Banking Operations Final

BANKING
OPERATIONS
K. ANBUMANI
New Royal Book Company

Contents II
Lucknow
© Authors
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ISBN : 978-81-943427-8-6
First Published : 2020
Published by Imran Mirza and Mirza Furqan Beg for

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PREFACE
Preface
The backbone of any economy can be best evaluated by the

strength and flexibility of its banking structure. The Indian
economy, especially the financial services industry, is
predominantly dominated by the banking sector. It has been
rapidly changing itself from being a sluggish industry into a
highly competitive, proactive and dynamic industry, thanks to
the new economic policy and the Liberalization, Privatization,
and Globalization (LPG) focused reforms introduced since 1991.
The financial sector reforms have allowed the banks to revamp
their style of operations and to explore new business
opportunities for their revenue generation, rather than relying
upon the usual activities of borrowing and lending.
The new entrants can take advantage of the benefits of the
latest technology, and adapt business models to leapfrog,
increasing inroads from non-traditional players are being
witnessed. The intense competition between the state-owned,
private sector and foreign commercial banks in the retail banking
industry is forcing the banks to become more professional and
customer-centric units. Banks are rapidly embracing technology
to improve their customer services, design flexible and
customized products, increase sales opportunities and to
differentiate themselves in a market where product features are
easily cloned.
The book Banking Operations, though it has been written
mainly to cover the new syllabus of B.Com and BBA courses of
Lucknow University, covers the whole syllabus of Undergraduate
and Post Graduate courses of many other Indian universities too.
It has been written in a lucid, up-to-date and comprehensive style
so that it can serve as reference material to everyone interested to
understand the banking operations in India, right from the
students to the teachers and bank professionals.
The author has made sincere efforts to discuss all significant
Preface V
areas of commercial banking and their operations including the
changing scenario in the banking industry, the regulatory
mechanism, rules, regulations and acts that bind their services.
The readers can find in this book, a variety of useful discussions
on NPA management, Money laundering, KYC Norms, BASEL
norms, E-Banking, etc. The step by step approach given in this
book would provide the readers a strong content and conceptual
clarity about the subject. It is hoped that this book Banking
Operations is interesting, informative, and useful to all.
The author thankfully acknowledges the love-filled blessings
of his parents. They are the real source of his confidence and
constant motivation. He also happily acknowledges the kind love,
understanding and unmatchable support extended by his wife G.
Neelambal, sons Akhilesh and Abhimanyu during the day-night
preparation of this book. They were kind enough to forgive even
his indifferences towards their personal needs and allowed him to
work peacefully and comfortably.
Dr. K. ANBUMANI
kandasamyanbu@gmail.com
TO
Shri NAWAL KISHORE Sir
Addl. Commissioner and Addl. Registrar (Co-op.)
Former Director, ICCMRT
Lucknow
SYLLABUS
Unit-I: Banking System in India, Monetary Policy: Concepts &
Objectives, Basic Concepts of Regulatory Environment
for Commercial Banks in India and their Provisions, RBI
Act- Chapter I, II, III, Banking Regulations Act General
Provisions, Management Control, Loan & Advances,
Deposit and Insurance Act- Objectives, SARFAESI Act,
Methods of NPA Recovery, Money Laundering-
Procedures, Laws and Guidelines for anti-money
laundering.
Unit-II: Reserve Bank of India- Operational aspects of Commercial
Banks in India, Relationship between Banker and
customers, Types of customer account, Cheque & its
types, Endorsement, Dishonour, Rights and Liabilities of
Paying and Collecting Banker, Time Value of Money –
Calculation of Interest on Loan & Deposits, EMIs -KYC
guidelines
Unit-III: Negotiable Instruments, Bills of Exchange and Promissory
Notes, Rights and Liabilities of Parties, Bills discounting
and purchasing, Ancillary Services of Bankers, E-Banking.
Unit-IV: Employment of funds by Commercial Banks, Types of
Securities, Mode of Creating Charge, Bank Guarantees,
BASEL Norms, Financial Sector Reforms in India Banking
ombudsman.
CONTENTS
Contents
Preface..................................................................................................III
Syllabus...............................................................................................VI
1.1. Banking System in India.......................................................1

1.2. Monetary Policy...................................................................15
1.3. Regulatory Environment For Commercial Banks............27
1.4. The RBI Act, 1934 (As Amended by the Finance Act,
2018).......................................................................................44
1.5. The Banking Regulation Act, 1949.....................................59
1.6. The Deposit Insurance And Credit Guarantee
Corporation Act, 1961..........................................................69
1.7. The SARFAESI Act, 2002.....................................................82
1.8. Management of NPAs..........................................................94
1.9. The Money Laundering Act, 2002....................................102
2.1. The Reserve Bank of India.................................................114
2.2. Commercial Banks in India................................................129
2.3. Banker Customer Relationships.......................................138
2.4. Types of Customer Accounts............................................167
2.5. Endorsement of Cheques...................................................205
2.6. Dishonour of Cheques.......................................................211
2.7. Rights And Liabilities of a Paying Banker.......................220
2.8. Rights and Liabilities of a Collecting Banker..................234
2.9. Time Value of Money.........................................................238
2.10.Calculation of Interest on Bank Loans and Deposits.....249
2.11.‘Know Your Customer’ Guidelines..................................268
3.1. Negotiable Instruments.....................................................278
3.2. Discounting of Bills............................................................295
3.3. Ancillary Services...............................................................300
3.4. Electronic Banking (e-Banking)........................................309
Preface IX
4.1. Employment of Funds by Commercial Banks................333
4.2. Types of Securities....................................................................344
4.3. Mode of Creating Charges.......................................................363
4.4. Bank Guarantee.........................................................................375
4.5. The Basel Norms.......................................................................382
4.6. Financial Sector Reforms..........................................................393
4.7. Banking Ombudsman Scheme................................................419
Appendix...........................................................................................427
1.1. BANKING SYSTEM IN INDIA
Design and Execution of the Study
Banking System in India
A banking system is a group or network of institutions that

provide financial services for us. These institutions are responsible
for operating a payment system, providing loans, taking deposits,
and helping with investments. The Reserve Bank of India (RBI) is
the apex institution in the banking system in the country. It is the
Central Bank and also the Regulator of the banking system.
Apart from the RBI, the banking system in India consists of
Commercial Banks (CBs), Regional Rural Banks (RRBs), Co-
operative Banks and Development Financial Institutions (DFIs).
COMMERCIAL BANKS IN INDIA
The Banking System in India consists of scheduled and non-
scheduled banks. A scheduled bank is one that is included in the
second schedule of the RBI Act. A scheduled bank may be a
scheduled commercial bank or a scheduled co-operative bank.
The scheduled commercial banks consist of (a) Public Sector
Banks (b) Private Sector Banks (c) Foreign Banks (d) Regional
Rural Banks (v) Local Area Banks.
(a) Public Sector Banks: There are 26 public sector banks
functioning in the country such as (i) State Bank of India and its 5
associate banks (6 nos.) (ii) Banks nationalized in the first round
in 1969 (14 nos.) (iii) Banks nationalized in the second round in
1980 (6 nos.) and (iv) IDBI Bank Ltd. Some critical points on
public sector banks are as follows;
 The General Bank of India was the first public sector bank
started in the country in as early as 1786, which was followed
by the Bank of Hindustan. Both are defunct now.
 The Bank of Calcutta was formed on 2 nd June, 1806. It was
renamed as the Bank of Bengal on 2 nd January 2000.It was
sponsored by the Government of Bengal and also had the
privilege as the first joint-stock banking company started in
India.
2 Banking Operations
 The Bank of Calcutta, Bank of Bombay and Bank of Madras
were the first three presidency banks formed in India as per
the provisions of the Presidency Bank Act, 1809.
 All these three presidency banks were amalgamated together
on 21st January 1921 to form the Imperial Bank of India
which also carried out the limited functions as the Central
Bank of India.
 The State Bank of India was set up on 1st July, 1955 as per
the provisions of the State Bank of India Act 1955. It took
over the assets and liabilities of the then Imperial Bank of
India. Initially, the share capital of SBI was held by the RBI
and the public. In 2008, the government of India purchased
the share capital held by the RBI.
 In 1959 the SBI took over the control of seven private sector
banks as per the provisions of the State Bank of India
(Subsidiary) Act 1959.
 On 13th August 2008, the State Bank of Saurashtra and the
then State Bank of Indore was amalgamated with the SBI,
and thus the number of associate banks of the SBI came
down to 5 from 7.
 Allahabad bank is the oldest public sector bank (1866)
 The State Bank of India is the largest bank in the country
with the highest number of branches, largest capital base,
high level deposits, high level advances and having exposure
to almost all aspects of financial services either directly or
through its subsidiaries is a financial conglomerate and is
also a Universal Bank.
 The SBI is the first Indian Bank to find a place in the list of
Global Fortune 500 Companies.
 On 1st October 2004 the IDBI took over the IDBI Bank Ltd.
and now the IDBI is also classified as a public sector bank.
 The share capital of the nationalized banks was 100% held by
the government till 1994. But now it is stipulated that the GoI
will hold not less than 51% of the share capital (55% in case
Discounting of Bills 3
of SBI) of these banks.
 The maximum amount of FII investment allowed in public
sector banks is 20% of the paid-up share capital of the bank
concerned.
 Allahabad bank is the oldest public sector bank (1866)
NATIONALIZATION OF COMMERCIAL BANKS
Nationalization of Banks, 1969: The first round of the
Nationalization of private sector commercial banks was made on
19th July 1969. Fourteen major private sector banks having
deposits of Rs.50 crores and more were taken over by the
government through an ordinance. This ordinance was made as
an Act called the Banking Companies (Acquisition and Transfer
of Undertaking) Act 1970.
Nationalization of Banks, 1980: The second round of the
Nationalization of private sector commercial banks was made on
15th April 1980. Six more private sector banks having deposits
more than Rs.200 crores were nationalized under the Banking
Companies (Acquisition and Transfer of Undertaking) Act 1980.
The total number of nationalized banks has become as 19 following
the merger of New Bank of India with the Punjab National Bank
on 3rd September 1993.
(b) Private Sector Banks: All domestic banks in the private
sector have been registered under the Companies Act as banking
companies, and therefore, the provisions of the Companies Act is
also applicable to them. The minimum capital required to form a
private sector bank is Rs.300 crores now. The promoter contribution
needed to create a private sector bank has a lock-in period of 5
years.
The maximum Foreign Direct Investment (FDI) in a private
sector bank allowed is 74% of the total capital value. As on
31.3.2008, ING Vysya Bank has the maximum FDI. The private
sector banks can be classified into two broad categories, such as
domestic banks and foreign banks. The banking companies
registered in India are called the domestic banks and which are
registered outside India are called the foreign banks. The
domestic private sector banks may be further grouped into two as
the Old Private Sector Banks and New Generation Private Sector
banks.
Old Private Sector Banks: The following 16 banks are known
as the old private sector banks in India: (1) City Union Bank (2)
Development Credit Bank (3) ING Vysya Bank (4) Karnataka
Bank (5) Nainital Bank (6) SBI Commercial and International
Bank (7) Tamilnadu Mercantile Bank (8) Catholic Syrian Bank (9)
Dhanalaxmi Bank (10) Federal Bank (11) Ganesh Bank of
Kurundwad (12) Jammu Kashmir Bank (13) Karur Vysya Bank
(14) Lakshmi Vilas Bank (15) Ratnakar Bank and (16) The South
Indian Bank Ltd.
NEW GENERATION PRIVATE SECTOR BANKS
The banks set up after 1994 following the amendment of the
Banking Regulation Act 1993 are called as the new generation
private sector banks. They are six in number: (1) HDFC Bank (2)
ICICI Bank (3) Indus Ind Bank (4) Axis Bank (5) Kotak Mahindra
Bank and (6) Yes Bank Ltd.
 The HDFC Bank Ltd. was set up in August 1994 and
commenced its operation from January 1995 with its
headquarters in Mumbai. The bank has achieved much
needed inorganic growth by acquiring some other banks. In
February 2000 it took over the Times Bank Ltd. (formed in
1995); In 2008 it took over the Centurion Bank of Punjab Ltd.
(established in 2005 by an amalgamation of the Bank of
Punjab and the Centurion Bank, both were set up in 1995)
 ICICI Bank Ltd. was set up in 1994. Following the reverse
merger of the bank with its parent company ICICI Ltd. now it
is the largest private sector bank based on asset size and also
the second-largest bank in India after the SBI. As a financial
conglomerate, the bank has currently 17 subsidiaries (10
domestic and seven global) in its control. To ensure its
inorganic growth and more branch presence the bank took
over the Bank of Mathura Ltd in 2001 and the Sangili Bank
Ltd. and the Bank of Rajasthan Ltd.
 The Indus Ind Bank Ltd. was set up in 1994.
 Axis Bank Ltd. was formed in 1994. Formerly it was known as
UTI Bank Ltd. It was renamed in 2007.
 The Kotak Mahindra Bank Ltd. was formed in 2003 by
converting an NBFC (Kotak Mahindra Finance Ltd.) into a
bank.
 The Yes Bank was the latest private bank formed in 2004 by
Robo Bank International Holding BV, Netherland and some
other private equity firms.
 The Development Credit Bank (DCB) is a unique example of
a co-operative bank converting itself into a private sector
commercial bank in India.
FOREIGN BANKS
The banking companies which are incorporated outside India,
but having their branches in India are called the foreign banks. As
on 31st March 2019, 40 foreign banks are operating in India. The
Standard Charted Bank (Headquarters: London, UK) is the
largest foreign bank in India which is followed by Citi Bank
(Headquarters: New York, USA), Hong Kong and Shanghai
Banking Corporation Ltd (HSBC, Headquarters: Hong Kong),
ABN Amro Bank (Headquarters: Amsterdam, Netherlands) and
BMP Paribas (Headquarters: Paris, France)The American Express
Bank (USA), Barclays Bank (UK), Bank of America (USA),
Deutsche Bank (Germany) Development Bank (Singapore), etc.
also come under this category.
REGIONAL RURAL BANKS

The Regional Rural Banks (RRBs) were formed as per the
recommendation of the Narasimham Committee by an ordinance
on 26thSeptember 1975 which was made as to the Regional Rural
Bank Act 1976 later. All RRBs are scheduled banks. On 2nd
October 1975, the first 5 RRBs were formed. A new RRB, namely
Puduvai Bharathiar Grama Bank sponsored by the Indian Bank
has come into existence on 26th March 2008 in the state of
Pondicherry.
The capital of RRBs is held by the Central Government, State
Government, and the Sponsor Bank in the ratio 50:15:35,
respectively. RRBs are required to maintain CRR and SLR at the
rate as applicable to other scheduled banks. They are also
required to declare their Capital Adequacy Ratio (CAR) as notes
to accounts in their Balance Sheet though they are not required to
maintain the same compulsorily. Each RRB functions in a
compact area of few districts in one state. The management of the
RRB is vested with a Board of Directors consisting of a maximum
of nine directors headed by a Chairman deputed by the Sponsor
Bank for a period not exceeding five years.
Sardesai Committee suggested the amalgamation of RRBs in
a state which is sponsored by the same sponsor bank. As a result,
196 RRBs have been reduced to 82. It was a working group
appointed by the RBI under the Chairmanship of Sri A.V.
Sardesai, to suggest measures for strengthening rural banks.
Rangarajan Committee suggested for the recapitalization of
the RRBs with a negative net worth to make them viable
organizations to serve the needs of the poor in rural areas. This
committee was appointed under the Chairmanship of Dr. C.
Rangarajan in 2007.Tosort out the problems faced by the RRBs at
the local level, the RBI has formed an Empowered Committee
consisting of representatives of sponsor banks and also the
Chairman of RRBs in each state. The Regional Director of the
Regional Office of the RBI acts as the convener of this Committee.
LOCAL AREA BANKS
The Local Area Bank Scheme was introduced in August 1996.
The minimum paid-up capital of a LAB is Rs. 5 crores out of
which the promoters are required to contribute minimum Rs.2
crores. The area of operation of these banks is restricted to 3
geographically contiguous districts. All regulatory provisions as
applicable to private sector banks are equally applicable to these
banks also. These banks are registered as public limited
companies and therefore have to comply with the provisions of
the Companies Act and Banking Regulations Act. The Coastal
Local Area Bank Ltd. (Head office in Vijayawada) is the first
local area bank set up in the country. The Raghu Rajan
Committee had recommended for opening more LABs. However,
in 2002, the RBI decided not to issue any more licenses for setting
up of any Local Area Banks. Out of the six banks formed at
present, there are only four are functioning now.
CO-OPERATIVE BANKS
The Co-operative Banks can be Urban Co-operative Banks or
Rural Co-operative Banks.
Urban Co-operative Banks: The Urban Co-operative Banks
have a single-tier structure and functions in urban areas only.
Rural Co-operative Banks: The Rural Co-operative Banks are
the one that gives short term credit or banks giving long term
credit. The short term co-operative banking structure has three
tiers namely (i) State Co-operative Bank (SCBs) functioning at
state level and acts as the apex bank for the DCCBs (ii) District
Central Co-operative Bank functioning at district level (DCCBs)
and acts as the apex bank for the PACS and (iii) Primary
Agricultural Credit Societies (PACS) functioning at panchayat
level. At present, the PACS are out of the purview of the
Banking (Regulation and Control) Act, 1949.
The long term co-operative banking structure has two tiers
namely (i) State Co-operative Agriculture and Rural Development
Bank (SCARDBs) functioning at the state level and acts as the
apex bank for the PCARDBs (ii) Primary Central Agriculture and
Rural Development Banks (PCARDBs) working at panchayat
level.
In Andhra Pradesh, the short term and long term credit
structure have been combined into one. The long term cooperative
banks in India were initially introduced with the name ‘Land
Mortgage Banks’ (LMBs) which were renamed as ‘Land
Development Banks’ (LDBs) in 1966-67. Given the broader role of
LDBs, they are now known as State Co-operative Agriculture and
Rural Development Banks (SCARDBs) Presently the co-operatives
are controlled by the Co-operative Department of the respective
state governments. In addition to the state government control
and supervision, the RBI also regulates and supervises certain
banking activities of the urban co-operative banks, and the
NABARD supervises the rural co-operatives.
As per the recommendations of the Vaidyanathan Committee
the GoI approved a package of revival of the short term rural co-
operative credit structure by which 25 states have entered into
MoU with the GoI and NABARD. It was a Task Force appointed
by the GoI under the Chairmanship of Prof. A. Vaidyanathan, to
suggest measures for the revival of the rural credit co-operative
institutions. Fourteen states have made necessary amendments to
their Co-operative Societies Act. As of 31 st December 2009,
Rs.7000 crores were released by the NABARD.
DEVELOPMENT FINANCIAL INSTITUTIONS
The Development Financial Institutions (DFIs) are specialized
institutions set up primarily to provide development Project
finance, especially in developing countries. These development
banks are usually majority-owned by national governments. The
source of capital of these banks is domestic or international
development funds. This ensures their creditworthiness and their
ability to provide project finance at very competitive rates.
DFIs Vs. COMMERCIAL BANKS
DFIs differentiates itself from commercial banks as it strikes a
balance between commercial, operational norms as followed by
commercial banks on the one hand, and developmental
responsibilities on the other. They provide long-term loans,
guarantees, and under writing functions. DFIs provide long term
finance to fund the activities to those sectors where the risk is
higher for the commercial banks to finance. So, DFIs are not just
plain lenders like commercial banks, but they act as companions
in the development of significant sectors of the economy. After
independence, as the role of commercial banks was limited to
providing working capital financing for short periods, the DFIs
were set up to finance the development on a long term basis for
the significant sectors of the economy like the infrastructure
sector.
DEVELOPMENT FINANCIAL INSTITUTIONS
In India, the role of DFIs is to support long term
infrastructures of industry and agriculture. The DFIs were set up
under the full control of both Central and State Governments. The
government used these institutions to spurring economic growth
and aid social development. The DFIs provide finance to all those
entities which are not adequately served by the banks and capital
markets like households, SMEs, and private corporations. The
Development Financial Institutions formed by the Government of
India (GOI) are as follows; (a) EXIM BANK, (b) NABARD, (c)
NHBI, (d) SIDBI, (e) IFCI Ltd. (f) IIBI Ltd. (g) TFCI Ltd. (h) IDFCI
Ltd. (i) IIFC Ltd. (j) State Level Institutions.
(a) Export and Import Bank of India (EXIM Bank): The EXIM
Bank was formed on January 1, 1982, as per the provisions of the
Export and Import Bank of India Act, 1981. It acts as the apex
level financial institution for the financing and development of
external trade (i.e., export and import) The Government of India
holds the entire share capital of this bank. It has its registered
office in Mumbai.
The EXIM Bank refinance banks against their finance for
project export. It also provides direct funding for project exports
deferred payment exports (i.e., trading with long and medium-
term payments) As commercial banks offer short term credit for
exports and imports, the EXIM Bank focus only in the medium
and long term credit only. The EXIM Bank provides buyers a
credit to importers in foreign countries for buying products from
India, which helps in the growth of exports in the country. It also
provides bills discounting facilities and guarantees to help the
exporters.
(b) National Bank for Agriculture and Rural Development
(NABARD): The NABARD was formed on 12th July 1982 as per
the provisions of the National Bank for Agriculture and Rural
Development Act, 1981. Its formation was recommended by the
Committee to Review Arrangement for Institutional Credit
(CRAFICARD) under the Chairmanship of Shri B. Sivaraman, a
former member of the Planning Commission, Government of
India. The NABARD is the apex level institution for financing the
development of agriculture and other rural, non-farm activities.
The share capital of this bank is held by the Reserve Bank of
India and the Government of India in equal proportion. It has
its registered office in Mumbai.
The NABARD refinance to banks against their finance to
agriculture and other activities in rural areas. It takes different
steps for promoting rural finance. Some of the well-known
schemes of the NABARD are the Kisan Credit Card, Farmers
Club and Self-Help Groups. The NABARD acts as the supervisor
for the Regional Rural Banks and also the co-operative banks and
conducts an inspection of these institutions.
(c) National Housing Bank of India (NHBI): The NHBI was
formed on 9th July 1988 as per the provisions of the National
Housing Bank of India Act, 1987. It is a wholly-owned subsidiary
of the RBI having the head office in New Delhi. The bank acts as
the apex level institution for promoting the housing finance
institutions in the country and provides financial and other
support to such institutions. It also serves as the regulator for
housing finance institutions. The bank has recently introduced a
scheme called the Reverse Mortgage for which it would provide
refinance to housing finance institutions. The bank has launched a
price index for residential housing properties called “RESIDEX.”
(d) Small Industries Development Bank of India (SIDBI):
The SIDBI was formed on 2nd April 1990 as per the provisions of
the Small Industries Development Bank of India Act, 1989 as a
wholly-owned subsidiary of the IDBI, but subsequently it was
delinked from the latter. It acts as the apex level institution
responsible for the finance and development of Micro and Small
and Medium Enterprises (MSME) sector. It provides direct
finance to these units, provides refinance to banks against their
finance to such units and also takes all steps to develop and
promote finance to this sector.
(e) Industrial Finance Corporation of India (IFCI) Ltd.: The
IFCI was the first development financial institution formed in the
year 1948 as per the statute passed by the parliament. In 1993 it
was converted into a joint stock-company. There were two more
financial institutions namely the Industrial Credit and Investment
Corporation of India (ICICI) formed in 1955 and Industrial
Development Bank of India (IDBI) established in 1964 which were
later converted into two independent commercial banks namely
the ICICI bank and IDBI bank respectively.
(f) Industrial Reconstruction Corporation of India (IRCI):
The Industrial Reconstruction Corporation of India was set up in
1971 with the sole objective of rehabilitating the industrial units
and was renamed in 1985 as the Industrial Reconstruction Bank of
India (IRBI) by an Act of the Parliament. In 1997 it was converted
to be a full-fledged developmental financial institution and was
renamed as the Industrial Investment Bank of India (IIBI) ltd. The
bank has its head office in Kolkata. Currently, this institution is
in the process of voluntary winding up following their consistent
financial loss.
(g) Tourism Finance Corporation of India (TFCI) Ltd.: The
TFCI was formed based on the recommendation of the Yunus
Committee on 27th January1989 as a specialized national level
development financial institution for catering to the financial
needs of the tourism sector. It has been promoted by the IFCI, SBI,
LIC and some other public sector banks and Insurance companies.
It has its head office in Delhi. The TFCI provides finance for the
development of tourism and connected activities like financing
hotels, amusement parks, etc.
(h) Infrastructure Development Finance Corporation of India
(IDFCI): The IDFCI was formed based on the recommendation of
Dr. Rakesh Mohan Committee, on 30th January 1997 to act as a
credit enhancer and policy advisor for the Infrastructure sector. It
has its registered office in Chennai and Corporate Office in
Mumbai. The IDFCI provides project finance, equity investment,
and advisory services to infrastructure projects. It also owns a
mutual fund recently purchased from the Standard Charted Bank.
It manages the assets in the form of funds called India
Development Fund, IDFC Private Equity Fund, and India
Infrastructure Fund. The IDFCI has introduced Take out finance
under which commercial banks provide finance to infrastructure
projects for five years after which the IDFC takes over the same.
(i) India Infrastructure Finance Company (IIFC) Ltd.: The
IIFC Ltd. was formed on 5thJanuary 2006 with the authorized
share capital of Rs. 1000 crores, as a wholly-owned finance
company of the Government of India. It provides direct long
term finance for the units engaged in the infrastructure projects. It
also refinances to Banks and FIs for loans of tenure five years and
more. It has its head office in New Delhi.
(j) State Level Institutions: Besides the national level DFIs
listed above, there are many state- level developmental financial
institutions (such as SFCs, SIDCO, etc.) also functioning in the
country. The State Financial Corporation’s (SFCs) have been
formed as per the State Financial Corporation Act, 1951. To
provide financial support to small and medium sector units.
Similarly, the State Industrial Development Corporations
(SIDCOs) have been formed by each state government as
companies providing finance to medium and large industrial
units and also help in accelerating the pace of industrialization in
the state concerned.
ISLAMIC BANKING
Islamic Banking is done as per the Sharia (Islamic) Principles
and does not pay interest on deposits and does not charge any
interests on its advances. Instead of paying interest, it operates on
the principle of sharing profit with the depositor and taking a
part of the appreciation of the asset of the borrower. It is also
called as the participatory banking as the depositor gets a part of
the profit of the bank instead of interest.
MERGER OF PUBLIC SECTOR BANKS
The government has unveiled a mega plan (in August 2019)
to merge 10 public sector banks into four
as part of plans to create fewer and
stronger global-sized lenders as it looks to
boost economic growth from a six-year
low. Finance Minister Ms. Nirmala Sithara-
man announced four new sets of
mergers as listed below;
1. The Oriental Bank of Commerce and the United Bank will be merged
into Punjab National Bank to create the nation's second-largest lender
with ₹17.95 lakh crore business and 11,437 branches.
2. The Syndicate Bank will be merged with Canara Bank to create the
fourth-largest public sector bank with ₹15.20 lakh crore business and a
branch network of 10,324.
3. The Andhra Bank and Corporation Bank will be merged with Union
Bank of India to create India's fifth-largest public sector bank
with ₹14.59 lakh crore business and 9,609 branches and,
4. The Indian Bank will be merged with Allahabad Bank.
Last year, the government had merged Dena Bank and Vijaya Bank
with Bank of Baroda, creating the third-largest bank by loans in the
country. After the mergers, the country will have 12 public sector banks,
including State Bank of India and Bank of Baroda. The Indian Overseas
Bank, UCO Bank, Bank of Maharashtra and Punjab and Sind Bank which
have a strong regional focus, will continue as separate entities. Also, the
Bank of India and Central Bank of India will continue to operate
separately as before.
SELF-ASSESSMENT
Fill in the blanks
1. The City Bank belongs to ………… country.
2. The minimum capital required to start a new private sector
bank is ………...
3. In a private sector commercial bank, the promoter’s
contribution has a lock-in period of ……….years.
True or False?
4. State Bank of India is a financial conglomerate.
5. The floor limit for the government shareholding of a public
sector bank is 75%.
6. Vyas Committee recommended the amalgamation of RRBs.
Answers: (1) USA (2) Rs. 300 Crores (3) Five (4) True (5) False (6)
False
Questions
1. Define the term ‘Development Financial Institutions’
2. Distinguish between domestic and foreign private banks
3. Write a short note on Islamic Banking.
4. Assess the functioning of the public sector commercial banks
in India.
5. What do you understand by new generation private sector
banks?

1.2. MONETARY POLICY
Monetary Policy
“The monetary policy is nothing but the conscious policy of

the center with the sole objective of achieving certain desirable
effects on the economy and avoiding certain undesirable effects
on the economy by the use of quantitative or selective credit
control techniques or the both.”
The RBI has used the weapons of quantitative controls such as
regulated bank rates and open market operations for regulating
the cost of credit and the quantity of credit. It has used the tool of
selective credit control for regulating the purpose or use of bank
loans when excessive bank lending has already taken place for a
given purpose. The varying reserve requirements (CRR and SLR)
are much useful in freezing additional liquidity when the banks
acquire significant new sources and thereby restrain the
expansion of bank credit.
OBJECTIVES OF MONETARY POLICY
The principal objectives of monetary policy are as follows;
 The safeguarding of the country’s gold reserves,
 Price/exchange rate stability by controlling inflation/deflation,
 Elimination of cyclical fluctuations,
 Achievement of full employment and,
 Accelerating economic growth/ development in the economy.
Which particular objective is to be pursued at any given time
will depend upon the economic situation to be tackled.
Accordingly, a country may follow a dear money policy or a
cheap money policy or a neutral policy. The ‘price’ of the money
more appropriately refers to the ‘rate of interest’ at which it can
be had or borrowed. Thus the term ‘dear money’ means that the
interest rate of money borrowed is high, and ‘cheap money’
means it is low.
Dear Money Policy: This policy is adopted when there exists

a galloping or hyperinflation in the economy; hectic speculative
activity and reckless investments by industrialists; the credit
creation of the banks has crossed all prudent bounds, and the
balance of payments (BoP) is heavily unfavorable. It is a
deflationary move that may be used to stem the rising tide of
prices, to apply a brake on senseless capital investments; to
control the reckless credit creation by the banks, to control
speculators and to put the BoP on a stable foot.
Cheap Money Policy: This policy may be followed when the
enterprises are struggling with the effects of depression when
there are a low investment and low employment, small economic
incentive due to weak pricing, and low level of credit creation by
the banks. It may be used to stimulate investment, create jobs,
improve the credit creation for productive purposes so that the
country is enabled to lift the blanket of depression, and remove its
negative influences in the economy. When a cheap money policy
is adopted, usually the government has to borrow from the open
market.
Neutral Money Policy: The monetary policy based on the
laissez-faire philosophy is called a neutral monetary policy. It
seeks to eliminate the disturbing influences caused by the
creation or withdrawal of money from the economy. Inflation is
associated with cheap money, while deflation is related to dear
money, and the neutral monetary policy suggests neither to have
dear nor cheap. To achieve this, both inflationary and
deflationary tendencies have to be curbed mainly by keeping an
eye on the price levels rather than maintaining a constant money
supply.
CENTRAL BANK: MONETARY POLICY AND
ECONOMIC DEVELOPMENT
In a developing economy, the role of a central bank is not only
‘regulatory’ but also ‘promotional and developmental’ in nature.
Besides mobilizing the financial resources of the country through
expansion of sound banking facilities, it must also make these
funds available to finance the development programmes in
respect of agriculture, trade, transport, and industry and create
specialized financial institutions for the purpose. It promotes
economic development in many ways as shown below;
(i) Sound Currency System: Economic development leads to
the expansion of market and increasing specialization. For
this, the central bank is expected to maintain sound and
efficient payment mechanisms.
(ii) Regulated and Adequate Money Supply: Too much of the
money supply leads to inflation, and too less of the same
results to the recession. The central bank ensures adequate
and regulated money supply so that neither of such
situations arises. By way of controlled expansion of credit, it
brings growth with stability.
(iii) Creation of New Financial Institutions: The central bank
creates individual financial institutions for promoting
economic development in different sectors such as
Agriculture Finance Corporation, Industrial Finance
Corporation, Export Finance Corporation, Small Industries
Development Corporation, etc. These institutions provide
much-needed finance to accelerate development in their
respective spheres.
(iv) Tackling Balance of Payment Problem: In a developing
economy, owing to mounting imports of food grains,
machinery and capital equipment, essential raw materials,
and technical know-how, the Balance of Payment (BoP) turns
adverse. The monetary authority tackles this problem by export
promotion, import-substitution, raising foreign loans, etc. so
that the economic development proceeds on an even keel.
(v) Restraining Inflationary Pressures: In a developing economy,
the budgetary operations owing to the increasing size of
government expenditure, generate intense inflationary
pressure. The central bank plays a significant role in containing
this pressure by freezing a part of the liquidity, thus created
usually by making adequate changes in the rate of interest
for bank loans and deposits.
All the above functions of the central bank are effectively
done with the conscious use of various tools of monetary policy,
as shown below.
TOOLS OF MONETARY POLICY
There are four critical tools or instruments of monetary policy
which can be used to achieve the economic and price stability by
influencing the aggregate demand or spending in the economy.
They are;
1. Open market operations
2. Changing the bank rate
3. Changing the reserve ratios and
4. Undertaking selective credit controls.
MONETARY POLICY
TO CURE RECESSION OR DEPRESSION
When the economy is faced with recession or depression or
involuntary cyclical unemployment, which comes about due to
the fall in aggregate demand, the central bank intervenes to cure
such a situation. It takes the required steps to expand the money
supply in the economy and or lower the rate of interest to
increase the aggregate demand, which will help in stimulating the
economy. It adopts the following measures to cure recession and
to establish the equilibrium of national income at full employment
level of output.
Open Market Operations: It buys securities in the open
market, from the public, chiefly from the commercial banks to
increase the reserves with the banks or amount of currency with
the general public. With more significant reserves, commercial
banks would lend more for business investments. More private
investments will cause the aggregate demand curve to shift upward.
Thus buying of securities will have an expansionary effect.
Lowering Bank Rate: The central bank may reduce the bank
rate for its loans to commercial banks. A lower bank rate may
induce commercial banks to borrow more from the central bank
and to lend it back to business people and investors at lower
prices. The increased investment would bring aggregate output
and income levels up.
Lowering Reserve Ratios: The central bank may reduce the
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to
be kept by the commercial banks. With lower reserve
requirements, a large number of funds would be available with
the commercial banks, which may be distributed to business
people for making investments. As a result, credit expands and
investment increases in the economy, which has an expansionary
effect on output, employment, and income levels.
The application of monetary policy increases bank reserves.
Such reserves are the basis on which banks expand their credit by
lending, the increase in reserves raises the money supply in the
economy. Thus appropriate monetary policy at times of recession
or depression can increase the availability of credit and also lower
the cost of the loan. This leads to more private investments, which
has an expansionary effect on the economy.
MONETARY POLICY TO CURE INFLATION
When the economy is faced with increased aggregate demand
due to large consumption or significant government expenditure
relative to its revenue resulting in huge budget deficits, demand-
pull inflation may occur in the economy. Besides, when there is
too much creation of money for one reason or the other, it
generates inflationary pressures in the markets. To cure such
situations, the central bank adopts a contractionary monetary
policy or tight money policy as discussed below;
Open Market Operations: It sells government securities to
banks, depository institutions, and the general public through
open market operations. This action will reduce the reserves with
the banks and liquid funds with the general public. With fewer
reserves with the banks, their lending capacity will be reduced.
Therefore they will have to reduce their demand deposits by
refraining from giving new loans as old loans are paid back by
the customers. As a result, the money supply in the economy will
shrink.
Raising Bank Rate: It may increase the bank rate to
discourage commercial banks from taking loans from the central
bank. This will tend to reduce their liquidity and also induce
them to raise their lending rates to the general public. The
simultaneous reduction in the availability of credit and an
increase in the cost of the loan would ultimately discourage the
borrowings for investment as it is required to curb inflationary
pressures.
Raising Reserve Ratios: The essential anti-inflationary
measures are the raising of Cash reserve ratio (CRR) to meet the
higher reserve requirements, banks will reduce their lending. This
will have a direct effect on the contraction of money supply in the
economy and would help in controlling the demand-pull
inflation. Besides the CRR, the Statutory Liquidity Ratio (SLR)
may also be increased through which the excess reserves of the
banks are mopped up, resulting in contraction of credit.
Selective Credit Control: Qualitative credit control is one
more crucial anti-inflationary measure used by the central bank to
curb inflation. This is achieved by raising the minimum margins
for obtaining loans from banks against the stocks of sensitive
commodities such as food grains, oilseeds, cotton, sugar,
vegetable oils, etc. As a result, businessmen themselves will have
to finance to a greater extent the holding of inventories of goods
and will be able to get less credit from the banks. This selective
credit control has been excessively used in India to control the
inflationary pressures.
FISCAL POLICY FOR ECONOMIC STABILIZATION
The economy does not always work smoothly. Often there
occur fluctuations in the level of economic activity. During a
recession, there is a lot of idle or unutilized productive capacity,
that is available factories, and machines are not working to their
full size. As a result, unemployment of labour increases along
with the existence of excess capital stock. On the other hand, the
economy is overheated at times of inflation. The fiscal policy is
used to correct such economic instability. It is of two types,
namely the discretionary and the non-discretionary fiscal policy.
Discretionary Fiscal Policy: The deliberate change in
government expenditure and taxes to influence the level of
national output and prices is known as discretionary fiscal policy.
It generally aims at managing aggregate demand for goods and
services.
Fiscal Policy to Cure Recession: Recession in an economy
occurs when aggregate demand decreases due to a fall in private
investment. The fiscal policy bridges the gap between the
investments and aggregate demand by increasing government
expenditure or by reducing taxes.
Fiscal Policy to Cure Inflation: Inflation in an economy
occurs when aggregate demand increases beyond what the
economy can potentially produce by fully employing it’s given
resources. It may arise either due to the substantial increase in
consumption demand by the households; or excessive
investments by business people; or huge budget deficit resulting
from excessive government expenditure etc. The fiscal policy
controls such inflationary pressures by reducing government
expenditure or by increasing taxes or by both.
NON-DISCRETIONARY FISCAL POLICY

The non-discretionary fiscal policy denotes a situation where
the tax structure and expenditure pattern are so designed that
taxes and government spending vary automatically in the
appropriate direction with the changes in the national income.
i.e., these taxes and expenditure pattern without any deliberate
action by the government and parliament, would automatically
raise aggregate demand in times of recession and would reduce
aggregate demand in times of boom or inflation and thereby help
in ensuring economic stability. These fiscal measures are therefore
called automatic stabilizers or in-built stabilizers. For example,
 Personal Income Tax: The personal income tax structure is so
designed that revenue from these taxes varies with income.
More the income one gets more the tax he pays and vice versa.
 Corporate Income Tax: Like the personal income tax, the
income tax paid by corporates also directly varies with their
profit. More the profit a firm earns more the tax it pays and
vice versa.
 Transfer Payments: During a recession, the increase in
unemployment makes the government spent more on
unemployment compensation and welfare benefits, whereas
during the inflation government would curtail its programme
of social benefits, which results in lowering the overall
government expenditure and thereby controlling the inflation.
 Corporate Dividend Policy: With economic fluctuations,
corporate profits also rise and fall. However, corporations do
not so quickly increase or decrease their dividends. This allows
the individuals to spend more during recession and less during
inflation and thereby tend to cushion a slowdown and curb
inflation by stabilizing the consumption expenditures.
LIMITATIONS
OF MONETARY POLICY
The major limitations of monetary policy are as follows;
 In a developing economy like India, the scope of using
monetary weapons is very much limited, as almost one-
third of the economy remains under the non-monetized
sector.
 Also the existence of large non-organized money market
poses major limitation to the use of the monetary policy.
The share of indigenous banking was around 90 percent in
the 1930s and is roughly 50 percent now.
 In recent years bringing about a precise and effective
monetary policy have become more difficult as the
liberalization and globalization has opened the gates of
banking and finance to foreign direct investments and
foreign institutional investors.
 The increased freedom to commercial banks and the entry
of foreign and private commercial banks have opened up
multiple innovations in the banking system.
 The increased use of credit cards, ATM, etc. has increased
the uncontrolled money supply in the country. The cheap
money policy of ‘Today credit –tomorrow cash’ offers
several financial products such as personal loans, car
loans, home loans, etc., without considering the
productive use of money credit and has made the
involvement of monetary policy low.
MONETARY POLICY Vs FISCAL POLICY

Basis Monetary Policy Fiscal Policy
Fiscal Policy can be
Monetary Policy can defined as the
be defined as impact of
controlling supply government
1. Meaning
and demand for spending and taxes
money by varying on aggregate
interest rates. demand and the
economy.
It’s about the
It’s about infusing
2. What it is all amount government
money in the
about? spends and the taxes
economy.
involved.
Fiscal Policy
Monetary Policy
3. Measuremen measures the taxes
measures the interest
t and capital
rates.
expenditure.
Appreciation caused Fiscal Policy has no
4. Exchange
by higher interest effect on an
rates
rates. exchange rate.
When monetary
When Fiscal Policy
policy is in place it
is in place, it has its
5. Impact impacts the cost of
impact on the
borrowing/mortgage
budget deficit.
s
The degree of Fiscal Policy has a
6. In relation Monetary Policy is direct relationship
with set by independent with the ministry of
central banks. finance.
7. How much The preference is The preference is
of it is
lower. much higher.
preferred?
NATIONALISATION OF COMMERCIAL BANKS

Despite the provisions, control, and regulations of the Reserve Bank
of India, banks in India except for the State Bank of India (SBI), remain
owned and operated by private
persons. By the 1960s, the Indian
banking industry had become a
valuable tool to facilitate the
development of the Indian economy.
At the same time, it had emerged as
a large employer, and a debate had
ensued about the nationalization of
the banking industry to ensure social
welfare, banking expansion, priority
sector lending, to reduce regional imbalance and to control private
monopoly. Indira Gandhi, the then Prime Minister of India, expressed
the intention of the Government of India in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization.” The meeting received the paper with enthusiasm.
After that, her move was swift and sudden. The Government of
India issued an ordinance ('Banking Companies Acquisition and
Transfer of Undertakings Ordinance, 1969’) and nationalized the 14
largest commercial banks that have minimum Rs.50 crores of deposits
(1.Allahabad Bank 2. Bank of Baroda 3. Bank of India 4. Bank of
Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank 8.
Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11.
Syndicate Bank 12. UCO Bank 13. Union Bank 14. United Bank of India)
with effect from the midnight of 19 July 1969. These banks contained 85
percent of bank deposits in the country. Jayaprakash Narayan, a
national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance,
the Parliament passed the Banking Companies (Acquisition and Transfer
of Undertaking) Bill, and it received the presidential approval on 9
August 1969.
A second dose of nationalization of 6 more commercial banks (1.
Punjab and Sind Bank 2. Vijaya Bank 3.Oriental Bank of Commerce
4.Corporation Bank 5. Andhra Bank 6. New Bank of India) followed in
15th April 1980. The stated reason for the nationalization was to give the
government more control of credit delivery. With the second dose of
nationalization, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government
merged the New Bank of India with Punjab National Bank. It was the
only merger between nationalized banks and resulted in the reduction
of the number of nationalized banks from 20 to 19 (Excluding the SBI)
Until the 1990s, the nationalized banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy.
SELF-ASSESSMENT
Fill in the blanks
1. The ‘price’ of the money more appropriately refers to the
…………. at which it can be had or borrowed.
2. ………….money policy is used when there is a state of
galloping or hyperinflation.
3. The monetary policy based on the …………….. philosophy is
called a neutral monetary policy.
True or False?
4. Open Market Operations can be performed only to cure
inflation.
5. When a cheap money policy is adopted, the government
borrows from the open market.
6. During the boom, RBI raises the bank rate to discourage
commercial banks from taking loans from the central bank.
Answers: (1) Rate of interest (2) Dear (3) laissez-faire (4) False (5)
True (6) True
Questions
1. What are the primary objectives of monetary policy?
2. Distinguish between discretionary and non-discretionary
fiscal policies.
3. What do you mean by variable reserve ratios?
4. How monetary policy differs from the fiscal policy? Explain
5. How is the monetary policy used to establish economic
stabilization during the depression?

1.3. REGULATORY ENVIRONMENT
FOR COMMERCIAL BANKS
Regulatory Environment for Commercial Banks
The Banking Regulation Act, 1949, primarily govern the

banking business and related financial services in India. The
Reserve Bank of India Act, 1934, empowers the RBI to issue rules,
regulations, directions, and guidelines on a wide range of issues
relating to banking and the financial sector. The RBI is the Central
Bank of India and the primary regulatory authority for banking.
The cross-border transactions and related activities are governed
by the Foreign Exchange Management Act, 1999. This provides
for, among other things, the banking and other institutions to be
licensed as authorized dealers in foreign exchange.
REGULATORY AUTHORITIES FOR
BANKING REGULATION
The RBI is the primary banking regulator in India, entrusted
with a wide range of powers to regulate the financial sector.
These powers include prescribing norms for setting up and
licensing banks (including branches of foreign banks in India),
corporate governance, prudential norms and conditions for
structuring products and services.
Besides, the RBI also entrusted with various other functions
such as (i) setting up the monetary policy (ii) regulation of
money, foreign exchange, government securities markets and
financial derivatives (iii) debt and cash management for the
government (iv) oversight of payment and settlement systems
and (v) currency management etc.
OTHER AUTHORITIES
In addition to the RBI, the other regulators of Indian financial
sector are as follows;
 The Securities Exchange Board of India (SEBI), regulates the
securities market in India.
 The Insurance Regulatory and Development Authority of
India (IRDAI), regulates the insurance sector.
 The Insolvency and Bankruptcy Board of India (IBBI),
regulates the process relating to conducting insolvency
proceedings under the Insolvency and Bankruptcy Code (IBC)
 The Central Government, through its Ministry of Finance
(Department of financial services), also monitors the
operations of banks and financial institutions, prescribes
norms for the maintenance and functioning of public sector
banks, examines legislative measures for recovery of bank
debts, and establishes judicial mechanisms for this purpose.
BANK LICENCE
License for Banks: An entity intending to carry out banking
business in India must obtain a license from the RBI. The
minimum paid-up equity required for an applicant is Rs. 5
million. A licensed banking company can also conduct certain
ancillary businesses such as borrowing and lending, trade
finance, guarantee and, indemnity business, financial leasing and
hire purchase and securitization. Foreign banks even holding
licence to carry out banking business in their home country are
still required to obtain licence in India before doing banking
business here.
License for ADs: An entity proposing to deal in foreign
exchange is also required to obtain a separate license as an
Authorized Dealer (AD) from the RBI. This licence is issued
under the Foreign Exchange Management Act (FEMA) ADs are
granted wide-ranging powers to monitor and facilitate foreign
exchange and cross-border transactions. All remittances of
foreign currency from or into India are routed through such
authorized dealers only.
Licensing Process: The applications are screened by the RBI
to assess the eligibility of the applicants against the criteria laid
down in the ‘on-tap guidelines,’ and then the applications will be
referred to a Standing External Advisory Committee (SEAC) to be
set up by RBI. The SEAC will scrutinize the applications and will
submit its recommendations to the Internal Screening Committee
(ISC) of the RBI for consideration. The ISC consisting of the
Governor and the Deputy Governors of RBI, examines all the
applications, deliberates on the rationale of the recommendations
made by SEAC, and then submits its recommendations to the
Committee of the Central Board (CCB) of RBI for the final
decision to issue in-principle approval.
Foreign Applicants: In addition to the general conditions, in
case of foreign entities, the RBI must be satisfied that both:
 The government or law of the country in which the foreign
bank is incorporated does not discriminate against banking
companies registered in India.
 The banking company complies with the provisions of the
Banking Regulation Act that apply to banking companies
incorporated outside India.
Cost and Timing of Licence: Apart from the prudential
norms of maintaining capital and liquidity reserves, there are no
specific ongoing costs associated with a bank license. As far as the
time limit is concerned, there is no particular time-line prescribed
for the RBI to issue a decision. However, the process can take
about 18 months or longer, depending on the discussions and
clarifications required to be made.
The validity of the in-principle approval issued by the RBI
will be 18 months from the date of granting and will then lapse
automatically. Therefore, the applicant bank must obtain the
banking license within 18 months of giving of the said in-
principle approval. An applicant, who has not been found
suitable for the issue of license by the RBI, shall not be eligible to
make an application for a banking license for the next three years
from the date of that decision.
TYPES OF BANKS
The different types of banks allowed to be operated in India
are as follows;
State-owned banks: The largest state-owned bank in India is
the State Bank of India (SBI), which is established under and
governed by a special statute, the State Bank of India Act, 1955.
Over the years, SBI has acquired several other state-owned banks,
which are governed by the State Bank of India (Subsidiary Banks)
Act, 1959. Additionally, between 1969 and 1980, the government
nationalized several banks by legislative mandate.
Universal banks, commercial and retail banks: Universal
banks are full-service banks offering a wide range of financial
products. These can be categorized into public sector banks (state-
owned), private sector banks, and foreign banks. The Banking
Regulation Act governs the licensing and operation of these
banks and the guidelines issued under it.
Investment banks: Investment advisory services and related
services are governed by the Securities Exchange Board of India
(SEBI) such activities are undertaken by entities that are licensed
by and registered with the SEBI. The licensing and regulatory
regime for such entities depends mainly on the activities they
undertake.
SOME OTHER BANKS
There are certain special types of banks as listed below;
 The Co-operative Banks organized on a co-operative basis
and governed by co-operative laws introduced by the
respective state governments in India cater to the financial
needs of farmers and other small borrowers.
 The Regional Rural Banks (RRBs) incorporated under the
Regional Rural Banks Act, 1976,are aimed at supporting and
developing the rural economy.
 The Payment Banks governed by the Banking Regulation Act,
the Payments and Settlement Systems Act, 2007 accept
demand deposits, issuing payment instruments other than
credit cards, payment and remittance services, and distribution
of financial products to small businesses, the unorganized
sector, low-income households, farmers and migrant workers.
 Small Finance Banks offer limited services such as savings
vehicles and credit. They are subject to special operational
guidelines and licensing conditions prescribed by the RBI.
 The Non-Banking Financial Companies (NBFCs), registered
with the RBI, also undertake financial activities but not
regulated as banks. They are engaged in a wide range of
activities such as investment, hire-purchase, leasing, factoring,
and lending, subject to the RBI Act and regulations made
explicitly in this regard.
CORPORATE GOVERNANCE FOR BANKS
The Corporate Governance rules for banks in India are
governed by the Companies Act 2013. Various guidelines have
been issued in it to strengthen corporate governance, for instance,
relating to the fit and proper criteria for the directors of banks,
separation of the post of chairman and managing director, and
remuneration. If a banking company is listed, then the SEBI
(Listing Obligations and Disclosure Requirements) Regulations,
2015 would also apply.
The SEBI Guidelines are generally given from the perspective
of investor protection, with an emphasis on disclosure and
transparency. Compliance laws, rules, and standards cover
matters such as observing proper standards of market conduct,
managing conflicts of interest typically, treating customers fairly,
and ensuring the suitability of customer advice. Each bank must
formulate a list of compliance functions. The bank's compliance
officer must assist the senior management in managing
compliance risks.
CORPORATE GOVERNANCE FOR NBFCs

