Greater reach to customers.

2. Quicker time to market.
3. Ability to introduce new products and services quickly and successfully.
4. Ability to understand its customers‟ needs.
5. Greater customer loyalty
B. To customers
1. View account balance and download statements.

2. Transfer funds between accounts in same bank or other banks.
3. Make payment/receive payments through RTGS.
Shashwathi B S
4. Create fixed deposits.

5. Request for Demand Draft.
6. Order for cheque book.
7. Request debit card.
8. Refill a prepaid mobile card or pay post paid mobile bills.
9. Make investment, purchase or sale of securities.
10. Make payments of utility bills.
C. To businessmen:
1. Increase in business due to facilitated activities.

2. Helpful in realising e-commerce activities.
3. Easy and risk free handling of cash.
4. Lower transaction cost.
5. Widened client base
Limitations of E-Banking
1. Technology issues
2. Security issues
3. Inefficient at complex transactions
4. No relationship with personal banker
Automated Teller Machine- ATM
An Automated Teller Machine (ATM) is an electronic banking outlet that allows customers to
complete basic transactions without the aid of a branch representative or teller. Anyone
with a credit card or debit card can access most ATMs. The first ATM appeared in London in
1967, and in less than 50 years, ATMs had spread around the globe, securing a presence in
every major country.
There are two primary types of ATMs,
i. Basic units allow customers to withdraw cash and receive reports of their account
balances only.
ii. The more complex machines accept deposits and report account information. To access
the advanced features of the complex units, a user must be an account holder at the
bank that operates the machine.
On the most modern types of ATMs the customers are identified by inserting a plastic card
with a magnetic stripe or a plastic card with a chip that contains a unique card number and
security information such as expiration date or CVV. Customer can secure his card through
his PIN (Personal Identification Number).
Shashwathi B S
An ATM card is an ISO 7810 card issued by a bank, credit union or building society. Its
primary uses are at,
 At an ATM for deposits, withdrawals, account information and other transactions often
through interbank networks.
 At a branch, as an identification for in person transactions.
 At merchants for EFTPOS (point of sale) purchases.
Advantages of ATMs
A. To customers
i. 24*7 services.
ii. Convenience of multiple locations.
iii. Quick and efficient service.
iv. Secured with a PIN.
v. Free from hassle of visiting bank branches and processing activities.
B. To banks
i. Lessened footfall at banks.
ii. Reduced operational costs.
iii. Alternative of extending bank hours.
iv. Alternative of opening new branches.
Limitations of ATMs
A. To customers
i. ATMs may be offline.
ii. Cases of forgetting PIN.
iii. Security threats at ATMs.
iv. ATMs can break down and run out of cash.
v. Fees charged for ATM usage.
B. To banks
i. Equipment and network acquisition and set up cost.
ii. Maintenance and service charges.
iii. Communication charges.
Mobile Banking
Mobile banking refers to the use of a smartphone or other cellular device to perform online
banking tasks while away from your home computer, such as monitoring account balances,
transferring funds between accounts, bill payment and locating an ATM.
Shashwathi B S
Mobile banking typically operates across all major mobile providers. Through one of three
ways: SMS messaging; mobile web; or applications developed for iPhone, Android or
Blackberry devices.
Mobile Banking Services
A. Account Information
1. Mini-statements and checking of account history.
2. Alerts on account activity or passing of set thresholds.
3. Monitoring of term deposits.
4. Access to loan statements.
5. Access to card statements.
6. Mutual funds/equity statements.
7. Insurance policy management.
8. Pension plan management.
9. Status on cheque, stop payment on cheque.
10. Ordering cheque books.
11. Balance checking in the account.
12. Recent transactions.
13. Due date of payment.
14. Blocking of cards.
15. PIN provision, Change of PIN and reminder over the Internet.
B. Payments, Deposits, Withdrawals and Transfers
1. Domestic and international fund transfers.
2. Micro-payment handling.
3. Mobile recharging.
4. Commercial payment processing.
5. Bill payment processing.
6. Peer to peer payments.
7. Withdrawal at banking agent.
8. Deposit at banking agent.
C. Investments
1. Portfolio management services.
2. Real-time stock quotes.
3. Personalized alerts and notification on security prices.
D. Support
1. Status of requests for credit, including mortgage approval and insurance coverage.
2. Check book and card requests.
3. Exchange of data messages and email, including complaint submission and tracking.
4. ATM location.
Shashwathi B S
Advantages of M-Banking
i. Time saving; no queue method of banking.

ii. Extra services like ATM locator, instant payments and so on.
iii. Free of cost; hassle-free transactions without extra charges.
iv. Available for everyone; SMS, Applications and Web browsers.
v. Encrypted servers ensure the security.
vi. More data privacy
Limitations of M-Banking
i. Risk of hacking.
ii. Unencrypted networks of service providers.
iii. Risk of mobile phone being stolen.
iv. Bank charges.
v. Threat of viruses and malware.
Debit card
A debit card is a payment card that deducts money directly from a consumer‟s checking
account to pay for a purchase. They can be even used to withdraw cash from the bank
account.
Debit cards are substitutes for cash or cheque payments much the same way that credit
cards are. However, banks only issue them to people if they hold an account with them. Debit
cards eliminate the need to carry cash or physical checks to make purchases. A debit card is
only accepted at outlets with electronic swipe-machines that can check and deduct amounts
from the bank balance online.
Features of Debit cards
1. Visa/ Mastercard/ Rupay card(Card issuing financial institution).

2. Linked bank account.
3. ATM access.
4. Contactless payment partners.
5. Overdraft.
6. Chargeback.
7. Reward options.
8. Security features.
9. Debit card fees.
Shashwathi B S
Advantages of Debit cards
i. Easy to obtain.
ii. Convenient.
iii. Safety.
iv. Readily accepted everywhere.
v. Rewards and offers.
vi. Instant settlement of funds.
vii. Free from debt burden- prepaid card.
Limitations of Debit cards
i. Fees and charges.

ii. Security issues.
iii. Difficulty in reviewing the transactions.
Smart cards
A smart card, typically a type of chip card, is a plastic card that contains an embedded
computer chip–either a memory or microprocessor type–that stores and transacts data. This
data is usually associated with either value, information, or both and is stored and processed
within the card's chip.
The card data is transacted via a reader that is part of a computing system. Systems that
are enhanced with smart cards are in use today throughout several key applications, including
healthcare, banking, entertainment, and transportation.
Features of Smart cards
1. Smart card can be used for storing personal information like name/address, driving
license details, medical records.
2. These cards can be used as a personal identification device anywhere.
3. Smart card can be used for carrying out financial transactions like the payment of
telephone and electricity bills, road toll taxes, ATM cash vending for withdrawing cash
and so on.
4. One of the best features of smart cards is the security provided by such cards. In
present days of heightened terrorist activities, smart card can be conveniently used for
airport security, defense services, controlling access to data in the computer industry
and so forth.
Shashwathi B S
5. Apart from the above security features, smart card can help to prevent card related
crimes.
6. With all the above features it would not be very surprising if in the future smart card
replaces the use of debit cards and credit cards.
Advantages of Smart Cards
i. Cannot be easily duplicated.

ii. Can store many types of information.
iii. Convenient.
iv. High security.
v. Low cost to issuers and users.
vi. High accuracy of information.
Limitations of Smart cards
i. Lack of universal standards for their design and utilization.

ii. Low consumer acceptance.
iii. Fees applied with the use of a card.
iv. It gives liability issues if stolen or lost.
v. The accuracy of information is small.
vi. Lack of technology to support users.
vii. Potential for data theft on one card if lost or stolen.
Electronic Payment System
The definition of an electronic payment system is a way of paying for a goods or services
electronically, instead of using cash or a cheque, in person or by mail. The Reserve Bank has
taken many initiatives towards introducing and upgrading safe and efficient modes of
payment systems in the country to meet the requirements of the public at large. The
dominant features of large geographic spread of the country and the vast network of
branches of the Indian banking system require the logistics of collection and delivery of
paper instruments. These aspects of the banking structure in the country have always been
kept in mind while developing the payment systems.
Types of Electronic Payments Systems
1. Electronic Clearing System (ECS)

2. National Electronic Funds Transfer (NEFT)
3. National Electronic Clearing Service (NECS)
4. Real Time Gross Settlement (RTGS)
5. Regional ECS (RECS)
Shashwathi B S
6. Electronic Clearing Service (ECS) Debit
MICR
MICR is an acronym for Magnetic Ink Character Recognition which is a technology used in
the banking industry in printing the MICR codes.
A MICR code is a 9-digit code that uniquely identifies a bank and a branch participating in an
Electronic Clearing System (ECS). The first 3 digit of the code represents the city code; the
middle ones represent the bank code and last 3 represents the branch code. One can locate
the MICR code at the bottom of a cheque leaf, next to the cheque number. It is also
normally printed on the first page of a bank savings account passbook.
How does MICR help speed up the processing of cheques?
Unlike the manual clearing of cheques where there is a possibility of many human errors and
subsequent delay in clearing, the MICR code on the cheque printed with a unique magnetic ink
usually iron oxide has magnetic material present in it and thus makes it machine-readable and
almost error proof.
Under this method the reading machine or a cheque sorting machine reads through a cheque
when inserted and identifies the branch the cheque belongs to and activates the automation
clearing process. The MICR code is so clear and fine that the machine could read it even if
the MICR code isn't visible due to other marks or stamps on it.
Features of MICR
1. MICR is the common machine language specification for the paper based payment
transfer system.
2. MICR characters are printed in the form of either an E-13B or CMC-7 font.
Shashwathi B S
3. Its specially designed magnetic ink printed characters can be recognized by high speed
magnetic equipment.
4. The series of readable characters provides the receiving party with information needed
for processing the cheque including the cheque number, bank routing number, checking
account number and the amount of cheque.
Advantages of MICR
i. In spite of rough handling, one can read the MICR information with high degree of
accuracy.
ii. The processing of MICR information is fast.
iii. It offers greater security compare to OCR technology as printed characters cannot
be altered.
iv. There is no manual input and hence errors are reduced.
v. The characters can be read even if somebody write on them. This is due to the fact
that special ink containing iron particles is used to print the characters.
vi. The document is not easy to forge.
Limitations of MICR
i. It can recognize only 10 digits & 4 special characters.

ii. Alphanumeric characters are not used in MICR. Only certain characters can be read.
iii. It is more expensive method of data entry.
Cheque Truncation
Truncation is the process of stopping the flow of the physical cheque issued by a drawer at
some point by the presenting bank en-route to the paying bank branch. In its place an
electronic image of the cheque is transmitted to the paying branch through the clearing
house, along with relevant information like data on the MICR band, date of presentation,
presenting bank, etc.
Cheque truncation thus eliminates the need to move the physical instruments across bank
branches, other than in exceptional circumstances for clearing purposes.
Features of Cheque Truncation
1. Electronic image of a paper cheque.

2. Only banks involved in clearing can truncate a cheque. The drawer/ holder of a cheque
cannot truncate a cheque.
3. The electronic image of the „cheque truncation‟ will substitute the physical cheque from
the point and time of truncation onwards.
Shashwathi B S
4. Truncation is to be done only during the course of a clearing cycle to reduce the time
taken for realisation.
5. A paper cheque, after truncation, has to be kept in the custody of the bank/ clearing
house that truncated the cheque.
6. Addition of digital signature of the truncating bank/ clearing house to the electronic
image of the cheque truncation is optional.
Advantages of Cheque Truncation
i. Shorter clearing cycle.

ii. Superior verification and reconciliation process.
iii. No geographical restrictions as to jurisdiction.
iv. Operational efficiency for banks and customers alike.
v. Reduction in operational risk and risks associated with paper clearing.
vi. Less prone to frauds.
vii. No loss of cheque in transit.
Limitations of Cheque Truncation
i. Costly to implement.
ii. Investment in a declining payment system.
ECS
ECS is an electronic mode of payment / receipt for transactions that are repetitive and
periodic in nature. ECS is used by institutions for making bulk payment of amounts towards
distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts
towards telephone / electricity / water dues, cess / tax collections, loan instalment
repayments, periodic investments in mutual funds, insurance premium etc.
Essentially, ECS facilitates bulk transfer of money from one bank account to many bank
accounts or vice versa. ECS includes transactions processed under National Automated
Clearing House (NACH) operated by National Payments Corporation of India (NPCI).
ECS Credit
ECS Credit is used by an institution for affording credit to a large number of beneficiaries
(for instance, employees, investors etc.) having accounts with bank branches at various
locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account
of the user institution. ECS Credit enables payment of amounts towards distribution of
dividend, interest, salary, pension, etc., of the user institution.
Shashwathi B S
Advantages of ECS Credit
A. To the beneficiaries
i. No need to visit bank branches.

ii. No fear of loss or theft of paper instruments.
iii. Cost effective.
iv. Receipt of funds on right time.
B. To the institutions
i. Reduced errors and frauds.

ii. Efficient payment on designated dates.
iii. Cost effective.
C. To the banking system
i. Freedom from paper handling.

ii. Easy processing.
iii. Smooth reconciliation process.
iv. Cost effective.
ECS Debit
It is used by an institution for raising debits to a large number of accounts (for instance,
consumers of utility services, borrowers, investors in mutual funds etc.) maintained with
bank branches at various locations within the jurisdiction of an ECS Centre for single credit
to the bank account of the user institution.
ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax
collections, loan instalment repayments, periodic investments in mutual funds, insurance
premium etc., that are periodic or repetitive in nature and payable to the user institution by
large number of customers etc.
Advantages of ECS Debit
A. To the customers
i. No need to visit banks.