Due to the significance of NBFCs in the financial system, the
regulatory framework on corporate governance for NBFCs was
revamped in 2014 and strengthened in terms of capital adequacy
and exposure norms. In 2015, the RBI issued revised
guidelines/directions on corporate governance for NBFCs with a
specific deposit base or asset size. Listed NBFCs must also
comply with the Listing Agreement of the Securities and
Exchange Board of India (SEBI) The Companies Act, 1956, govern
other NBFCs.
Some NBFCs having assets of at least Rs.5 billion have been
notified by the Ministry of Finance as a 'financial institution'
under the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interests Act, 2002 (SARFAESI) Such
NBFCs have been granted enforcement powers under the
provisions of the SARFAESI, which include rights to enforce
security interests outside the court process.
ORGANIZATIONAL REQUIREMENTS FOR BANKS
As per the provisions of the Banking Regulation Act, the
banking business in India can be conducted only by a company.
State-owned banks are typically incorporated under specific
statutes. Private Banks are incorporated as companies and
governed by the Companies Act. Their constitutional documents
include (i) Memorandum of Association (MoA), (ii) Articles of
Association (AoA) (iii) Certificate of Incorporation, and (iv)
Certificate of commencement of business.
The foreign banks are not required to incorporate a separate
company in India and can operate through a branch in India. In
some instances, the RBI can need a foreign entity to set up its
banking presence in India through a wholly-owned subsidiary.
This is usually due to the RBI's assessment of the laws of the
applicant's home country, and a general preference for
systemically important banks to have a wholly-owned-subsidiary
in India and not a branch. Foreign banks will be permitted to
either have branches or subsidiaries, but not both. A foreign bank
can operate in India through only one of the following three
channels, namely (i) Branches (ii) A wholly-owned subsidiary and
(iii) A subsidiary with aggregate foreign investment up to a
maximum of 74% in a private bank.
APPOINTMENT OF AUDITORS
The Banking Regulation Act requires all banks to have their
Balance Sheet and Profit and Loss statements audited. The
appointment/re-appointment and removal of auditors are
permissible only with prior approval of the RBI. Persons qualified
to be auditors by law are also eligible to audit banks. Along with
compliance with the Companies Act, auditors must provide
additional information such as;
 Whether the information supplied to the auditor was
satisfactory.
 Whether transactions noticed by the auditor were within the
powers of the bank.
 Whether returns from branches were adequate for the audit.
 Whether the profit and loss account shows an accurate
account of the status of the bank.
 Any other matter the auditor considers necessary to bring to
the notice of the shareholders.
The RBI can, under the Banking Regulation Act, order a
special audit (relating to any class of transactions or period) of a
banking company, if it believes that the audit is necessary for the
interests of the public, the depositors, or the banking company.
After completing its four-year tenure as the auditor in a particular
private/foreign bank, an audit firm, shall not be eligible for an
appointment as the auditor of the same bank for the six years.
Case law suggests that the auditor will be liable if, after signing
the auditors' report for a sound balance sheet; it is found that the
banking company is insolvent.
SUPERVISORY REGIME FOR MANAGEMENT
OF BANKS
As per the provisions of the Banking Regulation Act, the
appointment, re-appointment, or termination or remuneration of
a chairman, a managing or whole-time director, manager, or chief
executive officer and any amendment of it requires prior
approval of the RBI. Some critical requirements for bank boards
as prescribed by the Banking Regulation Act are as follows;
 Directors must have professional or other experience, and at
least 51% of the board must have specialized knowledge or
practical experience in any of the following fields: accountancy,
agriculture, and rural economy, banking, co-operation,
economics, finance, law, small-scale industry, or any other
matter which in the RBI's opinion would be useful to the
bank. Of these directors, at least two must have specialized
knowledge in agriculture and rural economy, co-operation, or
small-scale industry.
 A bank director must not have a substantial interest in or be
connected with (as an employee, manager, or managing
agent) any company or firm carrying on a trade, commerce, or
industry, which is not a small-scale industrial concern.
 Directors of banks are not allowed to own trading,
commercial, or industrial concern.
 A director cannot hold office continuously for a period
exceeding eight years, except for the chairman or a full-time
director.
 A bank cannot have a director who is a director of another
bank unless the RBI appoints the director. A bank cannot have
more than three directors who are directors of companies who
are together entitled to exercise voting rights exceeding 20%
of the total voting rights of the bank's shareholders.
 Each bank must appoint one director as chairman of the
board. A full-time chairman manages the bank's affairs,
subject to the superintendence, control, and direction of the
board.
Under the Banking Regulation Act, the RBI can remove from
office any Chairman, Director, CEO, any other officer or bank
employee, on the ground of (i) Public interest, (ii) To prevent the
bank's affairs being conducted in a manner detrimental to the interests
of the depositors or (iii) To ensure proper management of the bank. In all
instances, the individual must be given a reasonable opportunity
to be heard. The removal order can be appealed to the central
government, and its decision is final. A person removed cannot
be involved in the affairs of another bank for a period of the next
five years.
REMUNERATION POLICY
The RBI also published the Guidelines on Compensation of
Whole Time Directors/Chief Executive Officers/Risk takers and
Control function staff (Guidelines) on January 13, 2012. These
apply to private and foreign banks. The central government
determines compensation packages in state-owned banks. The
Guidelines have adopted the Financial Stability Board Principles
for Sound Compensation. These intend to reduce incentives for
excessive risk-taking that may arise from compensation schemes.
The principles call for effective governance of compensation,
alignment of compensation with prudent risk-taking, effective
supervisory oversight, and stakeholder engagement. They have
been endorsed by the G-20 countries and the Basel Committee on
Banking Supervision. As per the guidelines the compensation set
out for full-time directors CEOs should be adjusted for all types
of risk and should have the following components;
 Fixed pay: reasonable fixed pay, based on factors such as
industry practice.
 Variable pay: proper balance of variable and fixed pay.
Variable pay should not exceed 70% of the fixed pay in a year.
Variable pay can be in cash, stock linked instruments, or both.
 Claw back: in the event of negative contributions of the bank
and a relevant business line in any year, deferred
compensation should be subject to malus/claw back
arrangements.
 Guaranteed bonus: these are not consistent with sound risk
management or pay-for-performance principles, and should
not be part of a compensation plan.
The loans/advances granted to the CEOs or whole-time
directors for the purpose of purchasing (i) a car (ii) a personal
computer (iii) the furniture (iv) constructing/ acquiring a house
for personal use (v) festival advance and (vi) credit limit under
credit card facility will not be considered as "loans and advances":
Commercial banks can grant them as part of the compensation
and remuneration policy of the bank, without seeking prior
approval of RBI. The guidelines on base rate will not be
applicable on the interest charged on such loans. However, the
interest rate charged on such loans cannot be lower than the rate
charged on loans to the bank's employees.
The Guidelines provide that banks should formulate and
adopt a comprehensive compensation policy covering all their
employees. This policy must cover aspects such as fixed pay,
benefits, bonuses, guaranteed pay, severance packages, stocks,
pension plans, and gratuities. The Guidelines also call for the
board to set up a remuneration committee, to oversee the
framing, review, and implementation of the bank's compensation
policy. The staff members engaged in financial and risk control
should be compensated independently of the business areas they
oversee, and in proportion to their crucial role in the bank.
Foreign banks operating in India must submit a declaration to
RBI annually from their head office that their compensation
structure in India complies with Financial Stability Board
principles and standards.
The board of directors of a bank, in consultation with the
Remuneration Committee, is required to formulate and adopt a
comprehensive compensation policy for the non-executive
directors, under the provisions of Companies Act, 2013. The
banks are required to obtain approval of the RBI for the
remuneration of a part-time non-executive chairman. The board
can, at its discretion, provide for payment of compensation in the
form of profit-related commission to the non-executive directors,
subject to the bank making profits and such compensation not
exceeding Rs. 1 million per annum for each director. In addition
to the compensation, the non-executive directors will also be
entitled to sitting fees and reimbursement of expenses.
RISK MANAGEMENT RULES FOR BANKS
As per the guidelines issued by the RBI, the primary
responsibility of understanding risks in bank operations and
ensuring such risks are appropriately managed is vested with the
board. The board should set risk limits by assessing the risk-
bearing capacity of the bank. At the organizational level, the
overall risk management should be assigned to an independent
risk management committee or the executive committee of senior
executives reporting directly to the board.
The functions of the risk management committee are to
identify, monitor, and measure the risk profile of the bank. It
should also (i) develop policies and procedures (ii) verify the
models used for pricing complex products (iii) review the risk
models as development takes place in the markets and (iv)
identify new risks.
The RBI has also issued guidance notes on the management of
credit risk and market risk. As part of effective risk management,
banks are required to separate the credit risk management
function from the credit sanction process. As a step to bring
uniformity in risk management across banks in 2017, the RBI
advised banks to appoint a chief risk officer (CRO) and prescribed
specific roles and responsibilities of the CRO. For example,
 Banks should have a board-approved policy clearly defining
the role and responsibilities of the CRO.
 He must be a senior official in the banks' hierarchy and must
have the necessary and adequate professional qualification/
experience in risk management.
 He must have direct reporting lines to the MD and CEO and
the Risk Management Committee of the Board.
 He must not have any reporting relationship with the
business verticals of the bank and is not be given any business
targets.
 If the CRO is associated with the credit sanction process, it
must be enunciated whether the CRO's role would be that of
an adviser or a decision-maker. The policy is to include the
necessary safeguards to ensure the independence of the CRO.
 The CRO must not be given the responsibility of chief
executive officer, chief operating officer, chief financial officer,
chief of the internal audit function or any other function.
LIQUIDITY AND CAPITAL ADEQUACY
NORMS FOR BANKS
The Basel III capital regulations are being implemented in
India with effect from 1 April 2013. Banks must comply with the
regulatory limits as prescribed under Basel III capital regulations.
The phasing out of non-Basel III compliant regulatory capital
instruments has begun from 1 January 2013. The Basel III capital
regulations will be fully implemented by 31 March 2019.
The RBI also continues to monitor and review the Indian
framework of Basel III capital regulations and releases periodical
circulars/notifications aligning the Indian framework with Basel
committee rules and reports wherever there are discrepancies.
For example, the RBI has issued notifications modifying the
treatment of certain balance sheet items under the Indian
regulations on Basel III to align the same with what has been
prescribed by the Basel Committee on Banking Supervision.
While the RBI has previously released guidelines on maintenance
and computation of liquidity ratios, it has recently issued
guidelines to banks towards the upkeep of 100% Net Stable
Funding Ratio (NSFR) on an ongoing basis, as recommended by
the Basel Committee.
LIQUIDITY REQUIREMENTS
The banks in India are required to maintain the following
liquidity ratios;
The cash reserve ratio (CRR) is the average daily balance that
a bank must maintain with RBI, as a share of its net demand and
time liabilities deposits (NDTL) The RBI has issued guidelines to
determine the calculation of NDTL. Currently, banks must
maintain a CRR of 4%.
The statutory liquidity ratio (SLR) is the share of NDTL that
banks must maintain in safe and liquid assets, such as
unencumbered government securities, cash, and gold. Currently,
banks must maintain an SLR of 19.5%. The banks must keep
NSFR (ratio of available stable funding to require stable funding)
of 100%, from a date to be notified by the RBI.
LEVERAGE RATIO FOR BANKS
Currently, the Indian banking system is operating at a
leverage ratio of more than 4.5%, while the minimum leverage
ratio recommended under Basel III is only 3%.The Basel
Committee intends to migrate to a pillar 1 (minimum capital
requirements) approach in 2018. In the meantime, the RBI will
monitor individual banks against an indicative leverage ratio of
more than 4.5%.As the leverage ratio is an essential
supplementary measure to the risk-based capital requirements,
the disclosure guidelines apply to the leverage ratio also.
Therefore banks must disclose their Tier 1 capital, exposure
measure, and leverage ratio quarterly, irrespective of whether
their financial statements are audited or not.
CAPITAL ADEQUACY RATIO FOR BANKS
The capital adequacy ratio is the ratio (CAR) of capital funds
(Tier I and II capital) to risk -weighted assets. The RBI has
prescribed the banks to maintain a minimum CAR of 9% while
the wholly-owned subsidiaries of foreign banks are required to
maintain a minimum CAR of 10%, continuously for the first three
years from the date of commencing their operations. This ratio is
1% higher than what is required under the phased implementation
of Basel III.
CONSOLIDATED SUPERVISION OF A BANK
The term consolidated supervision consists of an overall
evaluation of the strength of a group with a large bank. The
objective is to assess the potential impact of other group
companies on the bank. All risks run by the banking group are
taken into account, independent of where they are booked.
A significant element is financial statements prepared on a
consolidated basis, combining the assets and liabilities and off-
balance sheet items of banks and their related entities, as if they
were a single entity. Supervisors can then measure the financial
risks faced by bank groups and apply supervisory standards on a
group basis, such as extensive exposure and connected exposure
limits and minimum capital adequacy ratios. As per the
guidelines issued by the RBI for consolidated supervision, the
supervisory framework should consist of the,
Consolidated financial statements: These are public documents
prepared and published annually, in addition to the annual
reports of financial institutions and their subsidiaries, and
submitted to RBI.
Consolidated prudential returns: The consolidated prudential
information is collected at the group level. It aims to capture data,
in the prescribed format of (i) Consolidated balance sheet (ii)
Consolidated profit and loss account (iii) Financial/risk profile of
the group and (iv) Operations of subsidiaries and related entities.
Group prudential norms: The RBI has also prescribed group
prudential norms for capital adequacy, significant exposures and
liquidity mismatches for financial institutions, taking into account
the assets and liabilities of their subsidiaries and associates, in
addition to prudential norms that may apply on a solo basis.
INTERNATIONAL SUPERVISORY CO-OPERATION

The RBI regularly enters into Memorandum of Understanding
(MoU) and agreements for co-operation with the Central Banks of
other jurisdictions. For instance, the RBI has entered into an MoU
on supervisory cooperation and exchange of supervisory
information with the Central Banks of Bangladesh, Bhutan,
Cambodia, Guyana, Israel, Nepal, Nigeria, Thailand, Zambia, etc.
Also, it has entered into MoU with the European Central Bank for
co-operation in the area of central banking and with the Central
Bank of the United Arab Emirates (UAE) on co-operation on
currency swap agreements.
FOREIGN DIRECT INVESTMENT IN BANKS
According to the provisions given under the Foreign Direct
Investment Policy (August 2017) by the government, foreign
investment in domestic private banks from all sources is
permitted up to 49% without approval, and up to 74% with
government approval. At all times, at least 26% of the paid-up
capital must be held by residents, except in the case of a wholly-
owned subsidiary of a foreign bank.
In the case of Non-Resident Indians (NRIs), individual
holdings are restricted to 5% of the total paid-up capital both on
repatriation, and non-repatriation basis, and the aggregate limit
cannot exceed 10% of the total paid-up capital both on
repatriation and non-repatriation basis. However, NRI holdings
can be allowed up to 24% of the total paid up capital both on
repatriation and non-repatriation basis subject to a special
resolution to this effect passed by the banking company's general
body.
Foreign investment in public sector banks, including the State
Bank of India (subject to Banking Companies (Acquisition &
Transfer of Undertakings) Acts, 1970 and 1980) is 20% with
government approval.100% foreign investment is also permitted
in NBFC's under the automatic route.
LIQUIDATION OF BANKS
The Central Government can direct the RBI wind up a bank if
it believes that the bank's affairs are detrimental to the interests of
its depositors. The RBI can initiate the wind-up process if the;
 bank fails to comply with its minimum capital and reserve
requirements or other provisions of the Banking Regulation
Act, banks' license is cancelled,
 bank is prohibited from accepting fresh deposits, under
certain provisions of the Banking Regulation Act or RBI Act,
or
 RBI believes that the bank is unable to pay its debts, or is
continuing to the detriment of its depositors, or
 In the opinion of the RBI, a compromise or arrangement
sanctioned by a court in respect of the banking company
cannot be worked satisfactorily with or without
modifications, or
 The bank itself can apply for voluntary winding up (solvent)
if the RBI certifies that it can pay its debts in full.
The High Court has the authority to order the winding up or
liquidation of a bank. Its jurisdiction is based on where the
registered office of the bank is located (for a bank incorporated in
India) and where the principal place of business is located (for a
bank incorporated outside India) Once the HC passes such a
winding-up order, a liquidator attached to the High Court is
appointed to conduct the liquidation. The Insolvency and Bankruptcy
Code (IBC) was passed by the Indian parliament in 2016 to deal
with cases of corporate entities, other than financial service
providers. The government is in the process of drafting and
introducing a separate bankruptcy law to deal with insolvency in
financial sector companies, which includes banks and NBFCs.
SELF-ASSESSMENT
Fill in the blanks
1. The cross-border transactions and related activities are
governed by the ………Act, 1999.
2. The ………… regulates the securities market in India.
3. The …..... are granted wide-ranging powers to monitor and
facilitate foreign exchange and cross-border transactions
under FEMA.
True or False?
4. The validity of the in-principle approval issued by the RBI for
granting bank license will be 36 months from the date of
granting.
5. The Corporate Governance rules for banks are governed by
the Companies Act 2013.
6. An audit firm, after completing its four-year tenure is eligible
for re-appointment as the auditor of the same bank after three
years.
Answers: (1) Foreign Exchange Management (2) Securities
Exchange Board of India (3) Authorized Dealers (4)
False (5) True (6) False
Questions
1. Write a short note about the procedure for applying for a
bank license?
2. Discuss the remuneration policy of commercial banks.
3. Discuss how and under what conditions RBI can initiate the
wind-up process of a bank.
4. Describe the various features of the regulatory environment
that exists in India for commercial banks.

1.4. THE RBI ACT, 1934
(AS AMENDED BY THE FINANCE ACT, 2018)
The RBI Act, 1934
The Reserve Bank of India (RBI) is India's central bank, which

controls the issuance and supply of the Indian rupee. It
commenced its operations on 1 April 1935 following the Reserve
Bank of India Act, 1934. The original share capital of Rs. 5 crores
was divided into shares of 100 each fully paid shares, which were
entirely owned by private shareholders. Following India's
independence on 15 August 1947, the RBI was nationalized on 1
January 1949. The essential provisions of the RBI Act, 1934
Chapter I, II, and III are discussed in this unit.
CHAPTER I: PRELIMINARY (SECTIONS 1- 2)

The preamble of the RBI Act 1934 states that the Reserve Bank
of India was constituted, “to regulate the issue of banknotes and
to keep the reserves with a view to secure monetary stability in
India and generally to operate the currency and credit system of
the country to its advantage.” Until the Monetary Policy
Committee was established in 2016, it also controlled monetary
policy in India. The primary objective of the monetary policy is to
maintain price stability while keeping in mind the objective of
growth. Chapter I deal with Sections 1 & 2 as described below;
Section 1: This Act is called the Reserve Bank of India Act,
1934, which extends to the whole of India.
Section 2: The various definitions given under Section 2 are as
follows;
Bank Reserve Bank of India constituted under

RBI Act, 1934
Bank of Corporate body established under the
International law of Switzerland on 20th January,1930
Settlements (BIS) signed at the Hague
Central Board Central 'Board of Directors' of the RBI
Consumer Price Consumer Price Index (CPI) compiled
Index and published by GoI
Exim Bank Export-Import Bank of India established
under EXIM Act 1981
Foreign Currency As per the meaning assigned in the
Foreign Exchange Foreign Exchange
Regulation Act (FERA), 1973
Industrial Finance Corporation established under IFCI Act,
Corporation 1948
Inflation Year wise change in monthly CPI
expressed in terms of%
National Bank Bank established under NABARD Act,
1981
Policy Rate Rate for repo transactions u/s. 17; sub-
Section 12AB
Rupee Coin Legal tender in India as per Indian
Coinage Act, 1906
Scheduled Bank Bank included in the second schedule
Small Industries Bank established u/s. 3 of SIDBI Act, 1989
Bank
Sponsor Bank Bank as defined in Regional Rural Banks
Act, 1976
State Bank Bank constituted under the State Bank of
India Act, 1955
CHAPTER II: INCORPORATION,

CAPITAL, MANAGEMENT AND BUSINESS
The II Chapter deals with Sections 3 to 19 as described below;
Incorporation: As per Section 3 of the Act, the RBI was
constituted for, (i) taking over the management of the currency
from the Central Government and (ii) carrying on the business of
banking under the provisions of the Act.
Capital: As per Section 4 of the Act, the capital of the Bank is
five crores of rupees. The Union Cabinet has recently approved
payment of the face value of the subscribed share capital of Rs.
1,450 crores in National Housing Bank (out of Rs. 2000 Crores
authorized capital of NHB) to Reserve Bank of India
consequent to amendments made to the NHB Act, 1987 in 2018.
Section 5: Increase and reduction of share capital (Repealed)
Branch Offices: As per Section 6 of the Act, the bank has
established offices in Bombay, Calcutta, Delhi, and Madras.
Besides, it has set up regional offices in 31 locations in India with
the previous sanction of the Central Government.
Management: As per Section 7 of the Act, the Central
Government may, from time to time, give such directions to the
Bank as it may, after consultation with the Governor of the Bank,
consider necessary in the public interest. The general
superintendence and direction of the affairs and business of the
Bank is entrusted to a Central Board of Directors which exercises
all powers and do all acts and things which may be applied by
the bank. The Governor and in his absence the Deputy Governor
nominated by him in his behalf shall also have powers of general
superintendence and direction of the affairs and the business of
the Bank.
Central Board: As per Section 8 of the Act, the Central Board
consists of the Governor and Deputy Governors (not more than
four) to be appointed by the Central Government four directors to
be nominated by the Central Government, one from each of the
four Local Boards as constituted by Section 9 ten directors to be
appointed by the Central Government and one Government
official to be nominated by the Central Government- The
Governor and a Deputy Governor shall hold office for such term
not exceeding five years and shall be eligible for re-appointment
A director nominated shall hold office for a period of four years
shall be eligible for reappointment. Any such director shall not be
appointed for more than two terms.
Local Boards: As per Section 9 of the Act, a Local Board shall
be constituted for each of the four areas specified in the First
Schedule and shall consist of five members to be appointed by the
Central Government to represent, territorial and economic
interests and the interests of cooperative and indigenous banks.
The members of the Local Board shall elect from amongst
themselves one person to be the chairman of the Board- Every
member of a Local Board shall hold office for a term of four years
and shall be eligible for reappointment for no more than two
terms A Local Board shall advise the Central Board on such
matters as may generally or specifically, be referred to it and shall
perform such duties as the Central Board may delegate to it.
Disqualifications: As per Section 10 of the Act, any person
who- is a salaried Government official; person adjudicated an
insolvent; suspended payment or has compounded with his
creditors; found lunatic; unsound mind; officer or employee of
any bank; Director of banking company or a co-operative bank
etc., are disqualified from being a Director or a Local Board
Member.
Removal of a Director Member: The Central Government is
empowered to remove from office the Governor Deputy
Governor any Director or a Member. As per Section 11 of the Act,
the Central Government shall remove from office any Director,
and the Central Board shall remove from office any member of a
Local Board if such Director or member becomes subject to any of
the disqualifications specified Section 10(1) and (2) mentioned
above. A nominated Director ceases to hold office if, without
leave from the Central Board, he absents himself from three
consecutive meetings of the Board convened u/s. 13(1). Such
removed Director Member is not eligible for re-appointment until
the expiry of the term for which his appointment was made. Also,
the nomination of an MP MLA as Director or Member of a Local
Board is void, unless within two months of the date of his
nomination, he ceases to be such member.
Casual vacancies and absences: As per Section 12 of the Act,
in the event of casual vacancies/ absences of the Governor or a
Deputy Governor the GoI may, after considering the Central
Board recommendation, appoint any person to officiate for him,
who would be acting as an officer of the Bank. Also, where any
casual vacancy occurs in the office of a Director, it may be filled
by the Central Government. In case of any casual vacancy in the
office of a member of a Local Board, the Central Board may
nominate any person recommended by the other members of the
Local Board. A person nominated under Section 12 to fill a casual
vacancy shall hold office for the unexpired portion of the term of
his predecessor.
Meetings of the Central Board: As per Section 13 of the Act,
the meetings of the Central Board shall be convened by the
Governor at least six times in a year and at least once in each
quarter. Any 4 Directors may require the Governor any time to
hold a Central Board meeting. The Governor or the Deputy
Governor authorized by him shall preside at meetings of the
Central Board and, in the event of an equality of votes, shall have
a second or casting a vote.
Section 14: General meetings (Repealed)
Section 15: First constitution of the Central Board (Repealed)
Section 16: First constitution of Local Board (Repealed)
The Business allowed: As per Section 17 of the Act, the Bank
is authorized to carry on and transact the several kinds of
business such as;
 To accept money deposits of the Central Government, the
State Government, local authorities, banks, and any other
persons.
 To accept money deposits repayable with interest, from banks
or any other person under the Standing Deposit Facility
Scheme, as approved by the Central Board, from time to time.
 To purchase, sale and rediscount of bills of exchange and
promissory notes repayable on demand or before the expiry of
90 or 180 days as the case may be, bearing two or more good
signatures of a scheduled bank or a State co-operative bank
or any financial institution, etc. as listed below;
promissory notes drawn and payable in India and arising out
of bona fide commercial or trade transaction; 180 days
maturity for export of goods from India and 90 days maturity
for other cases excluding the days of grace.
promissory notes, drawn and payable in India, drawn or
issued to finance agricultural operations or marketing of
crops, mature within 15 months from the date of such
purchase or rediscount excluding the days of grace.
promissory notes (for which the principal and interest is fully
guaranteed by the State Government), drawn and payable in
India, drawn or issued for the purpose of financing the
production or marketing activities of cottage and small scale
industries approved by the Bank and maturing within 12
months from the date of purchase or rediscounting.
promissory notes drawn and payable in India and bearing the
signature of a scheduled bank and drawn or issued for the
purpose of holding or trading in securities of the Central
Government or a State Government and maturing within 90
days from the date of such purchase or rediscount.
 To make loans and advances to any Scheduled Bank (SB),
State Co-operative Bank (SCB) or State Financial
Corporation (SFC) against securities (90 days maturity);
against promissory notes (180 days maturity) as the case may
be, bearing two or more good signatures of a scheduled bank
or a State co-operative bank or any financial institution etc.,
as listed below;
 To make loans and advances to any SB; SCB or SFC against
promissory notes or such bank, repayable within 180 days for
promoting export business transactions.
 To make loans and advances to any SB or SCB with 180 days
maturity, against promissory notes and written declaration of
the bank stating that the finance was made for bonafide
commercial or trade transactions; agricultural operations;
marketing of crops, etc.
 To make loans and advances to local authorities, scheduled
banks, state co-operative banks and state financial
corporations, against the security of (a) stocks, funds and
securities (b) gold or silver or documents of title to the same;
(c) bills of exchange and promissory notes etc., repayable
within 90 days. (d) Against promissory notes, repayable in
180 days.
 To make loans and advances to any State Financial Corporation
not exceeding twice, it’s paid-up share capital, against the
Central/State Government securities or the bonds or
debentures issued by the SFCs, repayable within 18 months.
 To make annual contributions to the National Rural Credit
(LT Operations) Fund and the National Rural Credit
(Stabilization) Fund established u/s. 42 & 43 of the NABARD
Act, 1981.
 To make loans and advances to the Industrial Finance
Corporation of India, repayable within 90 days from the date
of such loan or advance, against securities of the Central State
Governments; against its bonds and debentures guaranteed
by the GoI and repayable within 18 months, etc.
 To make loans and advances to any financial institution
notified by the Central Government (a) against securities of
Central or State Government, repayable in 90 days (b) against
the government-guaranteed bonds and debentures of such
institutions, up to 60 of their paid-up share capital, refundable
within 18 months.
 To make loans and advances to the Unit Trust of India (a)
against the security of stocks, funds, and securities (other than
immovable property), repayable within 90 days (b) against the
bonds guaranteed by GoI, repayable in 18 months, etc.
 To make loans and advances to the Deposit Insurance
Corporation, National Housing Bank, etc., as per the terms
and manner as decided by the central board.
 To make loans and advances; to purchase bonds and
debentures of the Exim Bank or the Reconstruction Bank or
the Small Industries Bank out of the National Industrial
Credit (LT Operations) Fund established u/s. 46C.
 To make loans and advances; to purchase bonds and
debentures of the National Housing Bank out of the National
Housing Credit (LT Operations) Fund established u/s. 46D.
 To make loans and advances to the Small Industries Bank-
Exim Bank-Reconstruction Bank, etc., (a) repayable within 90
days, against the security of stocks, funds and securities (other
than immovable property) etc., (b) against the bills of
exchange or promissory notes, arising out of bona fide
commercial or trade transactions maturing within 5 years
from the date of such loan or advance.
 To make loans and advances to the scheduled banks, Exim
Bank, Reconstruction Bank, Small Industries Bank, Industrial
Finance Corporation etc., repayable on demand or otherwise,
for the purpose of purchasing foreign exchange from the RBI
for the purpose of financing the import of capital goods or for
such other purposes as approved by the Central Government.
 To make advances to the Central and State Governments
through DD, Telegraphic Transfer, etc., this is repayable not
later than three months from the date of the making.
 To purchase and sale of the fully guaranteed securities of the
Central or a State Government or a Local authority of any
maturity as specified in by the GoI on the recommendation of
the Central Board.
 To purchase and sale of shares in, or the capital of the
NABARD; DIC; SBI; any other bank or financial institution as
notified by the Central Government in this behalf.
 To act as an agent for the Central Government and to issue
and manage the bonds and debentures on its behalf (a) in
guaranteeing the due performance by any small-scale
industrial concern approved by the Central Government (b) in
administering any scheme for subsidizing the rate of interest
or other charges in relation to any loans or advances made by
BFIs for the purpose of financing or facilitating any export
from India and to act as an agent of payments on behalf of the
Central Government.
 To purchase and sale of gold or silver coins; gold and silver
bullion and foreign exchange and the opening of a gold
account with the principal currency authority of any foreign
country or the Bank for International Settlements, etc.
 To purchase and sale of securities (maturing within ten years),
which are issued and guaranteed by the Government of any
country outside India or by any institution or body corporate
established outside India and expressed to be payable in a
foreign currency.
 To deal in repo or reverse repo. "repo" is an instrument for
borrowing funds by selling securities of the Governments
(Central/State/Local authorities) with an agreement to
repurchase the said securities on a mutually agreed future
date at an agreed price which includes interest for the funds
borrowed; (b) "reverse repo" means an instrument for lending
funds by purchasing the securities with an agreement to resell
the said securities on a mutually agreed future date at an
agreed price which includes interest for the funds lent.
 To open an account with any bank incorporated in but
functioning outside India; to act as an agent of any bank
incorporated outside India, or the principal currency
authority of any country etc., for the clearing and settlement
of any amounts due from or due to any person or authority on
account of the external trade of India with any other country
or group of countries.
 To borrow money (not exceeding its capital value) from any
scheduled bank in India or the principal currency authority of
any country outside India, for a period not exceeding one
month for the business of the Bank, and the giving of security
for money so borrowed.
 To issue the banknotes subject to the provisions of this Act -
the exercise of powers and functions and the performance of
duties entrusted to the Bank under this Act.
 To provide facilities for training in banking and the
promotion of research.
Power of direct discount: As per Section 18 of the Act, in
special occasions, for regulating credit in the interests of Indian
trade, commerce, industry and agricultural, the Bank may
purchase, sell or discount any bill of exchange or promissory note
of a State Co-operative Bank, or a Co-operative society registered
under it or any other person, repayable within 90 days. As per
Section 18A, such loans and advances shall not be questioned for
non-compliance with the provisions given under Section 17.
Business not allowed: As per Section 19 of the Act, the Bank
is not permitted to engage in any trade (commercial or industrial);
purchase the shares of any company (banking or otherwise);
grant loans upon the security of any such shares; advance money
on mortgage of or security of, immovable property/ documents
of title relating thereto; become the owner of immovable property
(except for own business premises and residences for employees);
make loans or advances; draw or accept bills payable otherwise
than on demand nor it is allowed to pay interest on deposits or
current A/c.
CHAPTER III: CENTRAL BANKING FUNCTIONS
(SECTION 20 - 61)
The III Chapter deals with Sections 20 to 61 as described
below;
Banker of the Central Government: As per Section 20 of the
Act, the bank accepts money deposits; makes payments, and
carries out other banking operations, including the management
of the public debt on behalf of the Central Government. Section 21
deals with various agreements made between the RBI and certain
States in this regard.
Right to issue banknotes: As per Section 22 of the Act, the Bank
has the sole right to issue banknotes in India, and Section 23
empowers the Issue Department of the Bank to issue the same.
Section 24specifies the denominations allowed for this purpose.
The Central Government may, on the recommendation of the
Central Board, direct the non-issue or the discontinuance of any
note.
Form of banknotes: Section 25of the Act, deals with the
design, forms the material of banknotes as approved by the GoI
after considering the recommendations of the Central Board.
Legal tender: As per Section 26 of the Act, every banknotes
shall be legal tender at any place in India in payment, or on
account for the amount expressed therein, and shall be
guaranteed by the Central Government. Section 26A lists out
certain banknotes to cease to be legal tender. Section 27 states that
the Bank shall not re-issue banknotes that are torn, defaced or
excessively spoiled.
Recovery of notes: As per Section 28 of the Act, no person is
entitled to recover from the Central Government or the Bank, the
value of any lost/ stolen/ mutilated/ imperfect currency note of
the GoI or banknote, unless there is found any prescribed
circumstances.
Issue of special banknotes and Re.1 notes: As per Section
28A of the Act, the GoI may, to control the circulation, issue Re.1
notes or Re.1 coin referred to as “special one rupee notes” which
is not to be considered a legal tender in India.
Bank Exempted from stamp duty: As per Section 29, the
Bank shall not be liable to the payment of any stamp duty under
the Indian Stamp Act, 1899, in respect of banknotes issued by it.
Superseding Central Board: As per Section 30 of the Act, the
GoI may by notification in the Gazette of India, declares the
Central Board to be replaced, if in its opinion, the Bank fails to
carry out any of the obligations imposed on it by or under this
Act.
Issue of demand bills and notes: As per Section 31 of the Act,
no person in India, other than the Bank shall draw, accept, make
or issue any bill of exchange, hundi, promissory note or
engagement for the payment of money payable to the bearer on
demand. Section 32: dealing with penalty is repealed.
Assets of the Issue Department: As per Section 33 of the Act,
the assets of the Issue Department shall consist of gold coin, gold
bullion, foreign securities, rupee coin and rupee securities to such
aggregate amount as is not less than the total of the liabilities of
the Issue Department.
Liabilities of Issue Department: As per Section 34 of the Act,
the liabilities of the Issue Department shall be an amount equal to
the total of the amount of the currency notes of the GoI and
banknotes for the time being in circulation.
Section 35: Initial assets and liabilities (Repealed);
Section 36: Method of dealing with fluctuations in rupee coin
assets (Repealed)
Section 37: deals with the suspension of assets requirements
as to foreign securities.
Obligations in respect of Rupee Coin: As per Section 38 of
the Act, the GoI shall undertake not to put into circulation any
rupees, except through the Bank and the Bank shall undertake not
to dispose of rupee coin other-wise than for circulation.
Obligation to supply currency: As per Section 39 of the Act,
the Bank shall, in exchange for currency notes or banknotes of 2
rupees or upwards, supply currency notes or banknotes of lower
value or other coins which are legal tender under the Indian
Coinage Act, 1906 in such quantities as may, in the opinion of the
Bank, be required for circulation. If the Central Government at
any time fails to supply such coins, the Bank shall be released
from its obligations to supply them to the public.
Transactions in Foreign exchange transactions: As per
Section 40 of the Act, the Bank shall sell to or buy from any
authorized person, foreign exchange at such rates and conditions
as determined by the GoI from time to time. No person is entitled
to demand to buy or sell foreign exchange of a value less than
two lakhs of rupees.
Obligations to buy sterling (Section 41), to provide remittance
between India and Burma (Section 41A) are repealed.
Cash reserves of scheduled banks: As per Section 42 of the
Act, every bank included in the II Schedule shall maintain with
the Bank an average daily balance the amount of which shall not
be less than 40% of the total demand and time liabilities of the
bank.
Publication of consolidated statement: As per Section 43 of
the Act, the Bank shall cause to be published each fortnight, a
consolidated statement showing the aggregate liabilities and
assets of all the scheduled banks together, based on the returns
and information received under this Act.
Protection of action taken in good faith: As per Section 43A

of the Act, no suit or other legal proceedings shall lie against the
Bank or any of its officers for anything which is in good faith
done or intended to be done in pursuance of Section 42, Section
43 or the provisions of Chapter IIIA.
Section 44: Power to require returns from co-op banks
(Repealed)
Appointment of agents: As per Section 45 of the Act, the
Bank may, in public interest, the convenience of banking and
banking development, appoint the National Bank State Bank, etc.
as its agent for such purposes (to receive -pay) as the Bank may
specify.
Collection & Furnishing of Credit Information: Section 45A
to Section 45G (Chapter IIIA) contains various provisions related
to the collection and furnishing of credit information by the Bank.
Provisions Relating to NBFCs: Section 45H to Section 45Q
(Chapter IIIB) contains various regulations related to financial
institutions non-banking institutions receiving deposits.
Un-incorporated bodies: Section 45R to Section 45T (Chapter
IIIC) contains the prohibitions of acceptance of deposits by un-
incorporated institutions.
Transactions in derivatives, money market instruments etc:
Section 45U to Section 45Y (Chapter IIID) contains regulation of
transactions in derivatives, money market instruments, securities,
etc.
Provisions for overriding other provisions: Section 45Z to
Section 45ZO (Chapter IIIF) contains various provisions such as
monetary policy, the constitution of the monetary policy
committee, inflation target, etc. to override other provisions of
Act.
General Provisions: Section 46 to Section 58A (Chapter IV)the
general provisions such as contribution by Central Government
to the Reserve Fund, contribution to National Rural Credit (Long
Term Operations Stabilization) Fund, National Industrial Credit
Fund, National Housing Credit Fund, etc.
Penalties: Section 58B to Section 58F (Chapter V) deals with
provisions for the cognizance of offenses and fines and penalties
for such offenses.
Section 59: Amendment of Act 3 of 1906 (Repealed)
Section 60: Repeals (Repealed) and,
Section 61: Amendment of Section II, Act VII of 1913
(Repealed)
SELF-ASSESSMENT
Fill in the blanks
1. The original share capital of RBI was Rs. ……… and the
shares were entirely owned by private shareholders.
2. The primary objective of the monetary policy is to maintain
……… while keeping in mind the objective of growth.
3. "Repo" is an instrument for ……….. funds and "reverse repo"
is an instrument for ………… funds.
True or False?
4. The RBI Governor and Deputy Governor shall hold office for
a term not exceeding five years and shall be eligible for re-
appointment.
5. Section 27 of the RBI Act 1934 states that the Bank shall re-
issue banknotes that are torn, defaced, or excessively spoiled.
Answers: (1) 5 Crores (2) Price Stability (3) Borrowing, Lending
(4) True (5) False
Questions
1. What do you know about the management of RBI? Describe
the formation and functions of the central board and local
boards?
2. List out the businesses allowed to be performed by the RBI.
3. What are the various functions performed by the RBI as the
Central Bank?

1.5. THE BANKING REGULATION
ACT, 1949
The Banking Regulation Act, 1949
The Banking Regulation Act 1949, which came into effect on

16thMarch 1949,was enacted to consolidate and to amend the law
relating to banking and to provide the Reserve Bank of India with
powers to regulate the banking system in the country. The Act
extends to the whole of India. The Act does not apply to the
Primary Agriculture Co-operative Societies (PACS) and Co-
operative Land Mortgage Banks, known as SARDBs PARDBs. For
other co-operative banks such as SCBs DCBs, it applies to the
extent specified in Part V of the Act.
Approved Securities: Section 5a of the Act defines the term
approved securities as the ‘securities in which a trustee may
invest trust money under section 20 of Indian Trusts Act, 1982.’
Banking: Section 5b of the Act defines the term banking as
‘accepting, for lending or investment, of deposits of money from
the public, repayable on demand or otherwise and withdrawable
by cheque, order or otherwise.”
Secured Advances: Section 5n of the Act defines the term
secured advances as ‘advances where the market value of the
security at any time is not less than the advance outstanding.’
AUTHORIZED BUSINESSES OF A
BANKING COMPANY
Authorized Businesses: Section 6 deals with the authorized
business of a banking company. It is not permitted to engage
itself in any form of business other than those mentioned in
Section 6(1) (a) to (o) of the Act. Some of the authorized
businesses are as follows;
(a) (i) Accepting deposits, (ii) Lending money, (iii) Dealing in
bills, (iv) Collecting instruments, (v) Issuing letter of credit,
traveler cheque circular notes, (vi) Dealing in bullion, (vii) Buying
selling foreign exchange, (viii) Providing self-custody and safe
deposit vaults, (ix) Underwriting and dealing in shares securities
investments. (b) Acting as agent (c) Issuing guarantee and
indemnity (d) Undertaking and executing trusts (e) Acting as
executor, trustee of estates, etc. Apart from this, a bank can do
any other form of business which the Central Government may
by notification in the Official Gazette specify.
The use of word bank: As per Section 7 of the Act, no
company other than a banking company is permitted to use the
words like Bank Banker /Banking as a part of its name.
Trading in goods: As per Section 8 of the Act, no banking
company can directly or indirectly buy/sell/barter goods except
in connection with the realization of security held by it.
Holding of immovable property: As per Section 9 of the Act,
a bank cannot hold immovable property (except for its use) for
any period exceeding seven years. Such properties owned as a
non-banking asset must be disposed-off within seven years from
the date of acquisition. However, the RBI may, in any particular
case, extend this not exceeding five years.
CHAIRMAN OF THE BANK
Appointment of Chairman: The Chairman can be appointed
on a whole-time or a part-time basis. Where the Chairman is
appointed on a whole-time basis, he will manage the whole of the
affairs of the banking company. However, where he is appointed
on a part-time basis, a Managing Director may also be appointed
in addition to managing the bank. Appointment of part-time
Chairman can be made so only with prior approval of the RBI as
per the terms and conditions specified in such approval.
Restriction on Employment: As per Section 10 of the Act, no
bank can employ a person who is/has been adjudged insolvent or
has suspended payment to his creditors or has compounded with
his creditors or who is or has been convicted of an offense
involving moral turpitude.
Qualification of Chairman MD: As per Section 10 of the Act,
a person appointed as a whole-time Chairman or a Managing
Director should not be the director of any other company
(except subsidiaries of the bank or companies registered under
Section 25 of the Companies Act) He should not be engaged in
any other business or vocation. Also, he should not have a
substantial interest in any other company or firm.
Appointment and removal of Chairman MD: Normally, the
Board of Directors should appoint one of the directors as the
whole time Chairman or MD of the bank for a period not
exceeding FIVE years at a time. It can be renewed/extended for a
period not exceeding five years at a time. Where the office of the
whole time Chairman/MD is vacant, the RBI can appoint a
Chairman /MD.
Composition of the Board of Directors: Section 10A of the
Act defines that not less than 51% of the directors shall be persons
who shall have specialized knowledge practical experience in
specified fields like accountancy, banking, economics, etc. Out of
this, a minimum of 2 directors shall be persons having specialized
knowledge of agriculture, rural economy, co-operation, or small
scale industry. A director cannot hold office continuously for a
period exceeding eight years.
No commission to staff: Section 10(1) (b) (ii) clarifies that a
bank cannot pay any commission/share in profit to any
employee. For this reason, banks should not pay any commission
to members of staff for the recovery of dues or for procuring any
other business.
CAPITAL AND RESERVE REQUIREMENTS
Capital and Reserve Requirement: Sec11 of the Act requires
the foreign banks to have a minimum of Rs.15 lakhs against the
paid-up capital and reserve requirements. It is Rs.20 lakhs where
the bank has its place of business in Mumbai or Kolkata or both.
Domestic banks formed after the Banking Companies Amendment
Act, 1962, shall have paid-up capital not less than Rs. 5 lakhs. A
banking company can issue equity shares and also preference
shares. However, this Section 11 does not apply to public sector
banks.
Capital Structure: As per Sec12 of the Act, the banks are
required to maintain the Authorized, Subscribed, and Paid-up
Capital in the ratio of 4:2:1, respectively. A shareholder,
irrespective of his holding, cannot exercise more than 10% of the
total voting rights of all shareholders of the bank. Any
shareholder intending to hold more than 5% of the total share
value is required to take prior permission from the RBI. This
Section 12 does not apply to public sector banks.
Prohibitions on a Banking Company: Sec13 of the Act
prohibits a banking company from paying brokerage/
commission exceeding 2.5% of the paid-up value of shares issued.
Sec14 of the Act prevents it from creating a charge on its unpaid
capital. Section 14A prohibits it from creating a floating charge
over its assets without permission from RBI.
Prohibitions against having Common Directors: Sec16 of the
Act prohibits a bank from having common directors. i.e., a bank
cannot have a director who is the director of another bank. Also,
it cannot have more than three directors who are directors of
other companies. Further, these directors cannot exercise more
than 20% of the total voting rights of the shareholders of the
banking company. This Section 16 does not apply to public
sector banks.
Transfer of Profit to Reserve Fund: As per Sec17 of the Act, a
banking company before declaring any dividend, is required to
transfer not less than 20% of the profit made during the year to
its reserve fund. The RBI has directed the banks to transfer not
less than 25% of net profit (before appropriation) to the reserve
fund w.e.f. 31st March 2001.As per Section 17(2), the banks are
required to take prior approval of RBI, before making any
appropriation from the reserve fund or any other reserve.
CASH RESERVE FOR NON-SCHEDULED BANKS
Cash Reserve for Non-Scheduled Banks: While the
scheduled banks are required to maintain a cash reserve under
Section 42 of the RBI Act, the non-scheduled banks are required
to maintain a cash reserve under Section 18 of the Banking
Regulation Act, 2002. It is necessary to keep at least 3% of its total
Demand and Time Liabilities (DTL) in India as on the last Friday
of the second preceding fortnight. The cash reserve is to be
maintained by way of balance with itself or with RBI or with
other scheduled banks.
Investment in shares: As per Section 19 (2) of the Act, no
banking company shall hold shares in any company, whether as
pledgee, mortgagee or absolute owner of an amount exceeding
30% of the paid-up capital of that company or 30% of its own
paid-up share capital and reserve whichever is less.
Advance against Own Shares: As per Section 20 (a) of the
Act, no banking company shall grant any loan or advance on
the security of its shares. Section 20 (1) lays down the restriction
on loans and advances to directors and also to firms in which
they hold a substantial interest. Section 20A stipulates that a
banking company cannot remit debt to any director or to any firm
or company in which such a director is interested or any loan
guaranteed by such director.
SELECTIVE CREDIT CONTROL
Selective Credit Control: Section 21 empowers the RBI to
determine the policy about advances to be followed by the
banking companies in general or by a particular banking
company. All banks are bound to follow the policy so
determined. In particular it can give directions to banking
companies on (i) the purpose for which a bank cannot provide
advance (ii) the margin to be maintained for a secured advance
(iii) the maximum amount of advance which can be given to
borrowing concerns (iv) the rate of interest and other terms and
conditions on which advances may be made.
Interest not subject to Scrutiny by Courts: As per Section
21A, the rate of interest charged by a bank is not subject to
scrutiny by courts w.e.f 15th February 1984. i.e., a transaction
between a banking company and its debtor shall not be reopened
by any court on the ground that the rate of interest charged is
excessive.
Licensing of Banks: As per Section 22 of the Act (not
applicable to public sector banks), a banking company is required
to obtain license from the RBI before carrying its banking
business.
Licensing of Banks: As per Section 23 of the Act, general or
specific permission of RBI is required for opening shifting any
branch or place of business. The RBI has now given general
permission to domestic banks to open/shift branches in all Tier 2
to Tier 6 centers. Prior permission is required for opening
branches in Tier 1 centers (i.e., centers with a population of one
lakh and above) No consent is necessary for opening a temporary
place of business upto one month for providing banking services
in any exhibition, mela, conference, etc., provided such place of
business is located within the city/town/village of an existing
branch. The RBI has also issued guidelines on doorstep banking
under this section.
Statutory Liquidity Ratio (SLR): As per Section 24 of the Act,
every scheduled and non-scheduled bank is required to maintain
a certain Statutory Liquidity Ratio (SLR), which is the ratio of
specified liquid assets to the Net Demand and Time Liabilities
(NDTL) of the bank. SLR is to be maintained daily. It is
maintained with respect to the NDTL figure as on the reporting
Friday of the second preceding fortnight. The NDTL to be
computed is almost the same as it is calculated for maintenance of
the Cash Reserve Ratio (CRR)
As per Section 24 of the Act (as amended on 23 rd January
2007), the RBI is empowered to vary the SLR with a minimum of
0% to the NDTL to a maximum of 40% (as against 25% to 40%
before this amendment) W.e.f. 11th August 2012, the SLR to be
maintained by banks at the rate of 23% of the NDTL. The liquid
assets to be maintained for the SLR purpose consist of (a) cash, (b)
Gold (c) Unencumbered SLR Securities;
 Cash will include cash held by the bank, current account
balance with other scheduled commercial banks, and the
excess balance kept with RBI over the required CRR.
 Gold will include the gold held by the bank and will be
valued at a rate not exceeding the current market rate.
 The unencumbered SLR securities will include the
Treasury Bills (TBs) and Government Securities of the
Central and the State Governments, which are notified as
securities with SLR status.
Asset Ratio: Section 25 of the Act requires that as on last
Friday of every quarter, the assets of a bank must not be less than
75% of its Demand and Time Liabilities in India.
Submission of Return on Unclaimed Deposits: Section 26 of
the Act requires that every bank shall within 30 days after the
close of each calendar year submit a return to RBI on all deposit
accounts which have not been operated for ten years and above.
In the case of term deposits, this ten year period starts from the
date of maturity.
Submission of Return on Assets and Liabilities: Section 27 of
the Act requires that every bank must submit a return to RBI on
all Assets and Liabilities as last Friday of each month, latest by the
end of the next month.
Balance Sheet of Banks: Section 29 to 33 deals with
maintenance of the Balance Sheet in Banks. The Balance Sheet and
Profit and Loss A/c must be prepared in the format “A” and “B”
given in the Third Schedule of the Act as amended in 1981. The
Balance Sheet has 16 Schedules. It is to be signed by the CMD
and at least three directors. According to Section 31 of the Act,
three copies of the Balance Sheet duly audited must be furnished
to RBI within three months of the date of the Balance Sheet.
POWER OF RBI TO INSPECT BANKS
Power of RBI to Inspect Banks: Section 35 of the Act
empowers the RBI to inspect any bank. As per Section 35A, it can
issue a direction to banks as it deems fit, and all banks are bound
to comply with such directions. For instance, it has the power to
issue a direction to banks on the rate of interest to be charged by
them on deposits and advances account. At present, RBI regulates
so far as deposits are concerned only non-resident deposits
interest rates. All other interest rates, including that for savings
bank accounts, are made free to be determined by market rates.
Some of the directives issued by RBI under this section are (i)
Complying with the provisions of Banking Ombudsman Scheme,
(ii) Adhering to Know Your Customer (KYC) Guidelines, (iii)
Adhering to guidelines issued on Clean Note Policy, and (iv) Rate
of interest on savings bank and term deposits.
Appointment of Chairman MD: As per the provisions given
under Section 35B of the Act, banks are required to take prior
approval of RBI before appointing/reappointing/ terminating a
Chairman Managing Director Chief Executive of the bank.
Powers to remove top management personnel: As per
Section 36 of the Act, RBI can prohibit a banking company from
entering into a particular transaction or a class of transactions.
Also it can terminate any Chairman Director/Chief Executive
Officer (CEO) other officer or any employee of the bank where it
considers desirable to do so.
Acquisition of Banking Companies: As per the provisions
given under Section 36AE to 36AJ, the Central Government may
acquire any banking company through prior consultation with
RBI.
Powers of Central Government: As per Section 45Y of the
Act, the Central Government is empowered to specify the period
for which a banking company shall preserve its books/accounts
and documents. The Central Government has made separate
rules for this purpose.
Return of paid cheques to customers: As per Section 45Z of
the Act, customers may get the paid cheques returned at their
request. True copies of all such instruments must be kept in a
banker’s possession (in mechanical or electronic mode) The
customers will meet the cost of making such copies. Customers
who take paid cheques from the bank are required to preserve
them for eight years and produce them before the ITO whenever
asked to do so. Other vital provisions under Section 45 of this Act
are (i) Section 45ZA and 45ZB- Nominations in deposit accounts,
(ii) Section 45ZC and 45ZD Nominations for articles kept in safe
custody, (iii) Section 45ZE and 45ZF Nominations for safe-deposit
lockers.
Deposits withdrawable by Cheque: As per Section 49A of the
Act, no person other than a banking company RBI and SBI can
accept from the public, the deposits of money withdrawable by
cheque. The Savings Bank scheme operated through Post Offices
and deposits accepted by the Primary Agricultural Co-operative
Societies (PACS) are specifically exempted from this section.
Power of GoI to make Rules: Section 52 of the Act empowers
the Central Government to make rules wherever necessary to
give effect to the provisions of this Act. These rules will be made
after consultation of the RBI and will be published in the Official
Gazette from time to time.
Rounding off of Transactions: As per the powers vested
under Section 21 and 35A of the Act, RBI has asked banks to
round off transactions to the nearest rupee value.
Applicability of the Act to PSBs: The sections which are
applicable to the Public Sector Banks (PSBs) are as follows:
Section 10, 13, 14, 15, 17, 19, 20, 21,21A, 23 to 28, 29, 30, 31, 34,
35,35A, 36,45Y to 45ZF, 46 to 48, 50, 52 and 53.
The sections which are not applicable are as follows: Section 9,
11, 12, 16, 22, 30,36AA to 36 AD, 36AE to 36 AJ, 36B to 45X.
SELF-ASSESSMENT
Fill in the blanks
1. The Provisions of the Banking Regulations Act1949 do not
apply to the ….... and……….
2. When a Chairman is appointed a part-time basis, a …………
may also be appointed to manage the bank activities.
3. The SLR is to be maintained on a ………..basis.
True or False?
4. A director cannot hold office continuously for a period
exceeding five years.
5. The rate of interest charged by a bank is not subject to
scrutiny by courts.
6. As per section 25 of the BRA 1949, as on last Friday of every
quarter, the assets of a bank must not be less than 75% of its
Demand and Time Liabilities in India.
Answers: (1) PACS, LDBs (2) Managing Director (3) Daily (4)
False (5) True (6) True
Questions
1. What are the authorized businesses of a banking company?
2. Explain the provisions related to the qualifications,
appointment and removal of a Chairman.
3. Write a note on the reserve requirements to be maintained by
a commercial bank.

1.6. THE DEPOSIT INSURANCE
AND CREDIT GUARANTEE
CORPORATION ACT, 1961
Deposit Insurance & Credit Guarantee Corporation Act, 1961
The concept of insuring deposits kept with banks received

attention for the first time in the year 1948 after the banking crises
in Bengal. The Rural Banking Enquiry Committee set up in 1950
also supported the idea of insuring bank deposits. However,
serious consideration of the idea was given by the RBI and GoI
only after the crash of the Palai Central Bank Ltd., and the Laxmi
Bank Ltd. in 1960. The Deposit Insurance Corporation (DIC) Bill
was introduced in the Parliament on August 21, 1961; got
President’s assent on December 7, 1961,and subsequently, the
Deposit Insurance Act 1961 came into force on January 1, 1962.
ELIGIBLE BANKS
The Deposit Insurance Scheme was initially extended to the
commercial banks only which included the State Bank of India
and its subsidiaries, other commercial banks, and the branches of
the foreign banks operating in India. With the enactment of the
Deposit Insurance Corporation (Amendment) Act 1968, the
Corporation was required to register the 'eligible co-operative
banks' also as insured banks (Section 13A)
An eligible co-operative bank means a co-operative bank
(SCB/DCCB/PACB) in a State, which has passed the enabling
legislation amending its Co-operative Societies Act, requiring the
State Government to vest power in the RBI to order the Registrar of
Co-operative Societies of the State to wind up a co-operative bank to
supersede its Committee of Management and to require the Registrar
not to take any action for winding up/amalgamation or reconstruction of
a co-operative bank without prior sanction in writing from the RBI.
Further, the GoI, in consultation with the RBI, introduced a
Credit Guarantee Scheme in July 1960. The RBI was entrusted
with the administration of the Scheme, as an agent of the Central
Government, u/s. 17 (11A)(a) of the Reserve Bank of India Act,
1934 and was designated as the Credit Guarantee Organization
(CGO) for guaranteeing the advances granted by banks and other
Credit Institutions to small scale industries.
For this purpose, the RBI promoted a public limited company
called the Credit Guarantee Corporation of India Ltd., (CGCI) on
14th January 1971. The main thrust of the credit guarantee scheme
was aimed at encouraging the commercial banks to cater to the
credit needs of the hitherto neglected sectors and weaker sections
of the society engaged in non-industrial activities and small
borrowers of the priority sector by providing guarantee cover to
the loans and advances granted by the credit institutions. The RBI
operated this scheme till March 31, 1981.
To integrate the functions of deposit insurance and credit
guarantee, the DIC and CGCI were merged, and the Deposit
Insurance and Credit Guarantee Corporation (DICGC) was
created on 15th July 1978. Consequently, the Deposit Insurance
Act, 1961, was renamed as the 'Deposit Insurance and Credit
Guarantee Corporation Act, 1961’. The authorized capital of the
corporation is Rs.50 Crore. Its headquarters is situated in
Bombay, and the Deputy Governor of RBI, Shri B. P. Kanungo, is
the current Chairman. DICGC is a wholly-owned subsidiary of
RBI and acts as a safety net for bank deposits in India.
Following the cancellation of the credit guarantee scheme of
the GoI, the corporation extended its guarantee support to credit
granted to small scale industries, also w.e.f 1 st April 1981.The
guarantee cover was extended to the entire priority sector
advances (as defined by the RBI) w.e.f 1 st April 1989. However,
from 1st April 1995, all housing loans have been excluded from
the guarantee cover purview of the corporation.
LEGAL FRAMEWORK AND OBJECTIVES

The preamble of the Deposit Insurance and Credit Guarantee
Corporation Act, 1961, states that it is an, “Act to provide for the
establishment of a Corporation for insurance of deposits and to
guarantee of credit facilities and for other matters connected in addition
to that or incidental thereto.” The functions of the DICGC are
governed by the provisions of 'The Deposit Insurance and Credit
Guarantee Corporation Act, 1961' (DICGC Act) and 'The Deposit
Insurance and Credit Guarantee Corporation General
Regulations, 1961' framed by the Reserve Bank of India in exercise
of the powers conferred by sub-section (3) of Section 50 of the
said Act.
MANAGEMENT OF THE CORPORATION
The management of the Corporation vests with its Board of
Directors, of which a Deputy Governor of the RBI is the
Chairman. As per the DICGC Act, the Board shall consist of,
besides the Chairman,
(a) One officer of the RBI (in the rank of Executive Director),
(b) One officer from the Central Government,
(c) Five directors nominated by the GoI in consultation with the
RBI, 3 having specialized knowledge of commercial banking,
insurance, commerce, industry or finance and 2 having
specialized expertise in co-operative banking; none of them
should be an employee of the GoI or RBI or the Corporation
or a director or an employee of a banking company or a co-
operative bank, or otherwise actively connected with a
banking company or a co-operative bank and,
(d) Four directors, nominated by the Central Government in
consultation with the RBI, having specialized knowledge or
practical experience in respect of accountancy, agriculture,
and rural economy, banking, co-operation, economics,
finance, law or small scale industry or any other matter which
may be considered to be useful to the Corporation.
The Executive Director is the overall in-charge of its day-to-
day operations. It has four Departments, viz. Administration,
Accounts, Deposit Insurance and Credit Guarantee under the
supervision of other Senior Officers. The Corporation had four
branches, situated at Kolkata, Chennai, Nagpur, and New Delhi.
Out of these, the offices located at Kolkata, Chennai, and Nagpur
were closed with effect from November 30, 2000, since almost all
the banks have opted out of the Credit Guarantee Schemes, and
most of the pending claims have been settled.
Administration: The Administration Department of DICGC
attends to all staff and establishment related functions in respect
of the employees of the Corporation who all are the employees of
the RBI. DICGC is treated as an independent salary drawing unit.
The Board Section attends to all matters relating to arranging for
the Board Meetings, preparation of the agenda notes and minutes
of the Board Meetings, and monitoring compliance of the
decisions taken in these meetings.
Accounts: The Corporation maintains three types of funds,
namely (i) Deposit Insurance Fund (ii) Credit Guarantee Fund
and (iii) General Fund. The first two are funded respectively by
the insurance premia, and guarantee fees received and are
utilized for settlement of the respective claims. The General Fund
is being used for meeting the establishment and administrative
expenses of the Corporation.
The surplus balances in all the three Funds are invested in
Central Government securities, which are the only investment
permissible under the DICGC Act, 1961, and the income derived
out of such investments is credited to the respective funds. An
inter-Fund transfer is permitted. The audited accounts, together
with the auditor's report and a report on the working of the
corporation, are required to be submitted to the RBI within three
months from the closing of accounts. Copies of these documents
are also to be forwarded to the Central Government, which are
laid before each House of the Parliament.
DEPOSIT INSURANCE & CREDIT GUARANTEE
The DICGC, while registering the banks as ‘Insured Banks,’
furnishes them with printed leaflets for display giving
information relating to the protection afforded by the Corporation
to the depositors of the insured banks. The deposit insurance
scheme is compulsory, and no bank can withdraw from it. In
case of doubt, the depositor should make a specific inquiry from
the branch office in this regard. The banks covered by Deposit
Insurance Scheme are as follows;
 Commercial Banks: The DICGC insures all commercial
banks, including branches of foreign banks functioning in
India, local area banks, and regional rural banks.
 Co-operative Banks: The Deposit Insurance Scheme covers all
eligible co-operative banks, as defined in Section 2(gg) of the
DICGC Act. The Union Territories of Lakshadweep and
Dadra and Nagar Haveli do not have Co-operative Banks. The
DICGC does not insure Primary Agriculture Co-operative
Societies (PACS)
Types of Deposits Insured: The DICGC insures all bank
deposits such as savings, fixed, current, recurring deposits except
the following types of deposits;
 Deposits of foreign Governments;
 Deposits of Central/State Governments;
 Inter-bank deposits;
 Deposits of the State Land Development Banks with the State
co-operative bank;
 Any amount due on account of and deposit received outside
India
 Any amount, which has been specifically exempted by the
corporation with the previous approval of RBI
Maximum Limit for Deposit Insurance: As per Section 16(1)
of the DICGC Act, w.e.f. 1st May 1993, each depositor in a bank is
insured upto a maximum of Rs. 100,000 (Rs. One Lakh) for both
principal and accrued interest amount held by him in the “same
right and same capacity” as on the date of liquidation/cancellation of
the bank's license or the time on which the scheme of amalgamation/
merger/reconstruction comes into force.
Particulars Saving Curren Fixed Total Insure
s A/c t A/c Deposit Deposit d up to
s s
Mr. K. 17,200 22,000 80,000 1,19,200 1,00,00
Sahadevan 0
(Individual)
Mr. K. 75,000 50,000 1,25,000 1,00,00
Sahadevan 0
(Partner of
Kanitha & Co.)
Mr. K. 7,800 80,000 87,800 87,800
Sahadevan
(Guardian of Mr.
Thenbavanam)
Mr. K. 2,30,00 45,000 2,75,000 1,00,00
Sahadevan 0 0
(Director, Jesan
Pvt. Ltd.,)
Mr. Sahadevan 7500 1,50,00 50000 2,07,500 1,00,00
jointly with Smt. 0 0
Sangupathi
Deposits held in joint accounts (revised w.e.f. April 26, 2007)
If there are more accounts in the same bank, all of those are
treated as a single account. The deposits kept in different
branches of a bank are aggregated and a maximum amount upto
Rs. 100,000 is paid. All funds held in the same type of ownership
at the same bank are added together before deposit insurance is
determined. If the funds are in different types of ownership or are
deposited into separate banks, then they would be separately
insured each upto Rs. 100,000.
Account Type Account Holders Max. Insurance Cover

Account (1) 1st A/c Holder "A" Max Insurance up to Rs.
(Savings 2 A/c Holder "B"
nd 1 Lakh
Bank /Current
A/c)
2 A/c Holder "C"
nd 1 Lakh
Account (3) 1st A/c Holder "B" Max Insurance up to Rs.