ii. Customers need not keep track of due date for payments.
iii. Monitored by the ECS Users and the customers alerted accordingly.
iv. Cost effective.
Shashwathi B S
B. To the institutions
i. Savings on administration costs

ii. Better cash management.
iii. Avoided chances of errors and frauds.
iv. Realisation of payments on a uniform date instead of fragmented receipts
spread over many days.
C. To the banking system
i. Freedom from paper handling.

ii. Ease of processing
iii. Smooth process of reconciliation
iv. Cost effective.
EFT
Electronic Funds Transfer (EFT) is a system of transferring money from one bank account
directly to another without any paper money changing hands. It is a transaction that takes
place over a computerized network, either among accounts at the same bank or to different
accounts at separate financial institutions.
Features of EFT
1. Quick movement of deposit money from the bank account of the customer to the
other bank account of other customers.
2. No intermediation of paper-based system.
3. Encryption key for protection and security.
Advantages of EFT
i. It is easy and convenient.

ii. It is fast and secure.
iii. It is efficient and less expensive than paper cheque payments and collections.
Limitations of EFT
i. Transactions once done cannot be reversed.
NEFT
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-
to-one funds transfer. Under this Scheme, individuals, firms and corporate can electronically
transfer funds from any bank branch to any individual, firm or corporate having an account
with any other bank branch in the country participating in the Scheme.
Shashwathi B S
In simple words, National Electronic Fund Transfer (NEFT) is a country-wide electronic fund
transfer system for sending money from one bank account to another in a safe and hassle-
free manner.
There is no limit – either minimum or maximum – on the amount of funds that could be
transferred using NEFT. However, maximum amount per transaction is limited to ₹ 50,000/-
for cash-based remittances within India. All NEFT settlements are made in a batch-wise
format (Deferred Net Settlement- DNS).
Money can be sent using this system to all NEFT-enabled banks in India on an individual
basis. To initiate a NEFT transfer, Bank IFSC Code is a must, along with other details such
as bank account number, bank branch and account holder name, among other details.
The recipient bank does not charge anything to the recipient account for a NEFT
transaction. For the sender, the sending bank charges the following based on the amount
being transferred as follows:
Transaction Amount NEFT Charges
Rs.10000 Rs.2.50+ Applicable GST

Rs.10000 to Rs.100000 Rs.5+ Applicable GST
Advantages of NEFT
i. The remitter need not send the physical cheque or Demand Draft to the beneficiary.
ii. The beneficiary need not visit his / her bank for depositing the paper instruments.
iii. The beneficiary need not be apprehensive of loss / theft of physical instruments or
the likelihood of fraudulent encashment thereof.
iv. Cost effective.
v. Credit confirmation of the remittances sent by SMS or email.
vi. Remitter can initiate the remittances from his home / place of work using the internet
banking also.
vii. Near real time transfer of the funds to the beneficiary account in a secure manner.
RTGS
The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the
continuous (real-time) settlement of funds transfers individually on an order by order basis
(without netting).
'Real Time' means the processing of instructions at the time they are received rather than
at some later time; 'Gross Settlement' means the settlement of funds transfer instructions
Shashwathi B S
occurs individually (on an instruction by instruction basis). Considering that the funds
settlement takes place in the books of the Reserve Bank of India, the payments are final and
irrevocable.
The RTGS system is primarily meant for large value transactions. The minimum amount to be
remitted through RTGS is Rs.2lakhs. There is no upper ceiling for RTGS transactions.
With a view to rationalize the service charges levied by banks for offering funds transfer
through RTGS system, a broad framework has been mandated as under:
 Inward transactions – Free, no charge to be levied.

 Outward transactions –
 2 lakhs to 5 lakhs-30.00 per transaction
 Above 5 lakhs-55.00 per transaction.
Advantages of RTGS
i. Certainty of payment.
ii. Faster collection of funds.
iii. No settlement risk.
iv. Improved liquidity management.
v. Less fraud and less processing cost.
Differences between RTGS and NEFT

RTGS NEFT
Minimum transfer value Rs.200000 Re.01
Maximum transfer value Rs.1000000 No limit
Type of settlement One-on-one Batches
2 hours (subject to cut-off

Speed of settlement Immediately
timings and batches)
Weekdays: 12 batches
Weekdays: 8:00 a.m. - 4:00 between 8:00 a.m. - 6:30 p.m.
p.m Saturdays: 9:00 a.m. - Saturday: 6 batches between
Service availability
4:30 p.m Sunday and bank 8:00 a.m. 1:00 p.m. Sunday
holidays: Unavailable and bank holidays:
Unavailable
Shashwathi B S
Unit 5 (8 Hours)
International banking – International Banking: Exchange rates and Forex Business,
Correspondent banking and NRI Accounts, Letters of Credit, Foreign currency Loans,
Facilities for Exporters and Importers, Role of ECGC, RBI and EXIM Bank
International Banking
International banking is just like any other banking service, but it takes place across
different nations or internationally. To put in another way, international banking is an
arrangement of financial service by a residential bank of one country to the residents of
another country. Mostly multinational companies and individuals use this banking facility for
transacting. International banking is that type of banking that has presence across
international borders.
International banking can be defined as a subset of commercial banking transactions and

activities having cross border and/or cross currency element. Multinational banking refers to
the location and ownership of banking facilities in a large number of countries and geographic
regions.
International banking comprises a range of transactions that can be distinguished from

purely domestic operations by,
a) The currency of the transactions,
b) The residence of bank and the customer and
c) The location of the booking office.
Features of International Banking
1. The banking activities are conducted in multiple currencies.