2nd A/c Holder "A" 1 Lakh

(At X branch 2 A/c Holder "B"
nd 1 Lakh
of the bank) 3rd A/c Holder "C"
Account (5) 1st A/c Holder "B"
2nd A/c Holder Max Insurance up to Rs.
"C" 1 Lakh
3rd A/c Holder "A"
Account (6) 1st A/c Holder "A" The account will be
(Recurring or 2 A/c Holder "B"
nd clubbed with the A/c
Fixed Deposit) No: 1
Account (7) 1st A/c Holder "A" The account will be

(At Y branch 2 A/c Holder "B"
nd clubbed with the A/c
No: 4
of the bank) 3rd A/c Holder "C"
2 A/c Holder "B"
nd 1 Lakh
3rd A/c Holder "D"
Same right and same capacity: If an individual opens more
than one deposit account in one or more branches of a bank, for
example, Mr. K. Sahadevan opens one or more savings/current
account and one or more fixed/recurring deposit accounts, etc. all
these are considered as accounts held in the same capacity and in
the same right. Therefore, the balances in all these accounts are
aggregated, and insurance cover is available upto Rs. 1 lakh
maximum.
If Mr. K. Sahadevan also opens other deposit accounts in his
capacity as a partner of a firm or guardian of a minor or director
of a company or trustee of a trust or a joint account, say with his
wife, Smt. Sangupathi Sahadevan, in one or more branches of the
bank, then such accounts are considered as held in a different
capacity and different right. Accordingly, such deposits accounts
will also enjoy the insurance cover up to Rs. 1 lakh separately. It
is further clarified that the deposit held in the name of the
proprietary concern where a depositor is a sole proprietor and the
amount of Deposit held in his capacity is aggregated, and
insurance cover is available up to Rs. 1 lakh in maximum. See the
above illustration.
If individuals jointly hold more than one deposit accounts
(Savings, Current, Recurring or Fixed deposit) in one or more
branch of a bank say three individuals A, B & C hold more than
one joint deposit accounts in which their names appear in the
same order then all these accounts are considered as contained in
the same capacity and in the same right. Accordingly, balances
held in all these accounts will be aggregated for the purpose of
determining the insured amount within the limit of Rs. 1 lakh.
However, if individuals open more than one joint accounts in
which their names are not in the same order for example, A, B
and C; C, B and A; C, A and B; A, C and B; or group of persons
are different say A, B and C and A, B and D etc. then, the deposits
held in these joint accounts are considered as held in the different
capacity and different right. Accordingly, insurance cover will be
available separately up to rupees one lakh to every such joint
account where the names appearing in different order or names
are different (See the illustration)
Returns: Every insured bank is required to furnish to the
Corporation as soon as possible, after the commencement of each
calendar half-year, but not in any event later than the last day of
the first month of the half-year, a statement (Form DI Return) in
duplicate, showing the basis on which the premium payable by
that bank has been calculated and the amount of premium
payable by that bank for that half-year. The statement should be
certified as correct by two officials authorized by the bank for this
purpose, and it has to furnish to the Corporation specimen
signatures of the officers authorized to sign the statements and
returns under the DICGC Act, 1961.
RIGHTS AND DUTIES OF THE INSURED BANK
The premium for deposit insurance is entirely borne by the
insured bank. Also, the banks have the right to set off their dues
from the amount of deposits. The deposit insurance is available
after the netting of such dues.
Insurance Premium: The rate of insurance premium was
initially fixed at 0.05 or 1/20thof 1 percent per annum. Since 2001,
the Corporation has had to settle claims for substantial amounts
due to the failure of banks, particularly in the Co-operative
Sector, causing a drain on the Deposit Insurance Fund (DIF)
While there is sufficient corpus in DIF at present, it is necessary to
build up a sound DIF in the long term to protect the interests of
the banking system.
With this objective, the Corporation has enhanced the deposit
insurance premium from 5 paise per Rs.100 of assessable deposits
to 10 paise from the financial year 2005-06. The insured banks pay
the insurance premium. This means that the benefit of deposit
insurance protection is made available to the depositors or
customers of banks free of cost. The formula for calculating the
half-yearly premium is, Deposits rounded to the nearest Rs.1000’s
x 0.05 100.
Interest: An insured bank is required to remit premium not
later than the last day of May and November each year. If it does
not pay on or before the stipulated date the premium payable by
it or any portion thereof, it is liable to pay interest at the rate of
8% above the bank rate on the amount of such premium or on the
unpaid portion thereof, as the case may be, from the beginning of
the half-year till the date of payment. Interest is calculated on this
basis for the actual number of days of default, taking one year as
365 days. The amount may be either (i) Directly credited to the
DIF A/c of the Corporation maintained with RBI, Mumbai, or
maybe (ii) Remitted by crossed cheque/T.T/ DD drawn in favour
of the Corporation and payable at Mumbai.
Supervision and Inspection of Insured Banks: The
Corporation is empowered (vide Section 35 of the DICGC Act,
1961) to have free access to the records of an insured bank and to
call for copies of such records. On Corporation's request, the RBI
is required to undertake/ cause the inspection/investigation of
an insured bank.
Settlement of claims: In the event of the winding-up or
liquidation of an insured bank, as per Section 17(1) of the Act, the
DICGC is liable to pay to each depositor through the liquidator,
the amount of his deposit up to Rs. 1 Lakh within two months
from the date of receipt of claim list from the liquidator.
As per Section 18(1) of the Act, when a scheme of compromise
or arrangement or re-construction or amalgamation is sanctioned
for a bank by a competent authority, and the scheme does not
entitle the depositors to get credit for the full amount of the
deposit on the date on which the scheme comes into force, the
Corporation pays the difference between the total amount of
deposit or the limit of insurance cover in effect at that time,
whichever is less, within two months from the date of receipt of
claim list from the transferee bank CEO of the insured /transferee
bank as the case may be.
As per Section 16 (2) and (3), the amount payable to a
depositor is determined in respect of all his deposits held in the
same right and in the same capacity in all the branches of that
bank put together subject to the set-off of his dues to the bank.
The DICGC makes the payment of the eligible amount to the
liquidator/chief executive officer of the transferee/insured bank,
for disbursement to the depositors. No payment is made directly
to the depositors. However, the amounts payable to the
untraceable depositors i.e., those in respect of whom necessary
information is not available, are held back till the liquidator/chief
executive officer is in a position to furnish all the requisite
particulars.
In terms of Section 21(2) of the DICGC Act read with
Regulation 22 of the DICGC General Regulations, the liquidator
or the insured bank or the transferee bank as the case may be, is
required to repay the amount to the DICGC within such a time
and in such a manner as may be prescribed, out of the amounts
realized from the assets of the failed bank and other amounts in
hand after making provision for the expenses incurred, as soon as
such amounts are sufficient to pay to each depositor.
DICGC’S WITHDRAWAL OF DEPOSIT INSURANCE
Under Section 15A of the Act, the Corporation has the power
to cancel the registration of an insured bank if it fails to pay the
premium for three consecutive half-year periods. However, the
Corporation may restore the registration of the bank, which has
been de-registered for non-payment of premium, if the concerned
bank makes a request in this behalf and pays all the amounts due
by way of premium from the date of default together with
interest. In the event of the DICGC withdrawing its coverage
from any bank for negligence in the payment of premium, the
public will be notified through newspapers.
Registration of an insured bank may also stand canceled if the
bank is prohibited from receiving fresh deposits, or its license is
canceled, or a license is refused to it by the RBI, or it is wound up
either voluntarily or compulsorily; or it ceases to be a banking
company or a co-operative bank within the meaning of Section
36A(2) of the Banking Regulation Act, 1949; or it has transferred
all its deposit liabilities to any other institution; or it is
amalgamated with any other bank, or a competent authority has
sanctioned a scheme of compromise or arrangement or
reconstruction, and the said scheme does not permit acceptance of
fresh deposits. In the case of a co-operative bank, its registration
also gets cancelled if it ceases to be an eligible co-operative bank.
In the event of the cancellation of registration of a bank, deposits
of the bank remain covered by the insurance till the date of the
cancellation.
DICGC's liability to banks in case of such withdrawal: The
corporation has deposit insurance liability on liquidation etc. of
"Insured banks" i.e. banks which have been de-registered (a) on
account of prohibition on receiving fresh deposits or (b) on
cancellation of license or it is found that license cannot be
granted. The liability of the corporation in these cases is limited to
the extent of deposits as on the date of cancellation of registration
of a bank as an insured bank. On liquidation etc. of other de-
registered banks i.e., banks that have been de-registered on other
grounds such as non-payment of premium or their ceasing to be
eligible co-operative banks under section 2(gg) of the DICGC Act,
1961, the corporation will have no liability.
SELF-ASSESSMENT
Fill in the blanks
1. DICGC is a wholly-owned subsidiary of the ………..
2. The ……….. is the overall in-charge of its day-to-day
operations of the DICGC.
3. The maximum limit for deposit insurance coverage for both
principal and accrued interest thereof is Rs……….
4. The amount payable to a depositor is determined in respect of
all his deposits held in the same right and the……. in all the
branches of that bank.
True or False?
5. The Corporation maintains five types of funds.
6. The deposit insurance scheme is compulsory, and no bank can
withdraw from it.
7. The Primary Agriculture Co-operative Societies (PACS) are
also eligible to be insured by the DICGC.
Answers: (1) RBI (2) Executive Director (3) One Lakh (4) Same
Capacity (5) False (6) True (7) False
Questions
1. Which banks and which deposits are covered by DICGC?
2. Write a short note on the objectives and management of
DICGC.
3. List out the liabilities of the Corporation to the banks on de-
registration.

1.7. THE SARFAESI ACT, 2002
The SARFAESI Act, 2002
The financial sector has been one of the key drivers in India's
efforts to achieve success in her fast-growing economy. While the
banking industry in India is progressively complying with the
international prudential norms and accounting practices, there
are certain areas in which the banking and financial sector do not
have a level playing field as compared to its counterparts in the
global financial markets. For example, there is no legal provision
for facilitating securitization of financial assets of Banks and
Financial Institutions (BFIs) Further, unlike international banks,
the BFIs in India do not have the power to take possession of
securities and to sell them when the borrower fails to repay.
Our existing legal framework relating to commercial
transactions has not kept pace with the changing business
practices and financial sector reforms. This has resulted in slow
pace of recovery of defaulting loans and mounting levels of Non-
Performing Assets (NPAs) of banks and financial institutions. The
Andhyarujina Committee constituted by the Central Government
(after the regime of Narasimham Committee I and II) for the
purpose of examining banking sector reforms have considered
the need for changes in the legal system and recommended to
enact a new legislation for the establishment of Securitization
and Asset Reconstruction Companies (SARCs) and to empower
the BFIs to take possession of the NPAs. i.e., the secured creditors
were allowed to recover their dues without the intervention of the court.
Accordingly, the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Ordinance
was promulgated on the 21st June 2002.
“to regulate securitization and reconstruction of financial assets and
enforcement of security interest and to provide for a central database of
security interests created on property rights, and for matters connected
in addition to that or incidental thereto.”
The provisions of the Ordinance enabled the BFIs, to realize
long-term assets manage the problem of liquidity, asset-liability
mismatches, and to improve recovery by exercising powers to
take possession of securities, sell them and reduce non-
performing assets by adopting measures for recovery or
reconstruction.
PROVISIONS OF SARFAESI ACT 2002
The Act has made provisions for the following;
1. Registration and regulation of Asset Reconstruction Companies
(ARCs) by the Reserve Bank of India.
2. Facilitating securitization of financial assets of the BFIs with
or without the benefit of underlying securities.
3. Promotion of seamless transferability of financial assets by the
ARCs to acquire financial assets of BFIs through the issuance
of debentures, bonds, etc.
4. Entrusting the ARCs to raise funds by issuing security receipts
to qualified buyers.
5. Facilitating the reconstruction of financial assets that are
acquired while exercising powers of enforcement of securities
or change of management or other capabilities that are
proposed to be conferred on the BFIs.
6. Presentation of any securitization company or an ARC
registered with the RBI as a public financial institution.
7. Defining ‘security interest’ to be any security, including
mortgage and change on immovable properties given for due
repayment of any financial assistance provided by BFIs.
8. Classification of the borrower’s account as a non-performing
asset (NPA) following the directions given or under
guidelines issued by the RBI from time to time.
9. The officers authorized will exercise the rights of a secured
creditor in this behalf under the rules made by the Central
Government.
10. An appeal against the action of any BFI to the concerned
Debts Recovery Tribunal (DRT) and a second appeal to the
Appellate Debts Recovery Tribunal;
11. The Central Government may set up or cause to be set up a
Central Registry for registration of transactions relating to
securitization, asset reconstruction and creation of security
interest;
12. Application of the proposed legislation initially to BFIs and
empowerment of the Central Government to extend the
implementation of the proposed legislation to Non-Banking
Financial Companies (NBFCs) and other entities;
13. Non-application of the proposed legislation to security
interests in agricultural lands, loans less than Rs. 1 lakh, and
cases where the borrower repays 80% of the loans.
SECURITIZATION
Securitization is the process of pooling and repackaging of
financial assets (such as auto or home loans) into marketable
securities that can be sold to investors. In the context of bad asset
management, securitization is the process of conversion of
existing less liquid assets (loans) into marketable securities before
selling the same only to the Qualified Institutional Buyers (QIBs)
The securitization company takes custody of the underlying
mortgaged assets of the loan taker and would initiate the
following steps;
 Acquisition of financial assets from an originator (bank)
 Raising of funds from qualified institutional buyers by issuing
security receipts (for borrowing money) for acquiring the
financial assets or
 Raising of funds in any prescribed manner, and
 The acquisition of financial assets may be coupled with taking
custody of the mortgaged land, building, etc.
ASSET RECONSTRUCTION
Asset reconstruction is the activity of converting a bad or non-
performing asset into a performing asset. The process of asset
reconstruction involves several steps such as;
 Purchasing of the bad asset (including the underlying
hypothecated asset) by a dedicated Asset Reconstruction
Company (ARC)
 Financing of the bad asset conversion into good assets using
bonds, debentures, securities, and cash.
 Realization of returns from the hypothecated assets etc.
The process of reconstruction is to be done under the RBI
regulations. The SARFAESI Act gives the following components
for the reconstruction of assets;
 Taking over or changing the management of the business of
the borrower,
 The sale or lease of a part or whole of the business of the
borrower;
 Rescheduling the payment of debts payable by the borrower;
 Enforcement of security interest under the provisions of this
Act;
 Settlement of dues payable by the borrower;
 Taking possession of secured assets under the provisions of
this Act.
Further, the Act provides an exemption from the registration
of the security receipt. This means that when the securitization
company or ARC issues receipts, the holder of the receipt is
entitled to receive the undivided interests in the financial assets,
and there is no need for registration unless and otherwise, it is
compulsory under the Registration Act 1908. However, the
registration of the security receipts is required when; (i) there is a
transfer of receipt (ii) the security receipt is creating, declaring,
assigning, limiting, and extinguishing any right, title, or interest
in a moveable property.
ENFORCEMENT OF SECURITY INTERESTS
The Act empowers the lender (banker), when the borrower
defaults, to issue notice to the defaulting borrower and guarantor,
calling to repay the debt within 60 days from the date of the
notice. If the borrower fails to comply with the notice, the bank
or the financial institution may enforce security interests (means
the interest of the bank/creditor) by following the provisions of
the Act;
 Taking possession of the security for the loan
 Sale or lease or assign the right over the security
 Appoint the manager to manage the security
 Ask any debtors of the borrower to pay any sum due to the
borrower.
If there are more than one secured creditors, the decision
about the enforcement of SARFEASI provisions will be applicable
only if 75% of them are agreeing. The act also provides for the
establishment of Asset Reconstruction Companies (ARCs)
regulated by the RBI to acquire the assets from the BFIs. The BFIs
may sell the assets to the ARCs.
FUNCTIONING OF THE SARFAESI ACT, 2002
Anbu
PROCESS OF SECURITIZATION
"Asset reconstruction" means the acquisition by any
securitization company or reconstruction company of any right or
interest of any bank or financial institution in any financial
assistance for the realization of such financial aid.
Securitization/Reconstruction Companies" means a company
formed under the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, and registered under the Companies Act
for asset reconstruction.
HOW DOES AN ASSET RECONSTRUCTION

COMPANY WORK?
(1) ARC will take over the NPA's from banks for a fixed cost,
which is less than the NPA amount.
(2) NPA is transferred to ARC along with any security which is
pledged while taking a loan.
(3) Now ARC will issue security receipts for fixed interest rates
and will raise money. The borrowed money can be invested in
financial institutions.
"security receipt" means a receipt or other security, issued by
a securitization company or reconstruction company to any
qualified institutional buyer under a scheme, evidencing the
purchase or acquisition by the holder thereof, of an undivided
right, title or interest in the financial asset involved in
securitization;
"qualified institutional buyer" means a financial institution,
insurance company, bank, state financial corporation, state
industrial development corporation, trustee or securitization
company or reconstruction company which has been granted
a certificate of registration under sub-section (4) of section 3 or
any asset management company making investment on behalf
of mutual fund or pension fund or a foreign institutional
investor registered under the Securities and Exchange Board
of India Act, 1992 (15 of 1992) or regulations made
thereunder, or any other body corporate as may be specified
by the Board;
(4) Now ARC will start legal procedures to sell the pledged
security in the market. This will take many years depending
on the complications involved. Meanwhile, Money raised by
issuing security receipts are used for meeting expenses of the
company, ARC has to pay timely interest on security receipts
to the buyers (qualified institutional buyers)
(5) After selling the asset by clearing all litigations, ARC will
redeem (take back) the security receipts which are issued
earlier for an agreed price. Profit of ARC = sale Price of
security + interest on investment purchase cost of NPA
interest on security receipts Expenses.
PRE-CONDITIONS
The act stipulates four basic conditions for enforcing the
rights by a creditor such as;
 The debt is secured
 The debt has been classified as an NPA by the banks
 The outstanding dues are one lakh and above and more than
20% of the principal loan amount and interest thereon.
 The security to be enforced is not agricultural land.
METHOD OF RECOVERY
The RBI does the registration or regulation of securitization
companies or reconstruction companies. These companies are
authorized to raise funds by issuing security receipts to qualified
institutional buyers (QIBs), empowering the BFIs to take
possession of securities given for financial assistance and sell or
lease the same to take over its management in the event of
default.
RIGHTS OF THE BORROWERS
 The borrowers can at any time before the sale is concluded
remit the dues and avoid losing the security.
 In case any illegal/unhealthy act is done by the authorized
officer, he will be liable for penal consequences.
 The borrowers will be entitled to get compensation for such
acts.
 For redressing the grievances, the borrowers can approach the
DRT firstly and, after that, the DRAT for appeal. The
limitation period is 45 days and 30 days, respectively.
POWERS OF DEBT RECOVERY TRIBUNAL
The Debt Recovery Tribunal (DRT) has been empowered to
entertain appeals against the misuse of the powers given to the
banks under this act. Any person aggrieved by any order made
by the DRT may go to the Appellate Tribunal within 30 days from
the date of receipt of the order of DRT.
Role of CMM/DM: The Chief Metropolitan Magistrate or
District Magistrate has been mandated to assist the secured
creditor in taking possession of the secured asset under this act.
These officers will make sure that once the creditor has given in
writing that all other formalities of the act have been done, they
would take the possession of such assets and documents relating
to that and forward the same to the secured creditor. For this act,
the CMM/DM cannot be called in question in any court or before
any authority.
Role of High Court: The act allows taking the matter to high
courts only in some issues related to the implementation of the
act in Jammu & Kashmir. However, the High Courts have been
entertaining writ petitions under article 226 (Power to issue writs)
of the Constitution of India.
AMENDMENT, 2011
The government had approved a bill to amend the act. The
Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Bill, 2011 amends two Acts SARFAESI Act 2002
and Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (DRT Act) via the following amendments;
 Banks and ARCs will be allowed to convert any part of the
debt of the defaulting company into equity. Such a conversion
would imply that the lenders or ARCs would tend to become
an equity holder rather than being a creditor of the company.
 Banks are allowed to bid for any immovable property they
have put out for auction themselves if they do not receive any
bids during the auction. In such a scenario, banks will be able
to adjust the debt with the amount paid for this property. This
enables the bank to secure the asset in part fulfilment of the
defaulted loan.
 Banks can then sell this property to a new bidder at a later date
to clear off the debt altogether.
 However the lenders will be able to carry this property on their
books only for seven years, as per the Banking Regulation Act,
1949.
SARFAESI ACT AMENDMENT, AUGUST 2016
Amendment in the (SARFAESI) Act, 2002 vide the enforcement
of the Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016. The
Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisional information in the Official Gazettes
(Amendment) Act, 2016, was published. It is an act further to
amend four laws as listed below;
1. Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
2. Recovery of Debts due to Banks and Financial Institutions
Act, 1993.
3. Indian Stamp Act, 1899 and
4. Depositories Act, 1996, and for matters connected in addition
to that or incidental to that.
The critical features of the amendment were as follows;
 To empower the ARCs (Asset Reconstruction Companies)
 To rejuvenate Debt Recovery Tribunals (DRTs) and
 To enhance the effectiveness of asset reconstruction under the
new bankruptcy law.
The amendment has given more regulatory powers to the RBI
on the working of ARCs. It was also aimed to empower asset
reconstruction and the functioning of DRTs in the context of the
newly enacted bankruptcy law. As per the amendment, the scope
of the registry that contains the central database of all loans
against properties given by all lenders has been widened to
include more information. RBI will get more powers to audit and
inspect ARCs and will get the freedom to remove the chairman or
any director. It can also appoint central bank officials into the
boards of ARCs.
RBI will get the power to impose penalties on ARCs when the
latter doesn’t follow the central bank’s directives. Similarly, it can
regulate the fees charged by ARCs from banks while dealing with
NPAs. The penalty amount has been increased from Rs. 5 lakh to
Rs. 1 crore. The amendment has brought hire purchase and
finance lease under the coverage of the SARFAESI Act. Regarding
DRTs, the amendment aims to speed up the DRT procedures.
Online procedures, including electronic filing of recovery
applications, documents, and written statements, will be initiated.
The amendments are essential for DRTs as they can play an
important role under the new Bankruptcy law. DRTs will be the
backbone of the bankruptcy code and deal with all insolvency
proceedings involving individuals. The defaulter has to deposit
50 percent of the debt due before filing an appeal at a DRT.
Banks use this act as a useful tool for NPA recovery. It is
possible where the NPAs are backed by securities charged to the
bank by way of hypothecation or mortgage or pledge or
assignment. Upon the loan default, banks can seize the securities
(except the agricultural land) without the intervention of the
court. The Act is valid only for secured loans where the bank can
enforce the underlying security, such as hypothecation, mortgage,
etc. However, if the asses in question is an unsecured asset, the
bank would have to move the court to file civil a case against the
defaulter.
SELF-ASSESSMENT
Fill in the blanks
1. The SARFAESI Act, 2002, does not apply to …………. lands.
2. Securitization is the process of conversion of existing less
liquid assets into marketable securities before selling the same
only to the…….….
3. The term ‘security interests’ in the SARFAESI Act, 2002,
means the interest of the ………..over the security for the loan.
True or False?
4. The SARFAESI Act, 2002, cannot be exercised when the loan
amount is less than Rs. 1 lakh and in cases where the
borrower repays 50% of the loans.
5. The Act provides an exemption from the registration of the
security receipt.
6. If there are more than one secured creditors, the decision

about the enforcement of SARFEASI provisions will be
applicable only if 75% of them are agreeing.
Answers: (1) Agricultural (2) Qualified Institutional Buyers (3)
Bank or Creditor (4) False (5) True (6) True
Questions
1. What is Securitization?
2. What do you mean by Asset Reconstruction?
3. Write a short note on the enforcement of security interests.
4. Describe how the ARC works?
5. What are the rights given to the borrowers under this Act?
6. List out the powers of Debt Recovery Tribunal.

1.8. MANAGEMENT OF NPAs
Management of NPAs
A nonperforming asset (NPA) refers to a classification for

loans or advances that are in default or are in arrears on
scheduled payments of principal or interest. In most cases, debt is
classified as nonperforming when loan payments have not been
made for 90 days. While 90 days of non-payment is the standard,
the amount of elapsed time may be shorter or longer depending
on the terms and conditions of each loan.
Nonperforming assets are typically listed on the Balance
Sheets of banks. Banks usually categorize loans as nonperforming
after 90 days of non-payment of interest or principal, which can
occur during the term of the credit, or at maturity. For example, if
a company with a $10 million loan with interest-only payments of
$50,000 per month fails to make a payment for three consecutive
months, the lender may be required to categorize the loan as
nonperforming to meet regulatory requirements. A loan can also
be classified as nonperforming if a company makes all interest
payments but cannot repay the principal at maturity.
The Non-Performing Assets (NPAs) are an inevitable burden
on the banking industry. Banks need to monitor standard assets
to arrest any account, becoming an NPA. Today, the success of a
bank depends upon the methods of managing NPAs and keeping
them within a tolerance level. All the 38 listed banks accounted
for gross NPAs totaling over Rs. 10.17 lakh crore in the quarter
ended March. In comparison, the gross NPAs of all the banks in
the country had amounted to Rs. 8.40 lakh crore as on December
31, 2017.
There's more bad news. In response to an RTI filed by The
Times of India, the RBI disclosed that the scheduled commercial
banks (SCBs) cumulatively wrote off as much as Rs. 2.25 lakh
crore through the five-year period that ended on March 2016.
These SCBs covering private lenders, PSBs, foreign banks, regional
rural banks, and some co-operative banks account for over 95
percent of the total formal credit disbursed in the country.
Furthermore, the amount being written-off is increasing every
year by an average of around Rs. 12,000 crore. This is significant
because banks deduct the written-off amount from their gross
NPA total. Imagine how much worse the bad loan problem
would appear otherwise.
FACTORS CONTRIBUTING TO NPAs
According to a recent study conducted by the RBI, the
underlying reasons for NPAs in India can be classified into two
heads, namely; (i) internal factors and (ii) external factors.
Internal factors: The following internal factors contribute to
NPA in the order of prominence;
 Diversification of funds for expansion/ diversification/
modernization or for taking up new projects.
 Diversion of funds for assisting or promoting associate
concerns.
 Time or cost overrun during the project implementation stage.
 Business failures due to product failure, failure in marketing etc.
 Inefficiency in management.
 Slackness in credit management and monitoring.
 Inappropriate technology or problems related to modern
technology.
External factors: The following external factors contribute to
NPA in the order of prominence;
 Recession in the economy as a whole.
 Input or power shortage.
 Price escalation of inputs.
 Exchange rate fluctuations.
 Accidents and natural calamities.
 Changes in govt. policies relating to excise and import duties,
pollution control orders, etc.
 Government loan waiver scheme.
Other factors: Apart from the above factors, some other factors
that are also responsible for the standard assets becoming
NPAs. They are as follows;
 Liberalization of the economy and the consequent pressures
from liberalization like severe completion, reduction of tariffs,
removal of restrictions, etc.
 Inadequate monitoring of credits and the failure to recognize
early warning signals shown by standard assets.
 Promoters’ over optimism in setting up of large projects.
 The sudden crashing of capital markets and the failure to raise
adequate funds.
 Granting of loans for certain sectors based on the
government’s directives rather than commercial imperatives.
 Mismatch of funding, i.e., using loans granted for short-terms
for long-term transactions.
 High leveraging and high cost of borrowing.
 The commitment of wilful defaults sensing that the legal
recourse available to collect debts is very slow.
EARLY WARNING SIGNALS
The Early Warning Signals (EWS) are those which indicate or
show some signs of credit deterioration in the loan account. They
indicate the potential problems involved in the accounts so that
remedial action can be initiated immediately. Most banks have
early warning systems for the identification of potential NPAs.
The EWS can be broadly classified into five broad categories as
discussed below;
Financial warning signals: The financial warning signals
include, (a) default in repayment, (b) continuous irregularity in
the account, (c) development of L/C or invocation of guarantees,
(d) deterioration in working capital position or in liquidity, (e)
declining sales compared to previous period, (f) substantial
increase in long-term debts in relation to equities, (g) raising sales
but falling net profits, (h) incurring operating losses or net losses
(i) raising level of bad debt losses.
Operational warning signals: The operational warning
signals include, (a) underutilization of plant capacity, (b) non-
payment of electricity, wages, etc. (c) frequent labour problems,
(d) poor diversification and frequent changes in plan for
expansion or diversification or modernization, (e) evidence of
overstocking and aged inventory, (f) loss of valuable customers.
Managerial warning signals: The managerial warning signals
include, (a) diversification of funds and poor financial controls,
(b) lack of co-operation from key personnel, (c) change in
management or ownership pattern or key personnel, (d)
undertaking of undue risks, (e) fudging of financial statements.
Banking signals: The banking-related signals include, (a)
frequent request for further loans, (b) delays in servicing of
interest, (c) reduction of operations in the account or decrease in
bank balances, (d) opening of accounts with other banks, (e)
dishonour of cheques or return of bills sent for collection, (f) not
routing sales transactions through the account, (g) delays in
submitting stock statements and other data or non-submission of
periodical statements, (h) frequent excesses in the account.
External warning signals: The external warning signals
include, (a) economic recession, (b) introduction of new
technology, (c) changes in government policies, (d) emergence of
new competition, (e) natural calamities, (f) weakening of industry
characteristics.
MANAGEMENT OF NPAs
The size of the NPA portfolio in the Indian banking industry
was Rs. 64,786 crore in 2004. However, due to the active steps
taken by the regulatory authorities and the banks, the gross NPA
level has reduced from 13.2% of total advances in 2000-01 to 7.2%
in 2004. To ensure long term profitability, banks have to manage
NPAs effectively by adopting the following techniques;
 Ensuring that loans are diversified across several customer
segments.
 Introducing robust risk scoring techniques to ensure a better
quality of loans.
 Improving the quality of credit monitoring system by
designating a separate credit manager or relationship manager
for that purpose.
 Raising the share of non-fund income by increasing service
product offerings by better use of technology.
 Reducing operating expenses by upgrading the banking
technology.
 Monitoring early warning signals and taking immediate and
appropriate remedial actions.
 Adopting the credit rating system to identify, measure, and
monitor the credit risk of individual proposals.
 Putting certain borrower’s accounts that exhibit certain distress
signals under watch list and paying close and special attention
so that they may not become an NPA.
 Reducing the impact of the operational risks by measuring
them and mitigating or insuring them.
 Knowing a client’s profile thoroughly and preparing a credit
report by paying frequent visits to the client and his business
unit.
 Appraising credit proposals professionally and insisting on
timely delivery of credit.
REMEDIES AVAILABLE
In spite of better credit management in terms of appraising
and monitoring of loan assets, NPAs do occur. In such cases,
various remedies are available to the bank deal with such NPAs
as follows;
Non-legal remedies: Non-legal remedies may be in the form
of compromise, mergers, and take-overs. The goods pledged or
hypothecated may be sold without the intervention of the court.
The debts can be assigned in favour of an agency that may come
forward to collect the debts for a service charge.
Legal remedies: The RBI has advised lenders to initiate legal
measures, including criminal actions. Some of the critical legal
steps available are as follows;
 Filing of civil suits for the recovery of debts or the enforcement
of the security.
 Filing of suits under the State Recovery Acts for the recovery of
debts.
 Referring to the cases to Debt Recovery Tribunals (DRTs) and
Debt Recovery Appellate Tribunal (DRAT) setup under the
Recovery of Debts due to Banks and Financial Institutions Act,
1993.
 Referring cases to Lokadalat constituted under Legal Services
Authorities Act, 1987, which help in resolving disputes
between the parties by conciliation, mediation, compromise or
amicable settlement. Every award of the Lok Adalat shall be
deemed to be a decree of a civil court.
 Resolving large loans via debt recovery mechanisms, most
notably the Corporate Debt Restructuring (CDR) Mechanism.
One time settlement schemes have been tried with excellent
results.
 Proceeding against the default borrower under the Securitization
and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act 2002 under which the banks
and financial institutions are allowed to issue demand notice to
defaulters and to take possession of the secured assets without
court intervention, if the dues are not paid within 60 days from
the date of such notice.
 The provisions of this Act do not apply to the unsecured loans
or loans below Rs. 1 lakh or to loans for which the due is less
than 20% of the principal amount and interest thereon.
 On 8th April 2004, the Supreme Court has upheld the validity
of the process of the Securitization Act by giving one
significant relief to the borrower litigant. The earlier provision
that the borrower will have to deposit 75% of the disputed
amount before appealing has been scrapped.
 With the implementation of the SARFAESI Act, many lenders
have commenced their recovery action against the recalcitrant
debtors. Since the Supreme Court has upheld the constitutional
validity of the Act, it will go a long way in managing NPAs
successfully.
 This Act also provides a formal legal basis for setting up the
Asset Reconstruction Companies (ARCs)
RECENT MEASURES
Credit Information Bureau (India) Limited (CIBIL): The
Credit Information Bureau (India) Limited (CIBIL) was incorporated
on January 2001 by the State Bank of India, HDFC Ltd., M/s Dun
and Brad Street Information Services (India) Pvt. Ltd., and M/s.
Trans Union. It was launched on 6th May 2004. CIBIL helps the
banks to reduce their NPAs by getting speedier credit information
about the customers.
It maintains a database of negative and positive information
on all borrower accounts and provides the same in the form of
Credit Information Reports (CIRs) to its members. It has a broad
and robust member base of over 950 entities, including non-
banking financial organizations, both private and public sector
banks, house-finance companies, and other financial institutions.
It has credit information of over 700 million trades across three
divisions namely, Consumer Bureau, Commercial Bureau and
Micro Finance Institution Bureau. Using credit information
collected across these three bureaus, CIBIL generates a CIBIL
credit report. The credit score issued under this credit bureau’s
name is known as the CIBIL score. Only those members who
contribute all data on all their borrowers to CIBIL are eligible to
access these reports.
Wilful defaulters: The list of wilful defaulters is required to
be submitted to SEBI as well as to the RBI to prevent their access
to capital markets. The passing of various Acts and the
introduction of scientific credit risk management systems would
lower the slippage of assets from the performing to the non-
performing category. There is no doubt that banks with a better
NPA recovery process would be able to reduce their provisioning
requirements, thereby would be increasing their profitability.
SELF-ASSESSMENT
Fill in the blanks
1. Debt is classified as nonperforming when loan payments have
not been made for a period of ……… …….
2. Nonperforming assets are typically listed on the ………. of
banks.
3. ……… helps the banks to reduce their NPAs by getting
speedier credit information about the customers.
True or False?
4. In the case of NPAs, the goods pledged or hypothecated may
be sold without the intervention of the court.
5. The provisions of the SARFAESI Act 2002 do not apply to the
unsecured loans or loans below Rs. 1 lakh or to loans for
which the due is less than 20% of the principal amount and
interest thereon.
Answers: (1) 90 Days (2) Balance Sheets (3) CIBIL (4) True (5) True
Questions
1. Define the term NPA. What are the factors contributing to
NPA?
2. List out the Early Warning Signals that indicate the potential
NPAs.
3. Describe the remedies available to the bankers in the case of
NPAs.

1.9. THE MONEY LAUNDERING
ACT, 2002
The Money Laundering Act, 2002
The term money laundering refers to the process of showing

the money obtained from criminal activities that have come from
legitimate sources. It is the act of disguising or concealing the real
source and ownership of the funds received from illegal activities
and integrating the same into the financial system to give it a look
that it is legally earned.
Examples of such illegal activities include several white-collar
crimes such as bank robbery, drug trafficking, extortion, arms
sales, cyber-crimes, etc. Once this illegally earned money is
integrated into the financial system, it is used for various
nefarious activities such as terrorism, cyber-crimes, etc. which is
detrimental to people all around the world.
One of the common ways of money laundering is to open
accounts in false names or the names of Shell Companies (i.e.,
non-existent companies) and to deposit substantial cash into these
accounts and transfer the same to other destinations to avoid
detection.
Another way is to send wire transfers (TTs) internet transfers
from bogus originators to different destinations. Banks are the
most preferred conduit for money laundering. It is estimated that
around 50% of the money laundering is done through the
medium of banks. The process of money laundering generally
involves three stages such as;
(i) Structuring: Placing the illegal funds in fictitious accounts.
(ii) Layering: The process of transferring the fund through a
series of complex transactions to confuse the audit trail/
detection and,
(iii) Integration: Mingling of the illegal property with the
legitimate property.
INTERNATIONAL MEASURES AGAINST MONEY
LAUNDERING
 In 1998, the UN General Assembly adopted a resolution
calling upon the member countries to pass the Anti-Money
Laundering (AML) legislation in their respective countries.
 Accordingly, the USA passed the USA PATRIOT Act
(Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct
Terrorism Act) to detect, investigate, and prosecute money
laundering. Many countries passed similar legislation.
 In September 2004, the G7 countries formed an inter-
governmental body called the Financial Action Task Force
(FATF) to combat money laundering and invited others to join
this body. By now, 35 countries and organizations like the
World Bank, IMF, ADB, etc., have become members of this
organization. India is not a member but has observer status.
 This organization sets standards, develops, and promotes the
policies for the prevention of money laundering. It monitors
the anti-money laundering measures taken by the member
countries and issues directions to take appropriate steps to
fight money laundering.
 The Basel Committee on Banking Supervision (BCBS) has
issued guidelines to all its member central banks to control
money laundering through the banking system. These
guidelines provide for Customer Due Diligence (CDD) by
banks to avoid illegal use of the banking system.
INDIAN MEASURES AGAINST MONEY
LAUNDERING
The Government of India enacted the Prevention of Money
Laundering Act in 2002 and has notified the Rules under this
Act on 1st July 2005. The Act is administered and enforced by the
Directorate of Enforcement, FEMA, in the ministry of finance for
all sectors other than the banking sector. In the banking sector, it
is administered and enforced by the Financial Intelligence Unit-
India (FIU-IND), which is vested with the concurrent and
exclusive power for the same.
FINANCIAL INTELLIGENCE UNIT- INDIA
The FIU-IND was set up by the GoI in November 2004 as an
independent body that is headed by a Director. In respect of all
matters relating to money laundering in the banking sector, the
Director of Financial Intelligence (DFI) officiates as the Director of
Enforcement.
It acts as the national agency to receive, process, analyze, and
disseminate information on all suspicious financial transactions.
This organization works in a close coordination with the FATF
and other international bodies to combat money laundering and
related crimes. It reports directly to the Economic Intelligence
Council (EIC) headed by the Finance Minister.
PREVENTION OF MONEY LAUNDERING ACT, 2002:
IMPORTANT PROVISIONS
Section 2(p) of the Act defines Money Laundering as,
“whoever has anything to do with the proceeds of crime and
projects such proceeds as untainted property commits the offense
of money laundering.”
The crime for this purpose includes certain offenses under
the following Acts, namely the (i) Indian Penal Code 1860 (ii)
Narcotic Drugs and Psychotropic Substances Act 1985 (iii) Arms
Act 1959 (iv) Prevention of Corruption Act 1988 if the offense
value exceeds Rs.30 lakhs (v) Immoral Traffic (Prevention) Act
1956 (vi) Wildlife (Protection) Act 1972.Not only persons who are
actually involved in such crime but any other person, including
bank officials who are directly or indirectly connected with the
process by opening the account or otherwise will be guilty of
money laundering.
Section 4 of the Act provides that an offense of money

laundering covered under this Act attracts rigorous imprisonment
for not less than three years but which may extend to seven years,
with a fine up to Rs. 5 lakhs. In case of drug trafficking the
imprisonment period can be extended up to 10 years.
Section 12 of the Act is very important for the banks. It
provides that the banks and FIs and all intermediaries in the
capital market associated with SEBI Act must maintain the record
in case of certain cash transactions and suspicious transactions as
may be prescribed by rules formed under this Act.
This section also provides that the banks must maintain the
documents of identity proof of all clients as per details to be
provided by the rules formed under this Act. These records and
documents are to be preserved for a minimum period of 10 years
from the date of cessation of the transaction between the bank
and the client. The bank is required to produce these records and
documents to the authority whenever directed to do so.
Section 13 of the Act stipulates that on failure to produce
these records and documents, the bank can be fined with an
amount being not less than Rs.10,000/- and not exceeding Rs. 1
lakh.
Section 24 of the Act provides that when the bank or the
person is accused of money laundering, the onus of proving
otherwise shall lie on the person so accused.
RULES NOTIFIED IN 2005 UNDER PML ACT, 2002:
IMPORTANT ASPECTS
Section 15 of the PML Act 2002 provides that the GoI would
prescribe the rules specifying the procedure and how the banks
will maintain and furnish information as stipulated in Section 12
of the Act. Accordingly the GoI notified the Rules on 1 st July 2005
which deal with the following aspects.
(A) Types of transactions for which the records registers are

to be maintained by the banks: Under Rule 3 of the Act, banks
are required to maintain all records/ registers relating to certain
types of (a) cash transactions and (b) suspicious transactions as
discussed below;
(A) CASH TRANSACTIONS
 All cash transactions of more than Rs. 10 Lakhs or its
equivalent in foreign currency.
 All series of cash transactions integrally connected to each
other which have been valued below Rs.10 Lakhs or its
equivalent in foreign currency where such series of
transactions have taken place within a month, and the
aggregate value of such transactions exceeds Rs. 10 lakhs.
(B) SUSPICIOUS TRANSACTIONS
 All cash transactions, where the forged or counterfeit currency
notes or bank notes have been used as genuine and where any
forgery of a valuable security has taken place.
 All other suspicious transactions whether or not made in cash.
A suspicious transaction means the one which;
(i) Gives rise to a reasonable ground of suspicion that it may
involve proceeds of crime (or)
(ii) Appears to be made in circumstances of unusual and
unjustified complexity (or)
(iii)It seems to have no economic rationale or bonafide purpose.
(B) The Nature and Content of Information in the records
registered to be maintained: Under Rule 4and 5 of the Act, the
RBI has prescribed the banks to maintain;
(a) Cash Transactions Index Book (CTIB) for cash transactions
and
(b) Suspicious Transaction Index Book (STIB) suspicious
transactions.
These registers/records must contain the details regarding

the;
 Nature of the transactions
 The amount and the currency of the transactions
 The date on which the transaction was made and
 The parties to the transaction
(C) The Period of Preservation of these Records: According
to Rule 6 of the Act, the banks are required to preserve these
records for at least ten years from the date of the transaction
between the client and the bank. However, the documents of
identity like Passport, PAN Card, etc. are to be preserved at least
for ten years from the closure of the account.
(D) Types and Manner of Submission of Returns
Information to FIU-IND: Rule 8 of the Act requires the banks to
appoint a Principal Officer who will be responsible for the timely
submission of information and returns to the Director, Financial
Intelligence Unit India (FIU-IND) The Principal Officer (AML) is
accountable for furnishing the information every month in the
form of a Cash Transaction Report (CTR) and Suspicious
Transaction Report (STR)
(A) CASH TRANSACTION REPORT (CTR)
 The CTR contains all transactions required to be recorded in
the Cash Transaction Index Book during the month (i.e., cash
transactions above Rs.10 lakhs)
 This report is to be submitted by banks to FIU-IND every
month.
 The Rules prescribe the format in which it is to be sent.
 The bank branches are required to send the return to their
regional offices/controlling offices, and the latter will
consolidate the same and send it to the Head Office/Central
Office of the bank.
 At the Head Office/Central Office, the Principal Officer
nominated for this purpose will send a consolidated report to
FIU-IND to reach them by 15th of day of the next month.
 While filing the CTR, individual transactions below Rs.50,
000/- may not be included.
 The Principal Officer of the bank has to submit under his
signature a summary of cash transaction reports for the bank
as a whole in physical form in the format specified.
(B) SUSPICIOUS TRANSACTION REPORT (STR)
 The STR is required to be sent by banks to FIU-IND, in respect
of the transactions needed to be recorded in the Suspicious
Transaction Index Book.
 The branches are required to submit the STR to RO for
onward transmission to the Principal Officer (AML) at Head
Office.
 The Principal Officer should record his reasons for treating
any transaction as suspicious and submit the same to FIU-
IND within seven days of concluding that the transaction is
suspected.
 Rule 8 of the Act requires the Principal Officer to furnish
information of any such suspicious transaction to the
Director, FIU-IND not later than 3 working days from the
date of the occurrence of such transactions.
 The CTR and STR may be submitted manually or
electronically as per the choice of the banks. However, it
should be ensured that the reports of all the branches are
compiled and filed in the same mode of submission.
(E) Verification of Record of the Identity of the Client: Rule
9 of the Act provides that every banking company at the time of
opening the account must verify and maintain a record of
identity and current address, including the permanent address of
the client and his status. The rule also prescribes the list of
documents to be obtained at the time of opening of the account
for a company, partnership firm, trust, association of persons, and
individuals.
 Rule 10 provides that these documents are to be preserved by
the bank for at least ten years after the cessation of the
transaction between the bank and the client. The bank has to
make such documents available to competent authorities
whenever required to do so.
 Rule 12 of the Act forms the basis for the KYC guidelines to
be followed by the banks.
 Rule 13 of the Act prescribes that on bank’s failure to produce
information, the Director, FIU-IND can levy a fine not less
than Rs.10, 000 and not exceeding Rs. 1 lakh, for each such
failure.
ADDITIONAL GUIDELINES ISSUED BY THE RBI
The additional guidelines issued by the RBI related to anti-
money laundering measures are as follows;
(a) Circulation of the names of banned terrorist organizations:
The Security Council of the United Nations issues from time
to time orders to the member states to take action against
certain terrorist organizations. Accordingly, the GoI has
issued a rule called the “Prevention and Suppression of
Terrorism (Implementation of Security Council Resolution)
Order 2006,” which contains the list of names of certain
terrorist organizations that have been banned. The RBI
circulates such lists among banks with an advice not to open
an account in their names and also to freeze their existing
accounts.
(b) Cash Ceiling for DD/ MT, etc: The RBI has restricted the
banks not to issue DD/ MT/TT/TCs against cash for an
amount beyond Rs.50, 000/-
(c) Instructions to follow AML KYC measures seriously: The
RBI has asked the banks to implement the AML measures,
and the KYC measures with all seriousness and has also
advised that the internal auditors and the concurrent auditors
of the banks to verify that the branches strictly adhere to the
KYC guidelines and other AML measures. The RBI inspection
also gives key focus to these aspects. Besides, the RBI has also
asked all banks to formulate a policy on KYC and AML and to
get it approved by their respective Board of Directors.
(d) Adherence to the Foreign Contribution Regulation Act
(FCRA) 1976: The banks are required to adhere to the
provisions of this Act while giving credit for any foreign
contribution to any account.
(e) Sensitization Training on KYC Norms: All banks have been
advised by the RBI to conduct training programmes for
sensitizing the staff on maintenance of the KYC norms.
(f) Stringent Action for not adhering: The RBI has reiterated
these guidelines under Section 35A of the Banking Regulation
Act (BRA) and the provisions of the PMLR Act 2002. Non-
compliance with the same will attract stringent action with a
penalty.
UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967:
AS AMENDED IN AUGUST 2009
Section 51A of the Unlawful Activities (Prevention) Act
(UAPA) 1967, as amended on August 2009, gives provisions for
the seizure of the accounts in the names of certain designated
individuals or entities.
Designated Individuals: The United Nations Security
Council sends its resolutions called UNSCRs to the GoI,
mentioning the names of individuals and entities which are
classified as terrorist organizations. The GoI, in turn, send these
names to the RBI, which circulates the same among the banks.
Such individuals/entities are called as the designated
individuals/entities. Banks are required not to open accounts in
the names of such individuals or entities, not to allow operating
such accounts, give information on such accounts to GoI, RBI, and
to act on their advice to freeze such accounts.
Procedure to be followed: After receiving the list from the
RBI, the banks are required to,
 Consolidate the list and hold an updated list of the designated
individuals/entities in electronic form and to ensure that no
branch opens any account in such names found in the list.
 Run a check/scan regularly and find out whether any bank
account is held in such names.
 If found any, they must inform the details immediately
within 24 hours of finding the same to the Joint Secretary
(JS.I) Home Ministry by telephone, e-mail, and by post.
 Send a copy of such communication to the Nodal Officer of
UAPA in RBI, DBOD (AML Section) Central Office, and also a
copy to the Nodal Officer of UAPA in the State Government
and also to the FIU-IND.
 Send a Suspicious Transaction Report to FIU-IND.
 The Ministry of Home Affairs will conduct an investigation
immediately after the receipt of the information. The inquiry
will be made through the State Police or Central Agencies and
will complete the same within five working days from the
date of receipt of information.
 If the investigation confirms, that the account is held by a
designated individual/entity the GoI (Ministry of Home
Affairs) will issue an order within 24 hours of such
verification to freeze the account under Section 51A of UAPA
and convey the same to the bank electronically under copy to
the RBI and FIU-IND. The order shall take place without any
notice to the designated individual and entity. All such
orders will be communicated through the RBI.
 As per Section 51 A of the UAPA as amended on August 27,
2009, the GoI can seize, freeze, attach funds, and other
financial assets and economic resources held in the name of
any such designated individual/entity.
 It also empowers the GoI to do so for any other person
engaged or suspended to have been involved in terrorism.
Further, it enables the GoI to prevent any entity from making
any fund/economic resource available to any person
engaged/ connected to terrorism.
 When a request is received from foreign countries to seize
such accounts, the request will be examined by the Ministry
of External Affairs, and the latter will send the same
electronically to the UAPA, Nodal Officer in IS-I division in
Home Ministry for freezing the account. The Latter has to
issue an order or otherwise within five working days. In case
the order is issued the bank has to act as per the order.
 When an account is seized inadvertently, the account holder
can apply to the bank to unfreeze the account, and the bank
will forward the request to the Nodal Officer in Home
Ministry. The latter will cause an investigation and will
dispose of the application within fifteen working days.
SELF-ASSESSMENT
Fill in the blanks
1. The process of showing the money obtained from criminal
activities have come from legitimate sources is known as
………….
2. The Prevention of Money Laundering Act, 2002, has come
into effect from……….
3. The Cash Transaction Report (CTR) is to be submitted by
banks to……… every month
4. The FATF is an organization engaged in the prevention of
………
True or False?
5. The CTR is to be submitted by banks in respect of cash
transactions above Rs. 5 lakh.
6. When a person is accused of money laundering, the onus of
proving otherwise shall lie on the person so accused.
7. Director, FIU-IND, is the enforcement authority for offenses
committed on the PML Act in respect of the banking sector.
Answers: (1) Money laundering (2) 1st July 2005 (3) FIU-IND (4)
money laundering (5) False (6) True (7) True
Questions
1. What do you mean by Money Laundering?
2. Define the cash and suspicious transactions, as mentioned
under Rule 3 of the PML Act 2002.
3. List out the essential provisions under the Prevention of
Money Laundering Act, 2002.
4. Discuss the procedures to be followed for seizing the accounts
of the designated individuals or entities under UAPA 1967, as
amended in August 2009.

2.1. THE RESERVE BANK OF INDIA
The Reserve Bank of India
The “Banking System” in any country would work

systematically only when there is a Central Bank to effectively
frame policies to guide them and co-
ordinate their business activities. A
Central Bank can be defined as “a
monetary institution, which fully controls
the production, circulation, and the supply
of money in the market, seeking to regulate
the member banks and stabilize a nation’s
economy and national currency.” The
active duties of Central Bank also
include controlling subsidized loan interest rates, the lender of
the last resort, banker’s bank, custodian of foreign currency
reserves, and the government treasury. It also has the supervisory
powers to ensure that banks and other financial institutions do
not behave recklessly or fraudulently.
Establishment: The Reserve Bank of India, our Central Bank
was established on April 1, 1935 under the provisions of
the Reserve Bank of India Act, 1934. It is known as the mother of
central banks since it provides the fundamentals of the art of
central banking. It is an autonomous institution, entrusted with
powers of control and supervisions of the monetary and banking
system of the country. Its primary responsibility is to maintain the
stability of the national currency and money supply. The Central
Office of the Reserve Bank was initially established in Calcutta
but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are
formulated. It has 27 Regional Offices, most of them in State
Capitals and 04 Sub-Offices. Though formerly privately owned,
since nationalization in 1949, the Reserve Bank is wholly-owned
by the Government of India.
Central Board: A Central Board of Directors governs the
general superintendence and direction of the Bank's affairs. The
Government of India appoints the board in keeping with the
Reserve Bank of India Act. The Board members are
appointed/nominated for four years. The Board is constituted
with full-time Official Directors (Governor and not more than
four Deputy Governors) and Non-Official Directors (Nominated
by Government: ten Directors from various fields and two
government Officials and also four Directors are also being
nominated, one each from four local boards) Currently Shri.
Shaktikanta Das is the Governor of the RBI.
Local Boards: Besides the Central Board of Directors, the RBI
also has four Local Boards, one each for the four regions of the
country in Mumbai, Calcutta, Chennai, and New Delhi. These
Local Boards consist of five members' each appointed by the
Central Government for a term of four years. The primary
function of these Local Boards is to advise the Central Board on
local matters and to represent territorial and economic interests of
local cooperative and indigenous banks; to perform such other
functions as delegated by Central Board from time to time.
MAJOR FUNCTIONS OF RBI
The Preamble of RBI Act says that the Central Bank has been
formed “to regulate the issue of Bank Notes and keeping of
reserves with a view to securing monetary stability in India and
generally to operate the currency and credit system of the country
to its advantage; to have a modern monetary policy framework to
meet the challenge of an increasingly complex economy, to
maintain price stability while keeping in mind the objective of
growth”. The main functions of RBI are as follows;
1. As monetary authority, RBI Formulates, implements and
monitors the monetary policy to maintain price stability while
keeping in mind the objective of growth.
2. As regulator and supervisor of the financial system, it
prescribes broad parameters of banking operations within
which the country's banking and financial system functions to
maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the
public.
3. As the manager of foreign exchange, RBI manages the Foreign
Exchange Management Act (FEMA), 1999. To facilitate external
trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
4. As the issuer of the currency, RBI issues and exchanges or
destroys currency and coins not fit for circulation and supplies
an adequate quantity of currency notes and coins to people, in
good quality.
5. As a developmental institution, it performs a wide range of
promotional functions to support national objectives.
6. As regulator and supervisor of payment and settlement
systems, RBI introduces and upgrades safe and efficient modes
of payment systems in the country to meet the requirements of
the public at large and ensures the maintenance of public
confidence in payment and settlement systems.
7. As banker to the Government, RBI performs merchant
banking function for the central and the state governments;
also acts as their banker.
8. As banker to banks, it maintains banking accounts of all
scheduled banks.
FUNCTIONS OF THE RBI: IN DETAIL
Implementation of monetary policy: The Central Bank
implements the monetary policy of the country, which involves
establishing the form of currency the country may have, whether
a fiat currency, a gold-backed currency, a currency board, or a
currency union. When a country has its national currency, it is
primarily treated to be promissory note a promise to exchange the
money for precious metals in some fixed amount. Now, when
many currencies are issued only as fiat currency, the “promise to
pay” mentioned in the currency notes consist of nothing more
than a promise to pay the same sum in the same currency.
Note issue: The issue of the paper currency is the most critical
function of a Central Bank. The Central Bank is the only authority
allowed to issue currency for circulation, which is legal tender
money. The Issue Department of the Central Bank has the
responsibility to issue notes and coins for the Commercial Banks.
It regulates the credit and currency according to the economic
situation of the country. For issuing banknotes, the Central Bank
is required to maintain at least Rs.200 Crores (Rs.115 crore in gold
and Rs.85 crore in foreign securities), but there is no limit to the
issue of notes.
Banker to the Government: The Central Bank acts as the
banker, fiscal agent and advisor to the government. As a banker,
it keeps the deposits of the Central and State Governments and
makes payments on behalf of them. It buys and sells foreign
currencies on behalf of the government. It keeps the stock of gold
in the country. As a fiscal agent, it makes short-term loans to the
governments for a period not exceeding 90 days. It floats loans
and advances to the State Governments and local bodies. It
manages the entire public debt on behalf of the government. As
an advisor, it gives useful advice to the governments on
significant monetary and economic problems such as devaluation,
foreign exchange policy, and budgetary policy.
Banker’s Bank: The Central Bank acts as the bank of all banks
(Commercial and Co-operatives) functioning in the country.
Commercial banks are required to keep a certain percentage of
cash reserves with the Central Bank. Based on these reserves, the
Central Bank transfers funds from one bank to another to
facilitate the clearing of cheques.
Custodian of foreign exchange reserves: The Central Bank
keeps and manages the foreign exchange reserves of the country.
It fixes the exchange rate of the domestic currency in terms of
foreign currencies. If there are any fluctuations in the foreign
exchange rates, it may have to buy and sell foreign currencies to
minimize the instability of exchange rates.
Lender of the last resort: The Central Bank keeps and
manages the foreign exchange reserves of the country. It fixes the
exchange rate of the domestic currency in terms of foreign
currencies. If there are any fluctuations in the foreign exchange
rates, it may have to buy and sell foreign currencies to minimize
the instability of exchange rates.
Clearing function: The Central Bank acts as a “Clearing
House” for other banks, and mutual obligations are settled
through the clearing system. Since the bank holds cash reserves of
commercial banks, it is easier for it to act as a clearing house.
Credit Control: Another most important function of the
Central Bank is to control the credit creation powers of the
commercial banks to inflationary and deflationary pressures
within the economy. For this purpose, it adopts quantitative and
qualitative control methods as shown below;
Credit Control Method
Qualitative Methods
Quantitative Methods 1. Margin Requirements
2. Regulation of Consumer
1. Bank Rate Policy
Credit
2. Open Market Operations 3. Rationing of Credit
3. Variable Reserve Ratios 4. Direct Action, Moral
Suasion & Publicity
The quantitative controls are indirect whereas the qualitative

controls are direct.
QUANTITATIVE METHODS OF CREDIT CONTROL

As the financial and monetary guardian of the nation, the
Central Bank adopts the following quantitative methods of credit
control;
Bank rate policy: The rate of interest at which the Central
Bank rediscounts the bills of exchange and government securities
held by the commercial banks, is called as the bank rate or
discount rate. When the cash reserves of the commercial banks
tend to fall below the legal minimum, the banks may obtain
additional; cash from the Central Bank either by rediscounting
bills with the Central bank or by borrowing from it against
eligible securities. During inflation, the Central Bank raises the
bank rate, which pushes the commercial banks to increase their
lending rates to customers, and thereby the credit creation is
controlled. In the case of deflation, RBI lowers its bank rate.
Open Market Operations: Direct buying and selling of
securities, bills, and bonds of government and private financial
institutions by the Central Bank on its initiative is called open
market operations such as;
1. Temporary lending of money for collateral securities. It is
carried out regularly where fixed maturity loans are
auctioned off.
2. Buying or selling securities on an ad-hoc basis.
3. Foreign exchange operations, such as forex swaps.
During inflation, it sells securities to commercial banks,
thereby lowers the money supply in the economy. Conversely, it
may raise the money supply during the depression by way of
buying securities, exchanging money for the securities, and
thereby directly influences the money supply in the economy.
Variable Reserve Ratio: All commercials banks are
compulsorily required to maintain a minimum percentage of its
time and demand deposits with the Central Bank. The excess
money that remains with commercial banks more and above
these minimum reserves is known as the excess reserves. The
commercial banks can create credits only using such excess
reserves. During inflation, these minimum reserves ratio may be
increased by the Central Bank to limit the capacity of commercial
banks for lending. During deflation, these ratios may be reduced.
These rates and ratios are as follows;
1. Cash Reserve Ratio (CRR): In India, banks are required to
retain a certain percentage of their deposits as liquid cash.
However, banks prefer to deposit this liquid cash with the
Reserve Bank of India, which is equivalent to having cash in
hand. The percentage of the deposits that should be kept aside
by banks is called Cash Reserve Ratio. The current CRR is 4%
p.a.
2. Statutory Liquidity Ratio (SLR): At the end of every business
day, banks are required to maintain a minimum ratio of their
Time liabilities (when the bank has to wait to redeem their
liabilities) and Net Demand (when bank can withdraw money
from these accounts immediately) in the form of liquid assets
like gold, cash, and government securities. The ratio of time
liabilities and liquid assets in demand is called Statutory
Liquidity Ratio or SLR. The maximum SLR that The Reserve
Bank of India can set is 40% p.a. However, the current SLR
is set at 19.00% p.a.
3. Base Rate: The Reserve Bank of India sets a minimum rate
below which banks in India are not allowed to lend to their
customers. This minimum rate is called the Base Rate in
banking terms. It is the minimum rate of interest the banks are
permitted to charge their customers. The new Base Rate as
fixed by RBI is in the range of 8.95% 9.40% p.a
QUALITATIVE METHODS OF CREDIT CONTROL
The Central Bank adopts certain qualitative methods of credit
control, which are also known as selective credit control methods.
Qualitative methods of credit control mean the regulation and
control of the supply of credit among its possible users. They aim
to channelize the flow of bank credit from speculative and other
undesirable purposes to socially desirable and economically
useful schemes. Some critical control methods are as follows;
Margin Requirements: These aim to prevent customers from
using a bank loan for purchasing securities with speculative
purposes. Whenever the Central Bank wants to curb speculative
activities, it may raise the margin requirements to be contributed
by the borrowers while taking bank loans. If it wants to expand
the credit, these margins may be reduced. For example, as the
government seeks to create more self-employment in agriculture
and allied sectors, agripreneurs obtaining bank loans upto Rs.5
Lakh, to setup their businesses are not required to contribute any
margin money.
Regulation of Consumer Credit: The Central Bank regulates
the use of bank credit by consumers to buy durable consumer
goods in instalments. To achieve this, it adopts two devices,
namely (i) minimum down payment and (ii) maximum period of
repayment.
Rationing of Credit: The Central Bank uses credit rationing to
control and regulate the purpose for which the bank loans are
used as shown below;
1. Variable portfolio ceilings wherein the Central Bank fixes a
ceiling on the aggregate portfolio of the commercial banks.
They cannot advance loans beyond this ceiling.
2. Variable capital assets ratio wherein the Central Bank fixes the
ceiling in relation to the capital of a commercial bank to its
total assets.
Direct Action: The Central Bank may give such “directives”
to the commercial banks and enforce them to follow a particular
policy such as; lending policies, the purpose for which advances
may be made, and the margins to be maintained in respect of
secured loans.
Moral Suasion: The term moral suasion implies persuasion
and requests made by the Central Bank to the commercial banks
to follow the general monetary policy in the context of the current
economic situation.
Publicity: The Central Bank publishes weekly, monthly, or
quarterly statements of the assets and liabilities of the commercial
banks for the information of the public. It also publishes statistical
data relating to the money supply, prices, production, employment
and of capital, money market, etc.
BOARD FOR FINANCIAL SUPERVISION (BFS)
The Reserve Bank of India performs the supervisory function
under the guidance of the Board for Financial Supervision (BFS)
The Board was constituted in November 1994 as a committee of
the Central Board of Directors of the Reserve Bank of India under
the Reserve Bank of India (Board for Financial Supervision)
Regulations, 1994.
Objective: The primary purpose of BFS is to undertake
consolidated supervision of the financial sector comprising
Scheduled Commercial and Co-operative Banks, All India
Financial Institutions, Local Area Banks, Small Finance Banks,
Payments Banks, Credit Information Companies, Non-Banking
Finance Companies, and Primary Dealers.
Constitution: The Board is constituted by co-opting four
Directors from the Central Board as Members and is chaired by
the Governor. The Deputy Governors of the Reserve Bank are ex-
officio members. One Deputy Governor, traditionally, the Deputy
Governor in charge of supervision, is nominated as the Vice-
Chairman of the Board.
In April 2018, a Sub-committee of the Board for Financial
Supervision was constituted, under Para 11 & 12 of the Reserve
Bank of India (Board for Financial Supervision) Regulations, 1994.
The Sub-committee performs the functions and exercises the
powers of supervision and inspection under the Reserve Bank of
India Act, 1934 and the Banking Regulation Act, 1949, in relation
to Payments Banks, Small Finance Banks, Local Area Banks, small
Foreign Banks, select scheduled Urban Co-operative Banks, select
Non-Banking Financial Companies and Credit Information
Companies. The Sub-committee is chaired by the Deputy
Governor in charge of supervision and includes the three Deputy
Governors and two Directors of the Central Board as Members.
BFS Meetings: The Board is required to meet usually once in
a month. It deliberates on inspection reports, periodic reviews
related to banking and non-banking sectors, and policy matters
arising out of or having relevance to the supervisory functions of
the Reserve Bank. The BFS oversees the functioning of the
Department of Banking Supervision (DBS), Department of Non-
Banking Supervision (DNBS) and Department of Co-operative
Bank Supervision (DCBS) and gives directions on regulatory and
supervisory issues.
FUNCTIONS OF BFS
Some of the initiatives taken by the BFS include;
1. Fine-tuning the supervisory processes adopted by the Bank
for regulated entities;
2. Introduction of off-site surveillance system to complement the
on-site supervision of regulated entities;
3. Strengthening the statutory audit processes of banks and
enlarging the role of auditors in the supervisory process;
4. Strengthening the internal defenses within supervised
institutions such as corporate governance, internal control,
and audit functions, management information and risk
control systems, review of housekeeping in banks;
5. Introduction of supervisory rating system for banks and
financial institutions;
6. Supervision of overseas operations of Indian banks,
consolidated supervision of banks;
7. Technical assistance programme for cooperative banks;
8. Introduction of a scheme of Prompt Corrective Action
Framework for weak banks;
9. Guidance regarding fraud risk management framework in
banks;
10. Introduction of risk based supervision of banks;
11. Introduction of an enforcement framework in respect of
banks;
12. Establishment of a credit registry in respect of large borrowers
of supervised institutions; and
13. Setting up a subsidiary of RBI to take care of the IT
requirements, including the cyber security needs of the
Reserve Bank and its regulated entities, etc.
A Central Bank is different from the other Commercial Banks
in the following aspects;
Central Bank Commercial Banks
1. The Central Bank is the 1. A Commercial Bank is only a
apex institution of the constituent unit of the
monetary and banking banking system and a
system of the country. subordinate to the Central
Bank.
2. The Central Bank has the 2. The Commercial Banks do
monopoly of note issue. not have this right.
3. The Central Bank is not a 3. The primary objective of the
profit-making institution. Commercial Banks is to earn
Its main aim is to promote profit for their shareholders.
the general economic
policy of the government.
4. The Central Bank 4. The CBs deal in foreign
maintains the foreign exchange only under the
exchange reserves of the control of the Central Bank.
country.
5. The Central Bank is an 5. The Commercial Banks act as
organ of the government advisors and bankers to the
and acts as its banker and general public only.
the financial advisor.
Training Establishments: The RBI has six training
establishments. The RBI Academy, College of Agricultural
Banking, and Reserve Bank of India Staff College are the parts of
the RBI. The other three, such as National Institute for Bank
Management, Indira Gandhi Institute for Development Research
(IGIDR), Institute for Development and Research in Banking
Technology (IDRBT), are autonomous.
Subsidiaries: The Deposit Insurance and Credit Guarantee
Corporation of India (DICGC), Bharatiya Reserve Bank Note
Mudran Private Limited (BRBNMPL), Reserve Bank Information
Technology Private Limited (ReBIT), Indian Financial Technology
and Allied Services (IFTAS) are the wholly-owned subsidiaries of
the bank.
KNOW YOUR CURRENCY

All of us spend every day of our life dealing with money and
transacting with it. How well informed are we about the Indian
rupee? With a history that dates back to 6th century B.C., here are
ten exciting but lesser-known facts for you about the Indian
currency;
1. Rs. 5,000 and Rs. 10,000 currency: The highest
denomination of the Indian rupee that can be printed today is Rs.
2,000. However, back in 1938, the Reserve Bank of India (RBI) had
printed currency notes with a denomination of Rs. 5,000 and Rs.
10,000. These notes were demonetized in 1946 and later
reintroduced in 1954. In 1978 these were again demonetized.
2. Paper currency notes: In the 18th century, the first paper
currency notes were printed by private banks and the presidency
banks like Bank of Hindustan, Bank of Bengal, Bank of Bombay
and Bank of Madras. After passing the Paper Currency Act of
1861, the British Government of India was conferred the
monopoly to issue paper notes in India.
3. Pakistan’s dependence after Independence: Even after
Pakistan separated from India after independence, it depended
on the Indian currency. How? They stamped Indian rupee notes
with the ‘Government of Pakistan’ until they had enough of their
currency.
4. 1,000 rupee coins: The Coinage Act of 2011 allows issuing
of coins up to a denomination of Rs. 1000.
5. The symbol: The rupee symbol (sign: ₹; code: INR) was
designed in 2010 by designer D.Udaya Kumar, Associate
Professor IIT Guwahati. The symbol is a combination of the
Devanagari and Latin script for the letter ‘Ra.’ The parallel line
gives the symbol a look of the Indian tricolor.
6. 17 languages: Every rupee note bears 15 languages apart
from Hindi and English. The languages are displayed in
alphabetical order. Languages included in the panel are
Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani,
Malayalam, Marathi, Nepali, Odia, Punjabi, Sanskrit, Tamil,

Telugu, and Urdu.
7. Mahatma Gandhi’s image: The image of Mahatma Gandhi
on the currency notes is not hand-drawn. It is a copy of a photo
which was taken in 1947. In the original photo, Gandhiji is
smiling at a person nearby. The photo was cropped to be used on
Indian rupee notes.
8. The 2007 coin shortage: The year 2007 saw an acute
shortage of coins in Kolkata. Shopkeepers bought coins at a
higher value from beggars to collect change. Indian coins were
smuggled to Bangladesh and melted down to make razor blades.
9. Coin minting: The coins are minted at four locations in
India. You can know the place where a coin is minted based on a
symbol below the year on each coin. Symbols and the minting
locations are: dot Noida, diamond Mumbai, star Hyderabad, and
nothing Kolkata. Due to shortages, RBI minted coins from other
countries too.
10. One rupee note: The first banknote printed in
independent India was a one rupee note. The Finance Secretary,
Government of India, signs on it. The other higher denomination
notes bear the promise (“I promise to pay the bearer the sum of …
rupees”) and signature of the RBI Governor.
Queues outside a bank to exchange demonetized banknotes
in Birganj, Kolkata on 10 November 2016.
DEMONETISATION OF INDIAN CURRENCY (2016)
Queues outside a bank to exchange demonetized Demonetized ₹500 and ₹1000banknotes

banknotes in Birganj, Kolkata on 10 November2016 of the Mahatma Gandhi Series
On 8 November 2016, the Government of India announced

the demonetization of all ₹500
and ₹1000 banknotes of the Mahatma
Gandhi Series. It also announced the
issuance of new ₹500
and ₹2000 banknotes in exchange for
the demonetized banknotes. The
government claimed that the action
would curtail the shadow economy
and reduce the use of illicit and
counterfeit cash to fund illegal activity
and terrorism. Prolonged cash shortages followed the announcement
of demonetization in the weeks that followed, which created
significant disruption throughout the economy. People seeking to
exchange their banknotes had to stand in lengthy queues, and
several deaths were linked to the rush to exchange cash.
According to a 2018 report from the Reserve Bank of India,
approximately 99.3% of the demonetized banknotes, or ₹15.30 lakh
crore (15.3 trillion) of the ₹15.41 lakh crore that had been
demonetized, were deposited with the banking system. The
banknotes that were not deposited were only worth ₹10,720 crores
(107.2 billion), leading analysts to state that the effort had failed to
remove black money from the economy. The BSE SENSEX
and NIFTY 50 stock indices fell over 6 percent on the day after the
announcement. The move reduced the industrial production of the
country and its GDP growth rate.
Initially, the move received support from several bankers as well
as from some international commentators. The move was also
criticized as poorly planned and unfair and was met with protests,
litigation, and strikes against the government in several places across
India. Debates also took place concerning the move in both houses
of parliament.
Ref: https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation, 9
Nov 2018,7 pm
SELF-ASSESSMENT
Fill in the blanks
1. Each of the Local Boards of the RBI consist of five members’
each appointed by the Central Government for a term of
……… years.
2. The rate of interest at which the Central Bank rediscounts the
bills of exchange and government securities held by the
commercial banks is called the …….. or ………..
3. The maximum SLR that the RBI can set is ………..and the
current SLR is 19% p.a.
True or False?
4. The RBI is known as the mother of central banks as it provides
the fundamentals of the art of central banking.
5. In the case of deflation, the RBI increases its bank rate.
6. The BFS is required to meet once every three months.
Answers: (1) Four (2) Bank rate, Discount rate (3) 40% p.a (4) True
(5) False (6) False
Questions
1. List the primary functions of RBI as the Central Bank of India.
2. Distinguish between the quantitative and qualitative methods
of credit control.
3. Discuss the primary objectives and functions of BFS.
2.2. COMMERCIAL BANKS
IN INDIA
Commercial Banks in India
Commercial Banks are those profit-making institutions that

accept deposits from the general public and give various loans
and advances to needy individuals such as households,
entrepreneurs, traders, etc. The primary objective of these banks
is to earn profit in the form of interest or commission. The
primary source of income of a commercial bank is the difference
between two interest rates which they charge from the borrowers
and pay to the depositors. The operations of all these commercial
banks are regulated by the RBI, which is the Central Bank and
supreme financial authority in India. The government or public
sector banks form a prominent part of the country’s financial
system.
STRUCTURE OF COMMERCIAL AND
CO-OPERATIVE BANKING IN INDIA
The structure of Indian banking system is as follows;
Reserve Bank of India
Scheduled Banks Non Scheduled Banks
Commercial Banks Co-operative Banks Local Area Banks
Public Sector Banks State Co-op. Banks Coastal Area Bank,

District Co-op. Banks Capital Local Area
Private Sector Banks
Bank, Krishna Bhima
Foreign Banks Land Development
Samrudhi Local Area
Banks, Urban Co-op. Bank, Subhadra Local
Banks etc. Area Bank
Commercial banks can be grouped into two major class
namely the (i) Scheduled banks and (ii) Non-scheduled banks;
SCHEDULED BANKS
Banks which satisfy the criteria laid down vide section 42(6)
(a) of the RBI Act 1934 and have been included in the Second
Schedule of the Act are called as scheduled banks. It comprises
the public sector banks, namely the State Bank of India and it’s
Associate Banks, other Nationalized Banks, Regional Rural Banks,
and the private sector banks, namely the Indian private banks
and foreign banks. It also comprises the co-operative banks,
namely State Co-operative Banks, District Co-operative Banks,
etc.
Public Sector Banks: The banks in which the government
holds the majority of stake is called public sector banks. At
present, there are 20 Public Sector Banks in India as shown below;
(A) State Bank of India and its six associate banks;
1. State Bank of Bikaner & Jaipur 4. State Bank of Mysore
2. State Bank of Hyderabad 5. State Bank of Patiala
3. State Bank of Indore 6. State Bank of Travancore
The State Bank of India (SBI) is India’s largest bank amongst
all public and private sector banks. Measured by the number of
branches, it is the second-largest bank in the world. It provides
various domestic, international, and NRI products and services
through its vast network in India and overseas. With an asset
base of $ 126 billion and its reach, it is a regional banking giant.
(B) Nineteen nationalized banks as listed below;
1. Allahabad Bank 11. Indian Overseas Bank
2. Andhra Bank 12. Oriental Bank of Commerce
3. Bank of Baroda 13. Punjab & Sind Bank
4. Bank of India 14. Punjab National Bank
5. Bank of Maharashtra 15. Syndicate Bank
6. Canara Bank 16. UCO Bank
7. Central Bank of India 17. Union Bank of India
8. Corporation Bank 18. United Bank of India
9. Dena Bank 19. Vijaya Bank
10. Indian Bank
Private Sector Banks: The banks in which private individuals

hold the majority of stake are called as private sector banks. The
first private bank in India to be set up was the IndusInd Bank Ltd.
It is one of the fastest-growing private sector banks in India.
HDFC Bank Ltd. was the first financial institution that received
RBIs approval to be incorporated as a private bank with its
headquarters in Mumbai. The private sector banks functioning in
India are listed below;
1. Axis Bank Ltd. 17. IDFC Bank
2. Balaji Corporation Bank 18. IndusInd Bank Ltd.
Limited 19. ING Vysya Bank Ltd.
3. Bandhan bank 20. Jammu and Kashmir Bank
4. Bank of Punjab Ltd. Ltd.
5. Bank of Rajasthan Ltd. 21. Karnataka Bank Ltd.
6. Bharat Overseas Bank Ltd. 22. Karur Vysya Bank Ltd.
7. Catholic Syrian Bank Ltd. 23. Kotak Mahindra Bank Ltd.
8. Centurion Bank Ltd. 24. Lakshmi Vilas Bank Ltd.
9. City Union Bank Ltd. 25. Lord Krishna Bank Ltd.
10. Development Credit Bank 26. Nainital Bank Ltd.
Ltd. 27. Ratnakar Bank Ltd.
11. Dhanalakshmi Bank Ltd. 28. Sangli Bank Ltd.
12. Federal Bank Ltd. 29. SBI Comm. and
13. Ganesh Bank of Kurundwad International Bank Ltd.
Ltd. 30. Tamilnadu Mercantile Bank
14. HDFC Bank Ltd. Ltd.
15. ICICI Bank Ltd. 31. United Western Bank Ltd.
16. IDBI Bank Ltd. 32. Yes Bank Ltd.
Foreign Banks: The banks whose Head Office is situated
outside India are called as foreign banks which are listed below;
1. ABN Amro Bank 16. Citibank
2. Abu Dhabi Commercial 17. DBS Bank
Bank 18. Deutsche Bank
3. American Express Banking 19. Hong Kong & Shanghai
Corporation Banking Corporation
4. Antwerp Diamond Bank
20. JP Morgan Chase Bank
5. AB Bank
21. JSC VTB Bank
6. Bank International Indonesia
22. Krung Thai Bank
7. Bank of America
23. Mashreq Bank
8. Bank of Bahrain & Kuwait
24. Mizuho Corporate Bank
9. Bank of Ceylon
25. Oman International Bank
10. Bank of Nova Scotia
26. Shinhan Bank
11. Bank of Tokyo Mitsubishi
UFJ 27. Societe Generale
12. Barclays Bank 28. Sonali Bank
13. BNP Paribas 29. Standard Chartered Bank
14. Ceylon Bank 30. State Bank of Mauritius
15. China Trust Commercial Bank 31. UBS AG
NON-SCHEDULED BANKS
The banks which are not added in the Second Schedule of RBI
Act 1934 are called as non-scheduled banks. Since May 1997, there
does not exist any non-scheduled commercial bank in India.
However, RBI considers the following 4 Local Area Banks as non-
scheduled commercial banks;
1. The Coastal Area Bank Ltd., Vijayawada
2. Capital Local Area Bank Ltd., Phagwara, Navsari
3. Krishna Bhima Samrudhi Local Area Bank Ltd., Mehabub
Nagar
4. Subhadra Local Area Bank Ltd., Kolhapur
FUNCTIONS OF COMMERCIAL BANKS
Commercial banks perform various functions that may be
grouped as i. Primary functions, ii. Secondary functions, and 3.
General utility functions as discussed below.
PRIMARY FUNCTIONS OF COMMERCIAL BANKS
The primary functions of commercial banks are as follows;
Accepting Deposits: The most critical function of a
commercial bank is to accept deposits from the general public,
lend it to borrowers to earn some interest income and share this
income with the depositors of money. Longer the period of
deposits, larger would be the amount of interest. As custodians of
public money, commercial banks accept deposits in the form of i.
Savings A/c deposits, ii. Current A/c deposits, iii. Recurring deposits,
iv. Fixed-term deposits, v. Tax saving deposits, and vi. Deposits for
NRIs.
Lending Money: The second important function of
commercial banks is to grant loans and advances. Loans are given
for longer periods, and advances are offered for shorter periods.
For advances, the interest is charged only on the amount
withdrawn and not on the sanctioned amount. The difference
between the rate of interest paid on deposits and charged on
loans is called the spread, which is the primary income of a
commercial bank. The loans issued by banks based on the
perceived personal worth of the borrower are called as clean
loans.
Term Loans: A term loan is the counterpart of a fixed deposit
in the bank. Term loans are made when the repayment is sought
to be made in fixed instalments. It is usually given for acquiring
long-term assets, which will benefit the borrowers over more than
one year. Loans are given to purchase plant and machinery,
constructing of factory building, set up of new business projects,
etc. fall under this category.
Cash Credit: It is an arrangement in which the bank allows
the borrowers to withdraw an amount upto a specified limit as
and when they require. A proper limit is sanctioned for this
purpose as a percentage of the value of the commodities/debts
pledged by the account holder with the bank. The amount is
credited to the account of the customer and the interest is charged
only on the amount withdrawn. Cash credit is granted as per the
terms and conditions agreed with the customers.
Overdraft Facility: It is an arrangement in which the
customers are allowed to withdraw more money from their bank
accounts than what they have deposited in them. It is allowed
against a host of other securities, including financial instruments
such as shares, units of mutual funds, surrender value of LIC
policy, and debentures. The overdrafts allowed by banks based
on the perceived personal worth of the borrower are called as
clean overdrafts.
Discounting of Bills: A bill of exchange is a written order by
the drawer to the drawee to pay money to the payee on the
maturity of the document. When payment is urgently required
before its maturity, banks may accept such bills and make
payments to the holder of the bill immediately after deducting a
certain amount as a discount/commission. The bank would then
present the bill to the drawee (borrower’s customer) on the due
date and collects the total amount. If the payment is delayed, the
borrower or his customer would be charged a predetermined
interest as per the terms of the transaction.
SECONDARY FUNCTIONS OF COMMERCIAL BANKS
The secondary functions of commercial banks are as follows;
Agency Services: The services rendered by commercial banks
as agents of their customers are called as agency services which
include the following;
1. Collection and payment of cheques and bills on behalf of the
customers.
2. Collection of dividends, interest, rent, etc. on behalf of the
customers, if so instructed by them.
3. Purchase and sale of shares and securities on behalf of the

customers.
4. Payment of rent, interest, insurance premium, subscriptions,
etc., on behalf of the customers, if so instructed by them.
5. Acting as a trustee or executor.
6. Acting as agents or correspondents on behalf of the customers
for other banks and financial Institutions at home and abroad.
GENERAL UTILITY FUNCTIONS OF
COMMERCIAL BANKS
The services rendered by commercial banks to both the
customers as well as the general public are called the general
utility services. These services are available to the public on
payment of a nominal fee or charge. They are discussed below in
detail;
Safe Custody: Bankers are in the business of providing
security to the money and valuables of the customers and the
general public. While they provide security to the money of the
general public by way of offering various deposits schemes, the
security of valuables is provided through safety lockers facility.
Lockers can neither be opened by the hirer nor by the banker
individually. Both must come together and use their respective
keys to open the locker.
Remittance of Funds: Apart from accepting deposits and
lending money, banks also carry out the transfer of money of
their customers from one place to another, both domestic to
foreign. Banks issue demand draft, banker’s cheque, telegraphic
transfers, RTGS, NEFT, etc. for this purpose.
Issuing Letter of Credit: Banks, instead of granting cash
credit to customers, may issue letters of credit (commercial or
standby), which can facilitate their trade requirements. A
commercial letter of credit is a contractual agreement between the
issuing bank on behalf of its customer on his her request, with
some other advising or confirming bank, so that the latter be
authorized to make payment to the beneficiary. It commits to
honour the drawings made under the credit. The beneficiary is
usually the provider of goods/services.
Letters of credit are usually negotiable. The issuing bank is
obligated not only to pay the beneficiary but also any bank
nominated by the recipient. Also these letters may be revocable or
irrevocable. A revocable letter of credit may be revoked or
modified for any reason, at any time by the issuing bank without
notification. In contrast, an irrevocable letter of credit may not be
canceled or amended without the agreement of the issuing bank,
the confirming bank and the beneficiary.
Payment of Pensions: Under the facility of disbursement of
pension through authorized banks available to pensioners, a
pensioner is entitled to receive his/her pension by getting it
credited to a savings/current account operated individually by
him/her. The joint account of the pensioner with the spouse
could be operated either by “Former or Survivor” or “Either or
Survivor” basis subject to certain conditions.
Performing Government Transactions: Banks act on behalf of
the government to accept its tax and non-tax receipts, which was
earlier carried out only by government treasuries. Most of the
government disbursements such as pension payments and tax
refunds also take place through banks.
SELF-ASSESSMENT
Fill in the blanks
1. The primary objective of commercial banks is to ……. in the
form of interest or commission.
2. The ……..was the 1st financial institute incorporated as a
private bank with its HQ in Mumbai.
3. Since May ………. there does not exist any non-scheduled
commercial bank in India.
4. The difference between the rate of interest paid on deposits
and charged on loans is called the ………. which is the
primary income of a commercial bank.
5. The loans issued by banks based on the perceived personal
worth of the borrower are called …………..
True or False?
6. In case of cash credits, the interest is charged for the entire
amount credited to the account of the borrower.
7. A letter of credit issued by a commercial bank is always
irrevocable.
8. The joint account of the pensioner with the spouse could be
operated either by “Former or Survivor” or “Either or
Survivor” basis subject to certain conditions.
Answers: (1) Earn profit (2) HDFC (3) 1997 (4) Spread
(5) Clean Loans (6) False (7) False (8) True
Questions
1. What do you mean by a scheduled commercial bank?
2. Describe the structure of banking in India with a suitable
diagram.
3. List out primary and secondary functions of commercial
banks in India.

2.3. BANKER CUSTOMER
RELATIONSHIPS
Banker Customer Relationships
The term “Banking” is defined in Section 5 (b) of the Banking

Regulation Act, 1949 as, “accepting, for lending and investment,
of deposits of money from the public, repayable on demand or
otherwise and withdrawable by cheque, draft, order or
otherwise.”Section 6 of the Act mentions the types of business a
banking company can undertake, Section 8 prohibits it from
engaging itself directly or indirectly in trading activities and,
Section 9 prohibits it from holding immovable properties (other
than for its use) for a period exceeding seven years.
CHARACTERISTIC FEATURES OF BANKING
From the above definition we get the characteristic features of
banking as;
 Accepting deposits of money from the public.
 Pay against cheque, draft, etc. out of such deposits.
 Use such deposits for lending and investment.
 Act as an intermediary to invest public money in investment
and advances.
 It cannot engage itself directly or indirectly in trading
activities
 It cannot hold immovable properties (other than for own use)
for more than seven years.
WHO IS A CUSTOMER?
The term “Customer” is defined in the KYC guidelines issued
by the RBI, but it is not defined in any Act. As per the KYC
guidelines,
 A customer is a person or any legal entity, who has an
account with the bank and whose dealings with the bank are
in the nature of the banking business.
 A person not having a bank account, but availing ancillary
services from the bank like purchasing a draft, remitting
money, hiring a locker, etc. cannot be strictly termed as a
customer since “such dealings are casual dealings and are not in
the nature of banking business.”
BANKER & CUSTOMER RELATIONSHIP
The primary relationship between a banker and a customer is
that of a debtor and creditor as “on opening the SB/CD/Term/
any other deposit account the banker becomes the
debtor.”However, the banker is different from an ordinary debtor
as;
 The banker is required to pay only when the customer
demands payment within the business hours of a working
day at the branch. In contrast, an ordinary debtor should
voluntarily repay the debt on the agreed date.
 For a normal debt, the period of limitation starts from the date
of the debt. However, in the case of bank deposits, it starts
from the date of demand by the depositor.
Apart from the primary relationship, there can be other legal
relationship also between a banker and its customer depending
upon the transaction as shown below;
Type of Transaction Banker Customer
1. Acceptance of deposits Debtor Creditor
2. Overdraft Loan. CC in debit Creditor Debtor
balance
3. Collection of cheque on behalf of Agent Principal
customer
4. Sale/purchase of securities shares Agent Principal
on behalf of customer
5. Carrying on standing instruction Agent Principal
(like paying insurance premium,
etc)
6. Purchaser of DD/MT/TT & Issuing Agent Principal

Bank
7. Payee of DD & Issuing Bank Beneficiary Trustee
8. Safe custody of article Bailee Bailor
9. Safe deposit locker Lessor Lessee
10.Money tendered to bank pending Trustee Beneficiary
instruction for its disposal
Tournier Vs National Provincial & Union Bank of England

Ltd., Case (1924)
This is one of the leading cases which has laid down many
rules on the duty of secrecy of a banker. Tournier was an
employee of a company who had an account with the Union
Bank of England Ltd. The manager of the bank, during his
conversation with Tournier’s employer, disclosed about the
overdraft taken by Tournier and his failure to pay the weekly
instalments to the bank. He also informed that Tournier was in
the habit of betting. After receiving such information, the
employer stopped renewing the service contract of Tournier.
Tournier sued the bank for slander and for its breach of duty of
secrecy. The court in the case decided that (i) The duty of the
bank to maintain secrecy is a legal obligation (ii) This legal
obligation arises out of a contract implied in relation to banker
and customer, (iii) Breach of the duty gives rise to actions for
damage.
DUTIES OF A BANKER
The primary duties of a banker are (i) Duty of secrecy, (ii)
Duty to honour cheques, (iii) Duty to submit a periodical
statement, and (iv) Duty to collect cheques/bills.
DUTY OF SECRECY
A bank is legally obliged to keep the affairs of his customer
secret. This obligation arises out of a contract implied with a
banker and customer.
EXTENT OF SECRECY
There is no need to have an express agreement for this
purpose. Section 13 of the Banking Companies (Acquisition and
Transfer of Undertaking) Act 1970 requires the nationalized
banks not to divulge any information relating to the affairs of
constituents except in circumstances in which they, under law or
practice, customary among bankers, are required to do so.
A banker must take all possible measures to ensure that the
state of affairs of his customer is not made known to any third
party. Ledgers should be beyond the reach of the public.
Telephone inquiry regarding balance should be replied only after
ascertaining the voice of the customer. As such, any Government
Official or Police Authority have no free access to any information
on account of the customer except to the extent authorized by law
or by established banking practice.
DISCLOSURE AUTHORIZED BY LAW
Court Order: A Court can direct a bank to furnish information
relating to a bank account, and the bank is bound to comply with
the same. It can also direct any party to a legal proceeding to
inspect the books of a bank or to take a copy of the same. Where a
bank is required to produce account books, it can provide a
certified copy of the same. The production of books cannot be
forced upon the banker. The certified copy should be treated as
sufficient evidence. As per Section 4 of the Bankers Books
Evidence Act 1891, a certified copy of any entry in banker’s book
shall, in all legal proceedings, be received as evidence.
Income Tax Act, 1961: As per the provisions of Section 131 of
the Income Tax Act, the IT authorities can examine a bank officer
on oath and can compel him to produce books of account and
other documents relating to any customer. As per Section 133(b)
of the Act, the IT authorities may call for any information,
statement of account, or other details regarding a particular
account or all accounts. This section authorizes the IT officials to
make roving inquiries (i.e., inquiry to give information on all
accounts of a specific nature) for all types of accounts irrespective
of their balance.
However the CBDT has clarified that roving enquiries can be
made only in respect of the following deposits/ transactions; (a)
Time deposits exceeding Rs. 2 Lakh, (b) Cash deposits of Rs. 2
lakh or more on a single day, (c) Cash purchase of DD/BCs in
aggregate for Rs. 1 lakh or more in a single day, (d) Credit card
entries for Rs.1 lakh or more but less than Rs. 2 lakh, (e) Credit
card entries in a foreign currency if the same is Rs.50,000 or more
but less than Rs. 2 lakh.
The Supreme Court decides it in Karnataka Bank Ltd., Vs.
Secrecy to the GoI, that;
The IT authority has powers to call for such general
information, even in the absence of any pending enquiry/
proceedings.
 The notice can be issued only with the prior approval of the
Director/Commissioner of Income Tax Department.
Therefore branches should comply with a notice served under
section 133(6) of the IT Act after seeking some time to furnish the
information given the volume of the transactions involved and
also requesting the IT authorities to confirm that the notice is
issued with prior approval of the Director Commissioner.
Gift Tax Act, 1958: Section 36 of the Act confers on the Gift
Tax authorities similar powers as given in Section 131 of the
Income Tax Act, 1961.
Criminal Procedure Code, 1973: As per the provisions of
Section 91(1), any officer in charge of a police station may issue a
summon or written order requiring any person to produce any
document or thing necessary for a trial or investigation. When
such a summon or written order is received, it should be
complied by the bank by providing a true copy of the document.
The regional office should be kept informed about the receipt of
such an order and its compliance.
As per Section 94, a first-class magistrate may, by the warrant,
authorize any police officer (above the rank of a constable) to
conduct a search and take possession of stolen property/
article/forged documents/counterfeit currency notes. In all such
cases, the original document can be given as per the warrant. A
xerox copy of the document duly attested by the branch
manager/police officer should be kept in the branch, and another
copy should be sent to the Regional Office. The acknowledgment
of the police officer to be obtained on the reverse of the xerox
copy and in the seizure memo. In case of cheque/drafts, etc.,
involving chemical alteration, a coloured photo should also be
obtained.
As per Section 102 of the Cr.P.C..1973, a police officer can
seize money (freeze) lying in the bank account. The Supreme
Court of India in the State of Maharashtra Vs. Tapas Neogy [2000
ISJ (Banking) 65] Case has decided the following; (i) A police
officer (including CBI) can direct a bank under Section102 to
freeze the operation of bank accounts (both of the accused and his
relatives), (ii) He may direct this amount to be remitted to the
CBI/ police authority by way of cash/DD/FD/BC, and the bank
is bound to comply the same.
Other Acts giving similar powers: Like State police
authorized by the Cr.P.C., some other authorities are also
empowered by different other Acts to call for information and
documents and summon persons in possession of the
information/document. Such authorities are (i) Central Bureau of
Investigation, (ii) Customs Officer under Customs Act Section 107
& 108, (iii) Central Excise Officer, and the (iv) Sales Tax Officer.
Foreign Exchange Management Act (FEMA): Section 19E &
19F of the FEMA Act empowers the Directorate of Enforcement to
summon any person to give evidence or to produce any
document which is in possession/control of a person. Section 43
of the Act further empowers the officer of the Directorate of
Enforcement and RBI to inspect books and accounts of any
authorized dealer and to examine its offices on oath.
Indian Companies Act, 1956: As per Section 251 of the Act, a
banker is under an obligation to disclose all information relating
to a company, when approached by an Inspector appointed by
the GoI u/s. 235 & 237 of the Companies Act to investigate into
the affairs of a company.
Reserve Bank of India Act, 1934: As per Section 45B of the
Act, the RBI is authorized to collect credit information from banks
and provide the same to different other banks. Section 45C
empowers the RBI to direct any bank to submit statements
relating to credit information as at deems fit.
DISCLOSURE PERMISSIBLE AS PER BANKING
PRACTICES
As per banking practice, disclosure is permitted under
different circumstances as shown below;
Disclosure to another bank: It is an accepted banking practice
to supply credit information/opinions on customers when
requested by other banks. Such opinions should be provided in (i)
IBA prescribed format, (ii) in general terms, (iii) without affixing
bank’s signature, and (iv) describing the means of the person in
coded words as circulated by IBA among banks. The means of a
customer is calculated by adding the value of his movable,
immovable assets, including his capital investment in business
and deducting his liabilities and borrowings.
The means of the customer and corresponding code words are
as follows;
Means of Customer Code Words

Rs.10,000 or less Very small means
Rs.10,000 to Rs. 25,000 Small means
Rs.25,000 to Rs. 50,000 Moderate means
Rs.50,000 to Rs. 100,000 Moderate to fair means
Rs.1 lakh to Rs. 2 lakhs Fair means
Rs.2 lakhs to Rs. 3 lakhs Fairly good means
Rs.3 lakhs to Rs. 5 lakhs Fairly good to good means
Rs.5 lakhs to Rs.10 lakhs Good means

Rs.10 lakhs to Rs. 25 lakhs Very good means
Rs.25 lakhs to Rs. 50 lakhs Large means
Over Rs. 50 lakhs Very large means
Disclosure with customer’s consent: Bankers in no case
should supply information about his customer to any other
person unless an express or implied authority to do so, is received
from him. A bank has implied authority to disclose details of a
borrower account to his guarantor. However, it should not
voluntarily give such information. It should be given only to the
extent solicited by the guarantor and only those which directly
related to the advance account.
Miscellaneous: The obligation to maintain secrecy continues
even after the account is closed. In case of unauthorized
disclosure, the customer may sue the bank for damages. The
banker is liable if it furnishes false or baseless or highly
exaggerated information. Any third party who relied on such
information and suffered loss can also sue the bank if the report
turns to be false.
GARNISHEE ORDER
A garnishee Order is an attachment order issued by a Court at
the request of a creditor to attach his debtor’s fund in the hand of
a banker. Attach means a direction to stop operation or to freeze
or withhold the payment of the entire or a part of the balance in
the account. Garnishee means a debtor to the debtor, and
accordingly, the banker who holds the deposit balance of the
debtor is called the garnishee. Since it is an order to the garnishee,
it is called a garnishee order.
ISSUE OF GARNISHEE ORDER

A garnishee order is issued u/s. 60 of the Code of Civil
Procedure, 1908.The procedure for issuing a garnishee order is
laid down in Order 21, Rule 46 of the Code of Civil Procedure,
1908. A garnishee order is first issued as an Order Nisi and then
as an Order Absolute.
Order Nisi: An Order Nisi requires the banker to explain as to
why the funds of the depositor should not be attached towards
satisfaction of the dues of the judgment creditor. On receipt of an
“Order Nisi” the bank is bound to stop operation of the
depositor’s account. He must immediately inform the customer
about the receipt of the order.
Order Absolute: After receipt of the explanation against the
“Order Nisi” from the bank, the Court may issue the “Order
Absolute.” On receipt of an “Order Absolute,” the bank should
pay the amount to the Court. The production of a passbook or
deposit receipt is not necessary for making such payments.
A garnishee order usually does not mention the amount. In
case no amount is indicated, the entire balance should be
attached. However, if it is issued for a specific amount, only that
amount should be attached.
TYPE OF ACCOUNTS ATTACHED
A garnishee order extends only to those accounts which are
held in the same capacity in which the order is issued and not to
accounts held otherwise.
Joint Account: If the garnishee order is in the name of A, but
the account is in joint names of A, B &C, the account is not
attached. However, if the garnishee order is in joint names of A, B
& C, it will not only attach the joint account of A, B & C but also
accounts of their names.
Partnership Account: In case the garnishee order is in the
name of A, and the account is in the name of a partnership firm
where A is a partner, the firm’s account cannot be attached.
However, a garnishee order issued in the name of a partnership
firm extends to the balance in the firm’s account and also to the
balance available in the accounts in the individual names of the
partners.
Proprietorship Account: Where the garnishee order is in the
name of an individual, it would extend to any account
maintained by him in the name of a firm as a sole proprietor.
There is no distinction between a proprietor and his proprietary
firm.
Trust Account: Accounts held by a person in trust in a
fiduciary capacity are not attached by a garnishee order issued in
the individual names.
Advocate’s Name: A garnishee order issued in the name of an
advocate will attach his office account (Reason: it is his personal
account) but not his client’s account maintained by him (Reason:
the advocate holds this account as a trustee for his client)
Deceased Person: Funds belonging to deceased constituents
are not attachable by a garnishee order.
Insolvent Person: Funds in the name of an undischarged
insolvent are not attachable by a garnishee order.
TYPE OF DEPOSITS ATTACHED
A garnishee order attaches all types of deposits due and
accruing. Deposits due means SB, CD, Call deposits, and overdue
time deposits as they are due for payment. Deposits accruing due
are term deposits that will mature for payment in the future,
where the attached amount is payable only on their maturity.
Where before receiving a garnishee order, an amount is
passed for payment, the debit entry is made, and token issued.
However, the amount is still not paid by the cashier, the
garnishee order would attach such amount also (Reason: A
payment is not conclusive unless the bank parts the amount)
Similarly, where a cheque is received in clearing for payment,
and a garnishee order is received before the time within which
the clearing cheque can be returned unpaid, the cheque should be
returned unpaid and the amount attached by the order. However,
if the garnishee order is received after such time, it does not apply
to the amount of cheque.
TYPE OF ASSET NOT ATTACHED
Funds/goods/money held by a bank other than as debtor: A
garnishee order attaches only debts. It does not extend to
funds/goods/money held by a bank other than as debtor.
Therefore funds owned in safe custody, safe deposit locker, funds
held in trust are not attachable by a garnishee order.
Cheques Bills sent on collection: Cheques, bills sent on the
collection are not attachable as the relationship of a banker and
customer is not that of a debtor and creditor. The sale proceeds of
shares/ securities yet to be received by the bank are not attached.
Notice deposits: The notice deposits cannot be attached under
a garnishee order as they are neither due nor accruing due unless
the bank receives a notice demanding payment. Presently banks
do not accept such deposits.
Cash credit A/c & Uncleared balances: The undrawn portion
of a cash credit account cannot be attached as it is not a debt due.
Similarly the uncleared balances in SB/CD account also cannot be
attached.
Future credits: Only the balance available at the time of the
receipt of a garnishee order is taken into consideration for
attachment. Credits/deposits given after the receipt of the order
are not attachable. For example, if the garnishee order is received
at 12 am, the money deposited at 3 pm., such deposit at 3 pm
cannot be attached.
MISCELLANEOUS
Notice to the customer: On receipt of a garnishee order, the
customer should be informed about it at the earliest. The branch
should also inform the RO/ controlling office about the action
taken.
Right to set-off: The bank is entitled to exercise its right of
set-off for all debt due from the customer but not contingent dues,
before complying with the order.
Served at head office: A garnishee order can be served at the
head office of a bank. However, it will become effective on the
branch after a reasonable time, which is required for sending the
communication.
Balance with foreign branches: No garnishee order can be
issued for attaching balance available in foreign branches of a
bank in the name of the debtor.
Salary: A garnishee order cannot attach a salary.
Cheques marked good for payment: Cheques marked “good
for payment” by a banker can be paid even after the receipt of a
garnishee order as it constitutes the liability of the bank.
INCOME TAX ATTACHMENT ORDER
An attachment order under the Income Tax Act, 1961, is
issued under Section 226(3) by an Income Tax Officer. This
section authorizes, “the ITO to require, by notice in writing, any
person from whom money is due or may become due, to the assessee or
any person who holds or may subsequently hold money for or on
account of assessee to pay the income tax officer an amount equal to the
amount of arrears of tax.”
It is not only debts due and payable (as is the case with a
garnishee order), but also an income tax attachment order
attaches any money held on account of the assessee. Accordingly,
it can attach;
(a) Savings Bank and Current Account.
(b) Term Deposit (but the amount is payable on maturity only)
(c) Proceeds of collection item not credited to account (note that a
garnishee order does not attach it)
(d) In case of term deposits, the notice attaches the deposit, but
the payment of the same to IT authorities will be made on the
maturity of the deposit.
ATTACHING JOINT ACCOUNT
Even though the order is received in a single name, it attaches
the balance (pro-rata) in any joint account maintained by such
person. Unless it is proved otherwise, the share of the joint
account holders is considered to be equal [(Section 226 (3)(iii)].
The account in joint names can be attached only where there is a
mention in the order that a copy of the same is sent to the other
joint account holders. In case no such remark is made, the income
tax department should be advised, “You have not sent the notice to
both all depositors as provided in Section 226 (3) (iii) of the Act. We are
therefore, unable to comply with your demand without references to the
other joint depositors.”
The joint account holders should be asked to establish their
claim, if any, to the entire balance to the exclusion of the person
named in the order. In case they fail to produce court order/stay
order within a reasonable time, the bank should act on the
presumption made by the Act and pay the proportionate amount
to income tax authorities.
The account of the deceased/insolvent person: An IT
attachment order attaches the funds held on account of a
deceased or a bankrupt depositor. Garnishee order does not
attach the same. Where the attachment order relates to the arrears
of tax dues on the estate of the deceased depositor, the balance on
the joint account in his name need not be attached.
Accounts in other capacities: If the order is in individual
name, it does not attach accounts in the name of partnership firms
(where he is a partner) or in the name of a trust (where he is a
trustee)
Money held or subsequently held: As per Section 226(3) of
the IT Act, the order also attaches money held or “that may be
subsequently held,” However, court decisions have struck down
the view that the money to be maintained subsequently by the
bank will be covered. Any payment made into the account after
the receipt of the notice cannot be attached and hence is not
payable to the IT department.
ACTING ON THE ATTACHMENT ORDER
 The bank is entitled to first exercise its ‘right of set-off’ before
acting on the order. Where a bank fails to attach the amount, it
would be deemed to be an assessee in default.
 On receipt of the order, the customer must be given notice.
The account should be attached only if all particulars in the
order tally precisely with those in the bank’s book. In case of
variation, the ITO should be informed immediately.
 Permission from Regional Central Office is to be obtained
before remitting the funds to ITO. The account holder also
must be informed about such payment to ITO.
Note: Like the IT attachment order, attachment order can also
be issued under Wealth Tax Act, The Recovery of Debts Due to
Banks & Financial Institutions Act, 1993, Employees Provident
Funds & Miscellaneous Provisions Act, 1952 u/s. 8F and also
Sales Tax Acts of the different States.
GARNISHEE ORDER VS ATTACHMENT ORDER
Garnishee Order Attachment Order

Issued by court authority Issued by IT/WT/ST
Dept.
Amount is not mentioned Amount is
mentioned
Savings Bank/ Current/ Call/ Term Same. Future credits
Deposits held at the time of receipt of are not attached.
the order are attached
Proceeds of Cheques Bills on collection Attached
are not attached as the banker customer
relationship is that of agent and
principal and not debtor and creditor.
Issued in single name, balance is joint Attached Pro-rata
account is not attached.
Issued in joint names, balance in joint Same
account and also in individual accounts
attached
Account of deceased insolvent cannot Accounts of deceased
be attached insolvent are
attached
ATTACHMENT ORDERS UNDER OTHER STATUTES

Like IT attachment orders, certain other statutes also provide
for the issue of attachment orders, and banks have to act almost in
a similar manner and pay the amount to the respective
authorities.
Employee State Insurance Act, 1948: As per Section 45G of
the Employee State Insurance Act 1948, the Director-General of
the ESI Corporation or any other officer authorized by the
corporation (i.e., Recovery officer) can issue a notice in writing to
any person from whom money is due or may become due to the
principal employer to pay the amount of dues owed by such
employer to the corporation. Therefore the bank may receive
notice under this section and should act almost in a similar
manner as in the case of an Income Tax attachment order.
Employee Provident Fund and (Miscellaneous Provisions)
Act, 1952: As per Section 8F of the Act, the Central PF
Commissioner or any other officer authorized by him may at any
time b notice in writing require any person from whom money is
due or will become due to the employer to pay the amount
needed. The bank may receive notice under this section and
should act almost in a similar manner as in the case of an Income
Tax attachment order.
Recovery of Debts Due to Banks and Financial Institutions
Act, 1993: As per Section 28, the Recovery Officer can issue a
direction to any bank to pay the amount due or becoming due to
the borrower and the bank is bound to honour such directive.
PAYMENT OF INTEREST ON FREEZED ACCOUNTS