2. It facilitates easy international transactions.
3. Facilities to conduct online banking.
4. Minimum fees on services provided.
5. Aids in expansion.
6. Different legal and regulatory framework.
7. Involves both financial and political risks.
8. Non-interest income is substantially more than interest income.
Types of International Banking
1. Correspondent banks
Correspondent banks involve the relationship between different banks which are in
different countries. This type of bank is generally used by the multinational companies
for their international banking.
Shashwathi B S
This type of banks is in small size and provides service to those clients who are out of
their country. Correspondent banks are financial institutions that provide banking or
financial services on behalf of other financial institution.
These are used to conduct banking operations in foreign countries as the domestic
banks have limited access to foreign markets and cannot directly reach clients. They
need to either set-up a foreign branch or get into a correspondent arrangement with
some foreign entity. A correspondent bank can conduct business transactions, accept
deposits and gather documents on behalf of the other financial institution. CBs are
more likely to be used to conduct business in foreign countries, and act as a domestic
bank‟s agent abroad.
2. Edge act banks
This designation applies to certain U.S. banks, and is based on a 1919 constitutional
amendment. While physically located in the United States, Edge Act banks conduct
business internationally under a federal charter.
3. Off shore banking centres
It is a type of banking sector which allows foreign accounts. Offshore banking is free
from the banking regulation of that particular country. It provides all types of
products and services.
„Swiss bank‟ is the perfect example for this kind of banks.
4. Subsidiaries and affiliates
Subsidiaries are the banks which incorporate in one country which is either partially or
completely owned by a parent bank in another country.
The affiliates are somewhat different from the subsidiaries like it is not owned by a
parent bank and it works independently.
5. Foreign branch bank
Foreign banks are the banks which are legally tied up with the parent bank but operate
in a foreign nation. A foreign bank follows the rules and regulations of both the
countries i.e. home country and a host country.
Shashwathi B S
Services rendered by International banks
1. To arrange trade finance- An international bank arranges the finance for the traders
who want to deal with the foreign country.
2. To arrange foreign exchange- The core services provided by the international bank
are to arrange a foreign exchange for the import-export purpose.
3. To hedge the funds- The international bank hedge the funds by buying the securities
at the lower price level and sell it when the price level rising.
4. Offer investment banking services- It also offers an investment banking services by

signing underwriting of shares, financial decisions for investment.
Foreign Exchange
Foreign exchange refers to the process of converting the home currency into foreign
currencies.
In a broader sense, the term foreign exchange includes the following,
 The method and means by which one country‟s currency is converted into another
country's currency.
 The method by which the exchange takes place between two countries.
 The rate at which such an exchange takes place.
Foreign Exchange Market
The market where foreign exchange transactions take place is called a foreign exchange
market. It comprises of individuals, business entities, banks, investors, users and
arbitrageurs across the globe, who buy or sell currencies. It is a communication system
based market, with no boundaries and operates around the clock, within a country or between
countries. Forex markets are dynamic and work around the clock due to different time zones
of various countries in which they are located.
Functions of Forex market
 To make necessary arrangements for transfer of purchasing power.

 To provide adequate credit facilities.
 To cover exchange risks.
Shashwathi B S
Exchange rate
An exchange rate is the rate at which one currency can be converted into another. In other
words, purchasing power of a home currency in another country in terms or the currency of
that country is called as exchange rate. Thus, external purchasing power of a currency is
called the rate of exchange.
Factors determining Exchange Rate
1. Fundamental reasons
These include all those causes or events which affect the basic economic and fiscal
policies of the concerned government. These causes normally affect the long term
exchange rates, while in short run many of these are found ineffective. In long run the
exchange rates of all currencies are linked to fundamentals are as follows,
a. Balance of payment- Generally a surplus leads to stronger currency while a
deficit leads to weaker currency.
b. Economic growth rate- A high growth rate leads to a rise in imports and a fall
in the value of currency and vice versa.
c. Fiscal policy- Expansionary policy, taxation policy and so on.
For example, lower taxes can lead to a higher economic growth.
d. Monetary policy- The way, a central bank attempts to influence and control
interest and money supply.
e. Interest rates- High domestic interest tends to attract overseas capital thus
the currency appreciates in the short run. But, in the long run higher interest
rates slow down the economy and thus weakening the currency.
f. Political issues- Political stability is likely to lead to economic stability and
hence a steady currency and vice versa.
2. Technical reasons
Government controls can lead to an unrealistic vale of currency, resulting in volatile
exchange rates. Freedom or restriction on capital movement can affect the exchange
rates at a larger extent. Capital tends to move from lower yielding to higher yielding
currencies and results in movement of exchange rates.
3. Speculation
Speculation forces have a major effect on exchange rates. With an expectation that a
currency will be devalued speculators will short sell the currency for buying it back at
a cheaper date later. This very act can lead to vast movements in the market as a
expectation for growth of devaluation and extends to other participants. Speculative
deals provide depth and liquidity to the market and at times acts as a cushion also, if
the views do not lead to contagious effect.
Shashwathi B S
Kinds of exchange rates
1. Spot rate
 Requires immediate delivery of currencies.

 Settlement takes place within one or two days.
2. Forward rate
 Delivery of currencies at a future rate as per the agreement.

 Quoted at par/ premium/ discount.
 Takes place in future market.
 Provides risk coverage for exporters and importers.
3. Fixed rate
 If the rate of exchange of currency is fixed permanently in terms of gold or

another currency.
4. Flexible rate
 A specified rate is fixed for a short period and there after subject to revision
from time to time depending upon the situations.
5. Floating rate
 Fixed on the basis of demand and supply of currencies in forex market.