 Where an account or an amount is attached/seized by a
competent authority by a garnishee order or IT attachment
order or any such order, banks were not paying interest on
such deposit if the amount has been transferred to the sundry
creditor or an overdue term deposit. As a result, the
customers were losing interest on such deposits, mainly when
deposit remained unrenewed for a long time. To give justice
to such depositors, the RBI has asked the banks to pay interest
on such deposits.
 In case of SB account, banks need not transfer the seized
amount to sundry creditor account rather block the same in
the computer and continue to pay interest as usual in the
account.
 In case of a term deposit, the banks should mark a lien on the
deposit. When the deposit becomes due for payment, the
bank on written request from the depositor will renew the
deposit for any period as requested by the depositor, and in
case there is no mention of the period for the same period
without insisting the deposit receipt. The bank need not issue
a new deposit receipt. The bank will inform in writing the fact
of the renewal to the concerned authority with a copy to the
depositor. Such a letter should mention the details of the
deposit, particularly the rate of interest for the information of
the depositor.
 In the case of overdue term deposits, the bank can renew the
deposit from the date of maturity only where the overdue
period does not exceed 14 days. In other cases, the bank has to
renew the deposit from the time of request and pay the
interest for the delayed period as per the bank’s policy.
RIGHTS OF A BANKER
The primary rights enjoyed by a banker are (i) Right of
general lien, (ii) Right of set-off, (iii) Right of appropriation, and
(iv) Right to act as per the mandate of the customer.
RIGHT OF GENERAL LIEN
A creditor in possession of goods and securities belonging to
his debtor (held in debtor’s name not jointly with others) can, in
the absence of a contract to the contrary, continue to retain them
till his dues are paid. Such a right of a creditor to retain is called
lien. This right gives the creditor only the power to preserve and
not to sell. The right is lost when the possession is lost. It is
available only on the goods and securities (shares, debentures,
bills, etc.) and not on any other things. It is a statutory right and is
available even in the absence of any agreement to this effect and it
can be excluded by the parties by their mutual agreement.
TYPES OF LIEN
A lien can be a (i) particular lien, (ii) general lien, and (iii)
banker’s lien.
(i) Particular lien: Section 170 of the Indian Contract Act deals
with the particular lien that gives the right to retain the goods
for a particular or specific due from the debtor and not
against other dues from him. The particular lien (also known
as ordinary lien) is available to anybody who has a right to
receive payment form other. For example (i) a tailor can
retain the shirt till his stitching charge is paid.
(ii) General lien: Section 171 of the Indian Contract Act deals
with the general lien, which is available only to certain
specified creditors, namely the bankers, factors, wharfingers,
attorneys of High Court, and policy brokers. It can be
exercised on goods and securities of the debtor for all his
dues payable and not for a particular due, as is in the case
with a particular lien.
(iii) Banker’s lien: A banker’s lien is also a general lien. It is an
implied pledge. Though the general rule is that a lien does
not confer a right to sell, a banker’s lien is exceptional. A
banker can sell the goods/ securities of a debtor after giving
him a reasonable notice.
WHERE THE RIGHT OF LIEN CAN BE USED?
The right of lien can be used only when;
(i) Goods & Securities received in the capacity of a creditor:
The right of lien is available on goods and securities received
only in the capacity of a banker or creditor. Therefore it
cannot be used against the goods received for safe custody,
goods in safe deposit lockers, goods held by the bank in the
capacity of a trustee, goods received for a specific purpose,
and the goods/securities left by the debtor by mistake.
Further, it cannot be exercised against the goods and
securities held by the debtor in joint names or in the capacity
other than that in which he owes the debt. Also, the right is
lost if there is a contract (expressed or implied) not to exercise
such lien.
(ii) Only on the goods and securities of the debtor: The lien is
available only on the goods and securities of the debtor, and it
cannot be extended to his money deposits in the bank. The
bank has only the right to set off (not the right to a lien) over
such deposit balances of his debtor. Lien is available on any
goods and securities such as bills, cheques, promissory notes,
share certificates, bonds, debentures, etc. which are delivered
to banks in the capacity of a banker.
(iii) Jewel loan and Banker’s lien: In the absence of a contract to
the contrary, a bank can exercise its general lien on the gold
ornaments remaining in its possession after the liquidation of
the debt. Banks usually obtain an express declaration to this
effect from the borrower. The same rule is applicable for
jewels pledged by the guarantor.
(iv)Guarantor and Banker’s lien: The bank can exercise a lien on
goods and securities belonging to a surety, once the debt is
due for payment and not before that.
(v) Lien and limitation period: The banker’s right of general lien
is not barred by law of limitation. It can be exercised at any
time. Lien is also available for the satisfaction of the debt,
which is time-barred. In case of a time-barred jewel loan, a
bank has got a right to sell the jewels and appropriate the
amount to the loan account and other dues of the borrower.
RIGHT OF SET-OFF
Where a customer has a credit balance in one of his accounts
and debit balances in another, the banker has a right to adjust the
credit balance with the debit balance and to arrive at the net
amount due. Such a right to combine accounts to arrive at the net
sum due to or from a person is called the right of set-off. It is a
statutory right available to any creditor, even in the absence of
any express agreement. However, the right of set-off is not
available in case there is an agreement (express or implied) for
not exercising this right.
WHERE THE RIGHT OF SET-OFF CAN BE USED?
The right of set-off cannot be used on all types of credit
(deposit) and debit (loan) balances. It can be used only when,
(i) Dues are certain; not contingent: The credit balance (balance
from deposits) held in the name of a guarantor cannot be set
off to the debit balance in the borrower’s account until a
demand is made to the guarantor and his liability becomes
certain.
(ii) Credit balances are due: The credit balance in a term deposit
that is yet to mature for payment is not available for set-off as
the amount is not due. Similarly, a loan that is payable
afterward cannot be considered for set off.
(iii) Held in the same capacity: The deposits held by the
customer in the position of a guardian, trustee, partner of a
firm, etc. are not available for such adjustment to the
borrowings in his personal capacity.
(iv) Prior notice to the customer: The right of set-off is exercisable
only when the bank has given prior notice to the customer.
(v) Immediate effect: The right of set-off can be exercised
immediately on the happening of certain events such as the
death, insolvency, lunacy of the customer, bankruptcy/
dissolution of a firm or liquidation of a company, on receipt of
Garnishee order/attachment order from the Income Tax and
time-barred debts. The right of set-off can be used even on the
deposit balances held in other branches of the bank.
EXAMPLES FOR THE RIGHT OF SET-OFF
1. Deposit in single name but borrowing in joint names and
several liabilities (available)
2. Deposit in partner’s name and borrowing by the firm where
the partners have taken joint and several liability or partners
are guarantors (available)
3. Deposit in proprietary firm’s name and borrowing by
proprietor or vice versa (available)
4. Deposit in joint names payable to former or survivor and
borrowing in the name of the former (available)
5. Deposit in joint names and borrowing in a single name (not
available)
6. Deposit in a firm/ partnership name and borrowing in a
partner’s name (not available)
7. Deposit in the dividend account of a company and borrowing
in the company’s name (not available)
8. Deposit in the client account of a solicitor and borrowing in
the personal name (not available)
RIGHT OF APPROPRIATION
When a debtor owing several debts makes a payment, the
creditor should appropriate it as per the rules of appropriation
laid down in Section 59, 60 and 61 of the Indian Contract Act.
Section 59: If the borrower expressly mentions the debt to
which the payment will be credited or if it is implied from the
circumstances, the creditor must appropriate the payment to that
debt.
Section 60: In the absence of the express or implied intention
of the borrower, the creditor may use his discretion and apply the
payment to any lawful debt due and payable, including the time-
barred debt from the debtor.
Section 61: Where neither of the two parties makes any
appropriation, the payment will be applied for discharging debts
in order of time. If the debts are of equal time, the payment will
go to discharge the debts proportionately. The provision of this
section is the same as that of the rule laid down in the famous
Clayton’s case. These sections are also applicable to loans taken
from the bank where a borrower has two or more loans. When the
bank wants to appropriate payment under Section 60, it has to
send a notice to the customer informing its decision. When the
customer has received the notice, the bank cannot change the
same without the consent of the borrower.
Rule in Clayton’s Case
This rule which was laid down in the famous case of
Devayanas Vs Noble states the rule of appropriation in running
accounts like cash credit and overdraft accounts. As per this
rule, each withdrawal in a cash credit account is considered as a
new loan and each deposit as a repayment of the loan in the
order, in which it is made. The first debit in the account is
considered to have been discharged or reduced by the first item
in credit side and accordingly the other entries follow suit in
chronological order. In order to avoid application of this rule,
the bankers stop operation of the account in case of
death/insolvency of a partner/ guarantor/joint account holder
etc.
INTEREST FIRST
In the absence of an agreement to the contrary, any payment
by a borrower to a loan will first go towards interest and then to
the principal (M/s Kharavela Industries Vs. OSFC and others)
Banks must follow consistent policy in this regard and disclose
the same in the balance sheets. For example, in IOB, all recoveries
must be first appropriated towards interest undebated interest
except in suit filed account where it should be principal
outstanding. If a customer wants, otherwise, the bank is not
bound to accept the payment from the borrower. But if the bank
accepts the same, it has to comply with the condition of the
borrower.
WHERE THE CLAYTON’S RULE IS APPLICABLE?
The Clayton’s rule is applicable in the following cases;
Death Insolvency of the borrower: Where an individual
borrower or the proprietor expires/becomes insolvent, a bank
may stop operation in his cash credit account. In case any fresh
credit is allowed to the account, the liability of such deceased
borrower stands reduced by this amount, and his estate cannot be
made liable for the same. The estate of the deceased/insolvent
borrower cannot be made responsible for all fresh debit after his
death/ insolvency.
Death/Retirement/Insolvency of a partner in a partnership
firm: On the death/retirement/insolvency of a partner, the
liability of such partner stands determined. In case of any new
debt to the account, the deceased/ retired/insolvent partner’s
estate cannot be made liable for the same. On the contrary, their
liability stands reduced by the credits. For this reason, the
operation in the account should be stopped to determine the
liability of the deceased/retired/insolvent partner. In case the
bank decides to allow the operation to the new firm, it should be
done after ruling off/breaking the account and allowing
operation on a new page.
Death of a Guarantor: On receipt of the notice of death/
insolvency of a guarantor the operation of the account should be
stopped or should be ruled off. In case it is not done, the rule of
Clayton’s case will apply & the liability of the estate of the
guarantor will diminish to the extent of credits allowed in the
account after the receipt of the news of death/insolvency. The
same principle also holds good in case of revocation of guarantee.
Joint Account: On receipt of the news of death/ insolvency of
one of the joint account holders, the operation in the account
should be stopped, or the account should be ruled off as
otherwise, the rule in Clayton’s case will be applicable. If a term
deposit is appropriated before maturity, it comes under the right
of appropriation, while if it is done after the maturity, it comes
under the right of set-off.
RIGHT TO ACT AS PER THE MANDATE AND POWER
OF ATTORNEY OF THE CUSTOMER
Both mandate and Power of Attorney are the instruments
through which one person (principal) appoints another (agent) to
act on his behalf. The law relating to agency/attorney is dealt
within the Indian Contract Act. A mandate is just a simple letter
of authority given by an account holder to the bank to allow a
certain named person to operate his account on his behalf. A
mandate is given for allowing somebody to operate the account,
to make, draw, accept or otherwise sign bills of exchange and
other negotiable instruments or to overdraw the account
whenever required.
SALIENT FEATURES OF MANDATE
The salient features of a mandate are as follows;
 Mandate can be issued for operating an SB A/c or current
A/c.
 A mandate to operate the account does not empower to
overdraw the account unless it expressly provides for the
same.
 In case of a joint account, the mandate must be signed by all
joint accountholders, in case of the partnership firm by all
partners, in case of Hindu Undivided Family (HUF) by Karta
& all major coparceners.
 Where the account holder is illiterate, the mandate must be
attested by a notary public.
 Details of the mandate must be recorded in the power of the
attorney register.
 A mandate is neither stamped nor witnessed.
Termination of Mandate: The authority given by a mandate
stands terminated in the following circumstances. (i) death/
insolvency/ insanity of the account holder, (ii) Revocation of the
mandate by the account holder, (iii) Refusal of the mandate
holder to act as agent.
POWER OF ATTORNEY
A power of attorney is a general document used to convey
powers for many other purposes besides the operation of the
account. It gives public notice and authority. A person can do
through the agency of an attorney, any act which he could do on
his account.
SALIENT FEATURES OF A POWER OF ATTORNEY
The salient features of a power of attorney are as follows;
General Vs. Restricted power: A general power of attorney
authorizes the agent (done/power of attorney holder/ attorney)
to do more than one transaction on behalf of the principal (donor)
whereas a restricted (particular or special) power of attorney
authorizes a person to act in a single transaction. A power of
attorney can be granted for a specific period or an indefinite
period.
Stamping: A power of attorney is required to be stamped as
per the Stamp Act of the State where it is executed. A general
power of attorney attracts more stamp duty compared to a
restricted power of attorney. A power of attorney executed
outside India for use in India should be executed before the
Indian Embassy High Commission in the country in which it is
executed and need not be stamped at the time of execution but
must be stamped within three months of its receipt in India
(Section 18 of Indian Stamp Act)
Execution: A power of attorney should be executed in the
presence of a notary public who should confirm under his
signature the identity of the principal. When it is executed outside
India, the signature of the notary or judge is to be legalized by the
high commissioner/ representative of the Indian Embassy in that
country. Persons incompetent to contract (viz., minors, lunatics,
insolvents) are not capable of executing a valid power of attorney
or mandate. The liquidator of a company can execute a power of
attorney to appoint an agent. A company is required to execute
power of attorney under its common seal. Legally there is no bar
to appoint a minor or an undischarged insolvent as an agent
provided they are of sound mind. A lunatic cannot be appointed
as an agent.
Registration: A power of attorney is registered with the
Registrar of Assurances. However, it is not compulsory to register
a power of attorney.
SCRUTINY OF A POWER OF ATTORNEY
A banker must verify that a power of attorney is duly
executed, attested, and is adequately stamped. Section 85 of the
Evidence Act provides that if it is executed/ authenticated before
by a Notary/Magistrate/Court/ Judge/Indian Consul or the
representative of the Central Government, it can be accepted
without any further enquiries, The authentication by notary
public provides legal prescription that the same has been duly
executed and the person executing had the authority to do so.
Powers to be exercised are expressed: The power of attorney
should contain the powers expressly that can be used by the
agent. Nothing should be inferred. For example, the power to
operate the account does not give authority to overdraw/
close/transfer the account or deal with negotiable instruments.
The power given to deal with shares does not provide powers to
deal with Government securities.
Powers to draw/endorse cheque: The power to draw/

endorse cheque does not give power to draw/accept/ endorse a
bill of exchange. Similarly, power delegated to draw a bill of
exchange does not ipso facto gives power to endorse the same.
If a power of attorney mentions that “the attorney is empowered
generally to act in relation to my estate and affairs as fully and
effectually in all respects as I myself could do,” these words should be
interpreted as to give all powers as necessary for carrying out the
specific powers set out in previous clauses. They cannot be told to
provide all-pervasive powers to the agent.
The specimen signature of the attorney should be obtained
and should be attested by the principal. Where an account is
operated by the power of attorney holder himself, then a letter of
thanks must be sent to the principal by Registered Post with
Acknowledgement due. An undertaking must be obtained from
the principal to the effect that he must notify the bank in writing
about the cancellation of a power of attorney in addition to public
notice in newspapers.
REVOCATION OF A POWER OF ATTORNEY
A power of attorney is cancelled by express revocation by the
principal or upon his death/ insanity/insolvency of the principal
or liquidation of the company. It also revoked upon the death or
insanity of the agent. In the case of joint attorneys, the death of
one cancels a power of attorney.
The insolvency of the attorney does not revoke a power of
attorney. However, he cannot receive payment on behalf of his
principal. Where a power of attorney is registered, it can be
revoked only through a registered instrument. A person dealing
with an attorney in good faith can assume that power has not
been revoked except in circumstances which should place a
reasonable person on suspicion that the power is no longer in
force. Under Section 208 of the Indian Contract Act, the
termination of authority of an agent takes effect as against third
persons when it becomes known to them.
POWER OF ATTORNEY COUPLED WITH INTEREST
Where a proper power of attorney is coupled with interest
(i.e., where the agent himself has interest in the property which
forms the subject matter of agency), it is not automatically
cancelled upon the death of the principal, nor it can be terminated
to the prejudice of such interest (Section 202 of Indian Contract
Act) As such, a power of attorney obtained by a bank in its favour
to collect book debts supply bills on behalf of his borrower who is
financed against the security of such book debts/bills, a power of
attorney remains operative even after the death of the principal.
In such cases courts have held that there is an “equitable
assignment” of the debts due to the borrower.
SOME MORE POINTS ON POWER OF ATTORNEY
Some more important points regarding power of attorney are;
Death of the agent: A cheque signed by a person in the
capacity of an agent can be paid (if otherwise in order) even after
his death (as the principal is still alive)
Form of signature: The agent should sign “Per pro-ABC,”
which means the agent is signing under limited authority. If he
signs so, he need not include the words like Agent Constituted
Attorney. Alternatively, he can sign as (i) “For ABC…” or (ii)
“ABC by his constituted attorney.”
An attorney cannot be delegated: As a general rule, a
delegate (attorney) cannot delegate his powers unless there is
express provision to that effect. In case of a joint account with
anyone to operate, one of them cannot give power of attorney to a
third party to operate the account on his behalf. When two
attorneys are authorized to act jointly, neither of them can act
independently to delegate/to appoint his substitute even if there
is express provision to delegate.
Sub-Agent Vs. Substitute Agent: A sub-agent is a person
employed by the agent in the business of agency and acts as an
agent to the original agent. Sometimes the principal authorizes in
a power of attorney to the agent to name other persons to act on
behalf of the principal. Such persons designated by the agent to
act on behalf of the principal are called the ’substituted agent.’
They are not an agent of the original agent but an agent of the
principal for such part of the agency as is entrusted to him. Where
the Chairman/MD/GM/such officer is authorized to delegate, he
can appoint other officers to act as a substituted agent to act on
behalf of the bank. Where a collecting bank appoints another
bank for collection of the cheque at a place where it has no
branch, such person is known as a substituted agent and not a
sub-agent of the customer.
TERMINATION OF THE RELATIONSHIP
The relationship between a banker and its customer stands
terminated on the;
 (i) Death, (ii) Insolvency, (iii) Lunacy of the customer. On the
happening of any of these events, the bank must stop the
operation of the account and stop payment of cheques against
such accounts.
 The banker-customer relationship is not affected because of (i)
Arrest of the customer, (ii) Imprisonment of the customer,
(iii) Migration of customer to a foreign country, and such
other reasons.
SELF-ASSESSMENT
Fill in the blanks
1. The term Garnishee means a debtor to the ………….
2. On receipt of an ……….. the bank is bound to stop operation
of the depositor’s account.
3. The right of a creditor to retain the goods and securities of his
debtor, till his dues are paid is called……….
4. The right of a banker to adjust the credit balance of a customer
with his debit balance and to arrive at the net sum due is
called the …………
True or False?
5. A person not having a bank account, but availing ancillary
services from the bank like purchasing a draft, remitting
money, hiring a locker, etc. can also be considered as a
customer.
6. A banker is required to pay only when the payment is
demanded by the customer within business hours of a
working day at the branch.
7. Accounts held by a person in trust in a fiduciary capacity are
attached by a garnishee order, even if it is issued in the
individual names.
Answers: (1) Debtor (2) Order Nisi (3) Lien
(4) Right of set off. (5)False (6) True (7) False
Questions
1. Define the term ‘Banking.’
2. List out the characteristic features of banking.
3. Who is a customer?
4. What is a garnishee order? List the types of accounts and
deposits attached to it.
5. List the types of lien. Where the right of lien can be used?
6. What do you mean by the right to set-off? Where is it used?
7. Discuss in primary duties of a banker.
8. Discuss in detail the rights of a banker.

2.4. TYPES OF CUSTOMER
ACCOUNTS
Types of Customer Accounts
Commercial banks offer choices to their customers to open

different types of deposit accounts, namely the savings account,
current account, fixed deposits, recurring deposits, etc. The
various types of customers and the procedures for opening
different types of bank accounts by these customers are discussed
in this lesson.
SAVINGS BANK ACCOUNT
Savings Bank Accounts (SB A/c) are opened mainly for
savings and not for any business. Therefore, such accounts cannot
be opened in the name of any business concern, whether
proprietary –partnership company or association. RBI has
expressly instructed the banks not to open SB A/c in the name of
(a) Government departments, (b) Municipal corporation, (c)
Panchayat samitis, (d) State housing boards, (e) Industrial
development authorities, (f) State electricity boards, (g) Water
sewerage drainage boards, (h) State textbook publishing
corporations, (i) Metropolitan development authority, (j) Housing
co-operative societies, (k) Any bank including land development
banks, and (l) Political parties.
WHO CAN OPEN A SAVINGS A/C?
The above-said prohibition is not applicable for the following
organizations agencies, and therefore banks can open SB A/c in
their names;
1. Companies licensed u/s. 25 of Indian Companies Act, 1956:
The companies (not for profit- making) permitted not to add
the word “limited” as a part of their names. Example: Rotary
Club.
2. Societies registered under Societies Registration Act, 1860,
or any other corresponding law in force in any State U.T.
3. Primary Co-operative Credit Society financed by a bank.
4. Any Government department body agency in respect of
grants subsidies released for implementation of schemes
sponsored by the Central Government or any State
Government subject to the production of an authorization
from the respective Govt. departments to open an SB A/c.
Example: District Rural Development Agency (DRDA), Khadi
& Village Industries Board (KVIB), etc.
5. Any trust or institution whose entire income is exempted
from payment of income tax. The branch should retain a copy
of such an exemption certificate. Example: Provident Fund
Org.
6. Hindu Undivided Family (HUF) if it is not engaged in
business activity.
7. Development of Women and Children in Rural Areas
(DWCRA)
8. Self-Help Groups (SHGs)
9. Farmer’s Club Vikas Volunteer Vahini (VVV)
10. Clubs, associations, society, and educational institutions.
11. Any other institutions permitted by RBI on an application
made by the bank provided it is a non-trading institution.
This application is to be given to the Regional Office of DBOD
of RBI.
PROCEDURES TO OPEN AN S/B ACCOUNT
Introduction: SB Account with RIP-ONE classification can be
opened without any introduction. The opening formalities should
be completed in the presence of an authorized official, and no
document should be allowed to be taken out for execution. In
exceptional cases, an officer can accompany the forms and get
them executed in his presence.
Identity proof: Along with the application form, the depositor
has to submit the Know Your Customer (KYC) form, identity
proof and also address proof as required under the KYC
guidelines. Such documents are to be submitted in original along
with a photocopy, and the original will be returned after
verifying with the photocopy. The documents which are accepted
as identity proof are (a) Passport, (b)PAN Card, (c) Voter’s ID, (d)
Driving Licence as laid down in the KYC policy.
Photographs: Two photographs of each person operating the
SB A/c is to be submitted.
Initial deposit: SB Account should be preferably opened with
an initial remittance of cash. Accounts can also be opened with
draft payable to the applicant or with a self cheque on other
banks drawn by the applicant. All private sector banks prefer to
open accounts with such self cheques. Accounts in case of salary
accounts can be opened with zero balance.
Minimum balance: The minimum balance required to be kept
in an SB A/c varies from bank to bank. Most of the banks require
the customers to keep Rs.1000 with cheque facility, Rs. 500
without cheque facility, Rs. 100 for rural or semi-urban branches.
Where an account holder fails to maintain minimum balance the
bank may (i) send letter to customer to maintain minimum
balance (ii) stop issuing cheque book where default is six times or
more (iii) account need not be closed (iv) cheques should not be
returned unpaid just due to this lapse (v) levy charges as
applicable (vi) the term penalty may not be used to avoid
resentment unpleasantness among the customers.
A bank may change the minimum balance requirement from
time to time. However, as per RBI guidelines, whenever there is a
change in this regard, the customers should be informed of the
same by giving at least one month’s notice. Further commercial
banks are required by RBI, to notify customers regarding the
requirement of minimum balance at the time of opening an SB
account.
Interest-free deposits: Not at all, to be accepted irrespective
of caste, creed, the religion of the depositor (except in current or
call deposit accounts)
Operations in the account: In the case of new accounts, the
computer system should flash “New account” or ledger should be
branded “New account.” The maximum number of withdrawals
in the SB account should not exceed 50 in a half year. If it exceeds
more, the bank should charge service charges as applicable to
current accounts.
Cash deposits: All cash deposits in SB accounts above Rs.50,
000/- should be done with the declaration of the PAN number of
the depositor or declaration in Form-60 or 61 as the case may be.
Third-party cheques: Instruments drawn payable to the
account holders should be accepted for credit to SB accounts.
Third-party cheques endorsed in favour of account holders
should not be accepted except interest warrants pf public sector
bonds after obtaining the necessary declaration.
Payment by withdrawal slip: The withdrawal slip carries a
notation “Passbook must accompany this order form” for this
reason, it cannot be called a negotiable instrument/ cheque.
Payment to the account holder himself through withdrawal slips
not accompanied by passbook should be made only after
thorough satisfaction. Payment to a third party through a
withdrawal slip (with passbook) is restricted to Rs.1000/-(this
amount varies from bank to bank)
ATM Payments: Banks encourage payments through ATM
cards as it reduces pressures on bank counters.
Overdraft in SB Account: Banks may sanction Over Draft
(OD) only on the request of salaried persons (not exceeding one
month salary) and others having an account for not less than six
months. Staff members and their close relatives are not eligible to
take the OD facility. Overdraft allowed should be adjusted within
one month. Conditions differ from bank to bank.
Interest payment: From 10th April 2010, banks have been
asked to calculate interest on a daily product basis. From 25 th
October 2011, RBI had deregulated the interest rate on SB
deposits and has given freedom to banks to determine the same
subject to the following conditions: (i) each bank should offer a
uniform interest rate on savings bank deposits upto Rs.1 lakh (ii)
for savings bank deposits over Rs.1 lakh, a bank may provide
differential rates of interest without any discrimination.
Issue of passbook/statement: RBI has directed all banks to
continue to offer passbook facility to all SB A/c holders and
should not stop the practice on the pretext that the computerized
statements are sent to them at periodic intervals. Denial of
passbook will amount to deficiency of service. RBI has also
directed all banks that the passbook supplied by them to the
customers must contain the address and telephone number of the
issuing branch.
The passbook statement of account should also mention the
IFSC code and also the MICR code of the branch for facilitating
electronic remittances electronic credits. The RBI has also directed
that proper narration should be given for the entries in the
passbook so that the customer can decipher the entries correctly.
No charges should be collected for providing passbook at the
time of opening accounts. The passbook entries are to be
authenticated by the officer concerned.
Issue of duplicate passbook statement: Prescribed service
charges must be levied for issuing duplicate passbook account
statement. If subsequently the original is presented, it should be
cancelled. Duplicate passbook should be handed over to the
depositor himself of sent by registered post.
Issue of cheque book: As per IBA guidelines, banks should
avoid issuing more than one cheque book at a time to an SB A/c
holder. Customers who require more than one cheque book
should open a current account. In case of very genuine
circumstances, branches may get permission from their higher
authority regional office and may issue more cheque books at a
time.
Transfer to Inoperative Unclaimed Balance A/c: SB accounts

having no operation during the previous twelve months should
be branded as dormant accounts. As per the master circular on
customer service issued by the RBI, the accounts (Savings and
Current) having no operation for a period of two years or more
(including the 12 months dormant period) as on March of every
year should be classified as inoperative accounts and should be
transferred to in-operative SB A/c head.
Before classifying an account as inoperative, the bank has to
send notice to the customer at least three months (period may
vary from bank to bank) before transforming the account as
dormant inoperative. The notice should be sent to close the
inoperative account. In case it is not settled within one month, the
branch may debit service charge of Rs.10 per half year and
thereby close the account. Accounts whose operation is stopped
under Garnishee or court order to obtain legal representation or
which is under lien to bank need not be transferred to the in-
operative account. No credit other than interest should be given
to inoperative accounts. The Manager or Deputy Manager must
pass all debts to an in-operative account. Banks now levy service
charges for such inoperative accounts.
Unclaimed accounts: After being transferred to an inoperative
account, if the account is not operated for five years, (i.e., seven
years since the last transaction), the account should be transferred
to the Unclaimed Balances account maintained at Central Office.
The details should be recorded as the Unclaimed Balance Account
Register. Where a cheque is received for payment in an unclaimed
account, the branch may allow overdraft to be adjusted on receipt
of funds from the Central Office. But ordinarily, the amount kept
in the unclaimed account should be paid only after getting the
amount from the Central Office.
RBI guidelines on inoperative and unclaimed accounts: In
August 2008, RBI advised banks to conduct an annual review of
all SB and Current accounts which have not been operated for the
last one year (i.e., no credit or debit has been made in the account
other than interest service charges) Banks are required to write to
the account holders to operate the account or inform any other
account in his name so that the balance can be transferred to the
latter. Where a customer states the reason for not operating the
account, the bank may classify the account as an operative for one
more year. If there will be no operation within the extended
period, banks will classify such accounts as inoperative.
Where the letter is returned undelivered, banks should
contact the introducer–employer -legal heir or any other person
close to the customer to make the account operative. All
transactions (debit or credit) at the instance of the customer or
third party will be considered as an operative. It is clarified that
the customer gave credit of interest on term deposits to SB/CA as
per the mandate, should be treated as a customer induced
transaction. However, service charges debited or interest credited
will not be considered as an operation for this purpose. There
should not be any charge for the activation of an inoperative
account. In the case of inoperative SB accounts, banks must
continue to credit interest regularly. Fixed deposits that are
overdue and unclaimed will also attract interest at the SB interest
rate.
MICR Cheques: Cheques Drafts Banker Cheque Dividend
Warrant and other payment instruments in the Magnetic Ink
Character Recognition (MICR) format contain a code line at the
bottom which contains coded information printed in magnetic
ink. The code contains 17 digits. First, six give the cheque
number, next three city code, next three bank code, next three-
branch code, and after some gap the transaction code (SB or CD)
The transaction code is 10 for SB, 11 for CD, 12 for Bankers
cheque, 13 for Cash Credit, and 16 for Demand Draft. This code
helps in mechanically sorting the clearing cheques bank-wise and
branch wise at a very high speed through a machine called
Reader Sorter. For mechanized processing, instruments have been
standardized in the following two sizes; (a) SB cheques and
Traveller cheques 6 ½" x 2¼" (b) CD cheques, Drafts -8” x 3 2/3 .”
IFSC Code: The Indian Financial System Code (IFSC) is a
unique code given to each branch and is allotted by the Head
Office of a bank to branches as per the procedure prescribed by
the Institute for Development & Research in Banking Technology
(IDRBT) This code helps user message transmission through the
Structured Finance Messaging System (SFMS) RBI has directed
banks to print IFSC of the branch in a cheque, preferably above
the MICR band of the cheque. IFSC is an alphanumeric code
consisting of 11 digits, out of which four are alphabets, and seven
are numerical. Example: The IFSC of a branch of SBI is SBIN
0004501.
Annual Information System: As per Section 285 BA of
Income Tax Act, starting from the financial year 2004-05, banks
are required to submit to Income Tax Department an Annual
Information Return to all cash deposits aggregating to Rs.10
Lakhs or more in any SB account during the fiscal year. The
purpose of such a return is to curb evasion of tax.
No Frill Account: In order to ensure that the general public,
mainly persons belonging to low-income group, is not debarred
from opening bank accounts and availing banking services due to
the requirement of higher minimum balance and rigid KYC
provisions stipulated by any banks, the RBI in Nov. 2005 has
asked banks to introduced No-Frill Account (Chapter 16 B)
Special Savings Bank A/c: In order to increase CASA
deposits, banks have introduced special SB account in which offer
many add on facilities to the customers like free remittance
facilities free or concessional rate for collection of cheques, waiver
of charges while opening Demat accounts, concession on issue of
cheque books, concession on transfer funds through RTGS,
insurance cover at concessional premium rate, etc.
CURRENT ACCOUNT: WHO CAN OPEN IT?

Current accounts can be opened in the names of individuals,
proprietary concerns, partnership firms, HUFs, Limited
companies, Associations, Clubs, Societies, Trusts, Executors,
Administrators, Liquidators, Banks, Government Departments,
and Financial Corporations. These accounts are generally opened
for business purposes, and therefore, the number of transactions
is comparatively more than SB accounts. The current account
cannot be opened in the name of a minor to be operated by
himself. Guardian operated minor accounts can be opened in
special cases only after obtained indemnity from the guardian. An
account in the name of an illiterate can be opened in very
exceptional circumstances. Accounts in the name of a blind
visually challenged can be opened after proper precautionary
measures.
RULES FOR OPENING A CURRENT ACCOUNT
As per the guidelines of the BCSBI, the banks are required to
make available the current account rules in their websites;
 While opening current accounts banks have to adhere to the
prescribed KYC guidelines as to customer acceptance and
customer identification both for the entity in whose name the
account is opened and also for all partners in case of a
partnership firm for all trustees in case of trusts and all
individuals operating the account in case of companies
corporates-associations.
 For customer identification, for individuals, Passport alone
will suffice for identity proof, and address proof provided
the address given in the account opening form and that the
passport is the same. In case the passport address is different,
the bank must insist on both photo proof and address proof.
 For photo proof, the bank may accept: Passport, PAN card,
Voter ID, Driving license, Identity card issued by the Central
State Government subject to the satisfaction of the banker.
Letter from the recognized public authority -public servant
verifying the photograph to the bank’s satisfaction.
 For address proof, the bank may accept: the latest telephone
bill, electricity bill, bank account passbook, bank statement, a
letter from the employer to bank’s satisfaction, property tax
book receipt, registered lease deed, ration card, any other
document to the bank’s satisfaction.
 In addition to the above documents, the KYC policy also
stipulates that the following additional documents must be
taken in respect of the entities other than individuals;
 Partnership firm: (1) Registration certificate, (2) Partnership
deed, (3) Authority to operate the account on behalf of any
partner if any, (4) Telephone bill in the name of the firm -
partners.
 Limited company: (1) Copy of the certificate of incorporation,
(2) Memorandum of association, (3) Articles of association, (4)
Certificate of commencement of business (copies of all these
documents should be duly certified by a Director or Secretary
of the company stating to be accurate and up to date)
(5)Resolution to open and operate account, (6) Power of
attorney to operate account, (7) PAN card or PAN allotment
letter and (8) Copy of the telephone bill.
 Trusts: Certified copies of the (1) Trust deed, (2) Order from
competent court-if trust deed is not available, (3) Certificate
from charitable commissioner–if it is a charitable trust, (4)
Resolution to open and operate account, (5)List of all trustees
with their bio-data, (6) Certificate under IT Act where deed
provides for the use of trust money for business purpose, (7)
Certificate of registration if registered, (8) Power of attorney to
transact business and operate account, (9) Any officially valid
document to identify trustees, settlers, beneficiaries and those
holding power of attorney founders managers directors, (10)
Telephone bill if available.
 Associations Clubs Societies: (1) certified true copy of the
Rules, Regulations, Bye laws as the case may be, (2) Certified
true copy of the certificate of registration in case of registered
bodies, (3) Certified copy of the resolution to open and operate
account certified by the chairman of the meeting of the
governing board, managing committee or such body at which
it is passed, (4) A copy of the balance sheet in case of co-
operative societies, (5)Certificate of registration if registered,
(6) Power of attorney to operate account if applicable, (7)
Power of attorney to transact business and operate account, (8)
Any officially valid document to identify the committee
members office bearers directors and their addresses, (9)
Telephone bill if available.
 Government departments: (1) A copy of the letter of authority
from the head of the department permitting the official to open
an account, (2) A copy of the government order notification
authorizing the concerned official to open and operate account,
(3) A certified copy of the rules and regulations if any framed
by the department regarding the power of the officer in
opening and maintaining the account.
 Accounts will be opened with initial remittance of cash or with
customer’s self cheque from another bank.
 Branches should obtain prior permission from their regional
office-controlling office before opening accounts in the name of
executors, administrators, liquidators, and trusts. Similarly,
accounts in the name of other banks can be opened only with
the prior permission from the head office controlling office.
 As per RBI guideline, banks, while opening a current account,
must get a declaration from the applicant regarding the credit
facility enjoyed by him from any other bank. In case the
depositor has availed credit facility from any other bank, the
branch must ask for no objection letter consent from such a
bank. In case no response is received with a fortnight, the bank
will open the account but should maintain a copy of such
correspondence with the account opening form.
OPERATION OF A CURRENT ACCOUNT
 All cheques drafts of Rs.25000/- and above should be
examined under the ultraviolet lamp before passing the same
for payment.
 All banks have stipulated their policy on minimum balance
requirements in the current account.
 No cheque should be returned unpaid for the reason that the
balance will fall below the stipulated minimum balance
requirement.
 No account should be closed just because the account holder
has failed to maintain the minimum balance.
 In case of non-maintenance of minimum balance, the bank
may charge penalty provided the customer has been informed
of such charge while opening the account. The fees should be
reasonable.
 All deposits in cash for Rs.50000/- and above must be
accompanied by the PAN of the account holder or Form 60 or
61 as the case may be.
 All cash deposits of Rs. 10 lakhs and above are to be
recorded in the Cash Transaction Index Book (CTIB) and
reported in the Cash Transaction Report at fortnightly
intervals.
 When an account is not operated for six months, it is to be
classified as a dormant account, if not operated for two years
or more, as an inoperative account and if not operated for the
next five years as an unclaimed deposit account.
 Folio charge is charged once in a year. Where the balance is
high, banks also provide some free folio and charge on the
balance folio used in the account.
 No interest is payable on current accounts except in the
following cases; (a) current account in the name of Regional
Rural Banks (b) accounts in the name of deceased from the
date of settlement at SB interest rate.
 Third-party cheques can be accepted for collection in case of
current accounts provided such transactions are prima facie in
order.
 MICR cheque book charges may vary from bank to bank, and
marking any cheque good for payment is strictly prohibited.
LEGAL ASPECTS OF ENTRIES IN CURRENT
ACCOUNT
Wrong credit entries: Money paid by mistake to the
customer's account can be recovered by the bank with interest
within three years from the date of the detection of the error.
Where a bank wrongly shows a higher balance in the statement of
account and the customer relying on such entry issues any
cheque, the bank has to honour the same. However, the bank can
deny payment if the customer issues such cheques after receiving
notice of such wrong entry, from the bank. If the customer, after
relying on the balance, withdraws the amount and alters his
position by spending the amount, the bank cannot recover the
amount from the customer.
Wrong debit entries: Where a bank pays forged cheques
(signature forged), it cannot debit the account of the customer. It
cannot take the plea that such debits cannot be compensated as
they are detected after a considerable time, and the customer was
negligent in not deducting the same. It is held in the Canara Bank
Vs Canara Sales Corporation case that (a) the customer under no
obligation to verify entries in the passbook even if the bank's
current account rules provide for the same, (b) if the customer
had knowledge about the forgery of the cheque, he must inform
the bank about the same and in case he fails to do so, he cannot
claim the amount paid by the bank on such forged cheques.
Where a customer was not aware of the fraud/forgery, he cannot
be expected to inform the bank about the same. His long silence
and inaction cannot absolve the bank from its liability. A bank is
bound to pay the amount to him.
False entries by bank employee: Where an employee
working in due course of his employment makes incorrect entries
in the passbook, the bank will be liable on the strength of such
entries. However where an employee is working as an agent of
the depositor and brings money from the depositor's house and
fails to account for the same in the bank and gives false entries in
the passbook, it is held that the bank is not liable on such entries
as the employee was acting as an agent of the depositor and not
that of the bank.
SPECIAL FEATURES OF CURRENT ACCOUNT
Special current accounts: There are current accounts that
stipulate a higher minimum balance and in turn, offer many add
on facilities. For example, IOB offers a classic current account
where the minimum balance requirement is Rs. 1 lakh and a
super current account where the minimum balance requirement
is Rs.5 lakhs. Such accounts provide add on facilities like internet
banking free, anywhere banking free, transfer of funds through
NEFT free, personal accident insurance cover up to Rs. 5 lakhs
free, name pre-printed cheque book free, multi-city cheque book
free, folio charges free, international debit card to all employees
and owner, online tax payment facility, transfer through RTGS
and DD with 50% concession, outstation collection at 50%
concession, utility bills payment facility, online trading facility
and the PAN -TAN facilitation. The customers of special current
accounts are provided with a kit containing ATM card, cheque
book, CD rules, code of BCSBI, schedule of charges, etc.
Utility bill payment facility: This facility is given to a
customer who avails internet banking service. To provide this
facility, the bank has to enter into an arrangement with a
company called theIndiaIdeas.Com Ltd., which is promoted by
Bank of Baroda, SBI, SIDBI Venture Capital Ltd., and some other
institutions. This company operates a payment management
bureau called the “Bill Desk.” The customer visits the website of
the bank, which enables it to connect to the website of the bill
desk, which in turn would allow him to transfer the amount from
his account to the bill desk and then to the utility company.
Apart from this, companies like LIC, MTNL, and BSNL are
also offering the facility of online payment through internet
banking. To avail of this facility, the customer has first to register
himself on the company's website and has to obtain the login ID
and password. The website lists the names of the banks through
which payments can be made, and once the customer makes his
choice, he will be directed to such a bank's internet banking
interface top do the transaction by entering his login ID and
password.
Online trading facility: This is a facility that enables the
customer to directly buy and sell shares and transfer the fund
from the bank account by using the internet banking facility. For
example, in the case of IOB, this facility is provided in association
with the MF Global Sify Securities Ltd., where the customer has
to open the Demat account. After opening the Demat account, the
customer has to log in to the web site of this company, which will
provide a dropdown menu for fund transfer from the bank. The
customer can then use the internet banking facility and transfer
the fund for the purchase of shares securities.
Multi-city cheque facility: A multi-city cheque is payable in
many other branches of a bank apart from the branch on which it
is drawn. The main advantage of a multicity cheque is that it need
not be sent to the place where it is drawn; instead, it can be paid
by the branch of the bank in the center where the payee presents
the cheque. Such payment is made by the use of the CBS facility.
Generally, the multicity cheques are marked payable only in
MICR centers. The list of centers where such cheques are payable
can be found on the website of the bank concerned.
SPECIAL TYPE OF CUSTOMERS: MINORS
Section 3 of the Indian Majority Act, 1875, defines a minor as
"a person who has not completed 18 years of age." As per the
amendment made in this Act, a minor is the one, "for whom a
guardian is appointed by the court (for the person or property or both)
also attains majority only on his completion of 18 years of age." Also, a
minor is one, "for whom a court of the ward is appointed as guardian,
whose minority continues till he completes his 18 years of age." A
person of foreign domicile attains the majority only on
completion of 21 years of age.
MINOR’S AGREEMENT
As per Section 11 of the Indian Contract Act 1872, a minor is
not competent to enter into a contract. All agreements with a
minor are void-ab-initio (i.e., invalid from the very beginning)
However, a contract to the supply of necessaries suitable to the
life of a minor is valid. In case a bank sanctions a loan or opens a
deposit account in the name of a minor, it cannot legally compel
him to perform his part of the contract since there cannot be a
contract with a minor. For this reason, banks never sanction loans
overdraft to minors. However, they can open deposit accounts in
the names of minors, after taking necessary precautions. As long
as the account is in credit, the banks run no risk in such accounts.
A person upon attaining the majority cannot ratify a contract
entered during his minority as there was no contract. Since he is
incapable of contracting, he can be represented by his lawful
guardian. A legal guardian, like a trustee, has the power to
represent the minor in dealing with his property. He has got a
fiduciary relationship and can lawfully deal with this property
only for the “benefit of the minor.”
GUARDIAN FOR A MINOR
The guardian to a minor can be a testamentary guardian or
legal guardian or a natural guardian. A testamentary guardian is
the one who is appointed by the will of the minor’s father. Such a
guardian acts only after the death of the father and mother of the
minor child. A guardian appointed (when there is no natural -
testamentary guardian) by a court is called a legal guardian. He
is appointed as per the provisions of Guardians and Wards Act,
1890.
NATURAL GUARDIAN FOR A MINOR
The conditions of natural guardian to a minor are as follows;
Hindus: In the case of Hindus, the guardianship of a minor is
determined as per the provisions of the Hindu Minority &
Guardianship Act, 1956. Section 6 of the Act provides that in case
of a minor boy or minor unmarried girl, the father and father his
death, the mother shall be the guardian of both person and
property of the minor. After the death of both the father and
mother, a minor can be represented only through a legal
guardian.
Type of Minor Natural Guardian

Minor boy Father and after his death, mother
Minor girl Father and after his death, mother
Husband (Father -mother if
Minor married girl husband is minor)
Minor married girl
widow Father and after his death, mother
Illegitimate child Mother
Step son Own father mother
Adopted son Adoptive father -mother
The stepfather or stepmother cannot act as a natural
guardian. For a minor married girl, her husband (if major) is the
natural guardian. In case the husband is a minor, her father
(mother if the father is dead) may continue to be her natural
guardian. For a minor married girl, who has become a widow, her
father (mother if the father is dead) may continue to be the
natural guardian. In the case of an illegitimate minor child, his -
her mother is the natural guardian. The natural guardian of an
adopted son is his adoptive father -mother.
Muslims: In the case of Muslims, the father is the natural

guardian of a minor and his property. After the father, the
guardianship lies with the (a) executor appointed by father’s will
and then (b) father’s father and then (c) executor appointed by the
will of the father’s father. In case any of these persons is not alive,
the minor can be represented only by a legal guardian. The
mother of a Muslim minor cannot act as guardian except when
appointed by the court or by the will of father (or father’s father)
In all systems of personal law, the father is the natural guardian
of a minor during his life-time.
Christians: In the case of Christians or persons of other
religions, the father, upon his death, the mother acts as the
natural guardian. Where both are dead, a person appointed by
the court can alone act as a guardian. Even after conviction, the
natural guardian continues to be the natural guardian. A
guardianship can be for the person or the property or both.
A legal guardian appointed for the person (not for the
property of the minor) is not entitled to alienate any property
even for the benefit of the minor. Accordingly, such a person is
not allowed to open, operate, and receive the deposit on behalf of
a minor child. In the case of Hindus and Christians, the natural
guardians are guardians in respect of both the person and
property of the minor. In the case of Muslims, the natural
guardian is guardian only for the property and not for the person
of the minor. A bank does not undertake to act as guardian of the
person of the minor.
DEPOSIT ACCOUNTS FOR MINORS
The types of bank accounts available for a minor are as
follows;
Opened and operated by guardian: The guardian can open a
deposit account in the sole name of the minor to be operated by
him on behalf of the minor. The style of the account should be
"Master ABC (minor) by father & natural guardian XYZ."
Alternatively, he can open a joint account in the name of the
minor and himself. The guardian can operate the account on
behalf of the minor. He can foreclose the term deposit or avail
loan against the same for the benefit of the minor. His power to
operate account foreclose deposits borrow against deposit ceases
as soon as the minor attains majority.
The minor (not the guardian) on attaining majority, has the
sole right to operate his account. For term deposits maturing for
payment on or after a date on which the minor reaches majority,
the guardian has ordinarily no power to foreclose the same. The
amount should be paid to the minor upon his attaining majority.
Advances against minor's deposits should be sanctioned only for
the benefit of the minor. Each bank has specified a limit up to
which loans can be approved at branch level against such deposit.
In the event of the death of a minor, the balance is payable to the
guardian, upon production of the death certificate. If the guardian
is dead, the balance is treated as a trust and is paid to the minor
upon his attaining majority. During his minority, it can be paid
only to his guardian appointed by the court.
Opened and operated by mother: Though a mother is not
legally entitled to deal with the property of a minor (as long as
the father is alive), the RBI after due consideration has asked
banks to permit the mother to open and operate deposit accounts
(only SB and term deposits including RD) in the name of her
minor child. While opening the account, the bank should obtain a
letter from the father, permitting the mother to open and operate
the account. However, if the mother refuses to produce the letter,
the bank should not insist on the same. Any instruction from the
father to stop operation in the account should be complied with
by the bank under notice to the mother. Similarly, no loan
overdraft should be allowed against such deposits without the
father's consent.
Opened and operated by minor himself: Minors who have
completed ten years of age, who are literates and can sign
uniformly, are permitted to open SB or TD account (not current
account) in their name and operate the same.
SB accounts can be opened in which the maximum balance
should not exceed Rs.50000/- and the maximum amount of
withdrawal at a time should not exceed Rs.10000/- Cheque books
should be issued, and the withdrawals should be allowed only in
cash to the minor himself (by using cheques) In exceptional cases,
cheque payment (otherwise than cash) can be allowed towards
payment of tuition hostel fees. Section 26 of Negotiable
Instrument Act provides that a minor may draw, endorse and
negotiate a negotiable instrument. A minor cannot appoint a
nominee for his account.
Term Deposits, including RD, can be allowed for any
amount. No advance can be given against such deposits.
Premature payment of such deposits is not allowed, nor is the
nomination permitted.
Joint accounts: In case of a minor, only term deposits (not SB
account) can be opened in joint names of the minor and his close
relatives. Such an account should be opened with “former or
survivor” notation, with the close relative as the former and
subject to the satisfaction of the applicable conditions including
that the minor should have completed ten years of age and
should be capable of signing consistently. The maximum amount
of the term deposit should not exceed Rs. 50000/-. Two minors
can open a joint account to be operated by both jointly. But the
account in the style of “Either or Survivor” cannot be opened as
minors cannot enter into a valid agreement.
SPECIAL TYPE OF CUSTOMERS: ILLITERATE
PERSONS
Persons who cannot read and write are called illiterates. Like
others, illiterate persons are fully competent to enter into
contracts. However, they can avoid the contract if they can prove
that their consent was obtained by misrepresenting the facts due
to their incapability to read. Banks, therefore, must create
sufficient evidence to confirm that the illiterate understood the
terms and conditions beyond doubt. While opening deposit
accounts in the name of an illiterate or giving loan to him, it must
be ensured that he cannot take the plea of misrepresentation.
OPENING OF A BANK A/C BY ILLITERATES
No current account should be generally opened in the name
of illiterate persons as it would be difficult to identify his Left-
hand Thumb Impression (LTI) in cheque issued by him. SB and
Term deposits can be opened with the condition that withdrawals
will be allowed only in person.
 Attestation: The officer of the bank who has the power to
authorize the opening of account and a respectable person (not
an employee of the bank) must record under their signature in
the account opening form that the contents of the form, as well
as the rules, have been read and explained to the applicant. He
has affixed his LTI after understanding the same. These two
persons should also identify the LTI both in the application
form and specimen signature card.
 Photograph: Three photographs are to be obtained- one to be
attached to the account opening form, second to specimen
signature card, and third to the inside cover of the passbook.
New photographs should be obtained every three years.
 Joint account: Joint accounts in the name of two illiterates can
be opened after observing the usual safeguards. A joint
account with an illiterate should be opened strictly on merit
and after getting approval from the regional office.
 Operation: No cheque book is to be issued. Withdrawals
should be allowed only in person after proper identification.
The passing official will add a certificate in the withdrawal
form under his signature to the effect that the left-hand thumb
impression is affixed in his presence & the (illiterate) depositor
orally confirms the amount withdrawn. Where the ignorant
person wishes to give a mandate authorizing somebody to
operate his account (by cheque or otherwise), the mandate
should be attested by a Notary Public.
VISUALLY CHALLENGED PERSONS
The Visually Challenged Persons (VCPs) are fully competent
to contract, and there is no legal bar in operating accounts in their
names or even issuing cheque books or opening locker accounts
in their names. However, in case of dispute, they can always
argue that the terms and conditions of the accounts and the
amount paid to them were misrepresented. They may even
dispute their signature at a later date. The courts may also believe
this on account of their blindness. For this reason, banks have to
be extra careful while opening and operating accounts for the
VCPs.
DIRECTION OF THE COURT GOI RBI
The court of the chief commissioner for persons with
disabilities has passed an order on 5th September 2005 instructing
the banks to offer all facilities like cheque book, ATM card, and
locker facility to the VCPs and assist them in the withdrawal of
cash. These persons must not be denied such a facility on the plea
that there is a risk in providing the same.
 The GoI (Ministry of Finance) has issued direction on 15th
September 2005 to the effect that the banks should meet the
requirement of the VCPs under social banking and should
provide them cheque book facility (including postdated
cheque facility), safe deposit locker and also ATM facility.
 RBI has asked all banks to provide all types of banking
facilities to the VCPs without any discrimination. As per RBI
guidelines these persons are to be provided with cheque
facility, ATM facility, net banking facility, locker facility, retail
loans, credit cards, etc. invariably so that they do not face any
problem in getting the banking services.
TYPES OF ACCOUNTS TO BE OPENED FOR VCPs

Banks are required to open all types of accounts for the VCPs,
but they must take necessary precautions for the same and open
the accounts only after ascertaining the need. The current account
in the name of VCPs can be opened subject to the required
precautions.
 A minor who is a VCP cannot be permitted to open a self-
operated account even if he is more than ten years of age.
 Joint accounts in the names of two VCPs cannot be opened.
However, a joint account in the name of a VCP and an
illiterate who is not a VCP but considered by the VCP as a
reliable person can be opened. Cheque books can be issued,
and the literate person can be authorized to operate the
account.
 No cheque book is ordinarily issued to a VCP account holder.
When a cheque book facility is given, the VCP should be
advised to come in person to withdraw cash deposit money in
their accounts.
 Cash payments and cash deposits should be made in the
presence of a witness who should be preferably a customer of
the bank.
 An illiterate VCP can be allowed to open an account after
taking necessary precautions. However, no cheque book
should be issued to such an account holder.
 While opening the account, both the signature as well as the
left-hand thumb (LHT) impression must be obtained in the
account opening form, and the same should be witnessed by a
respectable person who should certify that the contents are
explained to the VCP in his presence.
 Three passport size photographs should be obtained and to be
used, as explained in the case of the illiterate applicant. The
cost of the photograph not exceeding Rs.10 to be reimbursed
by the bank subject to the minimum deposit amount as
applicable in the case of illiterates.
 The account opening form, specimen signature sheet, pass
book, cheque book, etc. must be stamped “Blind Person” so
that caution is exercised while transacting with the VCP
customers.
MARRIED WOMEN
A married woman is competent to enter into a valid
agreement in her name, and therefore, the bank can open an
account in her name and can give loans against documents
executed by her.
 While opening the account in the name of a married woman
bank should obtain the employment particulars and
occupation of her husband.
 Cheques issued in favour of the company where her husband
is employed and endorsed in her favour should not be
collected in her account as this may make the bank liable for
conversion.
 Change in name: Where a lady maintaining deposit account in
her maiden name approaches the bank for a change of name
after her marriage, the bank should obtain: (1) letter from her
asking for the name change, (2) evidence of marriage such as
marriage invitation– certificate, etc. In case no marriage
evidence is produced, a respectable person introducer should
confirm the marriage, (3) new specimen signature, and change
the title of the account in the ledger as Mrs. Sarita Kanojia’s
new Miss Sarita Sonkar.
 There is no need to close the existing account and open a new
one. No fresh specimen is required unless there is any change
in the style of signature.
 Cheques in her maiden name can be collected in the account
after proper endorsement.
 Cheques issued before the change of name should expressly
authorize the bank to collect cheques in her maiden name and
also to pay cheques signed in her maiden name.
 Liability in case of loan/overdraft: A husband cannot be held
responsible for payment of loans taken by his wife except
when (1) the debt is incurred for necessities suited to her life,
and (2) the loan is given with his consent. For this reason,
banks prefer to take a guarantee of a husband while
sanctioning loans to a married woman.
 As per Section 56 of CPC, a woman cannot be arrested or
imprisoned for no repayment of a judgment debt. Further, a
married woman cannot be adjudged as insolvent.
PURDANASHIN LADIES
A Purdanashin lady is a woman who remains in complete
seclusion and does not transact with people other than her family
members;
 Type of account: No account should be opened in the name of
an illiterate Purdanashin lady. Similarly, no current should be
generally opened in the name of a Purdanashin lady except if
prior approval is taken from the RO.
 The signature of a Purdanashin lady in the account opening
form should be attested by her husband and in case of
unmarried, by her natural guardian.
 Photograph of the Purdanashin must be obtained while
opening an account in her name.
 The cheques withdrawal slips executed by her should be
attested by her husband or two account holders of the bank.
 Undue influence: A Purdanashin lady can avoid a contract if
there is an undue influence on her for signing the contract.
Where a Purdanashin lady complains of undue influence, the
onus of proving the absence of undue influence lies on the
other party to the contract.
INCAPACITATED PERSONS
Where a person is too ill to sign a cheque or to come in person
to bank to draw money, he can put his thumb or toe impression.
Two independent witnesses are known to the bank, one of them
being a responsible bank official should witness the impression.
In case the customer cannot put his thumb impression, the bank
should obtain a mark on the cheque withdrawal form. Two
independent witnesses should identify this mark, one of them
being a responsible bank official. Further, the customer should
locate a person who would receive the amount on behalf of him,
from the bank. These two persons should also witness this
person. This person who would be drawing money should be
asked to furnish his signature to the bank.
MISSING PERSONS
Section 107 of the Indian Evidence Act, 1872 deals with the
presumption of the continuation of life. Section 108 of the Act
deals with the presumption of the death that can be raised only
after seven years from the date of his/her being reported
missing. After this period, the nominee of the account or legal
heir can get a court order on the express presumption of death.
After getting a court order to the effect that it is presumed that
the account holder is dead, the bank will pay the amount to the
nominee or the account holder as the case may be. To avoid
hardship, RBI has asked banks not to insist on court order upto a
certain amount to be decided by the bank and settle such claims
only against the (i) copy of FIR and police report and (ii)
indemnity.
MENTALLY RETARDED PERSONS
In the case of lunatics and persons who are mentally unsound,
the Mental Health Act, 1987, allows the appointment of a
guardian by the District Courts. These legal guardians will have
the power to open and operate the account as permitted in the
order.
In case of persons who are suffering from Austin, Cerebral
Palsy or Mental Retardation the local level committees formed
under the provision of the “National Trust for the welfare of
persons with Austin, Cerebral Palsy, Mental Retardation, and
Multiple Disabilities Act, 1999” can issue guardianship certificate
and RBI has permitted banks to accept these certificates for
opening and operation of accounts and not to insist on
guardianship certificate under the Mental Health Act, 1987.
TRUST ACCOUNT
As per Section 3 of Indian Trust Act, 1882, “Trust is an
obligation, annexed to the ownership of property and arising out
of a confidence reposed in and accepted by the owner or declared
and accepted by him for the benefit of another or of another and
the owner.” Directly speaking, a trust is said to be created when
the ownership of a property is transferred to somebody with an
obligation to hold and manage the same for the benefit of another.
Usually, there are three parties to a trust namely,
(a) The person who transfers the property and reposes
confidence is called the Author of the trust or Creator of the
trust or Donor or Settlers.
(b) The transferee of the property on whom confidence or trust is
reposed is called the trustee.
(c) The person for whose benefit the trust is formed is called
beneficiary, donee or cestui-qui-trust.
Trust Deed is the document through which trust is formed. It
records the rights and obligations of the trustees. A trust deed
should be registered.
TRUSTS AND TRUSTEES
A trust can be a private trust or public trust. A private trust is
formed for the benefit of one or more specific individuals. Law
relating to private trust is codified in the Indian Trust Act, 1882.
Public trust is formed as per the Public trust Act of the state
concerned. These trusts are registered with the Charity
Commissioner of state and are controlled by the court.
A trust deed generally mentions the names of the trustees.
Alternatively, it may name a person who will appoint trustees. It
may provide that new trustees can be appointed by the surviving
trustees legal representative of the surviving trustee. In this case,
the appointment is made by executing a “deed of appointment”
by the outgoing and incoming trustees. The trust deed may
provide that the court will appoint new trustees.
OPENING OF A TRUST ACCOUNT
A trust account can be opened as described below;
Documents required: (1) Trust deed or court order for private
trust or Certificate from Charity Commissioner for public trust,
(2) Latest deed of appointment, (3) Certified copy of “resolution
by all trustees” regarding the opening and conduct of bank
account, (4) List of all trustees, (5) Specimen signature and
account opening form. The bank should retain the certified copies
of documents (1), (2), and (3)
KYC Guidelines for trust accounts: Banks must obtain the
following documents: (1) Certificate of registration if registered,
(2) Power of attorney granted to transact business on its behalf,
(3) Valid documents to identify trustees, settlers, beneficiaries and
those holding power of attorney, founders managers -directors
and their addresses, (4) Resolution of the Managing body of the
association, (5) Trust deed bye-law, (6) Telephone bill. Wherever
possible original documents should be obtained, or the copies
should be duly signed by the customers, which will be verified
with the originals and attested by an authorized officer of the
bank.
OPERATION OF A TRUST ACCOUNT
 Joint signatures: As per Section 48 of Indian Trust Act, unless
the trust deed provides otherwise, all trustees must join in
operating the account. All trustees can sign a resolution and
instruct the bank to allow one or more of them to operate the
account. In the absence of such instruction, all trustees must
join in signing the cheque.
 No delegation: Section 47 of the Act, insists that unless the
trust deed provides otherwise, the trustee(s) cannot delegate
his -her powers. Therefore if the instrument of trust does not
permit delegation, a person other than trustees cannot be
allowed to operate the account.
 Borrowing power: Unless the trust deed gives the power to
borrow money, trustees cannot borrow or overdraw the
account. To be on the safe side, the bank should ask for a
personal guarantee of trustees while giving advance.
 Death of trustee: If the sole trustee dies, the operation in the
account should be stopped. Cheque signed by him is not to be
paid. If one of the trustees dies retires, the surviving trustees
can operate the account if the trust deed provides so. For
example, if the trust deed provides that a minimum of two
trustees can operate the account, the operation of the account
need not be stopped as long as the number of surviving
trustees is two or more than two.
 Insolvency: Even if a person is declared insolvent, he can
continue to be the trustee. The trust property cannot be
attached to pay the dues of a trustee who is declared
bankrupt.
 Breach of trust: The bank must take all possible precautions
to protect the interest of the beneficiaries of the trust. So far as
the use of trust money is concerned, the bank’s responsibility
is as good as that of a trustee. In case there is any misuse of
money within his knowledge, he will be liable for “breach of
trust” and is required to compensate the beneficiary for any
loss. Breach of trust can be established where the bank allows
the transfer of funds from the trust account to the personal
account of any trustee or where a cheque favouring the trust
is collected in the personal account of the trustee.
 The bank is not bound by trust: It is an accepted practice that