 Not constant- fluctuates from time to time according to market conditions.
6. Multiple rate
 Different rates for different trades, countries and transactions.
NRI Accounts
In India banking terminology, the term NRI Account refers to funds deposited by a Non-
Resident Indian or NRI with a financial institution authorized by the Reserve Bank of India
to provide such services. A Non-Resident Indian is an Indian citizen who primarily resides
outside of India.
Shashwathi B S
Types of NRI Accounts
1. Non-Resident Ordinary Rupee Account (NRO)
A rupee dominated account which can be in the forms of savings, current or fixed
deposits. The income which is deemed to accrue or arise in India can be deposited only
in this type of account. Examples of such income are rent, dividends and interests.
Income earned on this form of account is taxable.
2. Non-Resident (External) Rupee Account (NRE)
A rupee dominated account which can be in the forms of savings, current or fixed
deposits and amount in this type of account is freely repatriable. The investor needs
to convert foreign currency to rupees in case if he wants to fund back to his home
country. This form of account is best suited for overseas savings which have been
remitted to India by converting foreign currency to rupees.
3. Foreign Currency Non Resident Account (FCNR)
These can be opened only in foreign currency but not in Indian currency. It is a form
of Fixed Deposit and interest is paid regularly. The investor need not bear any risk of
fluctuations in foreign currency. The account can be opened for a period of 1 to 5
years.
Letter of credit
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will
be received on time and for the correct amount. In the event that the buyer is unable to
make payment on the purchase, the bank will be required to cover the full or remaining
amount of the purchase. Due to the nature of international dealings, including factors such
as distance, differing laws in each country, and difficulty in knowing each party personally,
the use of letters of credit has become a very important aspect of international trade.
Because a letter of credit is typically a negotiable instrument, the issuing bank pays the
beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable,
the beneficiary may assign another entity, such as a corporate parent or a third party, the
right to draw.
Banks typically require a pledge of securities or cash as collateral for issuing a letter of
credit. Banks also collect a fee for service, typically a percentage of the size of the letter
of credit.
Letters of credit are formal trade instruments and are used usually where the seller is
unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the
Shashwathi B S
creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international
banking system acts as an intermediary between far flung exporters and importers.
However, the banking system does not take on any responsibility for the quality of goods,
genuineness of documents, or any other provision in the contract of sale.
Process of Letter of Credit
1. The starting point of the letter of credit process is the agreement upon the sales terms
between the exporter and the importer. Afterwards, they sign a sales contract. It is
important to stress here that a letter of credit is not a sales contract. Actually, letters
of credit are independent structures from the sale or any other contract on which they
may be based. Therefore, it should be kept in mind that a well-structured sales contract
protects the party, which behaves in goodwill against various kinds of risks.
2. After the sales contract has been signed, the importer (applicant) applies for its bank
having the letter of credit issued. The letter of credit application must be in accordance
with the terms of the sales agreement.
3. As soon as the importer and its bank reach an agreement together, the importer‟s bank
(issuing bank) issues the letter of credit. In case the issuing bank and the exporter
(beneficiary) are located in different countries, the issuing bank may use another bank‟s
services (advising bank) to advise the credit to the exporter (beneficiary).
4. The advising bank advises the letter of credit to the beneficiary without any undertaking
to honour or negotiate. The advising bank has two responsibilities against to the
beneficiary. Advising bank‟s first responsibility is satisfy itself as to the apparent
authenticity of the credit and its second responsibility is to make sure that the advice
accurately reflects the terms and conditions of the credit.
Shashwathi B S
5. The beneficiary should check the conditions of the letter of credit, as soon as it is
received from the advising bank. If some disparities have been detected, the beneficiary
should inform the applicant about these points and demand an amendment. If letter of
credit conditions seem reasonable to the beneficiary, then beneficiary starts producing
the goods in order to make the shipment on or before the latest shipment date stated in
the L/C. The beneficiary ships the order according to the terms and conditions stated in
the credit.
6. When the goods are loaded, the exporter collects the documents, which are requested by
the credit and forwards them to the advising bank.
7. The advising bank posts the documents to the issuing bank on behalf of the beneficiary.
8. The issuing bank checks the documents according to the terms and conditions of the
credit and the governing rules, which are mostly latest version of the UCP. If the
documents are found complying after the examination, then the issuing bank must honour
the payment claim. The issuing bank transmits the documents to the applicant, after
securing its funds. (Letter of credit amount, expenses and profits)
9. The applicant uses these documents to clear the goods from the customs.
Foreign currency loans
A loan made in a currency other than the one which the borrower usually operates. For
example, a borrower in the US may take out a loan in pounds sterling to finance new
operations in the UK.
The loan is covered because the parties use a foreign currency forward contract, an
agreement in which the parties agree to trade certain currencies in the future at a given
exchange rate to hedge against foreign currency exchange risk.
Facilities for Exporters and Importers
Export finance
Export financing refers to any form of financing export transactions. To make sales to
foreign customers, traders need export financing. Sales either short-term or long –term,
transactions are mostly funded through the private sector. Export financing generally
includes loans, loan guarantees, and export credit insurance.
Export finance is further classified into two categories:
1. Pre-shipment finance
a. Packing Credit.
Shashwathi B S
b. Packing Credit against Incentives Receivables from the GOI.

c. Advance against Cheques/Drafts Received as Advance.
2. Post-shipment finance
a. Negotiation of Export Documents Drawn under L/C.
b. Advance against Goods Sent on Consignment Basis.
c. Advance against Undrawn Balance.
d. Advance against Retention Money.
Import finance
Import plays an important role in the economy of every country, rich and poor alike. Rich
countries needs to import to ensure an optimum utilization of their production capacity, poor
countries needs import for accelerating pace of their development.
The following are the ways of import finance:
1. Financing import under Letter of Credit.

2. Financing under foreign credit.
3. Import loans by Export-import Bank of India.
ECGC (Export Credit Guarantee Corporation of India Ltd.)
ECGC was established in year 1957 by the Government of India to strengthen the export
promotion drive by covering the risk on exporting credit. The goal of ECGC is to provide
cost-effective insurance and trade related services to meet the needs and expectations of
the Indian export market. It provides a range of credit risk insurance cover to exporters
against loss in export of goods and services. ECGC also offers guarantees to banks and
financial institutions to enable exporters to obtain better facilities from them.
Services provided by ECGC to exporters
1. To provide risk cover to the exporters against the risk associated in world market,
viz., political risk and commercial risk.
2. To provide exporters information regarding credit-worthiness of overseas buyers.
3. Provides information on approximately 180 countries with its own credit ratings.
4. To help exporters to obtain financial assistance from commercial banks and other
financial institutions.
5. To provide other essential services which are not provided by other commercial
insurance companies.
6. To assists exporters in recovering bad debts.
7. To help exporter to develop and diversify their exports.
Shashwathi B S
Role of RBI in International Trade
 To administer the foreign exchange control.

 To choose the exchange rate system and fix of manage the exchange rate between
the rupee and other currencies.
 To manage exchange reserves.
 To interact or negotiate with the monetary authorities of the Sterling Area, Asian
Clearing Union, and other countries, and with international financial institutions such
as IMF, World Bank, and Asian Development Bank.
Schemes of RBI Regarding Exports
 Export Bill Credit Scheme – 1963: Grants advances to scheduled banks against
export bills, maturing within 180 days.
 Pre-Shipment Credit Scheme – 1969: Pre-finance facilities to scheduled banks that

provide pre-shipment loans.
 Export Credit Interest subsidy Scheme – 1968: Provides interest subsidy of

minimum 1.5% to banks that provide export finance to exporters, provided the banks
charge interest to exporters within the ceiling prescribed by RBI. The subsidy is given
both against packing and post-shipment.
 Duty Drawback Credit Scheme – 1976: The exporters can avail interest-free
advances from the bank up to 90 days against shipping bills provisionally certified by
customs authorities towards a refund of customs duty. These advances of commercial
banks are eligible for re-finance RBI.
 RBI also approves or sanctions application made by the exporters for:
1. Allotment of Exporters Code Number, which is a must for every exporter.

2. Reduction in invoice price of export goods.
3. Fixation of commission to overseas consignee or agents.
4. Remittances abroad in respect of advertising, legal expenses, etc.
5. Appointments of foreign nationals as technical and non-technical personnel in
Indian firms.
6. Appointments of non-residents as directors of Indian companies.
7. Clearance in respect of joint-ventures abroad.
EXIM Bank
The EXIM Bank was set up in January 1982 with the main object of giving a boost to the
country‟s export promotion drive and to pay for the increased imports. It took over the
Shashwathi B S
operations of the International Finance Wing of the IDBI. It acts as the apex agency in
coordinating the activities of the other institutions engages in the financing of exports and
imports of goods and services. The Bank is responsible for providing refinancing facilities to
the commercial banks and other commitments in the areas of exports and imports.
Objectives of EXIM Bank
1. Provision of financial‚ technical and administrative assistance in the export – import

sectors;
2. Planning‚ promotion‚ development and financing of export oriented concerns
3. Undertaking and financing research‚ surveys and techno – economic studies in
connection with the promotion and development of foreign trade;
4. Collection‚ compilation and dissemination of market and credit information in respect
of international trade.
***
Shashwathi B S
Unit 6 (8 Hours)
Banker as lender – Types of loans – Overdraft facilities – Discounting of bills – Financing
book debts and supply bills- Charging of Security bills- pledge – mortgage – assignment.
Bank lending
As studied earlier one of the primary functions of a bank is to grant loans. Whatever money
the bank receives by way of deposits, it lends a major part of it to its customers by way of
loans, advances, cash credit, and overdraft. Interest received on such loans and advances is
the major source of its income. The banks make a major contribution to the economic
development of the country by granting loans to the industrial and agricultural sectors.
Principles of sound lending
Banks should follow some basic principles at the time of lending. This ensures efficient and
long term working of the banks. Some of the basic principles of lending are as follows:
1. Safety of principal
The first and foremost principle of lending is to ensure the safety of the funds lent. It
means that the borrower is in a position to repay the loans, along with interest, according
to the terms of the loan contract. The repayment of the loan depends upon the
borrower‟s
a. Capacity to pay and

b. Willingness to pay.
The banker should, therefore, take utmost care in ensuring that the enterprise or
business to which a loan in to be granted is a sound one and the borrower is capable to
repay it successfully. The character of the borrower also needs to be carefully
investigated.
2. Profitability
Commercial banks are profit earning institutions. They must employ their funds profitably
so as to earn sufficient income out of which to pay interest to the depositors, salaries to
the staff and to meet various other establishment expenses and distribute dividends to
the shareholder. The sound principle of lending does not sacrifice safety or liquidity for
the sake of higher profitability.
3. Marketability or Liquidity
Liquidity of loans is another principle of sound lending. The term liquidity of loan indicates
quick realisation of loans from the borrowers. Banks are essentially dealers in short term
Shashwathi B S
funds and therefore, they lend money mainly for short term period. The banker should
see that the borrower is able to repay the loan on demand or within a short notice.
4. Purpose of the loan
Before granting loans, the banker should examine the purpose for which the loan is
demanded. If the loan is granted for productive purpose, thereby the borrower will make
much profit and he will be able to pay back the loan. In no case, loan is granted for
unproductive purpose.
5. Diversification
The element of risk in relation to loans cannot be totally eliminated, it can only be
reduced. Risks of lending can be reduced by diversifying the loans. While granting loans,
the banker should not grant a major part of the loan to one single particular person or
particular firm or an industry. If the banker grants loans and advances to a number of
firms, persons or industries, the banker will not suffer a heavy loss even if a particular
firm or industry does not repay the loan.
6. Bank credit, National policies and Objectives
Banks have certain social responsibilities towards society also. The banks have to take
into account the economic and social priorities of the country beside safety, liquidity and
profitability. While formulating the lending policy, the banks are guided by the
government policies in relation to disbursal of credit. Thus, national interest and policies
are influence the lending decisions of banks.
Kinds of bank lending
1. Cash credit system.

2. Overdrafts.
3. Loan system.
4. Purchase and discounting of bills.
5. Financing book debts.
Cash credit system
Under this system, the banker specifies a limit called the cash credit limit up to which the
customer is permitted to borrow against the security of tangible assets or guarantees. The
customer withdraws from his cash credit account as and when he needs the funds and
deposits any amount of money which he finds surplus with him on any day.
The bank requires security of certain bonds, promissory notes, shares, other commodities.
Sometimes commodities are kept in the possession of the bank in its warehouses. The
Shashwathi B S
borrower is charged interest on the amount of advance. Generally the cash credit system
provides adequate amount for meeting essential expenditures of the business. The large
amount of credit is granted through credit system because the whole amount of credit is not
required to be withdrawn at once.
It is the best method to suit the requirements of the business community. Generally raw
materials are purchased on the basis of this credit. This type of loan is mostly short-term
credit. The borrowers can withdraw the sanctioned loan according to their convenient. The
interest will be charged on the dates of withdrawal of the amount.
Advantages of cash credit system
a. Flexibility.
b. Operative convenience.
Limitations of cash credit system
a. Fixation of credit limits.

b. Bank‟s inability to verify the end use of funds.
c. Lack of proper management of funds.
Overdrafts
When a current account holder is permitted by the banker to draw more than what stands to
his credit, such an advance is called overdraft. The banker may take some collateral security
or may grant such advances on personal security of the borrower. The customer is permitted
to withdraw and repay as and when feasible. Interest is charged on the amount overdrawn by
the customer and for the period of its actual utilisation.
Overdrafts are used for long-term purposes. It is the most useful form of loans to
commercial and industrial units to avail from time to time. The overdraft will be granted by
the bank with the mutual agreement with the customer and bank.
Advantages of Bank Overdraft
a. Flexibility.
b. Quick to arrange.
c. Interest is charged only on the loan amount utilised.
d. No additional expenses for pre payment of bank overdraft
Limitations of Bank Overdraft:
a. Can be called back by the borrower any time.
Shashwathi B S
b. Bank overdraft has to be rearranged and an arrangement fee is usually payable

when the credit is extended.
c. If the agreed limit is extended, administration fees can be charged.
d. Secured overdrafts need business assets as the security, which may be lost unable
to repay the amount..
e. Maintaining a current account is necessary for overdraft facility
Loan system
Here, the credit is given for a specific purpose and for a predetermined period, which is
repayable in instalments. The borrower needs to negotiate every time while taking a new loan
or renewing an existing one. Banker is at liberty to accept or refuse depending upon the
prevailing circumstances.
Advantages of loan system:
a. Financial discipline on the borrower.

b. Periodic review of loan account.
c. Profitability.
Drawbacks of loan system:
a. Inflexibility.
b. Bank‟s inability to verify the end use of funds.
c. Fixed period of time.
d. More stringent documentation process.
Commercial loan
Object or purpose Consumer loan
Agriculture loan
Short term loan

Types of loans Time Medium term loan
Long term loan
Secured loan
Security
Unsecured loan
Shashwathi B S
Differences between loan and cash credit
Basis of Difference Loan Cash Credit
A fixed amount is
Amount A limit is fixed.
sanctioned.
Granted for a short, medium Only for a short period up to

Period
and long term. one year only.
The entire amount of loan is The customer can withdraw

Withdrawal credited to the customer‟s the amount up to the limit
account. when he needs.
Interest is payable only on

Interest is payable on the the amount actually
Interest
entire loan. withdrawn and for the period
the amount is withdrawn.
In lump sum or in Can repay any surplus amount