the bank should guard against the misappropriation in an
account where there are circumstances to indicate that it is a
trust. However, there is no responsibility on the part of a bank
to enquire as to whether an account is a trust account or not.
The trust does not bind a bank if it is not within its
knowledge.
EXECUTORS & ADMINISTRATORS OF A TRUST
ACCOUNT
The executors and administrators are the persons appointed
to administer the assets of a deceased. A will appoints an
executor. He can open an account only if he holds probate. The
court appoints administrators through a letter of administration.
Executors and administrators are just like trustees for the
deceased's assets.
An account in the name of an executor -administrator is
opened in style, "ABC executors (or administrators) of the estate
of XYZ." When more than one person is appointed as executor -
administrator, all of them must join in operating the account.
Alternatively, all of them can, by an authority signed by all, name
one or more of them to operate an account.
Anyone of the executors -administrators can stop payment of
a cheque or revoke the authority given for the operation of the
account. However, the revocation of a stop payment order should
be signed by all. In case of death of one of the executors
administrators, his powers are vested with the surviving
executors. They can operate the account (Section 226 of the Indian
Succession Act) If all or the sole executor(s) fie, the operation of
the account should be stopped, and new probate -letter of
administration need to be obtained.
The executor or the administrator, has no power to delegate
his authority. Accordingly, mandates or power of attorney giving
powers to the third-party to operate the account should not be
accepted.
HINDU UNDIVIDED FAMILY
A Hindu Undivided Family (HUF) or Coparcenaries or Joint
Hindu Family consists of the eldest male member of a family and
all other living male members for three generations. The eldest
male member is called the Karta, and all other male members
are called the co-parceners. Every co-parceners has equal right in
the HUF property. The relationship among co-parceners arises
out of status and not out of any contract. i.e., the HUF consists of
the Karta and his brothers, their male progenies, and the male
progenies of the latter.
 An HUF is governed by Hindu law and not by any contract.
It is not a partnership, and therefore the provisions of the
Partnership Act do not apply to a HUF.
 The first and foremost test of a HUF is the existence of an
ancestral business or an inherited property which is owned
and managed by the family. If there is no ancestral property,
there is no HUF in commercial sense.
 Once this ancestral property or business is divided, the HUF
relating to that undivided property comes to an end. However
the new HUFs come into existence for managing the new
properties thus obtained.
 The HUF is not a separate person in the eye of the law.
However, only the Income Tax Act provides some relaxations
to HUF and also to partnership firms by treating them as
independent and distinct juristic persons for assessment of
tax.
 There are two schools of Hindu law namely the, (1)
Mitrakshara which prevails throughout India except for West
Bengal considers that each male member has a share in the
joint family property by birth and even from the time he is
conceived in mother’s womb and (2) Dayabhaga which
prevails in West Bengal considers that the father is the
absolute owner of the property and sons do not acquire any
right on the property by birth.
CURRENT ACCOUNT IN THE NAME OF HUF
For opening an account in the name of a HUF, apart from the
account opening form, a HUF declaration letter signed by Karta
along with all co-parceners has to be taken. Whenever a minor co-
parcener attains the majority, a fresh HUF declaration letter has to
be obtained.
 The Karta is authorized to operate the account. He can give a
mandate in favour of a major co-parcener to operate the
account. But he cannot provide such a mandate in favour of a
third party. In case if it is to be given to a third-party, it has to
be signed by all co-parceners. Even if a Karta stays abroad,
still he continues to be the Karta and can give mandate in
favour of the major co-parcener to open the account.
 A co-parcener, even if not permitted to operate the account,
can revoke the payment of a cheque.
 On the death of a Karta, the account should be closed and the
balance transferred to a new account after obtaining the
account opening form and HUF declaration letter.
 On receipt of notice of insolvency of the Karta or any co-
parcener, all operations in the account should be stopped.
POWERS OF KARTA FOR TAKING LOAN
Karta has powers to incur debt, execute documents, pledge
securities on behalf of the family for the family business, and for
the legal necessity of the family.
 His liability is unlimited, while that of the co-parceners is
limited to that extent of their shares in the HUF. Therefore the
consent of co-parceners is not required for the Karta to do the
actions described above.
 However, the bank has to be very careful while advancing
loans to the HUF as the burden of proving the legal necessity
of the HUF lies with the creditor. For this reason, banks prefer
to obtain loan documents executed by all major male members
of the family or obtain documents by the Karta under the
written consent of all co-parceners.
 When the co-parceners execute documents, their liability
becomes personal and does not remain limited to their shares
in the HUF. In case of a minor co-parcener, his guardian
should sign on his behalf, and on attaining his majority, his
express consent has to be obtained.
 The credit facility should be sanctioned for an existing
ancestral business and not for any new one unless all co-
parceners join in executing the documents.
 In the case of a HUF consisting of father and sons, the new
business started by father is deemed to be ancestral, and the
co-parceners can be made liable to the extent of their shares in
the family property (Achyut Narayan Vs. Ratanji)
 A trading HUF can appoint a Karta or any member of the
family as the manager to function as the accredited
representative. There can be more than one manager, also. The
necessity of the same is generally felt if the HUF has a business
in different locations.
 The manager of the HUF, being appointed by all co-parceners,
has all the powers required to run the business. He can
contract debts, pledge property of the family, and draw
negotiable instruments. However, he is not permitted to
embark upon any new business.
HUF IN A PARTNERSHIP FIRM
Section 4 of the Partnership Act stipulates that a partnership
firm has to be formed "between persons," and HUF is not
considered as a person for this purpose. Thus a HUF cannot
become a partner in a partnership firm. Also two or more HUFs
cannot form a partnership.
A HUF is a fluctuating body whose membership can change
by birth, death, and any other change in the status of the family,
and such an organization cannot agree to form a partnership.
However, a Karta or any member of the HUF can join a
partnership firm as an individual, and in that case, the property
of the HUF is no way liable for the partnership. Karta also cannot
bind the HUF by signing on its behalf. Even where a person
nominated by the HUF becomes a partner, he becomes a partner
on his capacity and not otherwise. Thus a partnership with a
HUF as a partner is unlawful.
HUF PROPERTY AS SECURITY FOR OTHER
ADVANCES
Bankers should not accept the HUF property as security for
the loans and advances granted to any other body other than the
HUF. It should also not be taken as security for a partnership firm
where the Karta is a partner. It is because the right to minors
(born or yet to be born) who are will be co-parceners cannot be
put to the stake for other than family benefit and the benefit of the
minors.
CLUBS COMMITTEES ASSOCIATIONS
The conditions for an opening bank account in the names of
clubs committees associations, etc., are as follows;
 Registered clubs associations: Clubs can be registered or
unregistered. A club can be registered under (1) Societies
Registration Act, 1860, or (2) Companies Act 1956 (Section 25,
non-profit company) The Registrar of Societies, after
registering the bylaw of the society issues a Registration
Certificate.
 Unregistered clubs associations: The private schools, some
clubs, and other associations may function without any such
registration. In such cases bank account should be opened only
in case of very reliable persons. The resolution should be
signed by all members of the managing committee the
governing body, as per the rules. In no case, an overdraft
should be given in such accounts. No loan should be
sanctioned to an unregistered club association.
 Operation of account: Cheques signed by an authorized
signatory can be paid even after his death, insolvency, or
retirement as he is signing as an agent. Cheques favouring the
club-association should not be collected in the personal
account of its office bearers- employees as the bank can be held
guilty of conversion. Cheques drawn in favour of third parties
should not be collected in the personal account of office
bearers- employees for the above-mentioned reason.
CO-OPERATIVE SOCIETIES
A co-operative society is an association registered under the
provisions of the Co-operative Societies Act of the State
concerned. Therefore all formalities required for opening the
account of a registered association must be complied with by the
bank. Generally, co-operative societies are not permitted to open
accounts in banks other than co-operative banks expressly
permitted by Registrar of Co-operative Societies. Banks, therefore,
should ask for this permission before opening the account.
LOCAL AUTHORITIES
The authorities such as municipal corporations, Zila boards,
notified area council, etc., which are established under separate
statutes of State Central legislature are called local authorities.
The bank must obtain a copy of such ordinance and find out the
provisions as to who would authorize opening bank account and
who can be authorized to operate the account. Generally, these
authorities have a managing committee with a president, vice
president, and treasurer, and the treasurer is given powers to
open and operate the bank account. No overdraft advance should
be given to such authorities except to the extent and for the
purpose permitted by the statute.
GOVERNMENT DEPARTMENTS
While opening bank accounts for the government
departments, the bank should obtain a copy of the government
notification order authorizing the concerned person to open and
operate the account. Also, the bank should obtain a copy of the
letter signed by the head of the department, authorizing the
executive to open and operate a bank account. Also, get a certified
copy of the rules and regulations framed by the department for
the opening and operation of such an account.
PROVIDENT FUNDS
Opening an account in the name of the provident funds is
similar to the account opening process in case of trusts.
Documents to be obtained are (1) Copy of the trust deed, (2) Copy
of rules of the provident fund, (3) Resolution by trustees, and (4)
Other documents required to open a trust account.
PROPRIETARY CONCERNS
The proprietary accounts are individual accounts except for
the fact it is opened and operated in a name as chosen by that
individual to otherwise represent him. Therefore the account
opening form is to be signed by him in an individual capacity, i.e.,
without affixing the stamp of the proprietary concern. This is
because he is declaring that it is his concern. The specimen
signature must be obtained with the stamp of the concern. In case
of the death of the proprietor, the balance is payable to his legal
heirs. Nomination can be made in a deposit account kept in the
name of a proprietary firm.
KYC Requirements: While opening an account in the name of
a proprietary concern, the bank has to verify the genuineness of
the name, address, and activity of the concern by verifying any
two of the following documents. Copy of the following
documents should be retained for record: (1) Registration
certificate, (2) Certificate license issued by the municipal
authorities under Shop and Establishment Act, (3) Sales and
income tax returns, (4) CST -VAT certificate, (5) Certificate
registration document issued by Sales Tax Service Tax
Professional Tax authorities, (6) Licence issued by the Registering
authority like Certificate of Practice issued by Institute of Charted
Accountants of India, Institute of Cost Accountants of India,
Institute of Company Secretaries of India, Indian Medical
Council, etc.
From April 2012, two more documents have been added to

the list namely (1) The complete income tax returns (not just the
acknowledgement) in the name of the sole proprietor duly
authenticated by the IT authorities, (2) Utility bills such as
electricity, water and landline telephone bills in the name of the
proprietary concern.
The RBI has further clarified that banks may also accept for
KYC the licence registration document issued in the name of the
proprietary concern by the GoI State Government. Further banks
may also accept the import-export code as an identity proof for
proprietary concerns.
EDUCATIONAL INSTITUTIONS
The constitution of the educational institutions can be of three
types viz., (1) Trust- private or public, (2) Society—registered
under the Societies Registration Act, (3) Companies-registered
u/s.25 of the Companies Act. The process of starting a school
begins by forming any of these legal entities with a governing
board of five to six members. The document to be relied on is bye-
law for the society trust deed for the public trust -memorandum
of association for the company.
The distinction between a private trust and public trust is that
in the case of the former, the beneficiaries are specific, while in the
case of latter, the beneficiaries are the general public or a class
thereof. Some states have enacted regulations act that insists no
property of the private school college can be transferred
mortgaged except with prior permission of the competent
authority, and the banks should act accordingly.
SELF-ASSESSMENT
Fill in the blanks
1. Banks may sanction overdraft only on the request of salaried
persons, not exceeding ………. month salary, and others
having an account for not less than ……… months.
2. Savings Bank accounts having no operation during the

previous ………. months should be branded as dormant
accounts.
3. The Magnetic Ink Character Recognition Code found in a
bank cheque contains…..…digits.
4. All cheques and drafts of Rs.25, 000 and above should be
examined under… lamp before passing the same for payment.
5. All agreements with a minor are ……....
True or False?
6. In the case of an inoperative savings account, banks must
continue to credit interest regularly.
7. The bank cannot recover money paid by mistake to the
customer's account after the lapse of 1 year from the date of
the detection of the mistake.
8. The stepfather or stepmother, cannot act as a natural guardian
for a minor.
9. A minor can appoint a nominee for his or her account until he
or she becomes a major.
10. Two minors can open a joint account to be operated by both of
them jointly, but not in the style of ‘either or survivor.’
Answers: (1) One, Six (2) Twelve (3) Seventeen (4) Ultraviolet (5)
Void-ab-initio (6) True (7) False (8) True (9) False (10) True
Questions
1. Who can open a savings bank account?
2. List out the rules for opening a current account. What are its
unique features?
3. What do you mean by the natural guardian for minors?
Discuss the conditions and procedures involved in opening a
deposit account of a minor.
4. What is a trust? Explain the processes involved in operating a
bank account in the name of a trust.

2.5. ENDORSEMENT OF CHEQUES
Endorsement of Cheques
The act of a holder of a negotiable instrument signing his or

her name on the back of that instrument, thereby transferring
their title or ownership to another person or a legal entity, is
called an endorsement. The person making the endorsement is
the endorser, and the person to whom the instrument is endorsed
is called the endorsee.
As per the Section 15 of the Negotiable Instrument Act, an
endorsement is made for negotiating (transferring) a negotiable
instrument. It is usually done on the backside of the instrument.
Sometimes it can be done on the face of the instrument or on a
slip of paper (called “allonge”) attached to it.
As per the Section 50 of the Act, the endorsement of an NI
followed by delivery transfers to the endorsee the property
therein with the right of further negotiation. As per the
established usage and practice, an endorsement would also mean
‘payee’s discharge,’ but there is no specific provision in the NI
Act to this effect.
It is made by the holder of the instrument, payee in case of
cheque or promissory notes, and drawer in case of an accepted
bill. There can be any number of endorsements in a NI. An
endorsement need not be dated. Endorsement for a part of the
amount appearing on the instrument is not valid. An instrument
must be endorsed for the full amount.
The endorsement of an instrument to two or more endorsees
separately is invalid. Where a person expires after having
endorsed a NI, but before delivering the same, his representatives
cannot negotiate it by delivery alone. The endorsement becomes
ineffective. As per Section 118 of the Act, unless proved to the
contrary, it is presumed that the endorsements appearing on the
NI were made in the order in which they appear thereon.
TYPES OF ENDORSEMENTS
The endorsement in blank and in full (Section 16): Where
the endorser signs his name only, it is called endorsement in the
blank or general endorsement. If the sign is made explicitly
along with the name of the endorsee, it is called a special
endorsement or endorsement in full. As per Section 54 of the Act,
an order cheque or bill, if blank endorsed, becomes payable to
bearer. A blank endorsement can be converted to endorsement in
full by any holder by writing some person’s name above the
endorser’s signature, who has endorsed in blank. Such a holder
does not thereby incur the responsibility of an endorser (Section
55)
Other endorsements: Section 50 of the Act speaks about the
restrictive endorsement, which restricts further negotiation.
(Example: Pay to XYZ only) Section 52 introduces Sans Recourse
endorsement, which means ‘without recourse.’ Here the endorser
by express words excludes his liability as an endorser. (Example:
Pay XYZ or order without recourse to me) Where an endorser, by
express words, abandons some of his rights or increases his
liability under an instrument, the endorsement is called a
facultative endorsement (Example: Pay XYZ or order, a notice of
dishonour waived)
Endorsement to transfer a part of the amount of the
instrument is called a partial endorsement. Section 56 deals with a
partial endorsement, which is not valid. Where the endorser
states that he is not liable for any incidental expenses, it is called a
sans frais endorsement. The endorser is responsible only for an
amount payable on the instrument.
Forged endorsement: Where the endorsement is forged (i.e.,
signed by somebody other than the person who should endorse),
all endorsees subsequent to the forged endorsement do not derive
any title to the instrument. Even an endorsee who can otherwise
claim to be a holder in due course acquires no title if he obtains
his title through a forged endorsement. Similarly, a holder-for-
value also does not get any title if the endorsement is forged.
VERIFICATION OF ENDORSEMENTS
Section 85(i) protects the paying bankers while paying an
order cheque and Section 85 (A) for payment of drafts. This
section provides that, to get protection, the paying banker must
verify that the endorsement of the payee is regular.
The regularity of endorsement: An endorsement is said to be
regular, if it purports (appears to be) to have been made by or on
behalf of the payee, maybe that it is not genuine. A paying banker
is protected even if the endorsement is forged, provided it is
regular. In case there is an apparent irregularity, the paying
banker loses protection in case the payment is made to the wrong
person.
Forged endorsement: Where an endorsement is forged or is
made by an agent without authority, the paying banker cannot be
held responsible if the endorsement is regular, and the payment is
a payment in due course. Section 85(1) protects a paying banker
in case of forged endorsement or endorsement (by agent) without
authority.
Bearer cheque: Section 85(2) provides protection to a paying
banker while a bearer cheque in due course. In the case of a
bearer cheque, the paying banker need not verify endorsement
based on the principle “once a bearer is always a bearer.” i.e., a
cheque drawn payable to bearer does not lose its character of a
bearer instrument because of having any endorsement in full,
restrictive endorsement, or any endorsement making it an order
cheque. Endorsements on a bearer cheque are redundant and the
paying bank should not take cognizance of them. Once a bearer is
always a bearer.
Order cheque without endorsement: Section 85(1) is
applicable only where there is an endorsement of the payee. The
collecting bank’s certificate “payee’s account will be credited” is
not a substitute for the payee’s endorsement. However, it is a
practice to pay order cheques without endorsement if collecting
banker certifies that the amount will be credited to the payee’s
account.
RULES FOR REGULAR ENDORSEMENTS
Individuals: When the payee is an individual, the spelling
must be written the same, not written entirely in capital letters,
nor adds any prefix or suffix with the name. For example,
Payee’s Name Endorsed as Regular or not?
Pa. Ranjith RANJITH No
Maestro Ilayaraja Ilayaraja Yes
Dr. Thiruma Valavan, Ph.D. Thiruma Valavan Yes
Payee’s Name Endorsed as Regular?

1.Kanitha Kanitha Anand Nee Kanitha
Sahadevan Sahadevan Yes
2.Miss. Saritha Saritha Tamilzh

Kuppan (Nee Saritha Kuppan) Yes
3.Mrs.K. Neela Anbumani

Anbumani W/o K. Anbumani Yes
Women: When the payee is a woman, after marriage, her

name may change. Her husband's name may replace her father's
name. She can endorse the cheque in her present name though the
cheque is drawn in her maiden name. The word “Nee” is used to
refer to “formerly.”
Illiterates: When the payee is illiterate, his/her Left Thumb
Impression (LTI) should be affixed, and an independent person
should witness this with his/her full address.
Type of Name of Correct

Payee Payee Endorsement
1.Joint Vijayan and Vijayan, Indrasidhu
Payees Indrasidhu (In different handwriting)
2. Agents Sakthivel Per Pro Sakthivel For
Sakthivel XYZ (or) XYZ Agent
3. Trusts Rojavanam For Rojavanam Public Trust,

Public Trust XYZ, ABC Trustees
4. Executors J.Jayalalitha For the executors of
J. Jayalalitha (deceased)
XYZ (Executor)
5.Partnership M/s Kamaraj For Kamaraj & Bros
Firm Bros. XYZ (Managing Director) or
Per Pro Kamaraj & Bros XYZ
6. Company Kandasamy For Kandasamy & Co. Ltd.
& Co. Ltd. XYZ (Managing Director) or
Per Pro Kandasamy & Co. Ltd.
XYZ
7. Official Karnan & For Karnan & Co. Ltd.(in
Liquidator Co. Ltd. (in liquidation)
liquidation) XYZ (Liquidator)
8. Officials Income Tax XYZ
Officers Income Tax Officers
Other payees: When the payee is a company/ trust/agent,
etc. the correct endorsement is made as shown below;
MISCELLANEOUS RULES
Liability of an endorser: As per Section 35 of the Act, in case
of dishonour of an instrument, each endorser is liable to the
holder, except those who have endorsed sans recourse.
Discharge of endorser’s liability: As per Section 40 of the
Act, an endorser is not liable on the instrument when any
subsequent endorsee destroys his remedy against prior parties.
For example, an instrument is endorsed by A to b, B to C, C to D,
and D to E. Now E cancels the endorsement of B and C, then D is
no more liable on the instrument, and E cannot proceed against
him.
Endorsement without consideration: As per Section 43 of the
Act, an endorsee, who obtains an instrument without consideration,
has no recourse to his immediate earlier endorser.
SELF-ASSESSMENT
Fill in the blanks
1. The endorsement made on a slip of paper attached to an
instrument is called ………
2. If the sign is made explicitly along with the name of the
endorsee, it is called a …..… or ………
3. In case of a bearer cheque, the paying banker need not verify
endorsement based on …………..principle.
4. In case of endorsement by a married woman, the term “Nee” is
used to mean ………..
True or False?
5. The endorsement would also mean ‘payee’s discharge,’ and
there is a specific provision in the NI Act to this effect.
6. A holder-for-value also does not get any title if the endorsement
is forged.
7. An endorser is not liable on the instrument when any
subsequent endorsee destroys his remedy against prior
parties.
Answers: (1) Allonge (2) Special endorsement or Endorsement in
full. (3) Once a bearer is always a bearer (4) formerly
(5) False (6) True (7) True
Questions
1. What do you mean by endorsement?
2. List the features of different types of endorsements.
3. Discuss the provisions available for the verification of
endorsement by a paying banker.
4. What is regularity in the endorsement? How can it be checked?

2.6. DISHONOUR OF CHEQUES
Dishonour of Cheques
A cheque is said to be honoured if the bank makes payment to

the payee, and it is dishonoured if the bank refuses to make the
payment. Whenever the cheque is dishonoured, the drawee bank
instantly issues a ‘Cheque Return Memo’ to the payee banker
specifying the reasons for dishonour. The payee banker provides
the memo and the dishonoured cheque to the payee. The payee
has an option to resubmit the cheque within three months of the
date specified on the cheque after fulfilling the reason for the
dishonour of cheque.
Moreover, the payee has to give notice to the drawer within
30 days from the date of receiving “Cheque Return Memo” from
the bank. The notice should state that the cheque amount will be
paid to the payee within 15 days from the date of receipt of the
notice by the drawer. However, if the drawer fails to make a fresh
payment within 30 days of receiving the notice, the payee has the
right to conduct a legal proceeding against the defaulter as per
Section 138 of the Negotiable Instruments Act.
REASONS FOR DISHONOUR OF CHEQUE
 If the cheque is overwritten.
 If the signature is absent or the signature on the cheque does
not match with the specimen signature kept by the bank.
 If the name of the payee is absent or not clearly written.
 If the amount written in words and figures does not match
with each other.
 If the account number is not mentioned clearly or is altogether
absent.
 If the drawer orders the bank to stop payment on the cheque.
 If the court of law has given an order to the bank to stop
payment on the cheque.
 If the drawer has closed the account before presenting the
cheque.
 If the fund in the bank account is insufficient to meet the
payment of the cheque.
 If the drawer does not prove any alteration made on the
cheque by giving his/her signature.
 If any alteration made on the cheque is not proved by the
drawer by giving his/her signature.
 If the date is not mentioned or written incorrectly or the date
specified is of three months before.
LIABILITY OF A DRAWER
Civil liability: When a cheque is dishonoured, the legal
position of a drawer becomes that of a principal debtor to the
holder. The holder can bring civil suit just like any other creditor
to recover the amount from the drawer making him liable as the
principal debtor. Apart from proceeding against the drawer, the
holder can proceed against the endorsers to recover the amount,
making them liable as guarantors. Thus in case of a dishonoured
cheque, the legal position between the holder and the drawer is
that of a creditor and principal debtor, and that between the
holder and endorsers is that of a creditor and a guarantor.
Criminal liability: The Banking Laws Committee (Dr.
Rajmannar Committee) recommended in 1978 that the issue of
DUD CHEQUES should be considered a crime and should attract
punishment through the summary procedure. The criminal
liability of a drawer in case of dishonour of cheque is dealt in
Section 138 to Section 142 of Negotiable Instrument Act 1881.
These sections were added to the Act by the “Banking, Public
Financial Institutions, and Negotiable Instrument Laws
(Amendment) Act 1988” and came into force from 1 st April 1989.
Further Section 143 to 147 have been added through another
amendment in 2002. A drawer of a cheque is deemed to have
committed a criminal offense when the drawee dishonours the
cheque drawn by him on account of the insufficiency of funds.
CONDITIONS FOR CAUSE OF ACTION

The cheque should have been issued by the drawer against
valid consideration i.e., for discharge of a debt/liability. Cheque
given in gift will not attract the provisions of these sections. The
cheque should have been presented to the paying banker well
within its validity period, and the cheque is returned unpaid/
dishonoured by the bank. The payee or holder-in-due-course
gives notice in writing to drawer demanding payment. This
notice should be given within thirty days of his receiving
information of dishonour from the bank.
The drawer should be given fifteen days from the date of
receipt of the notice to make the payment. In case the drawer does
not make the payment within this stipulated period, there arises a
cause of action to file a criminal suit against the drawer. The
criminal litigation can be filed within one month from the date of
cause of action (i.e., after the expiry of 15 days given to make a
payment) However as per amendment in 2002, the suit can be
filed after this prescribed period, where the complainant satisfies
the court that he had sufficient cause for not making such
complaint within the prescribed period. The suit is to be filed in a
court not lower to, that of Metropolitan Magistrate or 1 st Class
Judicial Magistrate.
MAXIMUM PUNISHMENT
The maximum punishment for such an offense is
imprisonment for upto two years or fine upto twice the amount of
the cheque or both. Complaints under these provisions can be
made only by the payee or holder-in-due course and nobody else.
Where the cheque is drawn by a company, a firm or an
association of individuals, the punishment can be awarded to
every person who was in charge of and was responsible for its
conduct of business (except nominee directors) and also to the
company. Section 143 to 147 have been added to the Act vide the
amendment of 2002, with a purpose to expedite disposal of such
cases. They provide that,
(i) Such cases can be dealt with under the summary procedure.
(ii) Summons can be issued by speed post, courier, or as
approved by a court.
(iii)The bank’s return memo will form the prima facie evidence of
the fact of dishonour and
(iv) Every offense under this Act shall be compoundable.
SOME LEGAL DECISIONS
G.M. Mittal Stainless Steel Vs. Nagarjuna Investment
[(1997) 90 Comp Case]:It is held that Section 138 is applicable
even when the cheque is returned because the drawer closes the
account. So long as the petitioner admits issuance of cheque and
does not deny his liability to pay the amount the prosecution is
sustainable. The Supreme Court has also held that Section 138 to
142 is applicable even when a cheque is dishonoured due to stop
payment (M/s. Electronics Trade & Technology Vs. M/s. Indian
Technologies & Engineers (P) Ltd., ISJ Banking 1996, SC 129)
Sadanandan Bhadran Vs. Madhavan Sunil Kumar Case: The
Supreme Court has decided in this case that the issue as to
whether a payee/holder can initiate prosecution for an offense of
dishonour of cheque for the second time if he had not initiated
such action on the earlier cause of action. It is held that he can
present the cheque any number of times to enable him to exercise
such right at any point of time during the validity of a cheque.
But once he gives notice under clause (b) of Section 138, he must
exercise such right within one month of the cause of action. If he
does not avail of the cause of action in the first instance, he
forfeits such right. He cannot issue a second notice and get
another cause of action, for non-payment.
Suman Sethi Vs. Ajaya K.Chriwal: The Supreme Court has
decided that where incidental charges, interest, and get notice
charges are claimed, in addition to the cheque amount, the notice
will be ineffective (i.e., bad) if the break-up of the claim giving
cheque amount, interest, etc. are not separately given. The drawer
will be absolved of criminal liability if he pays the cheque
amount.
Anil Kumar Sawhney Vs. Gulshan Rai [1993 (4) SCC 424]
The Supreme Court has held that in case of postdated cheques,
the six months period (i.e., validity period of cheque) shall be
reckoned from the date mentioned on the face of the cheque and
not any earlier date on which cheque was made over by the
drawer to the drawee. The same decision is upheld again by the
Supreme Court in A.Y. Badeve Vs. S.M. Nighojakar (AIR 2001 SC
1315)
Goaplast (P) Ltd. Vs. Shri Chico Ursula D’Souza: The
Supreme has held that Section 138 of NI Act applies to a
postdated cheque, even if stop payment instructions are issued
before the dates mentioned in the cheque. Therefore if a person
issues a postdated cheque and thereafter stops its payment, the
payee can proceed u/s. 138 once the cheque is dishonoured.
ICDS Vs. Some Others: The Supreme Court held that
dishonour of a cheque issued by a guarantor towards payment of
a loan attracts Section 138, and the guarantor can be prosecuted
for an offense under this section. The SC has decided that where
after the cheque is dishonoured and the payee sent the notice to
the drawer within 30 days of return to pay the amount within 15
days, and such notice returned undelivered, the aggrieved party
can move to court for prosecution.
LIABILITY OF ENDORSERS
As per Section 35 of NI Act, each endorser is liable to
compensate the holder the loss caused to him due to the
dishonour of cheque. The liability of an endorser is similar to that
of the drawer. The holder can recover the amount from the
endorser, any one of endorsers, or the drawer. The amount that is
recoverable from any of these parties is the amount of the
instrument dishonoured plus loss or damage caused to the holder
due to the dishonour.
Section 37 of NI Act states that the drawer of a cheque is liable
to the holder as a principal debtor, and all endorsers are
responsible to him as sureties. Section 38 states that in between
endorsers, each endorser is liable as a principal debtor to hi
immediate endorsee and as surety to subsequent endorsees.
Section 40 provides that where a holder of a NI without the
consent of the endorser, destroys or impairs the endorser’s
remedy against a prior party, that endorser is discharged from his
liability to the holder.
WHEN SHOULD A BANK RETURN A CHEQUE?
Payment countermanded by drawer: On receipt of a valid
stop payment order, the cheque must be returned unpaid with
the remark “payment countermanded by the drawer.” These
words should also be written in red, across the face of the cheque.
It is only the drawer who can give a valid stop payment order.
Where a stop payment request is received from the payee,
endorsee, or anybody other than the drawer, it cannot be acted
upon. Pending receipt of drawer’s confirmation, the cheque
should be returned unpaid with the remark “payment postponed,
awaiting drawer’s instructions.”
The stop payment order should be in writing, giving the
printed serial number, date, amount of the cheque under the
signature of the drawer. When a telephonic message or telegram
requesting stop payment is received, it will, at best, justify the
postponement of the payment. The cheque should be returned
with remark, “instructions to stop payment, confirmation
awaited.” Stop payment order can be validity given in case of a
joint account by anyone of the joint account holders, whether he
is operating account or not. In case of a partnership account, it can
be any partner (even by a sleeping partner) whether authorized to
operate the account or not.
Banks are liable for damages arising due to their failure to
comply with the stop payment instructions. Some banks have
incorporated in their rules for a current account that they would
not be responsible in case the cheque is paid by oversight in spite
of having received the stop payment order. The courts hold that
this rule is not tenable.
Notice of Drawer’s Death: On receipt of the confirmed news
of the death of the account holder, cheques signed by him should
be returned unpaid with the remark “Drawer deceased.” Cheques
signed by a person in the capacity of an agent can be paid even
after his death as long as the principal is alive. On the other hand,
if the principal is dead, the authority given to the agent is
automatically cancelled, and the cheque signed by the agent
should be returned with the remark, “Principal deceased.”
Notice of Customer’s Insanity: Where the account holder is
certified as insane by a recognized medical practitioner, or there
is satisfactory proof that he is admitted to a recognized mental
hospital, then the cheques signed by him should be returned
unpaid. The amount should be given as per the instruction from
the court or from receiver or trustee or manager appointed by the
court.
Notice of Customer’s Insolvency: Where a customer is
adjudged insolvent, the banker must refuse to pay cheques drawn
by the customer. The balance in the account vest in the hands of
the official receiver/ official assignee.
Liquidation of the Company: When a bank receives notice
from the liquidator following the provisions of the Companies
Act, requiring to pay the balance to liquidator’s account, all
cheques by the company should be returned unpaid.
RETURN MEMO
The standard reasons quoted in the return memo for
returning cheques are given below;
Reply When it is used?
1.Insufficiency of fund Balance is not sufficient
2. Refer to Drawer Garnishee order is received
3. Not Arranged for Amount will exceed arrangement
4. Effects not cleared Cheques are lodged but yet to be
realized
RBI GUIDELINES ON DISHONOUR OF CHEQUES

Rule 6 of the Uniform Regulations and Rules for Bankers
Clearing House (URRBCH) prescribes that an objection slip
(cheque return memo) must be prepared while returning an
unpaid cheque and this slip must be signed and must bear the
date of return and also the valid reason for the return of the
cheque.
 Cheques dishonoured for want of funds should be returned
with the reason “insufficient funds.”
 No new cheque book would be issued if cheques valuing Rs.
One crore and above are dishonoured on four occasions
during a financial year for want of insufficient funds. This
condition should be advised to the constituent while issuing a
new cheque book.
 From 1st April 2003, branches are required to submit a “Daily
Statement of Dishonoured Cheques” (DSDC) to their
respective regional office giving (i) details of dishonoured
cheques of Rs. 1 crore and above and (ii) particulars of
dishonoured cheques irrespective of the amount drawn by
stock-broker entities in favour of stock-exchanges.
 The regional office will send these data along with a review
report to the central office for a quarterly review by the audit
management committee at the central office.
SELF-ASSESSMENT
Fill in the blanks
1. When a cheque is dishonoured, the legal position of a drawer
becomes that of a ……….. to the holder.
2. The Banking Laws Committee 1978 is also known as……….
3. On dishonour of a cheque, the criminal suit can be filed
within ….. month from the date of cause of action.
4. The maximum punishment for such an offense is imprisonment
upto …..…or fine upto …...the amount of the cheque or both.
True or False?
5. A drawer of a cheque is deemed to have committed a criminal
offense when the drawee dishonours the cheque drawn by
him on account of the insufficiency of funds.
6. When a Garnishee Order is received, the standard reason
quoted in the return memo is “Effects not cleared.”
Answers: (1) Principal debtor (2) Dr. Rajmannar Committee (3)
One (4) Two years, Twice (5) True (6) False
Questions
1. Discuss when a banker should return a cheque unpaid?
2. Distinguish the civil and criminal liabilities of a drawer when
a cheque is dishonoured.
3. What are the RBI guidelines on dishonour of a cheque?

2.7. RIGHTS AND LIABILITIES OF A
PAYING BANKER
Rights and Liabilities of a Paying Banker
The banker who is liable to pay the value of a cheque of a

customer as per the contract, when the amount is due from him to
the customer is called “Paying Banker” or “Drawee Bank.” The
payment to be made by him has arisen due to the contractual
obligation. He is also called drawee bank as the cheque is drawn
on him.
As per Section 31 of NI Act, a banker is statutorily obliged to
honour his customer’s cheque when duly required to do so. It
provides that “the drawee of a cheque (i) having sufficient funds of the
drawer in his hands, (ii) properly applicable to the payment of such
cheque, (iii) must pay the cheque when duly required to do so and (iv) in
default of such payment must compensate the drawer for any loss or
damage caused by such default.”
BANKER’S OBLIGATION TO PAY
The banker must pay his customer’s cheque if the following
conditions are satisfied;
 The customer must have sufficient and clear balance in the
bank, which is equal to or more than the amount of the
cheque.
 The balance available with the bank should not be meant for
any other purpose. For example, cheques can be paid only out
of balance available in the SB account or CD or CC and not
out of any Term Deposits.
 The balance in the SB CD- CC account to the extent it is
earmarked against a Garnishee Order Income Tax Attachment
Order is not available for cheque payment.
 The banker should be duly required to pay the cheque.
BANKER’S NOT REQUIRED TO PAY

The banker is duly required to pay the cheques unless there
he finds any of the following circumstances;
 A cheque is not correctly drawn.
 Payment is not demanded within banking hours.
 The drawer does not countermand payment.
 Banker is informed about the death or insolvency or insanity
of the drawer.
Example 1: A customer maintains two accounts, namely A/c
No.1 and A/c No. 2 in the same bank. He draws a cheque for
Rs.10, 000 in A/c No.1, which has a balance of Rs. 5000 whereas
A/c No. 2 has sufficient balance. In such a case, the banker can
safely return the cheque as he need not take into consideration the
balance available in A/c No.2.
Example 2: A customer draws a cheque for Rs. 10,000 in his
account. The cheque is presented across the counter but was
denied payment due to insufficient balance. After ten minutes,
the payee deposits Rs. 4000 to the account, which makes the
balance sufficient to honour the cheque. In this case, the banker is
justified in paying the cheque, but the banker should take
precautions not to disclose the balance and the amount by which
it falls short of the cheque.
Example 3: A customer draws a cheque for Rs. 5,000 in his SB
A/c, which shows a balance of Rs.5, 000 only. The SB A/c rules of
the bank state that the customer must maintain a minimum
balance of Rs.5000. In this case, the bank has to pass the cheque
and may charge the service charge as required on account of the
balance falling down the stipulated minimum.
Example 4: The bank receives three cheques, one for Rs.1000,
the second for Rs.2000, and the third for Rs. 5000 in a current
account with a balance of Rs. 6500 only. In such a case, there is no
hard and fast rule for selecting which cheque is to be paid and
which is to be returned unpaid. Depending on the purpose for
which the cheques are drawn, the bank may choose the cheque
which would safeguard the customer’s interest the most.
However, it is not obligatory on the part of the bank to do so.
RBI GUIDELINE TOWARDS CHEQUE PAYMENTS
The RBI has said that banks would be held squarely
responsible for a wrongful debit of a cheque to a drawer account
whether the debit arises out of a fraudulent transaction or not.
Where the banks are at fault, they should compensate the
customer without demur. In cases where neither the bank nor the
customer is at fault, but the fault is elsewhere in the system, then
the banks should compensate the customer upto a limit.
PAYMENT IN DUE COURSE
Section 10 of the Act defines “Payment-in-due –course”. A
paying banker needs to ensure that the payment to a cheque is
payment-in-due-course. A payment can be called ‘a payment in
due course,’ only if it is made; (i) in accordance with the apparent
tenor of the instrument, (ii) in good faith and without negligence,
(iii) to any person in possession of the instrument, (iv) under
circumstances which do not afford a reasonable ground to believe
that the person receiving the payment is not entitled to the same.
The term apparent tenor means that the real intention of
parties as appears found in the instrument. The payment should
be made in accordance with the (i) date, (ii) crossing, (iii)
endorsement, (iv) name of payee and, (v) amount, etc. as is
apparent in the instrument. Any payment which is in
contradiction to any one of the above is not a payment in due
course.
Date: A cheque which bears no date should be returned
unpaid. The holder of a cheque has the authority to fill up the
date. As such, a cheque bearing different handwriting and
different ink can be paid. A cheque bearing impossible date, for
example, 25.04.2019, can be paid on or after 24.04.2019 (preceding
date) A cheque bearing date before to the date of issue of cheque
book or the date of opening of the account can be paid as there is
a contractual relationship on the date of presentation of the
cheque. Similarly ,a cheque signed by an agent bearing date
before the date of the issue of power of attorney can be paid. A
cheque dated on a Sunday holiday can be paid. A cheque bearing
dates as per National Saka Calendar if in order should be paid.
Stale Cheque: As per the RBI directive issued u/s. 35A of BR
Act (from 1st April 2012) a cheque draft pay order banker’s cheque
cannot be paid if presented after three months from the date of
the instrument. Thus the cheque remains valid for three months
from the date of the instrument. Therefore it becomes stale (out of
date) after this period, which cannot be paid by a banker, unless
the drawer revalidates it. For example, the last date on which a
cheque dated 15.07.2019 can be paid is 15.10.2019. The period of
validity of a cheque can be curtailed or enhanced by expressly
writing the same on the cheque. For example, if a cheque
explicitly mentions being valid for fifteen days, it cannot be paid
after 15 days.
Postdated Cheque: A cheque bearing a future date is called a
postdated cheque. The bank should not pay a postdated cheque
as it is not a payment in due course. Postdated cheques should
not be paid as the drawer may die/become insolvent/insane
before the date of the cheque. He may revoke the payment. Other
cheques may be wrongfully dishonoured due to this payment.
Further, a garnishee order may be served on the account. A
cheque dated 18.09.2019 cannot be paid on 17.09.2019 on the plea
that a cheque is a bill of exchange and as per Section 25 of NI Act,
a bill of exchange which falls due on a public holiday is payable
on the previous business day. Section 25 applies only to the bills
and not to cheques.
PAYEE OF A CHEQUE
Minor: As per Section 26 of NI Act, “A minor may draw,
endorse, deliver and negotiate any negotiable instrument” to bind
all parties except himself. As such, a minor can be the payee of a
cheque. For example, if a cheque is drawn by ad depositor
favouring his minor son say aged 12 years the cheque if otherwise
in order can be paid.
Insolvent: Where the payee of a cheque is an undischarged
insolvent, the cheque should not be paid as the true owner of a
cheque favouring a bankrupt is the official receiver/assignee.
However, if the bank had no knowledge of the insolvency of the
payee and has paid the cheque in due course, it cannot be held
responsible for the wrong payment.
Minor: As per Section 26 of NI Act, “A minor may draw,
endorse, deliver and negotiate a negotiable instrument” to bind
all parties except himself. As such, a minor can be the payee of a
cheque. For example, if a cheque is drawn by a depositor
favouring, his minor son say aged 12 years the cheque if
otherwise in order can be paid.
Insolvent: Where the payee of a cheque is an undischarged
insolvent, the cheque should not be paid, as the true owner of a
cheque favouring an insolvent is the official receiver –the
assignee. However, if the bank had no knowledge of insolvency
of the payee and has paid the cheque in due course, it cannot be
held responsible for such wrong payment.
Company–Corporation Govt. Department: A cheque drawn
favouring a limited company corporation Govt. department
(bearer or order) should not be paid in cash. It should be collected
into the company’s account. Cash payment of such a cheque is
not a payment in due course. Such cheques should also not be
collected in third-party’s account. Where a cheque favouring a
limited company is endorsed in favour of the managing director
or any employee of the company, it should not be paid, as it may
lead to the abetment of fraud.
Alternate payees: As per Section 13 of NI Act, a cheque can be
drawn favouring alternate payees. As such, where a cheque is
drawn payable to A or B or C or order, the paying bank can
validly pay the cheque to any one of them or bearer.
Drawee bank as payee: Where the drawee bank is marked as
the payee of the cheque, it must ask for clear instructions either
on the cheque or by means of a letter, for disposal of the proceeds.
Impersonal payee: Where a cheque is drawn in favour of an
impersonal payee like “pay cash or order” pay wage or order, pay
Lord Krishna or order, it is a practice among banks to pay such
cheque to the drawer only after getting his endorsement.
Blank payee: Where a cheque is drawn “pay……or order” or
“pay…..or bearer,” the cheque should be returned with the
remark “payee’s name required.” A cheque can be drawn without
mentioning the words ‘order or bearer.’ In the absence of such
words, a cheque is treated as an order cheque. Therefore if a
cheque is drawn “payable to A,” it is “payable to A or order.”
However, if the cheque is drawn “payable to A only,” it can be
paid only to A and not his order. The change in the word order to
bearer requires the full signature of the drawer. The bearer can be
changed to order without any signature. Overwriting the payee’s
name on printed words like bearer or order does not cancel them.
Amount mentioned on cheque: As per Section 18 of NI Act,
and also as per guidelines issued by the Indian Banks
Association, where there is the difference between the amount
written in words and that in figures, the bank should pay the
amount written in words. If the amount is written only in words
(and not in figures), the cheque can be paid. In case the amount is
written in numbers alone, the cheque should be returned unpaid
with the reason, “amount should be written in words.”
DRAWER OF THE CHEQUE
Drawer arrested remanded kept under trial: Cheque can be
paid as in such circumstances of civil liability, his contractual
obligation remains intact.
Drawer imprisoned convicted: Where the imprisonment is
due to criminal liability, the cheque can be paid as imprisonment
does not take away the contractual powers.
Drawer adjudged insolvent and imprisoned: Cheque cannot
be paid.
Signature differs: Where the signature on the cheque differs
from that given in the specimen, the cheque should be returned
unpaid. However, the cheque can be paid if the drawer confirms
his signature in writing.
Forged signature: Where the signature is forged, (even if so
cleverly that none other than handwriting experts can detect the
forgery), the paying banker has no right to debit the customer’s
account. In case of debit, the banker must make good the amount
to the constituent as there is no mandate from him. The onus of
proving the fact that the signature is forged lies with the
customer.
Where the forged cheque is paid, the paying banker is to
suffer the loss. The collecting banker is protected under section
131 of the NI Act. In the case of a joint account, all signatures
must be genuine. The banker cannot debit the customer’s account
even if one of the signatures is forged. A banker cannot plead that
the customer was negligent in not keeping the cheque book under
lock and key as required under SB/CD account rules of the bank,
and therefore the bank is liable for the loss on account of the
payment of the forged cheque.
Debit Customer’s account: A bank can debit the customer’s
account towards the payment of a forged cheque only under the
following circumstances;
 The customer himself is a party to the forgery.
 The customer knows, or there was reasonable ground on his
part to believe that a forged cheque is being issued in his
account. In such circumstances, he is duty-bound to inform the
banker to avoid the loss.
 On enquiry, the customer confirmed that the signature was his
own. He is estopped from denying the signature later on
(Doctrine of Estoppel)
NOT A PAYMENT IN DUE COURSE
Payment to a cheque under any of the following situations
cannot be considered as payment in due course;
 Payment in contradiction to apparent tenor.
 Payment after receipt of the stop payment order.
 Payment made after banking hours.
 Payment of a cheque bearing forged signature.
 Payment when a banker knows or has reason to believe that
the instrument is stolen one and the presenter is not entitled
to receive the proceeds.
PAYMENT OF CHEQUE
Mutilated cheque: A cheque which is torn into two or more
pieces is called a mutilated cheque. Even if adequately pasted and
joined together, such a cheque should not be paid unless the
drawer or the collecting banker confirms the mutilation. The
usual wording for such certification is "mutilation guaranteed."
Materially altered cheque: Any alteration in a cheque which
makes a significant change in the mandate given by the drawer is
called a material alteration which may be done on the (i) date, (ii)
amount, (iii) place of payment, (iv) name of the payee, (v) order
or bearer, (vi) crossed cheque to open cheque, etc.
There are specific alterations which are permitted by the Act
and hence are not considered as material alteration, These are (i)
filling blanks of an inchoate instrument (Section 20), (ii)
conversion of a blank endorsement into an endorsement in full
(Section 49), (iii) qualified acceptances (Section 86), (iv) crossing
of open cheques (Sc.125), (v) conversion of general crossing to
special crossing. Certain alterations that do not change the
mandate of the drawer of the position of the parties materially
cannot be called a material alteration. For example, change of
bearer to order, completing date, etc.
Liability of paying banker: Each material alteration can be
done in a cheque only under the signature of the drawer. A bank
paying a cheque carries material alteration without being
authenticated by the drawer cannot debit his customer’s account
with the amount of the cheque.
Protection to paying banker: Section 89 of the NI Act protects
a paying banker in paying a cheque, which is materially altered.
Protection under this section is available only if the following
conditions are satisfied. (i) The instrument does not appear to
have been altered. The alteration is made in such a way that it
cannot be detected with reasonable care, prudence, and scrutiny,
(ii) the paying banker pays the cheque in due course as defined in
Section 10.
Outside banking hours: As per Section 65 of NI Act, a cheque
presented for payment after banking hours should not be paid as
it is not a payment in due course. The actual payment could be
made after banking hours if it had been presented for payment
within banking hours.
Payee’s discharge: While paying a cheque (order or bearer) in
cash, it is practice to ask for the signature of the person receiving
payment on the backside of the cheque. If the payee refuses to
sign, pleading that law does not require endorsement in case of a
bearer cheque, a separate receipt for such payment (stamped if
needed) can be insisted upon by the banker.
PAYMENT OF CROSSED CHEQUES
As per the NI Act, the crossing in cheque can be (i) general
crossing, or (ii) special crossing. Account Payee crossing is not
dealt with in the NI Act. It has been developed as a matter of
banking practice and usage. When the words "not negotiable" is
added to a general or special crossing, it is called a "not negotiable
crossing." The notation "not negotiable" alone does not constitute
a crossing. Crossing applies only to cheques and drafts and not to
the bills of exchange or promissory notes. Where a cheque is
crossed, the paying banker is required to pay the cheque through
a banker only and not directly to the person presenting it at the
counter. Section 123 to 131 of NI Act deals with different
provisions of the crossing.
General crossing: Section 123 of NI Act deals with the general
crossing. Where a cheque bears across its face to parallel
transverse (i.e., in cross direction) lines (with or without the
words"& Co." or "not negotiable"), the cheque is deemed to be
crossed generally, and the crossing is called a general crossing. As
per Section 126, a general crossing is a direction to the paying
bank not to pay the cheque across the counter but to pay through
a bank. A cheque can be crossed by the drawer or any other
holder or the banker. The following should also be considered as
general crossing as they have two parallel lines.
(i) Under Rs. 10,000 (ii) Not Negotiable

Special crossing: Section 124 of NI Act deals with the special
crossing. The essential feature of a special crossing is the addition
of the name of a bank on the face of the cheque. Two parallel lines
or the words "not negotiable" may or may not be there. A special
crossing is a direction to the paying banker to pay the cheque
only through the bank named in the crossing or the bank acting
as its agent for collection. It should not pay the cheque to any
other bank. Where a cheque is crossed specially to two banks, it
should be returned unpaid except when one of these two banks is
acting as an agent for collection for the other.
A cheque crossed to two branches of the same bank is not
deemed as crossed to two banks. A general crossing can be
converted to a special crossing by the drawer himself or by any
other holder of the cheque. However, changing a special crossing
to a general crossing can be done only under the signature of the
drawer as it constitutes a material alteration. In case of a cheque
bearing general/ special crossing, the bank may be paid cash if it
requests a separate memo for payment in cash. The following
should also be considered as special crossing: (i) clearing stamp
with the name of the bank, (ii) the addition of the words
"yourselves" within general crossing.
A/c Payee crossing: Where a cheque is drawn with or without
two parallel transverse lines but necessarily bears the words
"Account Payee" or "Account Payee Only" it is called an account
payee cheque. It is the direction to a collecting banker and not to
a paying banker. The collecting bank must ensure that the
amount is credited to the account of the person mentioned as a
payee on the cheque. In case it fails to do so, it may render itself
liable for conversion and lose the statutory protection available to
a collecting banker. As per RBI guidelines, the proceeds of a
cheque bearing "account payee” or "account payee only" notation
is to be credited to the payee named in the instrument and not to
account of any other person even if it is a bearer cheque. This, in
effect, means an account payee cheque cannot be endorsed,
though strictly law does not prohibit the same.
III party A/c payee cheque: RBI has permitted banks to credit
the proceeds of an account payee cheque favouring some other
person for amount not exceeding Rs.50, 000/- to the current
account of the co-operative credit societies/ banks provided the
cheque bears an endorsement to the effect that the latter will
credit the proceeds of the cheque to the account of the payee of
the cheque. In case of an account payee cheque, the paying
banker has no special responsibility except to get a confirmation
from the collecting banker that the amount is being credited to the
account of the payee only.
Not negotiable crossing: As per Section 130 of NI Act, the
notation "not negotiable" by itself does not constitute a crossing.
When it is added to a general or special crossing, the crossing
becomes a "non-negotiable crossing." The inclusion of the words
"non-negotiable" takes away one of the critical characteristics of
negotiability though the instrument continues to be transferable.
This characteristic is that the transferee of a cheque (if he satisfies
certain conditions) can get an absolute title to the cheque,
notwithstanding the defective title of the transferor. In case of a
cheque bearing not negotiable crossing, the transferee of a cheque
cannot have a better title than that of the transferor. Section 130 of
NI Act states "A person taking a cheque crossed generally or
specially bearing in either case the words "not negotiable" shall
not have and shall not be capable of giving a better title to the
cheque than that which the person from whom he took it, had."
Since one of the significant privileges of a holder in due
course (i.e., to derive an absolute title notwithstanding defective
title, if any of the transferor) is not available in case of a cheque
marked not negotiable, there cannot be a holder in due course in
such a cheque. "Not negotiable crossing" is meant to safeguard
the interest of the real owner of the cheque. Since nobody other
than the actual owner can pass a good title to the transferee, every
person taking such a cheque must be fully satisfied with the
genuineness of the endorser. In other words, a "not negotiable
crossing" is a warning to the endorsee/holder to thoroughly
ascertain that the endorser has the right title over the instrument.
In case he fails to do so, his title may become defective, and he
would be liable to the true owner of the cheque.
"Not negotiable crossing" is also a notice to the collecting
banker, mainly when it is collecting the cheque to the account of
an endorsee. It must ascertain the genuineness of endorsement
failing which it would be held guilty of conversion. This crossing
does not give any additional burden to the paying banker except
that it must pay the cheque (i) in due course and (ii) in accordance
with the crossing. "Not negotiable account payee" crossing gives
the highest safety to the real owner of the cheque.
Liability in case of general or special crossing: Section 129 of
NI Act states that, “Any banker paying a cheque crossed
generally otherwise than to a banker or a cheque crossed specially
otherwise than to a banker to whom the same is crossed, or his
agent for collecting being a banker shall be liable to the true
owner of the cheque for any loss he may sustain owing to the
cheque having been so paid”. Apart from being liable to the true
owner for the loss sustained, the paying banker cannot also debit
the account of his customer in case the payment goes to the
wrong person. Further, a paying banker will lose protection
available to him under Section 128 as such payment is not
deemed to be a payment in due course.
Protection to a paying banker: Section 128 of NI Act protects
a bank paying a crossed cheque in case of wrong payment. As per
this section, a bank paying a crossed cheque is not liable in case of
incorrect payment, if it can prove that it has paid the cheque in
due course as defined in Section 10.
Miscellaneous points on crossing: The cancellation of the
crossing is otherwise known as the opening of crossing. Since the
‘opening of a crossing,’ is a material alteration, it must be done
only under the signature of the drawer. The drawer should cancel
the crossing and should write the words “pay cash” or “crossing
cancelled” under his signature. A cheque in which the crossing is
cancelled should be dealt with care. It should be preferably paid
to the drawer or his known agent as payment to others is fraught
with the risk of the crossing being opened by some third party
forging the signature of the drawer. However, after carefully
ascertaining the genuineness of the drawer’s signature, there is no
bar in paying the cheque to the holder.
SELF-ASSESSMENT
Fill in the blanks
1. The RBI has said that ………. would be held squarely
responsible for a wrongful debit of a cheque to a drawer
account.
2. The term …… means that the true intention of parties appear
or found in the instrument.
3. A cheque cannot be paid if it is presented after ……… months
from the date of its making.
4. A cheque which is torn into two or more pieces is called a
……..cheque.
True or False?
5. The Act does not permit the conversion of general crossing into
special crossing in a cheque.
6. A cheque can be crossed only by the drawer of the
instrument, and not by others.
7. An A/c payee cheque cannot be endorsed, though strictly law
does not prohibit the same.
8. In case of a forged signature, the onus of proving the fact that
the signature is forged lies with the banker.
Answers: (1) Banks (2) Apparent tenor (3) Three
(4) Mutilated (5) False (6) False (7) True (8) False
Questions
1. Under what circumstances a payment can be called the
payment in due course?
2. What is crossing? What are the provisions and precautions a
banker should consider before making payment to different
types of crossed cheques?
3. Discuss the rights and liabilities of a paying banker while
making payment to a cheque

2.8. RIGHTS AND LIABILITIES OF A
COLLECTING BANKER
Rights and Liabilities of a Collecting Banker
The term collecting banker means the banker who collects the
cheques and bills on behalf of the customers. In other words,
every crossed cheque is necessarily to be collected through any
bank, which is known as collecting banker. The legal position of a
collecting banker of cheques can be either that of (i) an agent or
(ii) a holder for value or holder in due course.
Bank as an agent: When a bank collects the cheque on behalf
of his customer, and he has no interest as such on the cheque, the
bank is known as an agent. Here the bank first collects the
amount and then gives credit to the customer’s account.
Bank as a holder for value: When a banker collects the
cheque for himself because he has acquired some interest in the
cheque, the banker’s position is that of a holder for value or
holder in due course. The bank may become a holder for value
when he (i) purchases discounts the cheque, (ii) accepts a cheque
from a customer whose account is overdrawn, (iii) agrees to allow
withdrawal against the cheque.
Risk of conversion: One of the risks undertaken by a
collecting banker is the risk of conversion, which means the
wrongful interference in the property of another person. When a
banker collects a cheque paid in by his customer who has no title
or a defective title, he can be held guilty of conversion & can be
made liable for the amount to the true owner of the cheque.
Protection in case of conversion: Section 131 of NI Act
provides statutory protection to a collecting banker against
conversion while collecting a cheque. It says that, “A banker who
has (i) in good faith and without negligence, (ii) received payment
for a customer, (iii) of a cheque crossed generally or specially to
himself shall not, in case the title of the cheque proves defective incur
any liability to the true owner of the cheque, by reason only of having
received the payment”.
Good faith without negligence: Good faith means honesty.
To get protection, the bank should have acted bonafide and
should not have any fraudulent or malafide intention. Without
negligence means with reasonable care. A banker is said to be
negligent if the circumstances of the cases are such that he should
have doubted the genuineness of the title of the customer to the
cheque but has failed to do so.
EXAMPLES OF NEGLIGENCE
The following examples deal with the negligence by a
collecting banker;
 Collecting cheque in an account that is not properly
introduced.
 Collecting a cheque payable to the customer in his official –the
fiduciary capacity to his account viz., cheque payable to the
principal of a college collected in his account.
 Collecting cheques in contradiction to the apparent tenor of the
cheque viz., collecting a cheque specially crossed to another
bank.
 Collection of cheques of large value to new accounts or
accounts with small transactions without reasonable enquiry.
Received for a customer: The bank can claim protection if it
collects the cheque for a customer and not for a stranger. A
customer for this purpose means one who has an account like
SB/CC/CD with the bank (i.e., account for doing banking
business) An account should be opened with cash and not by
cheque as the bank would not get protection for collecting this
cheque.
Of a crossed cheque: Protection is available for collection of
crossed cheques and not for an open cheque. It should have been
crossed before being deposited with the bank. In case an open
cheque is deposited for collection, and the collecting banker
crosses the cheque, it is not deemed as a crossed cheque for
Section 131 and no protection can be claimed in respect of such
cheques.
Section 131 is applicable for cheques and drafts but not for the
bills of exchange and promissory notes. Banker’s cheques,
dividend warrants, interest warrants, which are drawn in the
form of cheques, are also covered under this section. Section 131
(A) provides the same for bank drafts. Protection under these
sections is available only when the banker is acting as an “agent
for collection” and not as a holder for value.
OTHER RESPONSIBILITIES
Some other responsibilities of a collecting banker are as
follows;
 To present the cheque within a reasonable time: A collecting
bank should present the cheque within a reasonable time (say
24 hours) Where the bank makes unreasonable delay in
presenting a cheque, it is liable to compensate the customer
for any loss sustained by him.
 In case of dishonour of a cheque: The payee has recourse to
the drawer. However, to make the drawer liable, Section 72 of
the NI Act provides that the cheques should have been
presented to drawee bank before the relation between the
drawer and the banker is altered to the prejudice of the
drawer.
 In case there is a delay in the meantime, the drawee bank fails,
which resulted in a loss to the drawer, his liability on the
cheque is reduced to the extent of damage suffered (Section 84
of NI Act).
SELF-ASSESSMENT
Fill in the blanks
1. In banking terminology, good faith means……… and without
negligence means ...……
2. Protection is available for collection of crossed cheques and
not for an ………. cheque.
True or False?
3. A bank account should be opened with cash and not by
cheque as the bank would not get protection for collecting this
cheque.
4. Section 131 (Protection in case of conversion) is applicable for
cheques and drafts but not for the bills of exchange and
promissory notes.
Answers: (1) Honesty, with reasonable care (2) Open
(3) True (4)True
Questions
1. Describe the legal position of a collecting banker.
2. What is meant by negligence by a banker? Give some
examples.

2.9. TIME VALUE OF MONEY
Time Value of Money
The term time value of money states that the value of money
received today is more than the value of money received after a
certain period in the future. That is, the sooner one gets the
money, the better would be its value. If you are given a choice to
receive Rs. One hundred today or after one year, you will take it
today instead of waiting for one year. This is because you would
value the current receipt of money higher than its future receipt.
This phenomenon is known as the time preference for money.
TECHNIQUES OF TIME VALUE OF MONEY
There are two techniques of the time value of money, namely
the (i) Compounding technique and the (ii) Discounting technique.
COMPOUNDING TECHNIQUE
(FUTURE VALUE OF MONEY)
The time preference for money encourages a person to receive
the money at present instead of waiting for the future. However,
he may be willing to accept it in the future if he is duly
compensated for the waiting time by way of ensuring more
money in the future. For example, a person being offered Rs.100
today may show his willingness to receive as Rs.110 after one
year, where the normal rate of interest is 10% p.a. For him, Rs.100
today would be equal to Rs.110 after one year. The formula for
calculating future value of money is,
Vn = V0 (1+i)n where,
Vn = Future value of money after n years,
V0 = Value of money in the beginning and
i = Rate of interest.
For example, if we proceed with the above example, when the
rate of interest is 10% p.a., the value of Rs.100 after one year, five
years and ten years would be as follows;
After 1 Year After 5 Year After 10 Year

V1 = V0 (1+i) n V5 = V0 (1+i) n V10 = V0 (1+i)n
= Rs.100 (1+.10)1 = Rs.100 (1+.10)5 = Rs.100 (1+.10)10
= Rs. 110 = Rs. 161.1 = Rs. 259.4
As n becomes large, the calculation of (1+i) n becomes difficult.
We can use the Compound Factor Table (given as appendix at the
end of this book) for calculating the value of money for larger
periods. For a clear understanding, a portion of the table is
reproduced below;
COMPOUND FACTOR TABLE
Period (n) 2% 4% 6% 8% 10%
1 1.020 1.040 1.060 1.080 1.100
2 1.040 1.082 1.124 1.166 1.210
3 1.061 1.125 1.191 1.260 1.331
4 1.082 1.170 1.262 1.360 1.464
5 1.104 1.217 1.338 1.469 1.611
6 1.126 1.265 1.419 1.587 1.772
7 1.149 1.316 1.504 1.714 1.949
8 1.172 1.369 1.594 1.851 2.144
9 1.195 1.423 1.689 1.999 2.358
10 1.219 1.480 1.791 2.159 2.594
DOUBLING PERIOD
People are often interested to know in how many years they
can get their savings doubled at a given interest rate. The
Compound Factor Tables are much helpful in calculating such a
doubling period. For example, we can find from Table A in the
Appendix that it takes about seven years to double the amount at
10% rate of interest p.a., and about six years at 12% p.a. Doubling
period can also be calculated by adopting the following Rules of
Thumb. For example, if you deposit Rs. 1 lakh at 6% rate of
interest it will be doubled in 12 years and 11.85 years as per Rule
of 72 and 69 respectively;
Doubling Period Rule of 72 Doubling Period Rule of 69
= =
=
= = 0.35+ 11.50
= = 12 Years
= 11.85 Years
MULTIPLE COMPOUNDING PERIODS

All the above examples have assumed that the interest is
compounded annually. But sometimes it may be compounded
more than once within a year. For example, banks may allow
interest to be compounded every quarter basis or a half-yearly
basis. The future value of money in such cases can be calculated,
as shown below. The formula for calculating future value of
money is,
Vn = V0 (1+ )m x n where,
Vn = Future value of money after n years,

V0 = Value of money in the beginning
i = Rate of interest and
m = Frequency (or) number of times compounded in a year.
For example, if the rate of interest is 12% p.a., the value of
Rs.10,000 after three years would be as follows, when the interest
is compounded (i) annually, (ii) half-yearly and (iii) quarterly
basis;
Compounded Compounded Half Compounded

Annually Yearly Quarterly
Vn = V0 (1+ ) m x n Vn = V0 (1+ ) mxn Vn = V0 (1+ ) mxn
=10,000(1+0.12/1)1x 3 = 10,000 (1+0.12/2)2 x 3 = 10,000(1+0.12/4)4x3

= 10,000 (1.12)3 = 10,000 (0.06)6 = 10,000 (1.03)12
= 10,000 (1.4049) = 10,000 (1.4185) = 10,000 (1.4257)
= Rs.14,050 = Rs.14,185 = Rs.14,260
EFFECTIVE RATE FOR MULTIPLE COMPOUNDING

We have noticed above that the amount grows faster in the
case of multi-period compounding, i.e. when the frequency of
interest compounding is more than once in a year. It is so because
the actual rate of interest realized (effective rate) is more than the
annual rate of interest (nominal rate) the effective interest rate can
be calculated, as shown below. The formula for calculating the
effective interest rate is, EIR = (1+ )m-1 where,
EIR = Effective Interest Rate,

i = Nominal rate of interest and
m = Frequency or No. of times the interest is compounded in a year.
For example, if the rate of interest is 12% p.a., the value of
Rs.10, 000after three years would be as follows, when the interest
is compounded (i) annually, (ii) half-yearly and (iii) quarterly
basis;
Compounded Compounded Compounded Half
Monthly Quarterly -Yearly
EIR = (1+ ) m-1 EIR = (1+ ) m-1 EIR = (1+ ) m-1
= = =
= 0.1268 = = 0.1255 = = 0.1236 = 12.36%

12.68% 12.55%
FUTURE VALUE OF A SERIES OF PAYMENTS
So far, we have considered only the future value of a single
payment made at time zero. The following example shows how to
calculate the future value of a series of payments made at
different times of periods. The formula is as follows;
Vn = R1 (1+i)n-1 + R2 (1+i)n-2 +… + Rn-1 (1+i) + Rn where,
Vn = Future value of money after period n
R1 = Payment after period 1,
R2 = Payment after period 2,
Rn = Payment after period n and i = Rate of interest
If you receive Rs.1000, Rs.2000, Rs.3000, Rs.4000 and Rs.5000
at the end of the 1st, 2nd, 3rd, 4th and 5th years respectively, where
the existing interest rate is 10% p.a, its overall future value after
five years can be calculated as shown below;
Vn= R1 (1+i) n-1 + R2 (1+i) n-2 +… + Rn-1 (1+i) + Rn
V5= 1000 (1.10)4 + 2000 (1.10)3+ 3000 (1.10)2+ 4000(1.10)1+ 5000
V5= Rs.1000 (1.464) +2000 (1.331)+ 3000 (1.210)+ 4000(1.100)+ 5000
V5= Rs.1464 + Rs.2662 + Rs.3630+ Rs. 4400+ Rs.5000
V5= Rs.17156
COMPOUNDED VALUE OF AN ANNUITY
(FUTURE VALUE)
An annuity is a series of equal payments lasting for some
specified duration. The premium payments of LIC for an example
are an annuity. When cash flows occur at the end of each period,
the annuity is called a regular annuity or a deferred annuity. All
the payments in an annuity are equal. Hence the future value of
an annuity can be calculated as follows;
Vn = R1 (1+i) n-1 + R2 (1+i) n-2 + …. + Rn-1 (1+i) 1 + R.
Since R1 = R2=R3....Vn = R [(1+i) n-1 + (1+i) n-2 + …. (1+i) 1 + 1]
ANNUITY COMPOUND FACTOR TABLE
Period
2% 4% 6% 8% 10%
(n)
1 1.000 1.000 1.000
2 2.020 1.000 1.000 2.080 2.100
3 3.060 2.040 2.060 3.246 3.310
4 4.122 3.122 3.184 4.506 4.641
5 5.204 4.246 4.375 5.867 6.105
6 6.308 5.416 5.637 7.336 7.716
7 7.434 6.633 6.975 8.923 9.487
8 8.583 7.898 8.394 10.637 11.436
9 9.755 9.214 9.897 12.488 13.579
10 10.95 10.583 11.491 14.487 15.937
0 12.006 13.181
Alternatively by using the Annuity Compound Factor (ACF)
given in the appendix, it can be calculated as Vn = (R) (ACFi, n)
If the cash flows occur at the beginning of each period it is
called an annuity due. Its value can be calculated as V n = R (1+i) n
+ R (1+i) n-1 + …. + R (1+i) 1
Since R1 = R2=R3.... Vn = R [(1+i) n-1/ i] (1+i)
Alternatively by using the Annuity Compound Factor (ACF)
given in the appendix, it can be calculated as Vn = (R) (ACF i, n)
(1+i)
DEFERRED ANNUITY Vn = (R) (ACFi, n)
Example: Mr. A deposits Rs. 5000 at the end of each year
consecutively for 5 years, Rate of interest is 10% p.a. What will be
its value after 5 years?
Vn = (R) (ACFi, n) = 5000 (6.105) = Rs. 30,525
Annuity Due Vn = (R) (ACFi, n) (1+i)
Example: Mr. A deposits Rs. 5000 at the beginning of each
year consecutively for 5 years, Rate of interest is 10% p.a. What
will be its value after 5 years?
Vn = (R) (ACF i, n) (1+i)
= 5000 [(6.105) (1.10)] = 5000 (6.7155) = Rs.33,577
DISCOUNTING TECHNIQUE
(PRESENT VALUE OF MONEY)
Today’s value of money, which is to be received sometime in
the future, is called the present value of money. In the
compounding technique, the money invested today appreciates
as we add the compounding interest with the principal. In the
discounting technique, the present value of the money to be
received in the future would depreciate as we discount the
existing interest rate from the money to be received in the future,
as we have lost the opportunity of investing the money at some
interest until we receive it in future.
The formula for calculating present value of money is,
Vn = V 0 or V0 = where
Vn = Amount of money to be received after n years,

V0 = Present value of money,
n = No of years and, i= Rate of interest.
Suppose you have an opportunity to buy a debenture today,
and you will get back Rs.5000 after one year, assuming your time
preference for money is 10% p.a, what you will be willing to pay
for that debenture as the purchase price today?
The present value of money is V 0 = = = Rs.
4545
i.e., you will be ready to purchase it for Rs.4545 in order to receive
Rs.5000 after one year.
DISCOUNT FACTOR TABLE

Period(n
2% 4% 6% 8% 10%
)
1 0.980 0.962 0.943 0.926 0.909
2 0.951 0.925 0.890 0.857 0.826
3 0.942 0.889 0.840 0.794 0.751
4 0.924 0.855 0.792 0.735 0.683
5 0.906 0.822 0.747 0.681 0.621
6 0.888 0.790 0.705 0.630 0.564
7 0.871 0.760 0.665 0.583 0.513
8 0.853 0.731 0.627 0.540 0.467
9 0.837 0.703 0.592 0.500 0.424
10 0.820 0.676 0.558 0.463 0.386
As ‘n’ becomes large, the calculation of discount rates 1/ (1+i)
n
becomes difficult. For example, if we continue with the above
example, but assuming that you will receive that Rs.5000 after
five years, how much price you will be willing to pay?
We can use the Discount Factor Table (given as appendix at
the end of this book) for calculating value of money for larger
periods. Using the formula V0 = Vn x (DFi,n), we will get the
answer as given below;
V0 = Vn x (DFi,n) Present value
V0 = Future value Rs.5000 x 0.621 = Rs.3105
PRESENT VALUE OF A SERIES OF PAYMENTS
So far, we have considered only the present value of a single
payment to be received after a certain period. The following
example shows how to calculate the present value of a series of
payments (R1, R2, R3, etc.) to be received at different times of
periods in the future. The formula is as follows;
V0 = + + +… +
or
V0 = where Rt = Payment at period t,
If you receive Rs.5000 p.a. for the next five years at the end of
each year, where the existing interest rate is 10% p.a, its overall
present value can be calculated as shown below;
V0 = + + +… +
V0= + + +… +
V0 = Rs.4545 + Rs.4132 + Rs.3757+ Rs. 3415+ Rs.3105

V0 = Rs.18954 i.e., the present value of Rs. 25000 is Rs.18954.
DISCOUNTED VALUE OF AN ANNUITY
(PRESENT VALUE)
An annuity is a series of equal payments lasting for some
specified duration. If the amount of payment is taken to be R,
then the PV of an annuity can be calculated as V 0=
ANNUITY DISCOUNT FACTOR TABLE

Period (n) 2% 4% 6% 8% 10%
1 0.980 0.962 0.943 0.926 0.909
2 1.942 1.886 1.833 1.783 1.736
3 2.884 2.775 2.673 2.577 2.487
4 3.808 3.630 3.465 3.312 3.170
5 4.713 4.452 4.212 3.993 3.791
6 5.601 5.242 4.917 4.623 4.355
7 6.472 6.002 5.582 5.206 4.868

8 7.325 6.733 6.210 5.747 5.335
9 8.162 7.435 6.802 6.247 5.759
10 8.983 8.111 7.360 6.710 6.145
Alternatively by using the Annuity Discount Factor (ADF)
given in the appendix, it can be calculated as V0 = (R) (ADFi,n). If
the cash flows occur at the beginning of each period, it is called an
annuity due. Its value can be calculated as; V0 = (R) (ADF i, n) (1+i)
DEFERRED ANNUITY V0 = (R) (ADF i, n)
Example: Mr. A receives Rs. 5000 at the end of each year
consecutively for 5 years; Rate of interest is 10% p.a. What will be
its overall value today?
V0 = (R) (ADF i, n) = 5000 (3.791) = Rs. 18955
ANNUITY DUE V0 = (R) (ADF i, n) (1+i)
Example: Mr. A receives Rs. 5000 at the beginning of each
year consecutively for 5 years; Rate of interest is 10% p.a. What
will be its overall value today?
V0 = (R) (ADFi, n) (1+i) = 5000 (3.791) (1.10) = 5000 (4.1701)
= Rs. 20850
PRESENT VALUE OF AN ANNUITY
FOR AN INFINITE PERIOD
The present value of an infinite (or) life annuity can be
calculated as V0 = (R) (ADF i,α ) (or) For example, if the existing

interest rate is 10% p.a., the present value of old age pension
Rs.2000 received by a senior citizen for an infinite period (till his
lifetime) can be calculated as;
V0 = = Rs.20000.
SELF-ASSESSMENT
Fill in the blanks
1. The formula used to calculate the doubling period of money
deposits under the rule of 69 is……...
2. When cash flows occur at the end of each period, the annuity
is called a …….annuity.
3. An ……….. is a series of equal payments lasting for some
specified duration.
True or False?
4. If the cash flows occur at the beginning of each period, it is
called an annuity due.
Answers: (1) 0.35+ (2) Deferred (3) annuity
(4) True
Questions
1. How will you calculate the doubling period for money
deposits in a bank?
2. What is an effective interest rate? How to calculate the EIR for
multiple compounding?
3. How to calculate the present value of money using the PVF
table?

2.10. CALCULATION OF INTEREST
ON BANK LOANS AND DEPOSITS
Calculation of Interest on Bank Loans and Deposits
When you take out a loan, whether it’s a car loan, home

loan or credit card, you’ll have to pay back both the amount you
borrowed and interest on top of it. Essentially, interest is a fee you
pay for using someone else’s (usually the bank’s) money. It’s how
lenders make a profit from giving out loans. Usually, the
repayments you make on loan will be made up of two parts: the
part that reduces your balance to pay off your loan, and the part
that covers the interest on the loan. Interest may be simple
interest or compound interest.
Simple Interest: Simple interest is the interest earned on an
investment at a pre-decided rate of interest for a specific number
of periods. Simple interest is calculated by multiplying the
principal amount, the rate of interest per annum, and the time for
which the money is lent in years.
Simple Interest (SI) = P x r x t 100 Where,
P = Principal amount
r = Rate of interest per annum
t = Number of years (period)
For example, if a sum of Rs. 10,000 is invested for 3 years at
10% interest rate per annum, then at the time of maturity, SI =
10,000 * 10 * 3 100 = Rs. 3,000 Total Amount = Rs. 13,000
Compound Interest: Compound interest is the interest earned
on principal as well as interests. It is calculated by multiplying the
principle amount with the interest rate raised to the number of
periods in years for which the interest will be compounded.
Compound Interest (CI) = P {(1 + I 100) n 1} Where,
P = Principal amount
n = Number of years
i = Rate of interest per period
For example, if a sum of Rs. 10,000 is invested for 3 years at
10% compound interest rate p.a., then at the time of maturity, CI=
10000 {(1+10/100)3 1} = Rs. 3481, Total amount= Rs. 13481
FACTORS AFFECTING THE RATE OF INTEREST
The interest paid for bank loans depends upon several factors
as discussed below;
Principal Amount: This is the amount you’re looking to
borrow. But it’s not as simple as deciding how much you want
you should be focusing on how much you can realistically afford
to pay back. To work it out, consider your budget on all levels
yearly, monthly, and weekly and think about any life changes
you might encounter (are you about to have kids? or going to
make a big move?) Larger the amount you borrow, higher would
be the interest burden.
Purpose of Loan: The interest you pay for bank loans
depends upon the purpose for which the credit is obtained. For
example, the annual rate of interest charged by the State Bank of
India for personal loans is between 12.50% to 16.60%; for home
loans 12.25% 12.35%; for car loans 9.30%; for educational loan
8.85% to 10.75%.
Loan Term: How long will you be repaying your loan?
Shorter loan terms will generally mean higher repayments, but
less interest in the long run, while longer terms will lower
monthly repayments, but cost more in interest over the entire life
of the loan. For example, when you take a personal loan of
Rs.100000 at 12.50% p.a and decided to repay in 2 years, on
average you would be paying the EMI of Rs. 4731 each month,
and the interest paid in 2 years would be coming to Rs. 13538
only. In case if you agree to repay in 5 years, then the EMI you are
paying would be Rs. 2250 each month, but the interest paid over
five years would be coming around Rs.34988.
Repayment Schedule: On many loans, you’ll have the option
to make repayments weekly, fortnightly, or monthly. Which one
you choose will depend on your budgeting style. More
repayments mean less interest because of the effects of
compounding. Weekly repayments will save you some money.
But before you commit to a weekly repayment schedule, make
sure that your budget can meet it!
Repayment Amount: When you make your repayment, not
all of it goes to paying off your loan, as such. A certain amount
will go towards paying the interest first and then what’s left chips
away at your loan principal. Because the amount of interest you
pay depends on what your principal is, to calculate ongoing
interest costs, you’ll need to know what amount you’re making in
repayments.
CALCULATION OF INTEREST ON BANK DEPOSITS
Fixed Deposit (FD) is one of the safest short term investment
options available for a bank customer/ investor. FDs offer a
higher rate of interest than a savings account. The rate of interest
may differ from bank to bank and decided by the bank only. The
following are some of the factors that determine the rate of
interest on fixed deposits;
 RBI Regulations: The regulations imposed by the central bank
have a significant impact on the interests of various financial
products of banks.
 Recession leads to means economic slowdown during which
the RBI increases the supply of the money in the market by
lowering the rate of interest on the cash or deposits in the
banks. This results in a decreased rate of interest in FDs.
 Inflation has a significant influence on the country’s money
value. It leads to a devaluation of rupee and the decrease of
purchasing power over the lent amount. In such situations, to
pay the loss, banks collect more cash by imposing higher
interests on deposits.
 Deposit Amount: This is the amount you invest while opening
an FD account. The best part of an FD is that one can invest
with a minimum of Rs. 1000.
 Interest Rate: The rate of interest may vary depending on the
FD tenure and from bank to bank. Moreover, the different
financial institute offers different RoI.
 Deposit Tenure: The tenure you decide for investing will also
decide the rate of interest. Higher the tenure, the higher will be
the ROI you are offered with. You will have to invest for a
minimum of 7 years to 10 years on FDs.
 The frequency of Compound Interest: This calculates the
maturity amount to be earned at the end of the tenure on
monthly, quarterly, semi-annually, or annually.
VARIOUS DEPOSITS
Banks offer the general public several options to deposit their
money savings in the banks and pay them reasonable interest on
their cash deposits. The method of calculating interest for bank
deposits such as savings bank account, fixed deposits, and
recurring deposits are discussed below;
SAVINGS BANK DEPOSITS
A savings account is the most widely used account to park
your savings. The withdrawal flexibility is what makes it the most
preferred account, and Fixed Deposits are popular in terms of
returns. The following example will help you to understand how
interest is calculated on the money saved in a savings account.
CALCULATING INTEREST ON SAVINGS BANK
DEPOSITS
As per the RBI guidelines 2010, the interest on the savings
bank account is calculated daily on the outstanding balance. It
means that you earn interest on the bank balance you have at the
end of each day. The formula used to calculate interest is as
follows;
Interest on SB A/c = Daily Balance * Rate of Interest *

For example, if you have Rs. 50,000 in your account on 1 st
January 2019, withdraw Rs. 5000 after seven days, deposits Rs.
35,000 on the 14th day, and after that, keep no transactions.
Assuming the rate of interest is 4%, let’s look at the interest that
you would be getting by the end of that month.
Opening Withdrawa Out
Date Deposit
Balance l standing
1.1.2019 50,000 - - 50,000
7.1.2019 50,000 - 5000 45,000
14.1.2019 45,000 35,000 - 80,000
31.1.2019 80,000 - - 80,000
Now the interest can be calculated as follows;
 From 1.1.2019 to 6.1.2019 the outstanding balance was
Rs. 50,000. The interest will be calculated on Rs. 50,000 for 6
days which is, Rs. 50000 * 4 100 * 6 365 = Rs. 32.88.
 From 7.1.2019 to 14.1.2019 the outstanding balance was
Rs. 45,000. The interest will be calculated for the period of 7
days which is, Rs. 45000 * 4 100 * 7 365 = Rs. 34.52.
 From 14.1.2019 to 31.1.2019 the outstanding balance was Rs.
80,000. The interest will be calculated for the period of 18 days
which is, Rs. 80000 * 4 100 * 18 365 = Rs. 157.80.
Thus, the total interest earned for the month of January 2019
would be Rs. 32.88 + Rs. 34.52 + Rs. 157.80 = Rs. 225.20.
Even though the interest is calculated daily on your savings
bank account balance, it will be credited to your account either
half-yearly or quarterly only depending on the bank's policy.
FIXED DEPOSITS
Fixed Deposit is a kind of Term Deposit with a higher interest
rate (as compared to a regular savings account) Because of the
high-interest rate and low risk, it's quite a popular investment
choice in India. The interest rate is fixed for the whole maturity
period, and, it's usually considered an extremely safe investment.
(AAA) The invested amount should be locked for a fixed tenure
ranging between 7 days and ten years at a fixed rate of interest.
Interests earned on FDs are either paid out at regular intervals or
are reinvested, depending on the investor's choice. The maturity
amount of the fixed deposit is paid out at the end of the tenure.
The interest rates differ from FD INTEREST RATES IN
bank to bank and also on the SOME BANKS
maturity period (usually 1-3 years of
Bank Interest
term deposits offer a higher interest
rate) The interest is compounded SBI 6.60%
quarterly (every three months) in ICICI 7.30%
most banks. Fixed Deposits have
very low liquidity, and, you're not HDFC 7.25%
supposed to withdraw any amount PNB 6.90%
(however, you could take a loan at
low-interest rate @ 1% or 2%) before Axis 7.00%
the maturity date. If you do, a Canara Bank 7.40%
penalty may be applied, and the
Kotak Bank 6.75%
interest rate will be reduced.
However, few banks (e.g., ICICI) do Central Bank 6.60%
offer fixed deposits with a premature
withdrawal facility.
You also need to pay taxes on the interest earned during a
financial year, depending on your tax bracket. If you're in a 30%
tax bracket, it would be better if you invest in debt or liquid
funds. (Returns are somewhat similar, but you get the benefit of
indexation) For long term needs, you could also look for some
alternatives to FD, such as Ultra Short Bond funds or liquid funds
or PPF (very safe and it has tax benefit as well Section 80C) and
setting up SIP for equity mutual funds. Investing in equity assets
is risky. Still, it has the potential to generate higher returns in the
long term, FD would barely beat inflation, and actual returns are
lower if you consider inflation and taxes.
FACTORS AFFECTING THE FD INTEREST RATES
While Fixed Deposits have a fixed rate of interest throughout
their tenure, the interest rate can change at maturity, and the FD
renewal or reinvestment is always done at the interest rate at
maturity. The interest rates may increase or decrease with time,
depending on bank norms. Therefore, it is best to compare the
fixed deposits and re-invest in the scheme, which offers higher
interest. The following are some of the certain factors that can
affect FD interest rates
RBI’s reaction towards economic situation: During the
recession, the Central Bank may increase the money supply in the
market by lowering the interest rate on the cash stock or deposits
in the bank. As a result, FD interest rates would decrease.
Alternatively, during inflation, banks attract more cash by
offering higher interest rates on term deposits.
Amount Invested: Investment in a Fixed Deposit is made only
once, and the minimum amount for opening an FD varies in the
case of different financial institutions. You can start with as low as
Rs. 5000 and invest even up to Rs. 10 Crores or more. Higher the
amount of deposit made, higher will be the interest income
received.
Tenure of FD: Fixed Deposit has a period or tenure for which
the sum invested gets fixed or locked. You can avail of an FD for a
tenure of anywhere between 7 days and ten years. Different
financial institutions offer different tenure options. Longer the
tenure, higher will be the FD interest rates.
FD Interest Rates: Interest rates on FD are higher as compared
to savings accounts. The interest payout or compounding
frequencies vary between FD schemes and are usually done on a
quarterly, half-yearly or yearly basis. However, the interest rate
for tax-saving FDs is decided at the start of every financial year
by the government and is the same across banks.
HOW IS FIXED DEPOSIT INTEREST CALCULATED?
The returns on your fixed deposit investment, are determined
by your interest rates and frequency of interest payouts. These
interest rates are compounded periodically, and the formula
supporting the FD interest rates calculator is listed below;
A = P (1 + r/4/100) ^ (4*n) and
A = P (1 + r/25) 4n where
A = Maturity Amount, P = Deposit Amount and n =
Compounded Interest Frequency.
Example: Suppose that you are investing Rs.100000 in a fixed
deposit for a tenor of 3 years at an interest rate of 10%.
Now A is your maturity amount = 100000* (1+(10/25))^ (4*3)
Here, P is the principal amount, n is the tenor and r is the interest
rate. Maturity Amount A = 100000*(1.025)^12 A = 100000*1.34489
A = Rs.134489
Therefore, interest= Rs. 134489 Rs. 100000 = Rs. 34489
CALCULATION OF INTEREST ON FIXED DEPOSITS
FOR PRE-MATURE WITHDRAWAL
Fixed deposits generally pay higher interest than a savings
account, but it comes with a lock-in period. If you withdraw
before the fixed tenure, then a penalty (ranging from 0.5% to 1%)
is levied on the withdrawal.
Example: Suppose that you are investing Rs.100000 in a fixed
deposit for a tenor of 1 year at an interest rate of 8%, and the
penalty for premature withdrawal is 0.5%. The interest rate
offered for deposits for six months, and the lessor is 6%. You
broke your deposit after six months. In this case, the interest
income and penalty would be calculated as follows;
Since you had promised the banker to keep the deposit for
one year, they were offering you 8% interest. But as you have
withdrawn your money before maturity, you will not get 8%
interest; instead, you will be given the interest rate applicable for
deposits of less than the period of 6 months, i.e., 6%. Also, the
bank will charge a penalty of 0.5% for your premature
withdrawal. Therefore your effective interest rate would become
as 6% 0.5% = 5.5%.
Hence you would be getting the interest as Rs. 100000 * 5.5% =
Rs.5500.
Thus, it is not just the interest rate that should be considered
while calculating returns on FDs. It is also important to plan and
calculate the effect on your overall return in case you need to
break the FD prematurely.
TAX ON FIXED DEPOSITS
Interest on fixed deposits is fully taxable at your slab rate. If
the interest exceeds Rs. 10,000 in a year, TDS (Tax Deducted at
Source) is deducted on it, by the concerned bank. The applicable
TDS rate is 10% for resident Indians. For NRIs, the TDS rate is
30%, but no TDS is deducted for interest on NRE (Non-Resident
External) Fixed Deposits since the interest on such FDs is free of
tax. If you are a resident Indian but your income from all sources
is below the exemption limit of Rs. 2.5 lakh per annum, you can
submit Form 15G/15H to your bank to prevent it from deducting
TDS. Interest on fixed deposits up to Rs. 50,000 per annum is tax-
free for senior citizens under Section 80TTB, and no TDS is
deducted on the same.
TAX DEDUCTED AT SOURCE (TDS)
ON INTERESTS EARNED
The rate of interest earned on FDs is liable for tax deduction at
10.30% on the interest paid. If the interest exceeds Rs. 10,000 in a
financial year, the applicable TDS will be levied. In the case of
firms, the tax will be deducted if the interest earned exceeds Rs.
5000 in a year.
BENEFITS AND LIMITATIONS OF FDs

The significant benefits of FD schemes are as follows;
 Guaranteed Returns: FD is a secure investment and offers
assured returns for the investment you made.
 Encourages Saving Habit: As the investment is locked for a
fixed tenure, it inculcates the habit of savings. Unknowingly
you can develop this habit and save a handsome amount with
compounding rates.
 More Interest than Savings Account: FD rates of interest are
higher than the savings account. Thus, it yields better returns
at maturity. A savings account can offer you a maximum of
6%, whereas, in an FD, the offered interest is 7% or more.
 Partial Withdrawal: FD schemes allow early withdrawal of the
invested amount. However, one can withdraw 50% of the total
amount on the account and requires a nominal penalty.
 Payment of Interest at Intervals: The depositor can earn
interest at maturity, annually, or monthly based on the exact
term he/she chooses at the time of opening an account.
 Flexible Tenure Options: Also, enjoy the benefit of flexible
tenure and fix your hard-earned money as long as you wish to.
The minimum tenure of an FD account ranges from 7 days to
10 years.
The significant limitations of FD schemes are as follows;
 FD has low liquidity (you'll earn less interest in case of
premature withdrawal)
 Low returns, when you take inflation in the account, actual
returns are lower. It will further be reduced because of taxes
(especially if you're in 30% tax brackets)
 Not suitable for long term wealth creation or the investors with
high-risk appetite (For example, young investors in their 20s or
30s)
 Fixed Deposit is a smart choice to make when you have a lump
sum amount to invest, but if you can allocate only a certain
amount from your income every month towards investment,
then the recurring deposit is a better choice to make.
RECURRING DEPOSITS
Recurring deposit is a scheme offered by banks where a
person deposits monthly installment, and banks give higher
interest rates than a savings account. Recurring deposit is a kind
of fixed deposit and interest rates of recurring deposit is just little
less than a fixed deposit. Recurring deposit is suitable for those
people who have a constant source of income, for example,
salaried people. It is the best solution for medium-term saving (6
months to 3 years) with higher interest rates.
The minimum deposit amount for starting a recurring deposit
account varies for every bank, and it can be as low as Rs.10. Banks
generally offer a slightly higher rate of interest to senior citizens
for the RDs than the normal deposits. Usually, banks provide 0.25
percent to 0.75 percent more interest than normal RDs. To start a
recurring deposit account, the minimum period of deposit starts
from 6 months and may extend to the maximum period of 10
years in most RD Accounts. As per the Income Tax Law, TDS of
10% is applicable on the interest earned on Recurring Deposits.
The TDS will be deducted if the interest earned on the Recurring
Deposits is more than Rs.10, 000.
Recurring Deposit Interest: The interest rates given by banks
are generally above 8.0%, and it is compounded quarterly. The
interest for recurring deposits are calculated using the
compounding interest rate technique as shown below;
Example: Suppose you want to purchase a motorcycle next year,
and you want to save some money for it, but you also want higher
interest rates, so you may choose to start RD. You begin an RD of
Rs.5000 for one year. So you are going to deposit Rs.5000 in the bank
for the next year. And your bank gives you interest 8.25% for 1year
compounding quarterly. This means, for your first installment of
Rs.5000, you'll get 8.25% interest for 12 months from the bank
compounding quarterly. For the second installment, you'll get 8.25%
interest for 11 months compounding quarterly, and for the third
installment of Rs.5000, you'll get 8.25% interest for ten months
compounding quarterly and so on.
RECURRING DEPOSIT FORMULA
A = P * (1+R/N) ^ Nt where
A = Maturity amount,
P = Principal amount (In our case, it is Rs.5000)
R= Interest rate in decimal, convert interest rate into decimal by
dividing it by 100 (In our case, 8.25/100 = 0.0825)
T = Time duration in months (Here, it will be 12 months)
t = Time duration in years
N= compounding frequency (Quarterly it will be 4)
CALCULATING RECURRING DEPOSIT
MATURITY AMOUNT
Now, we will calculate the amount (A) from the above
formula for each installment we pay, starting from the first month
to 12th month and then add all of them. So the final maturity
amount will be, A = A1+A2+A3+.....+A12 where A1, A2,
A3….A12 are the maturity amount for respective installment.
Using the above formula, we have calculated the amount for
each installment and then added all of them to get our final
maturity amount. For the first 5000 that you deposited in the
bank, you will get interest for 12 months (t = 12/12 = 1), and for
the second installment that you paid, you'll get interest for 11
months. It's not that hard to calculate the RD maturity amount;
you need to understand the formula for calculating the recurring
deposit maturity amount.
T
Month P R t(years) N A= P*(1+R/N)^Nt
(months)
1 5000 0.0825 12 12/12 4 A1 = 5425.44

2 5000 0.0825 11 11/12 4 A2 = 5388.64
3 5000 0.0825 10 10/12 4 A3 = 5352.10
4 5000 0.0825 9 9/12 4 A4 = 5315.80
5 5000 0.0825 8 8/12 4 A5 = 5279.75
6 5000 0.0825 7 7/12 4 A6 = 5243.94
7 5000 0.0825 6 6/12 4 A7 = 5208.38
8 5000 0.0825 5 5/12 4 A8 = 5173.05
9 5000 0.0825 4 4/12 4 A9 = 5137.97
10 5000 0.0825 3 3/12 4 A10 = 5103.12
11 5000 0.0825 2 2/12 4 A11 = 5068.51
12 5000 0.0825 1 1/12 4 A12 = 5034.14
A = 62730.84
TAX DEDUCTION ON RD INTEREST

 Earlier, no tax was deducted on recurring deposits. With
effect to 1st June 2015, recurring deposits are subject to the
Tax Deducted at Source (TDS) as per the income tax laws.
TDS on RD would be deducted at the rate of 10%. However,
no TDS would be deducted if the interest income earned does
not exceed Rs. 10,000 in a financial year.
 Tax is to be paid as per applicable slabs at the time of filing an
income tax return. If you have submitted Form 15G (in case of
ordinary citizens) and 15H (in case of senior citizen) in the
bank, your TDS will not be deducted (in case your total
taxable income doesn’t come under tax slab)
INCOME TAX ON RECURRING DEPOSIT INTEREST

 RD’s interest income is taxed at the tax rate applicable to the
deposit account holder. So, depending upon your tax bracket,
out of the 10% that your bank pays on your deposit, you may
have to pay up to 33.99% of that to the government for it to
run the country. You can always contribute more to the native
land by donating some more.
 Interest on deposits is to be taxed on an accrual basis and not
a receipt basis. Say, you make a cumulative deposit for five
years with a bank and hence will receive interest only at the
end of five years. Still, you must pay tax on the accrued
interest for each of the years in that year itself.
FIXED DEPOSITS Vs. RECURRING DEPOSITS
Both FD and RD are term deposits that earn interest at the
same rate for the entire tenure of the deposit. At maturity, the
invested amount is paid out along with the accrued interest.
However, FD of same amount and same tenure as that of RD
fetches more returns. The reason being, in case of FD, you make a
lump sum investment, and so the entire money earns interest for
one year. Whereas, in RD, the first installment earns interest for
12 months, the second for 11 months, third for ten months, and so
on.
CALCULATING INTEREST ON CAR LOANS
PERSONAL LOANS / HOME LOANS, ETC.
Banks offer loans for every need of a customer in the name of
home loans, car loans, personal loans, etc. These loans are
generally called as amortizing loans which means that your
banker has meticulously worked out a set of EMI amount
(comprising both principal and interest) that you are required to
pay each month. At the end of your loan term, you would have
fully paid off both your interest and principal dues. You can
calculate how much interest you’re paying for your bank loan as
shown below;
X Principal Amount = Interest
1. Divide your interest rate by the number of payments you’ll

make in the year (interest rates are expressed annually) So, for
example, if you’re making monthly payments, divide by 12.
2. Multiply it by the balance of your loan, which for the first
payment, will be your whole principal amount. This gives
you the amount of interest you pay the first month.
For example, on a personal loan of Rs. 100,000 over two years
at 12.50% p.a. and making monthly repayments;
X Principal Amount = Interest
X Rs. 100000 = Rs. 1042
Because you've now begun to pay off your principal, to work

out the interest you pay in the following months, you need first to
calculate your new balance. Therefore, Principal Amount (Repaid
Amount of EMI Interest Portion) = New Balance.
1. Minus the interest you repaid. This gives you the amount that
you have paid off the loan principal.
2. Take this amount away from the original principal to find the
new balance of your loan. i.e.,
Rs. 100000 (Rs. 4731 Rs. 1042) = Rs. 96311
Mont Principal EMI Interest Principal New
h Paid Paid Paid Balance
1 Rs. 100000 Rs. 4731 Rs. 1042 Rs.3689 Rs. 96311
2 Rs.96311 Rs. 4731 Rs.1003 Rs. 3728 Rs. 92583
3 Rs.92583 Rs. 4731 Rs.964 Rs.3767 Rs.88816
4 Rs.88816 Rs. 4731 Rs.925 Rs.3806 Rs.85010
5 Rs.85010 Rs. 4731 Rs.886 Rs.3845 Rs.81165
To work out ongoing interest payments, the easiest way is to
break it up into a table. So using the above example, your
calculations might look like the above table.
When calculating interest on your loan, remember to use the
basic annual interest rate and not the comparison rate to get
accurate numbers. The comparison rate takes into account fees,
charges, and interest so if you use it, you will get a higher amount
of interest than you should. Keeping in mind that doing the
calculations yourself means slight discrepancies due to rounding
and human error, this should give you a pretty good idea of what
you’re paying in interest each month.
INTEREST ONLY LOANS
Taking out a home loan? You might have the option to choose
between a principal and interest loan or an interest-only loan. As
the name suggests, if you choose to take out an interest-only loan,
then your total monthly payment will be going toward interest
payment only. You won’t be chipping away at your principal
amount, which means the amount of interest you pay won’t
change. In the above example, you’d pay only Rs.1042 as interest
each month, and then at the end of the 2nd year, you’d have to pay
the full principal amount of Rs.100000.
CALCULATING INTEREST ON CREDIT CARDS
People extensively use credit cards for a wide range of
purposes, such as booking a flight ticket, purchasing jewelry,
filling up fuel from the petrol bunks, paying up of the hotel bills,
etc. Credit cards let you spend other's money for your
requirements. For using other's money, you're required to pay
interest. You should pay your credit card dues as soon as you can.
For the most part, working out how much you pay as interest on
your credit card balance works much the same way as for any
other loan. The main differences are;
 Your basic repayment is a minimum amount set by your credit
card company. It might be a set amount of rupees, similar to
any other loan, or it might be a percentage of your balance. It’s
best to pay more than the minimum amount, because often, it
doesn’t even cover the cost of interest. Paying only the
minimum is how you wind up with a massive credit card debt.
 If you make purchases on your card before paying off the
previous dues, it will be added to your balance, and you’ll pay
interest on the whole lot. This will change your minimum
payment amount as well, if the minimum payment is based on
a percentage of your balance.
It’s always a good idea to pay off as much of your credit card
balance as you can, as early as you can that way, you avoid
getting hit by high interest rates.
CALCULATION OF EMI ON BANK LOANS
Suraj Dutt, 29, a New Delhi-based store manager, bought a car
in 2015 worth Rs. 5.95 lakh. He made a down payment of Rs. 1.5
lakh and took an auto loan for the rest of the amount at 12%
interest per annum for four years. At present, he is paying an
equated monthly instalment, or EMI, of Rs. 11,700 per month.
However, he has no way of knowing if the amount is correct or
not.
Like Suraj, many people are confused if their lender is
charging them a fair amount as EMI. So, we decided to tell you
how to calculate EMI so that you can cross-check that with what
you have been paying per month. You can calculate your EMI by
using a piece of software called Microsoft Excel or a mathematical
formula.
USING EXCEL SHEET
One of the easiest ways of calculating the EMI is by using the
Excel spreadsheet. In Excel, the function for calculating the EMI is
PMT and not EMI. You need three variables. These are the rate of
interest (rate), number of periods (nper) and lastly, the value of
the loan or present value (pv)
The formula which you can use in excel is = PMT (rate, nper, pv)
Let us check the EMI of Suraj by using the above formula. It must
be noted that the rate used in the formula should be the monthly
rate, that is, 12%/12=1% or 0.01.
The number of periods represents the number of EMIs.
= PMT (0.12/12, 4*12, 445,000) = 11,718
The result will come in negative or red, which indicates the
cash outflow of the borrower. Let's take another example.
Suppose you are paying a quarterly instalment on a loan of Rs. 10
lakh at 10% interest per annum for 20 years. In such a case,
instead of 12, you should divide the rate by four and multiply the
number of years by four. The equated quarterly instalment for the
given figures will be = PMT (10%/4, 20*4, 10,00,000)
USING MATHEMATICAL FORMULA
Unfortunately, you cannot access the Excel spreadsheet
everywhere. In such a case, you can use your mathematical mind
or an electronic calculator to know how much the EMI comes to.
The mathematical formula for calculating EMIs is;
EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the
loan amount or principal, R is the interest rate per month [if the
interest rate per annum is 11%, then the rate of interest will be
11/(12 x 100)], and N is the number of monthly instalments.
When you use the above formula, you will get the same result
that you will get in the Excel spreadsheet.
SELF-ASSESSMENT
Fill in the blanks
1. The formula for calculating the Compound Interest (CI) =
…………
2. The interest on deposits of savings bank account is calculated
on …….basis.
3. If the interest on fixed deposits exceeds Rs. ……….. in a year,
TDS is deducted on it, by the concerned bank.
True or False?
4. If you make purchases on your credit card before paying off
the previous dues, it will be added to your balance, and you’ll
pay interest on the whole lot.
5. If you have submitted Form 15H (in case of ordinary citizens)
and 15G (in case of senior citizen) in the bank, your TDS will
not be deducted.
Answers: (1) P {(1 + I 100) n 1} (2) Daily (3) 10,000 (4) True (5)
False
Questions
1. How are the simple and compound interests calculated on
bank deposits?
2. What are the factors that determine the interest amount on
your bank deposits?
3. List the advantages and limitations of a fixed deposit?

2.11. ‘KNOW YOUR CUSTOMER’
GUIDELINES
‘Know Your Customer’ Guidelines
From the year 2002, the RBI has asked all banks to
meticulously follow the Know Your Customer (KYC) guidelines
in all accounts to prevent banks from being used (i) for money
laundering, (ii) for terrorist financing activities, (iii) by fraudsters.
It involves the following 4 steps; (i) Proper identification of every
customer while opening account in his name, (ii) Establishment of
database on the customer to know his profile, (iii) Monitoring
transactions in his account to ensure that it is not used for money
laundering, and (iv) Risk management.
The RBI, as the regulating authority, has issued AML and
KYC guidelines in line with the international standards to be
followed by banks in India. The RBI has issued these guidelines
under Section 35A of the BR Act, and hence they are directives,
and non-adherence to the same would attract penalties. RBI has
asked all banks to formulate their policy on KYC in line with
these guidelines and get it approved by their board of directors
and follow the same meticulously.
CORE COMPONENTS OF KYC
The KYC policy broadly deals with four core components,
namely (1) customer acceptance procedure (2) Customer
identification procedure (3) Monitoring of transactions and (4)
Risk management.
CUSTOMER ACCEPTANCE PROCEDURE (CAP)
While accepting a customer, banks must take care of the
following things;
1. Banks must not open accounts in fictitious/benami/
nicknames.
2. While opening account banks should judge the risk associated
with the customer and categorize the customers as per their
risk perception into Low Risk, Medium Risk, High Risk, and
Exceptional Risk to be called RIP-One, RIP-Two, RIP-Three,
and RIP-Exceptional respectively.
3. Banks must obtain identity proof, address proof, customer
profile, and also other documents as required for opening such
accounts as per Rule 9 of the Rules notified under the
Prevention of Money Laundering Act.
4. Banks must not open accounts or close the existing accounts
where they are not able to apply Customer Due Diligence
(CDD), which means accepting the customer after knowing
entirely his identity, address, and authority to deal with the
bank in a representative capacity if any.
5. Banks must document in clear terms the circumstances in
which a customer is permitted to act on behalf of another
person and obtain documents like power of attorney. Mandate
and any other document required to prove the fiduciary
relationship.
6. Banks must not open accounts in the name of a lawyer or
accountant or any other professional to keep funds in the name
of their clients if they do not divulge the name of such clients
and their identity.
7. Banks must verify while opening an account that the identity
of the customer does not match with any other person with a
known criminal background or any members of entities of
terrorist individuals.
8. Banks must obtain a detailed profile of the customer and
should update the same annually. This form should contain
relevant information on the customer, including his identity
and social standing, business activity and also the risk
perception of the bank on the customer and risk level threshold
limit beyond which bank should probe the transactions in the
account.
CUSTOMER IDENTIFICATION PROCEDURE (CIP)

The customer identification procedure provides the Customer
Due Diligence required to be made as to the identity and profile
of the customer;
(i) As to identity: Banks must obtain reliable information
necessary to establish the identity of each customer coming for
both regular and occasional transactions. This is done by
obtaining an introduction, photo, identity proof, address proof,
PAN, Independent verification of address, etc. The ID proof and
address proof documents should be verified in original and a
photocopy of the same should be verified and attested under the
signatures of the authorized officers of the bank. The same should
be retained in the bank records. The signature of the client should
also be obtained on the photocopy to avoid disputes in the future.
These documents are to be held for a minimum period of 10 years
from the date of cessation of the account relationship with the
client as required under Rule 10 of PMLR Act 2002 and also KYC
directive of the RBI.
Photo: It is compulsory for opening any account except
depositors coming under excepted category.
Identity proof: As per Rule 9 of the PML Act, every banking
company shall at the time of opening account verify and maintain
identity and current address of the client and also his status. The
documents accepted for ID proof are, (i) Passport, (ii) PAN Card,
(iii) Voter’s ID Card, (iv) Driving Licence, (v) ID Card subject to
bank’s satisfaction, (vi) Letter from public authority or public
servant verifying the identity and residence of the customer to the
satisfaction of the bank. From 2011 onwards, (vii) job card issued
by NREGA duly signed by an officer of State Government, (viii)
Letter issued by the Unique Identification Authority of India
(UIDAI) containing the name, address and Aadhaar Number also
accepted as identity proofs.
Address proof: As per Rule 9 of PML Act independent

verification of the new depositors should be made without fail by
asking them to produce any of the following documents such as,
(i) Passport, (ii) Telephone bill, (iii) Electricity bill, (iv) Ration
card, (v) Bank A/c passbook or statement, (v) Letter from the
employer to the satisfaction of the bank, (vi) Property tax book/
receipt, (vii) Registered lease deed, (viii) Present gas connection
paper, (ix) Any one or more document which provides customer
information to the satisfaction of the bank, (x) Postal Identity
Card (PIC) issued by the GoI, Department of Post (valid for 3
years from the date of issue) are accepted as address proofs.
PAN: As per the Income Tax Act, it is mandatory to submit
the Permanent Account Number (PAN) while opening SB or
current account. If PAN is not available, he has to declare the
same in Form 60/ Form 61 as the case may be.
Independent verification of address: Banks should send a
letter of thanks to the new depositor by ordinary post as per the
address is given in the account opening form to verify the
genuineness of the address.
(ii) As to profile: Banks must get sufficient information on the
nature of business and occupation of the customer and record the
same in a form called KYC Form and from this information
understand the predictable pattern of the transaction in the
account of the customer. This will enable the banks to know the
risk associated in the account (risk perception) and also to
determine the threshold limit of the total amount of transaction
(risk level threshold limit) beyond which the details of the
transactions need to be checked to ensure that the account is not
used for money laundering.
OTHER DOCUMENTS IN CASE OF COMPANIES
As per Rule 9 of the KYC guidelines, while opening accounts
of the companies the KYC procedure requires the following
documents to be taken;
 Certificate of incorporation, Memorandum of Association,
Articles of Association, Resolution of the Board of Directors.
 Identity proof of those who have been authorized to operate
the account.
 Copy of the PAN allotment letter to the company.
 Copy of the telephone bill.
OTHER DOCUMENTS IN CASE OF
PARTNERSHIP FIRMS
While opening accounts of partnership firms the KYC
procedure requires the following documents to be taken;
 Registration certificate, if registered.
 Partnership deed.
 Power of attorney letter of authority in favour of persons who
are permitted to operate the account.
 ID proof and address proof of those who have the authority to
operate the account.
 Copy of the telephone bill in the name of the firm partners.
OTHER DOCUMENTS IN CASE OF TRUSTS OCIETIES
ASSOCIATIONS
While opening accounts of trusts societies associations the
KYC procedure requires the following documents to be taken;
 Certificate of registration (if required)
 Trust deed and By Laws.
 Resolution of the managing body to open the account.
 Power of attorney letter of authority in favour of persons who
are authorized to operate the account.
 ID proof and address proof of those who have the authority to
operate the account.
 Copy of the telephone bill in the name of the trust society
association.
OTHER DOCUMENTS IN CASE OF POLITICALLY
EXPOSED PERSONS (PEPs)
Politically exposed persons are those who are entrusted with
prominent public functions in a foreign country such as the
Heads of States, Senior Government Official, Senior Executives of
State-Owned Corporations, etc. In the case of PEPs or residents
outside India and their relatives, banks must verify the identity of
the person and should seek information about the source of
funds.
OTHER DOCUMENTS IN CASE JOINT A/Cs
As per RBI guidelines, joint accounts cannot be opened for
more than four individuals in a single account.
 The photo, identity proof, address proof, and also a record of
profile have to be obtained for all the account holders.
 A letter of thanks to the addresses given in the account
opening form has to be sent to all account holders.
 The signatures of all the account holders are to be obtained in
the presence of bank officials.
 The introduction should be obtained for all account holders.
1. MONITORING OF TRANSACTIONS
The transactions of the customers should be monitored for
RLTL and STR. Depending on the source of income–the volume
of transaction of the customer, the banks are required to fix a Risk
Level Threshold Limit (RLTL) For example, the RLTL of a
salaried person will be his annual salary, the same for a
businessman is his annual business income. In case the total
transactions exceed the threshold limit, the bank must enquire
from the customer regarding the details of the transactions.
In case, the response from the customer is not convincing, the
branch should prepare a Suspicious Transaction Report (STR)
and send it to the controlling office for guidance, and if necessary,
should report to FIU-IND.
2. RISK MANAGEMENT
Banks are more susceptible to money laundering as accounts
opened with them act as the main conduit for the same. The
incidence of risk of money laundering begins at the time of the
entry of the customer by opening an account. If the bank is found
to have been involved in money laundering, it has to pay a heavy
price for the same by way of fine and also by losing its reputation
(reputation risk)
Therefore, they have to judge the risk profile in the account,
categorize the same into a proper risk category, and should
introduce the appropriate system of monitoring to avoid the
occurrence of money laundering through the accounts handled by
them. Banks also face the non-compliance risk in case they fail to
adhere to the KYC guidelines of the RBI and even the PMLR Act
provisions.
OBTAINING CUSTOMER PROFILE
The customer identification procedures also stipulate that
apart from identity proof and address proofs, banks must also
obtain the profile of the customer in the Customer Profile Form or
KYC Form. This is to be obtained from all new as well as existing
customers of deposits and loan accounts. The KYC forms are to be
updated every year in December.
 In this form, banks may collect details such as the occupation -
business of the customer, annual income, etc., to understand
the types of transactions in the account.
 This will enable banks to perceive the risk in the account (RIP-
One –Two –Three -Exceptional) to ensure the bank account is
not being used for money laundering.
 The low and medium level risk perception should be
reviewed every year in December, and the high and
exceptional risk cases should be examined twice in a year
during June and in December.
 The KYC form will also throw light on the level of annual
transactions an account would show so that the banks may fix
Risk Level Threshold Limit (RLTL) to curb the possibilities of
money laundering.
 Branches have to update the address and ID proofs, including
photographs once in five years for low and medium risk
customers and once in two years for high and exceptional risk
customers.
 The information in the KYC form must not be divulged for
cross-selling or any other purpose.
OPENING OF SMALL ACCOUNTS
As per the notification of GoI, a small account is a savings
account with a bank with the following three features;
 The aggregate credit to the account during a financial year
should not exceed Rs. 1 Lakh.
 The Aggregate monthly withdrawals from an a/c should not
exceed Rs.10, 000/-.
 The balance in the account should not exceed Rs.50, 000/-.
Small accounts can be opened by submitting the following as
ID proof; (i) Job card issued by NREGA duly signed by an officer
of the State Government, (ii) Letter issued by the Unique
Identification Authority of India (UIDAI) containing the name,
address and Aadhaar Number.
It can also be opened by submitting a photograph duly signed
in the presence of the officer designated by the bank, who will
attest the same. In case of transfer of an account from one branch
to another branch of the same bank, there is no need to go for
KYC again. The transferee branch should ask for address proof
alone and rely on the detailed KYC done by the transferor branch.
GUIDELINES FOR WIRE TRANSFERS
The transfer of money from one account to another account by
electronic means domestically or cross the border, through banks
is called the wire transfers. The cross border wire transfer is the
one where the originating bank (where the order is made to remit
money) the beneficiary bank is located in a foreign country. Banks
must ensure that all cross border transfers are accompanied by
meaningful and accurate information of the originator (person
ordering remittance of money from his account) i.e., the name,
address, and account number with the bank. If an account is not
maintained, the originating bank must give the Unique Reference
Number as prevalent in its country.
All domestic wire transfers of Rs.50, 000/- and above must
include complete originator information such as name, address,
and account number. Where a customer is found structuring wire
transfers below Rs.50,000/- to several beneficiaries, the bank
should get originator information failing which it should treat it
as a suspicious transaction and should report to FIU-IND (except
interbank transactions)
The ordering bank (the bank originating the wire transfer)
and the intermediary bank (bank, if any, through which the wire
transfer is routed) must preserve all originating information for at
least ten years. The beneficiary bank must ensure that the wire
transfer contains all originating information failing, which must
ask for the same, and in case it is not provided, it may restrict
and, if necessary, should terminate the business relationship with
such bank.
SELF-ASSESSMENT
Fill in the blanks
1. Since the KYC guidelines have been issued by the RBI under
Section 35A of the BR Act, they are ……….. and non-
adherence to the same would attract penalties.
2. Banks must not open accounts or close the existing accounts
where they are not able to apply ………..
3. While opening an SB or current account, if PAN is not
available, the applicant must declare the same in ……………
as the case may be.
4. The term STR stands for …………
True or False?
5. The notation RIP-One and RIP-Two means low risk and high-
risk customers, respectively.
6. The perception over the high and exceptional risk customers is
reviewed once every year during December.
7. As per the notification of GoI, a small account is a savings
account with a bank, where the aggregate monthly
withdrawal does not exceed Rs.10, 000/-.
Answers: (1) Directives (2) Customer Due Diligence
(3) Form 60/ Form 61 (4) Suspicious Transaction Report
(5) False (6) False (7) True
Questions
1. What do you mean by the customer acceptance procedure as
defined in the KYC policy?
2. Discuss the guidelines available concerning wire transfers.
3. Elaborate in detail the four core components of the KYC
policy.