Repayment
installments. from time to time.
Differences between cash credit and overdraft
Basis of Difference Cash Credit Overdraft
Cash credit is granted

Period comparatively, for a longer OD is a temporary facility.
period.
For granting cash credit it is

No new account is necessary
Opening Separate Account necessary to open a new
for OD.
account.
Shashwathi B S
It is not necessary to be a
current account holder, to OD facility is granted to
Current Account
avail of the facility of cash current account holder only.
credit.
In case of under utilization of

Commitment Charges CC a customer has to pay No commitment charges.
commitment charges.
On the security of goods by

On personal security of the
Form of Security way of pledge or
borrower or assets.
hypothecation.
Discounting of bills
The bills of exchange is a document in writing, containing an unconditional order signed by

the maker directing a certain person to pay on demand or at a fixed or determinable future
time period, the certain sum of money only to or to the order of a certain person or to the
bearer of the document.
If the holder of the bill is in need of money before the due date of the bill, he can approach
the bank by the way of discounting it. The bank deducts a certain amount as discount and
advances the balance amount. This process of encashing of bill by banker is called
discounting. The bank gets the amount from the drawee on the due date.
Advantages of discounting of bills
1. Safety of bank funds.

2. Certainty of payment.
3. Facility of refinance.
4. Stability in the value of the bill.
5. Profitability.
How a Bill of Exchange Works?
A bill of exchange transaction can involve up to three parties. The drawee is the party that
pays the sum specified by the bill of exchange. The payee is the one who receives that sum.
Shashwathi B S
The drawer is the party that obliges the drawee to pay the payee. The drawer and the payee
are the same entity unless the drawer transfers the bill of exchange to a third-party payee.
Unlike a check, however, a bill of exchange is a written document outlining a debtor's

indebtedness to a creditor. It‟s not payable on demand and is usually extended with credit
terms, such as 90 days. As well, a bill of exchange must be accepted by the Drawee to be
valid.
Bills of exchange generally do not pay interest, making them in essence post-dated checks.
They may accrue interest if not paid by a certain date, however, in which case the rate must
be specified on the instrument. They can, conversely, be transferred at a discount before
the date specified for payment.
Example of a Bill of Exchange
Company ABC purchases auto parts from Car Supply XYZ for $25,000. Car Supply XYZ draws
a bill of exchange, becoming the drawer and payee in this case, for $25,000 payable in 90
days. Car Supply XYZ becomes the drawee and accepts the bill of exchange and the goods
are shipped. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC
for payment. The bill of exchange was an acknowledgment created by Car Supply XYZ, which
was also the creditor in this case, to show the indebtedness of Company ABC, the debtor.
Requirements for a Bill of Exchange
A bill of exchange must clearly detail the amount of money, the date, and the parties
involved (including the drawer and drawee).
Financing book debts
A book debt is a sum of money due to a business in the ordinary course of its business. Book
debts include sums owed to a business for goods or services supplied or work carried-out.
Sums due under loans may also be treated as book debts.
Modes of financing book debts
1. Factoring.
2. Forfeiting.
3. Overdraft and cash credit against hypothecation of book debts.
Shashwathi B S
Factoring
Factoring is a financial service in which the business entity sells its bill receivables to a third
party at a discount in order to raise funds. It differs from invoice discounting. The concept
of invoice discounting involves, getting the invoice discounted at a certain rate to get the
funds, whereas the concept of factoring is broader. Factoring involves the selling of all the
accounts receivable to an outside agency. Such agency is called a factor.
Factoring therefore relieves the first party of a debt for less than the total amount
providing them with working capital to continue trading, while the buyer, or factor, chases up
the debt for the full amount and profits when it is paid. The factor is required to pay
additional fees, typically a small percentage, once the debt has been settled. The factor may
also offer a discount to the indebted party.
Factoring is a very common method used by exporters to help accelerate their cash flow.
The process enables the exporter to draw up to 80% of the sales invoice‟s value at the point
of delivery of the goods and when the sales invoice is raised.
Process of factoring
Advantages of Factoring
1. It reduces the credit risk of the seller.

2. The working capital cycle runs smoothly as the factor immediately provides funds on
the invoice.
3. Sales ledger maintenance by the factor leads to a reduction of cost.
4. Improves liquidity and cash flow in the organization.
5. It leads to improvement of cash in hand. This helps the business to pay its creditors in
a timely manner which helps in negotiating better discount terms.
6. It reduces the need for the introduction of new capital in the business.
Shashwathi B S
Limitations of Factoring
1. Factor collecting the money on behalf of the company can lead to stress in the
company and the client relationships.
2. The cost of factoring is very high.
3. Bad behaviour of factor with the creditors can hamper the goodwill of the company.
4. Factors often avoid taking the responsibility for risky debtors. So the burden of
managing such debtor is always on the business.
Forfeiting
Forfeiting is a means of financing exporters use that enables them to receive immediate
cash by selling their medium and long term receivables, the amount an importer owes the
exporter at a discount. The exporter also eliminates risk by making the sale without
recourse, which means the exporter has no liability regarding the importer's possible
default on the receivables.
The forfeiter is the individual or entity that purchases the receivables, and the importer
then pays the receivables amount to the forfeiter. A forfeiter is typically a bank or a
financial firm that specializes in export financing
Advantages of Forfeiting
1. Exporter gets better liquidity as the receivables get easily converted into cash on the
presentation of the bill or promissory note.
2. There is no risk of exchange rate fluctuations.
3. It is simple as well as flexible in nature and hence can be altered to suit the
requirements of the exporters.
Limitations of Forfeiting
1. From bank point of view there is no legal framework to protect the banker or financial
institution doing forfeiture and hence they face the risk in the form of political,
exchange rate risk and other risk associate with foreign transactions.
2. It is very expensive from exporter point of view because banks take high fees for
forfeiture due to high risks involved in it.
3. There is no secondary market for these types of instruments hence there is lack of
liquidity for these instruments.
Differences between Factoring and Forfeiting

Basis for difference Factoring Forfeiting
Shashwathi B S
Factoring is an arrangement
Forfeiting implies a
that converting of receivables
transaction in which the
into ready cash and you don't
Meaning forfeiter purchases claims
need to wait for the payment
from the exporter in return
of receivables at a future
for cash payment.
date.
Involves account receivables

Involves account receivables
Maturity of receivables of medium to long term
of short maturities.
maturities.
Trade receivables on ordinary Trade receivables on capital

Goods
goods. goods.
Finance up to 80-90% 100%
Type Recourse or Non-recourse Non-recourse
Cost of factoring borne by Cost of forfaiting borne by

Cost
the seller (client). the overseas buyer.
Does not deal in negotiable Involves dealing in negotiable

Negotiable Instrument
instrument. instrument.
Secondary market No Yes
Supply bills
Supply bills are raised when the buyer is the government or a large corporation. The seller or
supplier delivers the goods against a specified „work order‟, and produces documents
evidencing dispatch of goods, such as railway receipt or a bill of lading. These goods have to
be inspected by the buyer, and once buyer is satisfied, and invoice is raised on the buyer.
The supplier submits the invoice along with the buyer‟s certification of acceptance of the
goods to the bank for financing.
Shashwathi B S
Charging of security bills
There are a number of methods by which banker can obtain a charge over the debtor‟s
property. The method used depends on upon.
 The type of property to be charged

 The nature of the advance
 The degree of control over the debtor‟s property required by the banker.
The common methods of charging securities are:
i. Lien
ii. Hypothecation
iii. Pledge
iv. Mortgage
v. Assignment
vi. Set-off.
Pledge
Section 172 of contract Act, 1872, defines a pledge as, the „bailment of goods as security
for payment of a debt or performance of a promise.” Only movable goods can be pledged.
From the above definition we observe that,
 A pledge occurs when goods are delivered for getting advance,

 The goods pledged will be returned to the owner on repayment of the debt,
 The goods serve as security for the debt.
The person who transfers the goods is called pledger and to whom it is transferred is called
the pledgee. Delivery can be „physical‟ or „symbolic‟ where symbolic implies that goods need
not be physically transferred but must be placed in the possession of the pawnee.
For example, handing over the keys to a godown or freight receipt in respect of goods in
transit.
The borrower retains the title to the security and the lender gets a qualified interest and
possession of the security to the extent of the advance.
Right to deal with the security is with the borrower and passes on to the lender only in case
of default.
Shashwathi B S
Mortgage
Section 58 of the Transfer of Property Act 1882, define a mortgage as follows: “A mortgage
is the transfer of an interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future debt, or
the performance of an engagement which may give rise to a pecuniary liability.”
The transferor is called a „mortgagor‟, the transferee a „mortgagee‟, the principal money and
interest of which payment is secured for the time being are called „mortgage money‟, and the
instrument (if any) by which the transfer is effected is called a „mortgage deed‟.
A mortgage is a method of creating charge on immovable properties like land and building.
In terms of the definition, the following are the characteristics of a mortgage:
 Only on immovable property.

 The object of transfer of interest in the property must be to secure a loan or
performance of a contract which results in monetary obligation.
 The property to be mortgaged must be a specific one, i.e., it can be identified by its
size, location, boundaries etc.
 The actual possession of the mortgaged property is generally with the mortgager.
 The interest in the mortgaged property is re-conveyed to the mortgager on repayment
of the loan with interest due on.
 In case, the mortgager fails to repay the loan, the mortgagee gets the right to
recover the debt out of the sale proceeds of the mortgaged property.
Differences between Pledge and Mortgage
Basis of difference Pledge Mortgage
Type of security Movable Immovable
Usually remains with the

Possession of security Remains with the lender
borrower
Gold Loan, Advance against Housing Loans, Loan against

Examples of securities used
NSCs, Advance against goods lands and buildings
Shashwathi B S
Assignment
Assignment means transfer of any existing or future right, property or debt by one person
to another person. The person who assigns the property is called assignor and the person to
whom it is transferred is called assignee. Usually assignment are made of actionable claims
such as book debts, insurance claims etc.
Assignment of a contract means transfer of contractual rights and liabilities to a third

party. The transferor or borrower is called the assignor, and the transferee or banker is
called the assignee. The borrower can assign any of his rights, properties or debts to the
banker as security for a loan. These might be existing or future. Generally the „actionable
claims‟ are assigned by the borrower. An actionable claim is a claim to any debt, other than a
debt secured by mortgage of immovable property, or by hypothecation or pledge of movable
property, or to any interest in movable property not in the possession, either actual or
constructive, of the claimant which the civil court recognizes as affording ground of relief,
whether such debt or beneficial interest be existent, accruing, conditional and contingent.
In banking business, a borrower may assign to the banker,
 The book debts.

 Money due from government department.
 Insurance policies
Assignment may be two types,
i. Legal Assignment
A legal Assignment is an absolute transfer of actionable claim. It must be in writing
signed by the assignor. The assignor informs his debtor in writing intimating the
assignee‟s names and address. The assignee also gives a notice to the debtor and seeks
a confirmation of the balance due.
ii. Equitable assignment
An equitable assignment is one which does not fulfil the entire above requirement.
***
Shashwathi B S

Banking System and Structure in India

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Banking System and Structure in India

Uploaded by

Copyright:

Available Formats

Jai Sri Gurudev

Banking- Theory and Practices

Course: Principles & Practices of

Unit 1 (10 Hours)

Unit 2 (10 Hours)

Unit 1: (10 Hours)

Meaning and Definition of Banking

Evolution of Indian Banks

1. The Pre-Independence Phase i.e., before 1947,

 Presence of large number of banks more than 600.

 This phase was characterised by nationalisation.

1960 7 subsidiaries of SBI

1969 14 major banks

1980 8 more banks

ii. Central Co-operative Banks

Performance of Public Sector Banks

 A financial institution that provides services, such as accepting deposits, giving

Structure of Banks in India

Public Sector Nationalised

Functions of Commercial Banks

b. General Utility Services

 Issuing gift cheques.

Role of Commercial Banks in Socio-Economic Development

Credit creation in Banks

The basis of credit money is the bank deposits

Limitations of credit creation

Factors influencing deployment of funds,

Role of RBI as a regulator of Banking System

RESERVE BANK OF INDIA

Functions of Reserve Bank of India in Indian Banking System

8. Money supply and controller of credit.

Banking Regulation Act of 1949

Important Provisions of Banking Regulation Act, 1949-

The Reserve Bank of India Act, 1934

Unit 2 (10 Hours)

To constitute a customer the following essential requisites must be fulfilled,

Banker and customer relationship

Types of relationship between banker and customer

Transaction Bank Customer

Deposit in bank Debtor Creditor

Loan from bank Creditor Debtor

Safe custody Bailee Bailor

Locker Lessor Lessee

Collection of cheque Agent Principal

Purchase of a draft Debtor Creditor

Payee of a draft Trustee Beneficiary

Pledge Pawner Pawnee

Mortgage Mortgagee Mortgager

Standing instruction Agent Principal

Sale/purchase of securities on behalf of customer Agent Principal

Articles left by mistake Trustee Beneficiary

Shares given for sale Agent Principal

Hypothecation Hypothecatee Hypothecator

Termination of relationship between a banker and a customer

The relationship between a bank and a customer ceases on:

Bankers obligations to customers

The following are the additional obligations of a banker,

1. The obligation to honour the cheques

2. The obligation to maintain the secrecy of the customer accounts

1. Appropriation of payments or Right of appropriation

1. Appropriation of payments or Right of appropriation

Appropriation of payments or Right of appropriation in the normal course of business, a