3.1. NEGOTIABLE INSTRUMENTS
Negotiable Instruments
The exchange of goods and services is the basis of every

business activity. Goods are bought and sold for cash as well as
on credit. All these transactions require a flow of cash either
immediately or after a specific time. In modern business, large
number of transactions involving huge sums of money take place
every day. It is quite inconvenient as well as risky for either party
to make and receive payments in cash. Therefore, it is a common
practice for businessmen to make use of certain documents called
‘negotiable instruments’ as the means of making payments.
The term ‘negotiable instrument' consists of two parts viz.,
‘negotiable' means transferable by delivery, and ‘instrument'
means ‘written document by which a right is created in favour of
some person.' This means that "any instrument possessing the
quality of negotiability" is entitled to be called a negotiable
instrument. In other words, negotiable instruments are those
documents that are meant for making payments, the ownership
of which can be transferred from one person to another, many
times before the final payment is made. According to Section 13
of the Negotiable Instruments Act 1881, a negotiable instrument
means "a promissory note, bill of exchange or cheque payable either to
order or to bearer."
From the above statement, we can understand that there are
three types of negotiable instruments, namely (i) promissory note
(ii) bill of exchange and (iii) cheque. However, in practice, many
other documents such as hundies, treasury bills, share warrants,
etc., are also recognized as negotiable instruments based on custom
and usage, provided they possess the features of negotiability.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
The characteristics of a negotiable instrument are as follows;
1. Payable to order or bearer: It must be payable to order or
bearer.
2. Freely transferable: The right of ownership contained in the
instrument can be transferred from one person to another by
mere delivery if it is payable to bearer, or by endorsement and
delivery if it is payable to order.
3. Presumption as to holder: Every holder of a negotiable
instrument is presumed to be its holder in due course. He can
sue in his name (and can recover the full amount of the
instrument) without giving any notice to the drawer of his
becoming holder. All prior parties are liable to him.
4. Holder in due course is free from defects: The title of the
holder is free from all faults, and a person who receives a
negotiable instrument has a clear and indisputable title to the
instrument. For example, if Mr. X sold goods worth of Rs.1
lakh to Mr.Y and received a promissory note in return from
him. Afterward, Mr. Y refused to honour promissory notes
claiming that the goods were not of the agreed quality.
(1) If Mr. X sues Mr. Y on the pro-note, Mr. Y's defence is
good.
(2) If Mr. X negotiates pro-note to Mr. Z (who is now the
holder in due course),
(3) Mr. Y's defence will be of no avail.
5. Presumption as to consideration: The title of the receiver will
be absolute, only if he has got the instrument in good faith
and for a consideration.
PROMISSORY NOTES
According to the Section 4 of the Negotiable Instruments Act
1881, a promissory note is “an instrument in writing (not being a
banknote or a currency note) containing an unconditional
undertaking signed by the maker, to pay a certain sum of money
only to or to the order of a certain person, or to the bearer of the
instrument”. However, according to the Reserve Bank of India
Act, a promissory note, payable to the bearer, is illegal. It defines
a promissory note as “a document of promise in writing by a
person to pay a certain sum of money unconditionally to a certain
person or according to his order.”
SPECIMEN OF A PROMISSORY NOTE
Rs.50,000/- Lucknow January 10, 2019
On demand, I promise to pay Mr. K. Anbumani, s/o Mr. A.
Kandasamy, resident of 14/803, Indira Nagar, Lucknow-226016
or order a sum of Rs.50,000/- (Rupees Fifty Thousand Only) for
value received.
To, Mr. K. Anbumani Sd/ Akhilesh
Address: Lucknow Stamp
CHARACTERISTICS OF A PROMISSORY NOTE

Promissory notes payable on demand (immediately) are
called Demand Promissory Notes (DPN), and those payable after
a definite period are called Usance Promissory Notes (UPN) Both
need to be duly stamped. The stamp duty is the same throughout
India. Promissory notes containing an undertaking to pay the
amount in installments are valid if it provides that on default in
payment of one installment, the entire amount will become due.
The general public is prohibited from issuing demand or usance
promissory notes payable to bearer. Banknote/currency note
cannot be called a promissory note since this itself is money.
1. The instrument in writing: A promissory note must be in
writing, duly signed by its maker, and adequately stamped as
per the Indian Stamp Act.
2. Undertaking to pay: It must contain an undertaking or
promise to pay. Mere acknowledgment of indebtedness such
as, ”I owe Rs.50, 000/- to Mr. K. Anbumani” would not make a
promissory note.
3. Unconditional: The promise to pay must be unconditional. If it
is written, “I promise to pay Rs.50, 000/- to Mr. K. Anbumani
after I join the government job,” it is not a promissory note.
4. Pay money only: It must contain a promise to pay money only.
If someone writes, “I promise to give Mr. Anbumani, a Maruti
car,” it is not a promissory note.
5. Certain parties: The parties of a promissory note (maker and
the payee) must be certain.
6. Payable on demand: It must be payable on demand or after a
date mentioned thereupon. The proof of protest to pay is taken
to be an evidence of dishonour.
7. Sum payable is certain: The sum payable must be certain or
capable of being made certain.
PARTIES OF A PROMISSORY NOTE
There are primarily two parties involved in a promissory
note, namely the maker and the payee.
1. Maker (drawer): He is the person who promises (makes or
draws) the promissory note to pay a certain sum as specified in
it. He is also called the promisor.
2. Payee (drawee): He is the person in whose favour the
promissory note is drawn. He is also called the promisee.
When a borrower executes a promissory note in favour of the
bank, he becomes the maker, and the bank would be the payee. A
promissory note does not require any acceptance because the
maker of the promissory note himself promises to make the
payment. In the above example, Mr. Akhilesh is the maker or
promisor (who promises to pay Rs.50, 000), and Mr. K. Anbumani
is the payee or promisee (on whom the payment is to be made)
Suppose Mr. Anbumani transfers this promissory note in favour
of Mr. Abhimanyu, then Mr. Abhimanyu would become the
payee. Similarly, if Mr. Anbumani gets this promissory note
discounted from the bank, then the bank would become the
payee. In the course of transfer of a promissory note by payee and
others, the parties involved are the endorser and the endorsee.
1. Endorser: He is the person who endorses the promissory note
in favour of another person.
2. Endorsee: He is the person in whose favour the promissory
note is negotiated by endorsement.
BILLS OF EXCHANGE
A bill of exchange is a written unconditional order by one
party to another to pay a certain sum, either immediately or on a
fixed date, for payment of goods and services received. The
drawee accepts the bill by signing it, thus converting it into a
post-dated cheque and a binding contract.
According to the Section 5 of the Negotiable Instruments Act
1881, 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.”Demand drafts
issued by banks fall in the category of the bill of exchange. A
cheque is also a bill of exchange. A bill of exchange drawn in
vernacular language as per local use is locally called “hundies.”
CHARACTERISTICS OF A BILL OF EXCHANGE
The characteristics of a bill of exchange are as follows;
1. The instrument in writing: A bill of exchange must be in
writing, duly signed by its maker, and adequately stamped as
per the Indian Stamp Act.
2. Certain parties: The parties of a bill (drawer, drawee, and
payee) must be certain. The order to pay must be directed to a
certain person or drawee. Also, it must be payable to a definite
person or payee or his order. A bill may be made payable to
two or more payees jointly or in the alternative.
3. Order to pay: The bill of exchange must contain an order by
the drawer to the drawee to pay under any circumstances. The
order must be imperative and not in the form of excessive
requests.
4. Unconditional: The order to pay must be unconditional. If it is
written, “Pay Rs.50,000/- to Mr. K. Anbumani after my sister’s
marriage,” it is not a bill of exchange.
5. Pay money only: It must contain an order to pay money only.
If someone writes, “Give Mr. Anbumani, a Maruti car,” it is not
a bill of exchange.
6. Sum payable is certain: The amount payable must be specific,
although it includes future interest or is payable at an
indicated rate of exchange or is according to the course of
exchange. Where the rate of exchange is not specified, it shall
be determined in the course of exchange on its maturity.
TYPES OF BILL OF EXCHANGE
A bill of exchange may be an Inland bill or a Foreign bill.
Originally, the bill was a means by which a trader in one country
paid a debt in another country without the transmission of the
coin. An Inland bill is drawn and payable in India or drawn in
India upon some person resident in India, even though it is made
payable in a foreign country. A bill that isn't inland is a Foreign
Bill (Section 12)
Accommodation Bill: Legitimately speaking, an
accommodation bill is not a bill as such. It is merely a mode of
accommodating a friend in the business. For example, A may be
in want of money and approach his friend B and C who, instead
of lending the money directly, propose to draw Accommodation
Bill' in his favour. A promises to reimburse C before the period of
the bill is up (which is generally three months) If the credit of B
and C is good, this device enables A to get an advance from his
banker at the commercial rate of discount. The real debtor, in this
case, is not C, the acceptor, but A the payee who has engaged in
finding the money for its final payment, and A is here the
principal debtor and the others merely sureties. Thus, as between
the original parties to the bill, the one who would prima facie be
principal is, in fact, the guaranty, whether he be a drawer,
acceptor, or endorser. That bill is an accommodation bill.
Rights to Duplicate Bill: Where the bill is not overdue but
has been lost, the person who was holder of it may apply to the
drawer, to give him another bill of the same tenor, providing
security to the drawer if required, to indemnify him against all
persons whatever in case the bill alleged to have been lost shall be
found again. If the drawer refuses to give such a duplicate bill
may be compelled to do so utilizing a suit. The holder is the
person who can ask for a duplicate.
Bank Draft: A demand draft is a bill of exchange drawn by a
bank on another bank, or by itself on its branch, and is a
negotiable instrument. It is like a cheque but differs in certain
respects. First, it can be drawn only by a bank on another bank
and not by a private individual, as in the case of cheques. As
against a cheque, it cannot be revoked easily either by its
purchaser or by the bank to which it is presented. Finally, it
cannot be made payable to bearer. These days it is an accessible
mode of making payments. Banks charge a nominal amount of
commission for this service.
Bill in Sets: Foreign bills are generally drawn in sets of three
each. According to S. 132, the bill of exchange may be drawn in
parts, each part being numbered and containing a provision that
it shall continue to be payable so long as the other part remains
unpaid. All the parts together make a set, but the whole set
constitutes one bill and is extinguished when one of the parts, if a
separate bill, would be destroyed. The bills are drawn in sets, in
foreign trade to facilitate a prompt and easy presentation for
acceptance and payment. It also reduces the risk of loss in the
course of transit.
PARTIES TO A BILL OF EXCHANGE
Three parties are involved in a bill of exchange, namely the
drawer, drawee and payee.
1. Drawer or maker: The person who orders to pay a certain sum
to someone as specified in it.
2. Drawee: The person directed by the drawer to pay the money.
3. Payee: The person to whom or to whose order the money is to
be paid. He is the real beneficiary under the instrument.
In the course of transfer of a bill of exchange, there may be
some other parties involved such as;
1. Holder: A person who is legally entitled to the possession of
the negotiable instrument in his name and to receive the
amount thereof, is called a 'holder.' In case the bill is payable to
the bearer, the person in possession of the negotiable
instrument is called the 'holder.' He is either the original payee
or the endorsee.
2. Endorser: When the holder transfers or endorses the
instrument to anyone else, the holder becomes the 'endorser.'
3. Endorsee: He is the person to whom the bill is endorsed.
4. Acceptor: After a drawee of a bill has signed his assent upon
the bill (or if there are more than one party if anyone of such
parties has signed his assent upon the bill and delivered the
same to the holder or some person on his behalf) he is called
the acceptor.'
5. Acceptor for honour In case the original drawee refuses to
accept the bill or to furnish better security when demanded by
the notary, any person who is not liable on the bill, may accept
it with the consent of the holder, for the honour of any party
liable on the bill. Such an acceptor is called 'acceptor for the
honour.' His name is not mentioned in the bill.
6. Drawee in Case of Need: When in the bill or any endorsement,
the name of any person is given, in addition to the drawee, to
be resorted to in case of need, such a person is called 'drawee
in case of need.' In such a case, it is obligatory on the part of
the holder to present the bill to such a drawee in case the
original drawee refuses to accept the bill. The bill is taken to be
dishonoured by non-acceptance or for nonpayment, only when
such a drawee refuses to accept or pay the bill. His name is
mentioned in the bill.
SPECIMEN OF A BILL OF EXCHANGE

Rs.75,000/- Chennai March 5, 2019
Three months after date pay to Mr. K. Kamaraj or order the
sum of seventy five thousand rupees for value received.
To,
Mr. K. Ganesan, Sd/ Ashok
Chairman, Vasantha Financiers, Salem Chennai
LIABILITY OF PARTIES
1. The maker of a promissory note and the acceptor of a bill of
exchange are primarily responsible for the payment due.
2. The drawer of a bill or cheque is bound in case of dishonour
by the drawee or acceptor thereof, to compensate the holder,
provided due notice of dishonour has been given to or
received by the drawer.
In consequence, the maker of a note, the drawer of a cheque,
the drawer of a bill until acceptance, and the acceptor are
respectively liable on the instrument as principal debtor. The
other parties, i.e., the intermediate indorses and drawer of a bill
after acceptance, are liable thereon as sureties for the maker,
drawer, or acceptor. In between parties are responsible as sure tie
each prior party is also liable thereon as a principal debtor in
respect of each subsequent endorsement.
A draws a bill payable to his order on B, who accepts it. A
afterward endorses the bill to C, C to D, and D to E. As between E
and B, B is the principal debtor, and A, C, and D, are his
securities. As between E and A, A is the principal debtor, and C
and D are his sureties. As between E and C, C is the principal
debtor, and D is his surety. The maker of a note and the acceptor
before the maturity of a bill are bound to pay the amount at
maturity to the holder. The acceptor of a bill at or after maturity
must pay the amount to the holder on demand. The drawer of a
cheque (i.e., the paying banker) must pay it when presented for
payment if the drawer has sufficient funds to his credit with the
banker.
BILLS OF EXCHANGE Vs. PROMISSORY NOTES
Basis Bills of Exchange Promissory Notes

1. Drawer Creditor is the drawer Debtor is the drawer
2. Order/ It is an order to pay It is a promise to pay
Promise
3. Acceptance It needs acceptance by It doesn’t need
the drawee acceptance by the
drawee
4. Parties 3 Parties Drawer, Drawee 2 Parties Promisor and
and Payee Payee
5. Liability Liability of the drawer The promisor has the
arises only if the acceptor primary liability to
does not pay pay
6. Noting and In case of dishonour, it is In case of dishonour
Protesting better to get it noted or noting is necessary
protested for non-
payment
7. Copies In case of foreign bills, 3 Only one copy is
copies are made, prepared whether it is
otherwise 1 copy is foreign or local
prepared
8. Stamp Not required for bills Stamping is necessary
payable on demand, for in all cases
other bills it is necessary
CHEQUE
A cheque is a negotiable instrument that orders a financial
institution (bank) to pay a specific amount from a particular bank
account held in the drawer's (account holder's) name with that
institution. Though the usage of the cheque has partly fallen due
to the electronic payment systems now, the cheque payment is
still widely used by many people for several financial
transactions. In the case of a cheque, both the drawer and payee
may be natural persons or legal entities.
According to Section 6 of the Negotiable Instruments Act
1881, "a Cheque is an instrument drawn on the specific banker,
ordering to pay a specific amount, to a specific person, after the
specific date." Chalmer rightly points out that, "All cheques are
bills of exchange, but all bills of exchange are not cheques."
(i) It is always drawn on a specific banker by an account
holder.
(ii) It consists of an unconditional order on the banker and is
always payable on demand.
A cheque is a bill of exchange drawn on a specified banker
and payable on demand. It should satisfy all requirements of a
bill of exchange except that (i) it cannot be drawn on any person
other than a bank, (ii) it cannot be drawn payable so many days
after date or after sight as is the case with a bill of exchange. It is
always payable on demand.
The NI Act does not provide any standard format for a
cheque. Since a cheque is not a legal tender, nobody can be
compelled to accept cheque towards the settlement of his debt. By
an amendment of the NI Act in 202, the definition of the cheque
has been broadened to include (i) electronic image of a truncated
cheque and (ii) cheque in electronic form.
Truncated cheque: Currently, cheques are physically
presented for clearing, which involves time. Replacing such
physical movement of cheque by its electronic image or record is
called cheque truncation. As per Section 6 of the NI Act, cheque
truncation means sending the electronic image or electronic
record of the cheque for further processing and transmission. RBI
is introducing a pilot project for cheque truncation, which will
compress the clearing cycle to provide faster clearance of cheque.
E- Cheque: A cheque which contains the exact image of a
paper cheque and is generated, written and signed in a secure
system ensuring the minimum safety standards with the use of
digital signature and a symmetric crypto system is called an e-
cheque.
CHARACTERISTICS OF A CHEQUE
The characteristic features of a cheque are as follows;
1. An instrument in writing: A cheque must be in writing, duly
signed by its maker or drawer.
2. On a specified banker: A cheque must be drawn on a
specified banker only and not on any other individual person.
The cheque must contain the name and the address of the
banker.
3. On a specified payee: An instrument to be valid, it should be
made payable to, or to the order of, a specific person or the
bearer. The payee must be specified.
4. For a specified sum of money only: The order must be only
for the payment of a certain sum of money. Orders asking the
banker to deliver securities or certain other things cannot be
regarded as cheque. The sum of money to be paid must also be
mentioned as certain. The sum is usually stated in words as
well as in figures to avoid mistakes.
5. Unconditional: Cheque must contain definite and
unconditional order to pay. A conditional instrument is
invalid. For example, if it is written that the amount is to be
payable out of a particular fund, the order will be regarded as
conditional, and hence, the instrument cannot be regarded as a
cheque.
PARTIES TO A CHEQUE
There are primarily three parties involved in a cheque,
namely the drawer, drawee and payee.
1. Drawer: He is the account holder who draws and signs the
cheque directing the bank to pay a certain sum of money from
his bank account and to pay the same to a certain person or the
bearer of the instrument.
2. Drawee: He is the person to whom the drawer gives the order
to pay the amount to the person named on the cheque or his
order to the bearer. Only a bank can be called a drawee of a
cheque. When the bank follows the order of the drawer and
pays the cheque amount out of his bank account, then the
cheque is said to be honored. In case of refusal of the order, the
cheque is said to be dishonored.
3. Payee: The party in whose favour the cheque is issued is called
a payee. He is the person whose name is mentioned on the
cheque, who presents the cheque for payment and receives the
money from the bank. If the cheque is made payable to self, the
drawer (account holder) himself becomes the payee.
TYPES OF CHEQUE
The different types of cheques used are as follows;
1. Bearer Cheque: The cheque that orders a bank ‘to pay the
bearer a sum of money’ is called a bearer cheque. It is not
necessary for the payee himself to personally present the
cheque and receive the money from the bank. He can sign on
the back of the cheque and hand it over to any other person
who can collect the money from the bank on his behalf. The
person who presents the cheque is called the bearer. The bank
is not bound to verify the identity of the bearer. Any bearer
cheque lost or stolen is likely to be presented for payment.
Thus, bearer cheques are somewhat risky.
2. Order Cheque: An order cheque instructs the banker explicitly
to ensure that the person mentioned only receives payment.
Here the bank is duly bound to verify the identity of the
person and see that the person presenting the cheque is the
person whose name is mentioned on the cheque. If the word
'bearer' is struck off, the cheque becomes order cheque. Thus,
the order cheque is safer than a bearer cheque. If both the
words 'bearer' and 'order' are cancelled, then the cheque
becomes not negotiable, i.e., it cannot be legally transferred to
any other person.
3. Crossed Cheque: A crossed cheque (also known as account
payee cheque) is the safest type of cheque. When two parallel
lines are drawn on the top left side of the cheque, it is called a
crossed cheque, and the crossing is called a general crossing. In
case of a crossed cheque, the payment is not made across the
counter but is credited to the payee's account only. Sometimes,
the name of a specific bank, and branch is written between the
crossed lines. It means the cheque must be presented through
that bank only. This is called a special crossing. In such a case,
the amount is paid to the specific bank, which in turn credits
the amount to the payee's account. The words 'not negotiable'
between the lines would destroy the negotiability of the
cheque.
4. Uncrossed/Open Cheque: When a cheque is not crossed, it is
known as an "Open Cheque" or an "Uncrossed Cheque." The
payment of such a cheque can be obtained at the counter of the
bank. An open cheque may be a bearer cheque or an order one.
5. Anti-date Cheque: If a cheque bears a date earlier than the
date on which it is presented to the bank, it is called as "anti-
dated cheque." Such a cheque is valid upto six months from the
date the cheque was made. For Example, a cheque issued on
10th Jan 2019 may bear a date 20th Dec 2018.
Post-dated Cheque: If a cheque bears a future date that is yet
to come, then it is known as post-dated cheque (also known as
PDC in short) A post-dated cheque cannot be honoured earlier
than the date mentioned on the cheque. For example, if a cheque
presented on 10th Jan 2019 bears a date of 25 th April 2019, it is a
post-dated cheque. The bank will make payment only on or after
25th April 2019.
Stale Cheque: If a cheque is presented for payment after six
months from the date it was made, it is called an expired cheque
or a stale cheque. The bank does not honour a stale cheque.
Mutilated Cheque: When a cheque is torn into two or more
pieces and presented for payment, such a cheque is called a
mutilated or a damaged cheque. The bank will not make payment
against such a cheque without getting confirmation from the
drawer.
CROSSING OF CHEQUE
The payee may present an open cheque to a banker on whom
it was drawn and is paid over the counter. An open cheque is
liable to high risk in the course of circulation. For example, it may
be stolen or lost, and the finder may get it encased in the bank
counter unless the drawer has already given the ‘stop-payment'
instruction to the banker. To avoid such unexpected losses
incurred in open cheques by getting into the wrong hands, the
custom of crossing was introduced.
TYPES OF CROSSING
General crossing: When two parallel lines are drawn on the
top left side of the cheque, it is called crossed cheque. This is
called a general crossing. The lines should be conspicuous. The
lines may or may not contain the words '& Co'. A crossing is a
direction given by the drawer (bank customer) to the paying
banker to transfer the money only into the bank account of the
holder/bearer and not to make any cash payment to him across
the bank counter.
Special crossing: When two parallel lines cross a cheque and
the name of the banker is written between the two parallel lines, it
is called a special crossing. It means the cheque must be presented
through that bank only. In such cases, the amount is paid to the
specific bank, which in turn credits the amount to the payee's
account. There may be words "not negotiable" written between
these two lines. The banker on whom it is drawn shall not pay it
otherwise than to the banker to whom it is crossed or his agent for
collection. It will be paid only when presented by the banker.
Not negotiable crossing: The general crossing does not stop
the negotiability of a cheque. To restrain the negotiability or
transferability of the cheque, it should be additionally written
"Not Negotiable" or "Account Payee Only." Often cheques are
crossed with two parallel transverse lines. The words "A/c payee"
or "A/c payee only" are written between these two lines. It means
that the proceeds of the cheque are to be credited to the account
of the payee only. This kind of crossing is also called 'Restrictive
crossing."
BILLS OF EXCHANGE VS CHEQUES
Basis Bills of Exchange Cheque
1. Defined in Section 5 of NI Act 1881 Section 6 of NI Act
1881
2. Meaning Document showing Document for easy
indebtness of debtor payment on demand
3. Acceptance It needs acceptance by A cheque does not
the drawee require acceptance
4. Payments As per RBI Act,1934 not Always payable to
payable on demand bearer on demand
5. Crossing Crossing is applicable Crossing is not
applicable
6. Noting and In case of dishonour, it is If the cheque is
Protesting better to get it noted or dishonoured, it cannot
protested for non- be noted or protested
payment
7. Stamp Not required for bills Stamping is not
payable on demand, for required
other bills it is necessary
8. Validity Not applicable; Grace 3 months; No grace
period 3 days period
SELF-ASSESSMENT
Fill in the blanks
1. There are only three types of negotiable instruments
namely……….. …….… and ………
2. Promissory notes payable after a definite period are called
………….
3. A bill of exchange drawn in vernacular language as per local
use is called ………
4. Replacing the physical movement of cheque by its electronic
image or record is called ……..
True or False?
5. Banknotes or currency notes are good examples of promissory
notes.
6. Only a bank can be called a drawee of a cheque.
7. A crossed cheque is also known as the account payee cheque.
Answers: (1) Promissory notes, Bills of exchange, Cheque (2)
Usance Promissory Notes (3) Hundies (4) Cheque truncation
(5) False (6) True (7) True
Questions
1. What is a bill of exchange? Discuss its types.
2. Distinguish between a bill of exchange and a promissory note.
3. What are the different types of cheques? Discuss various
methods of crossing a cheque.

3.2. DISCOUNTING OF BILLS
Discounting of Bills
The most crucial form by which a banker gives financial

accommodation to a borrower without any collateral security is
the discounting of bills. Discounting is nothing but taking a bill
by a bank as transferee for value. The holder of the bill, by
discounting, gets cash before its date of maturity. The banker
charges a small sum for this operation. The charge includes
interest for an unexplained period of the bill and compensation
for the expense and trouble in the realization.
Sir Jon Paget defines discounting of a bill as, ”to buy it, to
become the transferee of it, by having endorsed or transferred by delivery
by the holder, giving him a price settled either by agreement or by the
current rate in the money market and based on the time the bill has yet
to run…”
The person who gets the bill discounted parts with all his
rights, title, and interest in the bill and its proceeds. The banker
becomes the holder for value. He can deal with and part with the
bill as he likes. He gets an absolute title to the bill, which covers
the full face value.
DISCOUNTING Vs. PLEDGING
Discounting a bill is entirely different from pledging a bill.
When a bill is pledged, the banker has an interest equal to the
amount he has advanced on the security of the bill. The bill
remains the property of the pledger.
ADVANTAGES OF DISCOUNTING
Discounting of a bill is an ideal form of bank lending; the
significant advantages of such discounting are as follows;
Helps for an ideal investment of funds: Bills are for periods
not exceeding six months, and as such, they represent an advance
for a definite period. This enables the banker to arrange the
investment of funds consistently from time to time without
keeping the funds idle.
The certainty of payment: Bills represent amounts owing to a
consumer for goods supplied or services rendered by him. The
acceptor, by accepting the bill, undertakes to pay the amount on
the due date. The resale of the goods will provide the acceptor
with the necessary funds. So the banker is assured of payment on
the maturity of the bill. Also, since there is more than one party
liable to a bill, in case of dishonour at maturity, the banker can
look forward to all other concerned parties such as acceptor and
endorser for payment.
Stability in value: The value of a bill will not change as in the
case of many securities such as stock exchange securities, real
estate, etc.
High and quick yield: The yield is comparatively high. The
discount is deducted while making advance itself. In case of loans
and advances, interest becomes payable only when the principal
falls due or is payable quarterly, half-yearly, or annually.
Single legal remedy: A legal solution is relatively simple in
the event of non-payment of the bill on maturity. What banker
has to do on the dishonour of a bill is to have it noted only,
protested, and then the whole amount should be debited to his
customers account.
Liquidity: Bills are highly liquid assets. In times of necessity,
they can be rediscounted with the Central Bank. That is why it is
said that "a prudent banker is one who knows the distinction between a
bill and a mortgage."
PRECAUTIONS TO BE TAKEN WHILE
DISCOUNTING BILLS
The precautions to be taken by a banker while discounting a
bill of exchange are as follows;
The integrity of the parties: The banker must be conversant
with the standing means and integrity not only of the drawer of
the bill but also of the acceptor and other endorsing parties. If the
various parties to the bill are customers of the bank, reliable
information can be obtained from their records. If the acceptor or
endorser has an account with another bank, an enquiry put
through ordinarily will disclose the facts required. Generally,
banks keep detailed information regarding the credit of different
customers whose names are likely to appear on commercial
banks.
Genuine trade bills: The banker should be satisfied that the
bill is a bonafide trade bill, accepted for value. According to
Sheldon, the banker should also take into account the customers
of various trades. i.e., setting a transaction by means of a bill
should be usual practice. For example, a bill given by an
individual to a retail trader would not be a suitable bill for a
discount. It is not customary between a trader and his customers
to settle with bill accounts.
Avoid accommodation bills: A banker should not prefer to
discount accommodation bills which do not arise out of trade
transactions but merely a means between drawer and acceptor to
raise money. An accommodation bill can be easily identified. For
example, if a doctor accepts a bill drawn by a merchant, the
banker may presume that the bill is more like the accommodation
bill. Another kind of bill which is not suitable to discount is a bill
created to furnish the acceptor with fixed assets. Another bill to
be avoided is the non-transferable (Example: payable to Mr.
Kamaraj Only) because, in the event of dishonour, the banker
cannot sue on the bill.
Short term bill is preferable: Banks should prefer bills drawn
for short periods to those drawn for long periods. Generally, bills
drawn for more than six months are not discounted.
Proper endorsement: While discounting a bill, the banker
should see that the bill is in proper form. It must comply with the
requirements of the law regarding the acceptance and that the
customer’s endorsement on the bill. The endorsements, if any, on
the bill must be complete and regular.
Only for customers: The banker must also see whether the
party who intends to discount a bill with him is his customer or
not. Bankers render this service only for their customers.
Term of the bill: If the due date of the bill has already been
covered, the bill will become a dead bill, and so the banker should
carefully note the due date of the bill.
Proper records: When the banker discounts the bill of a
customer, he credits the customer’s account with the amount of
the bill less discount charge. The bill is then entered in the Bills
Payable Book, and its date of maturity is noted in the Bills
Payable Diary.
Dishonour of a bill: On maturity, if the discounted bill is
dishonoured, the customer's account should be debited with the
amount of bill plus charges (if there is adequate credit balance in
his account) and the bill should be returned to him with a piece of
advice for debiting the account. If there is no sufficient balance in
his account to meet the bill, notice of dishonour along with a
request for payment should be served to the customer as well as
all other parties liable on the bill.
Notice of dishonour: The banker should also be careful in
sending the notice of dishonour. If the intended person resides in
the location of the banker, it must be sent to reach him on the
same day of dishonour. If he lives in a distant place, notice must
be dispatched at least on the next working day after dishonour.
Otherwise, the banker will lose his right to claim the amount.
Not to retain any balance: The customer is contingently liable
on the bills receivable for the bill discounted. But it does not
entitle the banker to retain a part or whole of the customer’s
credit balance to meet the liability. But if the customer is
insolvent, the bill receivable may be retained until the maturity of
the bill.
DISCOUNTING Vs. PURCHASING OF BILLS
In Bill Discounting, the interest is deducted up-front while
creating a loan. This is typically a case of USANCE drafts where
the maturity can be calculated as per the tenor. For example, if the
tenor is 30 days from shipment date, then while creating a loan,
the draft will be discounted up-front, by deducting the interest
for 30 days.
In Bill Purchase, the loan will be created for the full value of
the draft, and the interest will be recovered when the actual
payment comes. This is typically the case with SIGHT drafts,
where fixed maturity is not known. For example, if the sight draft
is presented for which the loan is created for 100% of the draft
value. The money is received after five days; then, day’s interest
will be recovered for five days along with the principal.
SELF-ASSESSMENT
Fill in the blanks
1. Discounting is nothing but taking a bill by a bank as ………
for value.
2. Bills that do not arise out of trade transactions but merely a
means between drawer and acceptor to raise money are
known as the …….….bills.
3. Generally, bills drawn for more than …….. months are not
discounted.
True or False?
4. While pledging a bill with a banker, the bill remains the
property of the pledger.
5. In Bill Discounting, the interest is deducted up-front while
creating a loan.
Answers: (1) Transferee (2) Accommodation (3) Six
(4) True (5) True
Questions
1. Define the term ‘Discounting.’ What are the advantages of
discounting a bill?
2. List out the precautions the bank should take while
discounting a bill.
3. How discounting is different from purchasing a bill?

3.3. ANCILLARY SERVICES
Ancillary Services
Banks are financial institutions that deal with monetary

transactions. Banks form an integral part of any society. There are
numerous banks located in different parts of our country. While
earlier, there were a limited number of banks with a few branches
in big cities and towns in India, several new banks have opened
in the last few decades with branches in every nook and corner of
the country.
Banks provide a lot of services based on the customer’s
requirements. Their primary services include accepting money
deposits from the general public and lending the same for the
needy individuals and legal entities for their consumption or
investment needs. Besides their primary banking services, banks
do also offer certain ancillary services to their customers such as
(i) Demat Account, (ii) Safe deposit lockers, (iii) Safe custody
services, etc., as discussed below;
DEMAT ACCOUNT
Banks can function as depository participants and can open
the Demat account in the name of investors and can earn good fee
income on the same. A Demat account helps the investors to hold
shares securities in electronic form and to sell/buy such securities
without involving any physical movement or transfer of share
certificate. As per the SEBI guideline, almost all shares listed in
stock exchanges are required to be traded only in Demat for, and
therefore, there is a great demand for opening Demat account in
banks.
DEPOSITORY Vs. DEPOSITORY PARTICIPANT
Depository: A depository is an organization which holds the
shares securities of different investors in electronic form and acts
as the registered owner of all these shares in the books of
companies who have issued such shares. The actual shareholders
remain as the beneficial owner of these shares and enjoy the right
to vote, right to get a dividend, etc., which are the natural rights
of shareholders holding shares in physical form.
A depository is formed as per the provisions of the
Depository Act, 1996, which contains detailed rules on the
formation and functions of depositories in India. Till date, two
depositories have been established in India, namely the (i)
National Securities Depository Ltd., (NSDL), and (ii) Central
Depository Services Ltd., (CDSL) All depositories in India are to
be registered with SEBI and have to adhere to the guidelines
issued by it from time to time under SEBI (Depositories &
Participants) Regulations, 1996.
Depository participants: To provide depository services
throughout the country, the depositories have appointed
Depository Participants. As per SEBI guidelines, only banks,
financial institutions, custodians, stockbrokers, registrar to an
issue, and share transfer agents can be appointed as depository
participants. Accordingly many banks like UTI Bank Ltd., ICICI
Bank Ltd., IDBI Bank Ltd., and many other public sector banks
become depository participants. Each depository participant is
given a unique identification number called the DP ID Number.
They maintain the Demat accounts in the name of shareholders,
which records the number of shares purchased, the number of
shares sold, and the balance number of shares held by him in
electronic form.
ADVANTAGES OF DEMAT ACCOUNT
The significant advantages of a Demat account are as follows;
 In the books of the company, the name of the depository is
shown as the registered owner of the shares. This reduces to a
great extent, the workload of the company on the transfer of
shares and also maintenance of shares register.
 As per Section 2 of the Depositories Act, 1996, the individual
shareholders remain the beneficial owners and enjoy the right
to vote, to get a dividend, and to get the right bonus shares.
 The transfer of shares from one Demat account to another
Demat account is made by just handing over a “delivery
instruction” by the account holder.
 The account holder can instruct the depository participant to
lock-up or freeze his account until further instruction, which in
turn helps in reducing the risk of unauthorized operation in
the Demat account.
 The account holder can pledge the shares in favour of a bank
(for availing loan against shares) by sending a “Pledge &
Hypothecation Form” to the depository through a depository
participant (DP)
 In case of default by the account holder in repayment of the
loan, the pledge can invoke the pledge by submitting an
“Invoke the Pledge/ Hypothecation Form.”
 SEBI, the regulator for the capital market, has stipulated that
with effect from 1st April 2006, “no Demat account should be
opened without the Permanent Account Number (PAN) In the
case of Demat accounts opened before this date, no operation
in the account can be allowed from 1st January 2007 without
the submission of the PAN.
SAFE DEPOSIT LOCKERS
 Lockers should not be rented out to minors.
 Lockers can be rented to individuals jointly with instruction to
operate by either or survivor, anyone or survivor, but not
with the former or survivor.
 While renting lockers to partnership firms/companies/
societies/government departments HUFs, all formalities
required for opening and operating accounts should be
complied with.
 As renting lockers to illiterates is fraught with risk, it should
be done in very exceptional cases
 Banks can extend the locker facility to visually challenged
customers after taking necessary precautions.
 A staff member can hire only one locker unit. He is required
to pay rent at a concessional rate, which is also applicable to
the ex-staff members. However, staff members who have
resigned or terminated from service are not eligible for such
concession.
 No staff member should be permitted to hire a locker jointly
with a constituent of the bank.
RBI GUIDELINES
 As per the recommendation of the Committee on Procedure
and Performance Audit of the Public Services (CPPAPS), the
RBI directed banks in April 2007, not to insist on fixed deposit
as a precondition for the allotment of lockers.
 However, banks can obtain at the time of allotment a fixed
deposit, which would cover three years’ rent and the charges
for breaking open the locker in case of an eventuality. Banks
should not insist on such a deposit from the existing locker
hirers.
 Branches should maintain transparency in allotment of
lockers and should maintain a waiting list for allotment of
lockers.
 Banks are advised to give a copy of the locker agreement to
the customer at the time of the allotment of the locker to the
hirer.
 Banks should carry out customer diligence for both new and
existing customers as per KYC norms.
 Where the lockers remain unoperated for more than three
years for medium risk category or more than one year for
high-risk category customers, banks should immediately
contact the customer and advise him to either operate the
locker or to surrender the same.
 In case the locker hirer does not respond nor operate the
locker, bank should consider opening the locker after giving
due notice to the hirer. The bank should incorporate a clause
in the locker agreement that in case the locker remains
unoperated for more than one year, banks would have the
right to cancel the allotment of the locker and to open the
locker even if the rent is paid regularly.
 In case he doesn’t operate the locker, the bank can open the
same with the help of the police after giving sufficient notice.
SOME MORE GUIDELINES
Locker agreement: The hirer should execute an agreement in
the prescribed format giving the terms and conditions of hire.
This agreement should be stamped as per stamp duty applicable
to the state. As per the RBI guideline, banks are advised to give a
copy of the locker agreement to the customer at the time of the
allotment of the locker.
Own lock and password: The hirers can put their lock at their
own cost. They can also be required to give a password/code
word, which acts as an additional safeguard in identifying him
apart from their signatures.
Addition/deletion of name: In case the hirer wants to
add/delete names, the locker account should be closed, and a
new contract should be entered into. At least one of the original
hirers must continue to be the hirer. Also, a fresh nomination
should be obtained.
Locker rent: The locker rent varies depending upon the size of
the locker and is also different for rural and
semi-urban/urban/metropolitan branches. In case of revision of
rent, a notice must be sent to the hirers.
In case of non-payment of rent, the bank can break open a
locker after giving due notice to the hirer. It should be broken
only by the representative mechanic of the locker manufacturer in
the presence of three respectable outside witnesses and two from
the bank. A list of inventory is prepared in quadruplicate under
their signatures, in which the original is retained in the branch,
duplicate sent to the central office and the triplicate kept with
joint custody of manager and deputy manager along with the
articles and the quadruplicate forwarded to the hirer along with
the notice for payment of rent and charges.
Supervision of lockers: The banks should record check-in
and check-out time for persons operating the lockers. The
custodian of the locker room must check at the end of the day and
ensure that no customer is inadvertently trapped in the locker
room. At the end of each day, the officer in charge of the locker
should verify all the lockers operated that day to ensure that they
are properly locked.
In case a locker is left open without its key, and its hirer is not
available, the contents should be kept sealed in an envelope in the
presence of the manager, deputy manager, and the custodian and
one/two customers. The packet should be kept under the joint
custody of the manager or custodian.
Articles found outside the locker: All locker hirers who
operated the locker during that day should be contacted, articles
should be restored to the true owner on the satisfactory proof. As
per Section 169 of Indian Contract Act, if the owner cannot be
found with reasonable diligence or if he refuses to pay the lawful
charges to the finder of the goods, the finder may sell it (i) when it
is in danger of perishing or (ii) when the lawful charges of the
finder amounts to two-thirds of its value.
Search and seizure by IT authorities: The Commissioner of
Income Tax is empowered to authorize entry and search any
locker.
Burglary of lockers: The legal relationship between the bank
and the hirer is that of lesser and leasee. As regards liability of the
banker, the Supreme Court held in National Bank of Lahore Ltd.,
Vs. Sohanlal Senegal (1965) that a bank can be held responsible if
there is negligence on the part of the bank regarding the quality
of the strong room and its conditions, quality of locker,
safeguards required in the light of the location. Therefore strong
room grill doors should be closed during the working hours, and
all windows should be properly closed during night time.
Nominee Succession certificate: Where there is nomination
or where the account had a mandate for operation by the
supervisor (s) bank must not insist on succession certificate, letter
of administration, or obtain any bond of indemnity or surety for
the settlement of the claim. In case there is no nomination or
survivorship clause, the contents can be delivered as per the
procedure prescribed by the bank or to the person authorized by
a letter of administration issued by a court.
A succession certificate cannot be granted for receiving
contents of a locker as Section 370, of the Indian Succession Act
stipulates that it can be issued only in respect of debts ad
securities and not for any other property. Banks should prepare a
list of inventory before allowing the removal of the article by the
nominee claimant. The list of inventory should be in the form as
prescribed by RBI as per powers vested in it vide Section 45ZC (3)
of the Banking Regulation Act, 1949.
SAFE CUSTODY SERVICES
Banks may accept sealed packets, shares, securities, and
bank deposit receipts from their customers for their safe custody.
In the case of safe custody, the relationship between the banker
and customer is bailee and bailor. When kept in safe custody, the
shares and securities should be in the name of the bank/the name
of the depositor/one of the joint depositors. The articles kept
under safe custody are not subject to banker’s lien. The packets
accepted for safe custody should be sealed with the customer’s
seal and in no case by the bank’s seal. The deposit receipts issued
by the bank can be kept in safe custody free of charge.
Bank’s liability: Being a bailee, the banker is bound to take a
reasonable degree of care of the articles given for safe custody
(Section 151 of the Indian Contract Act) If in spite of this care,
there is a loss/the destruction of the valuables, he cannot be held
liable for the same, unless there is a specific contract to the
contrary (Section 152 of Indian Contract Act) A bank may be
called careless if (i) deposit vaults are not strong or (ii) deposit
vaults are kept unlocked or (iii) allows others to access without
restriction. Also, it can be held liable for conversion if it delivers
goods to a person other than the depositors of the same.
Devolution of joint rights: Section 45 of the Act specifies that
when a bank makes promise to two or more persons jointly, then
unless a contrary intention appears from the contract, the right to
claim performance rests with all the joint promisees and after the
death of one of them, with the representative of such deceased
person jointly with the survivors.
Thus unlike the case of joint promisors whose liability is joint
as well as several, the right of joint promisees is only joint, and
therefore any of them cannot enforce performance. For example,
all the hirers must join to operate a locker. All persons who have
given an article for safe custody must join to take it back. All
depositors of an account must join to close the deposit unless they
have agreed for joint and several operations.
SELF-ASSESSMENT
Fill in the blanks
1. A …….. is an organization that holds the shares or securities
of different investors in electronic form and acts as the
registered owner of such shares.
2. In case of safe custody, the relationship b/w the banker and
customer is ……… and ……….
3. No Demat account should be opened without the
………….Number
True or False?
4. Lockers can be rented to individuals jointly with instruction to
operate by ‘either or survivor’ or ‘former or survivor.’
5. The articles kept under safe custody are subject to banker’s lien.
6. Lockers should not be rented out to minors.
Answers: (1) Depository (2) Bailee, Bailor (3) Permanent Account
(4) False (5) False (6) True
Questions
1. What is a Demat Account? List out its advantages.
2. Write a short note on the safe custody services offered in the
commercial banks.
3. Discuss the RBI guidelines regarding the lockers facility
provided by the banks.

3.4. ELECTRONIC BANKING
(e-Banking)
Electronic Banking (e-Banking)
Electronic banking has many names like e-banking, virtual

banking, online banking, or internet banking. It is simply the use
of electronic and telecommunications networks for delivering
various banking products and services. Through e-banking, a
customer can access his account and conduct many transactions
using his computer or mobile phone.
The information technology has revolutionalized various
aspects of human life. The world at large has rapidly entered into
the age of the ‘internet.’ Internet or simply the ‘Net’ is an inter-
connection of computer communication networks covering the
whole world. The growth and expansion of the internet and
information technology have facilitated the emergence of E-
commerce.
E-commerce essentially is the paperless exchange of business
information spread through computer devices like Electronic
Data Interchange, E-mail, Electronic Bulletin Boards, in short, the
tools such as, Internet/Intranet, and Extranet created under the
network-based technologies. Thus E-commerce in today’s context
is a commercial transaction routed through the internet. When the
business and commerce tend to be on the electronic modes, the
banking operations cannot be expected to remain isolated. When
E-commerce refers to carrying on business transactions
electronically, it covers any form of business, including banking.
The term E-banking implies performing the underlying
banking transactions by customers round the clock globally using
electronic media. Modern banking is more information-based,
speedy, and boundary-less due to the impact of E-revolution.
Modern banks have to be well-versed in information technology,
its users, and applications. Banking decisions have to be IT-based,
with the speed of the digital economy. E-banking is more of a
science than art. It is knowledge-based and most scientific in
using electronic devices of the computer revolution. When most
business and commercial enterprises tend to become
internetworking organizations, banking has to be E-banking in
the new century.
Today’s banking is virtual banking. Virtual banking denotes
the provision of banking and other related services through the
extensive use of IT without direct resources to the bank by
customers. The salient features of virtual banking are the
overwhelming reliance on IT and the absence of physical bank
branches to deliver banking services to customers. The principal
types of virtual banking services include Automated Teller
Machines (ATMs) Shared ATM networks, Electronic Fund
Transfers at point of sales (EFTPoS) smart cards, stored value
cards, phone banking, home banking, internet, and intranet
banking. Thus the practice of banking has undergone a significant
transformation due to the adoption of E-banking.
TRADITIONAL BANKING Vs. E-BANKING
In traditional banking, the customer has to visit the bank
branch in-person to perform the banking transaction such as cash
deposit, withdrawal, fund transfer, account enquiry, etc. The
brick and mortar structure of a bank is essential for performing
the banking function. On the other hand, E-banking enables the
customers to perform the basic banking transactions by sitting at
their homes through viewing their account details trough PC or
laptop or their android mobile phones.
The customers can access the bank’s website for viewing their
account details and perform the transactions on account as per
their requirements. With E-banking, the brick and mortar
structure of the traditional banking gets converted into a click
and portal model, thereby giving a concept of virtual banking a
real shape. Thus today’s banking is no longer confined to
branches. Customers are being provided with additional delivery
channels, which are more convenient to customers and are cost-
effective to the banks. These delivery channels include ATM,
telebanking, internet banking, mobile banking, home banking,
etc. Thus E-banking facilitates banking transactions by customers
round the clock globally.
Conventional banking is an art, but E-banking is more of a
science than an art. E-banking is knowledge-based and mostly
scientific in using the electronic device of the computer
revolution. When most corporates tend to become
internetworking organizations, banking has to be E-banking in
the new century.
ELECTRONIC DELIVERY CHANNELS
Banking activities through the traditional delivery channel of
branch networks are on the decline, and customers can now do
banking transactions from the comfortable confines of their
homes using the most modern electronic delivery channels. Banks
can deliver their products more cheaply than the traditional
branch networks loaded with expensive staff. The information
technology has enabled banks to increase the rage of their
products also and market them more effectively. The popular
electronic delivery channels include (i) ATMs, (ii) Smart cards,
(iii) Telebanking, (iv) Net banking, and (v) Mobile banking.
AUTOMATED TELLER MACHINES (ATMs)
ATMs have become the order of the day in banking. Though
they were evolved as new cash dispensers now, they have
emerged as a marketing tool to target the masses. There are about
45000 off-site and on-site ATMs of many banks, which are
nothing but virtual branches as customers can conduct any
transactions through the touch screens.
They are user-friendly and have mass acceptability. They can
effectively reach out to a large customer base at a low cost. At
present, banks have started outsourcing and sharing of ATM
services to reduce the cost. Most banks are used to cross-sell other
products also as to meet the varied requirements of customers.
Banks have started dispensing railway tickets, air tickets, movie
tickets, etc., through ATMs. Voice-activated ATMs, ATMs with
fingerprint scanning technology, etc., are on the move. If they
become operative they can save the customers even from the
hassle of carrying a card. In the future, a bank's ATM would
function like a kiosk delivering more on non-cash transactions,
thereby reducing the fixed and operating costs.
The spread of ATMs has increased from 34,789 in March 2008
to 43,651 in March 2009.The biggest commercial bank, like the
SBI, has committed to open 1000 ATMs every month in the years
to come. Moreover, banks have entered into bilateral or
multilateral arrangements with other banks to have inter-bank
ATM networks. To bring greater transparency and
reasonableness in ATM charges, the RBI has issued necessary
directions that customers could make use of their own bank’s
ATMs or any other bank’s ATMs at free of cost for cash
withdrawal from April 1, 2009,onwards. The Volume of ATM
transactions has increased from17,797 lakh aggregating to
Rs.4,38,151 crore during 2007-08 to 23,530 lakh aggregating to
Rs.6,16,456 crore during 2008-09.
SMART CARDS
The smart card technology is also widely used by bankers to
market their products. A smart card is a kind of an electronic
purse embedded with a microchip to store a monetary value,
which will be automatically debited when a transaction is made
using the card. The card may be credited with a fresh amount at
any time so that it is kept operational. It provides communication
security as it verifies whether the signature is genuine or not. The
card also recognizes different voices and compares them with the
original recorded voice. It is used for making purchases without
the necessity of requiring the authorization of Personal
Identification Number (PIN) as in a debit card. It does away with
all problems associated with the traditional currency. A smart
card is indeed a powerful token that carries out all the functions
of magnetic cards like ATM cards, credit cards and debit cards,
etc.
TELE BANKING
Telebanking is increasingly used as a delivery channel for
marketing banking services. A customer can do entire non-cash
banking transactions over the phone anywhere anytime 24x7. The
Automatic Voice Recorders (AVR) or ID numbers are used for
rendering telebanking services, which have added convenience to
customers.
INTERNET BANKING
The net banking or internet banking has enabled banking at a
click of a mouse. Internet banking is all poised to emerge as the
most profound electronic channel shortly. It reduces the
operating expenses of the banks, mainly due to savings on
prohibitive estate costs and expensive staff salary. It is estimated
that the cost per transaction in internet banking will be only one-
tenth of a regular branch transaction.
It is a platform for the electronic delivery of banking services
to the customers. In net banking, customers having a computer
with internet facility can access to their bank’s website and
perform various banking transactions in their bank account
anywhere and anytime without requiring to visit the bank
premises physically.
With the drastic fall in the cell phone tariff and the emergence
of seamless connectivity between the fixed and mobile phone
lines, telebanking or mobile banking is set to emerge as one of the
cost-effective delivery channels shortly. The toll-free number
would also gain popularity as an important delivery mechanism.
Successful adoption of wireless technology would help banks to
offer not only any time anywhere banking but also the device
banking.
FACETS OF E-BANKING
As said earlier E-banking means the conduct of banking
electronically. It calls for the elimination of paper-based
transactions and radical change in banking operations. E-banking
will operate through the internet/intranet, and extranet. It is,
therefore, a banking on the information superhighways on the
frontier of the internet. Thus E-banking must have at least the
following dimensions;
 Customers-to-bank
 Bank-to-bank
 Electronic central banking
 Intranet procurement
CUSTOMERS-TO-BANK
E-banking is internet-based. Banking products and services
such as deposits, remittances, credit cards, etc. as well as all-
important banking information, can be made available with easy
access to customers on the internet. Customers can make use of
these services with no restricted office hours, no queues, no
tellers, and no waiting. Several network innovations for E-
banking can be visualized, such as smart cards, electronic data
interchange (EDI), etc. Of course, the banking operations have to
be guarded against unauthorized access by intruders.
BANK-TO-BANK
This form of electronic banking is for transacting inter-bank
transactions such as money-at-call etc. This type of E-banking is
driving extranets, which is restricted to banks only. Hence it is
well secured and unauthorized access is less.
ELECTRONIC CENTRAL BANKING
Unless this E-banking, all banks within the purview of a
central bank are interconnected on extranet to facilitate the
clearing of cheques management of cash reserves, open market
operations, discounting of bills, etc. The central bank has to be
connected with the Government treasury on extranet to carry out
its functions as an agent of the Government. Again the central
banks on all countries can be interlinked with the International
Monetary Fund (IMF), World Bank (WB), and other international
financial institutions through extranets.
INTRANET PROCUREMENT
For the transactions that are internal to a bank, between the
bank and its branches and subsidiaries, intranet procurements of
banking are required. On the other hand, extranet permits a bank
to have full control over the users of intranet and the information
to be transmitted. The extranet-intranet-internet relationship that
exists in the process of E-banking is shown in the following
figure;
Intranet Banks Customers
Banks Extranet Central Bank
Extensive work is required to integrate the internal and

external communication of banking-related information through
banking internet and intranet for the development of the financial
sector.
E-BANKING TRANSACTIONS
Though any type of transactions can be handled through E-
banking in the initial phase most of the basic banking transactions
can be performed conveniently through internet banking. The
following are some of the primary functions;
 Account enquiry
 Fund transfer
 Payment of electricity, water, phone, DTH, broadband bills,
etc.
 Online payment for transactions performed through the
internet.
 Request for issuance of cheque book, draft, etc.
 Statement of accounts
 Access to the latest schemes.
 Access to rates of interest and other service charges.
TRUNCATED CHEQUE AND E- CHEQUE

Section 6 of the Negotiable Instruments Act (NI Act) contains
the definition of a cheque. This section has been recently
amended to include truncated cheques and electronic cheques
within the meaning of a cheque.
NEGOTIABLE INSTRUMENT ACT AMENDMENT
The amendment Section 6 of the NI Act now reads as follows;
“A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on-demand, and it includes the
electronic image of a truncated cheque in the electronic form.”
TRUNCATED CHEQUE
The NI Act has permitted the use of a truncated cheque as
well as an electronic cheque. In this connection, one is naturally
interested to know more about a truncated cheque. The concept
of truncation refers to the process of replacing a physical cheque
with an electronic image of that cheque. It is permitted only for
speedy collection of a cheque through electronic mode instantly.
DEFINITION OF A TRUNCATED CHEQUE
A truncated cheque is defined by the new Section 6 (b) of the
NI Act as follows;
“A cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank, whether paying or receiving
payment immediately on generation of an electronic image for
transaction, substituting the further physical movement of the cheque in
writing.”
ESSENTIAL FEATURES OF A TRUNCATED CHEQUE
As per Section 6(b), the essential features of a truncated
cheque are as follows;
 It is nothing but an electronic image of a physical paper
cheque.
 It is only the clearinghouse or the banks involved can truncate
a cheque. As already stated, truncation means creating an
electronic image of a cheque.
 Any holder or drawer cannot truncate a cheque.
 This electronic image of the truncated cheque will substitute
the physical cheque immediately from the time of truncation.
 Truncation can be done only to reduce the time taken for
collection.
 The physical cheque after truncation is to be retained in the
custody of the clearing-house/bank that truncated the cheque.
 The addition of digital signature, the truncating bank or
clearinghouse to the truncated cheque is optional since the
Negotiable Instrument Act is silent on this issue.
MERITS OF A TRUNCATED CHEQUE
 It introduces a secured a clearing system. It makes the cheque
clearing process efficient through the transmission of cheque
images. This will reduce the time to complete the clearing
cycle of cheque presenting, returning as well as cheque
realization time.
 The current cheque realization period varies from one to ten
days. The new cheque imaging system will minimize this to
T+1, where T is the cheque receiving date.
 Cheque imaging will result in result in cost savings due to the
lower cost involved in the physical transportation of cheques.
 Cost of storing physical cheques (according to existing norms,
banks have to keep physical cheques for eight years) gets
reduced.
 The risk of losing physical cheques during transportation is
reduced.
 Faster collection of cheques/better customer services by
having a larger acceptance window and faster credits.
 Removing geographical dependencies for participation in the
clearing process.
 Enhanced security as the original paper is available at the
point of truncation.
ELECTRONIC CHEQUE
The Negotiable Instruments Amendment Act has introduced
another new concept called “electronic cheque” to facilitate E-
banking.
DEFINITION OF AN ELECTRONIC CHEQUE
Section 6 of the Negotiable Instruments Act (NI Act) defines
an electronic cheque as follows;
“A cheque in the electronic form means a cheque which contains the
exact mirror image of a paper cheque, and is generated, written and
signed in a signature (with or without biometrics signature) and a
symmetric crypto system.”
ESSENTIAL FEATURES OF AN E- CHEQUE
As per Section 6(b), the essential features of an electronic
cheque are as follows;
 It is the exact mirror image of a paper cheque. In other words,
it is the electronic image of a paper cheque.
 It is generated, written, and signed in a secured manner using
a digital signature, which has been legally recognized.
 It may or may not have a biometric signature.
 Digital signature of the drawer is compulsory.
 There should be minimum safety standards like asymmetric
cryptosystem.
STEPS INVOLVED IN PREPARING AN ELECTRONIC
CHEQUE
The steps involved in preparing an e-cheque are as follows;
 Prepare a physical paper cheque as usual with all details like
date, name of the payee, amount, signature, etc.
 Scan the paper cheque and create an electronic image of it.
 Add a digital signature to the e-cheque.
 Make it secure under the asymmetric cryptosystem by using
the private key of the drawer.
 Add a biometric signature to the e-cheque if desired.
 Forward the e-cheque to the payee through e-mail or the
internet.
 The drawee bank is bound to honour it after verifying the
digital signature.
MECHANISM OF ELECTRONIC CHEQUE
The operational mechanism of an e-cheque is as follows;
 The drawer prepares the e-cheque in his computer with the
help of specialized software.
 He enters all the particulars like name of the drawee bank,
date, payee, amount, signature, etc. and fills them up.
 He signs the same with his digital signature.
 It is then forwarded to the payee through e-mail or the
internet.
 The payee, upon receiving the email, opens the e-cheque with
specialized software.
 After verifying the authenticity of the drawer’s signature, he
endorses it as usual for getting payment. He also writes out a
deposit slip and signs the same with his digital signature.
 Then the payee forwards the e-cheque along with the deposit
slip to his bank through e-mail.
 The payee’s bank verifies the signatures of the drawer and the
payee and then forwards it to the drawer’s bank (paying
banker)
 The paying banker verifies the signature of the drawer and
honours it by debiting the account of the drawer and effecting
payment to the payee’s bank by crediting its account.
ADVANTAGES OF AN ELECTRONIC CHEQUE
The significant advantages of using an e-cheque are as
follows;
Convenient: E-cheque offers more convenience to the account
holders as they need not carry a physical cheque book with them
for banking transactions. A specimen cheque can be prepared in
an electronic mode and stored in the computer. Whenever a
cheque has to be drawn, a drawer has to fill up the particulars
and send it immediately through e-mail. One can leisurely sit at
home and prepare an e-cheque there itself.
Transacted anytime: E-cheque can be drawn, and banking
business can be transacted at any time during the day. But
physical cheque has to be transacted only during the banking
hours.
Less expensive: These days, the cost of producing, issuing,
and maintaining paper cheques are going up like anything. The
physical handling of paper cheques involves more labour also.
On the other hand, the cost of producing an e-cheque is
practically nil. The handling cost is also considerably low.
Avoids loss in transit, bad delivery, etc: There is every
possibility of the physical cheque being lost in transit. There may
be bad deliveries also. The question of loss in transit, bad
delivery, etc., does not arise in the case of an e-cheque.
More protection: Unauthorized alterations may take place in
a paper cheque. The signature can be forged skilfully, and
unscrupulous persons can make payment. They cannot take place
in an e-cheque. More authenticity and scarcity have been
provided to e-cheques using digital signatures.
Avoids delay in payment: A paper cheque sent for collection
requires a long period for its realization. But a physical cheque
can be converted into a truncated cheque, and it can be credited
to the payee’s banker’s account instantly, and there is no delay in
encashing that e-cheque.
Facilitates e-banking: E-cheque is a boon to e-banking. E-
cheque facilitates the performing of banking transactions round
the clock. There are no restricted office hours either for e-cheque
or for e-banking.
MOBILE CHEQUE (MChq)

Another innovative banking product is the mobile-to-mobile
payment option called as ‘MChq' (for example, paytm) Now one
can do shopping without keeping any money/credit card or debit
card in his purse but just by keeping a "mobile wallet." It means
that one can use his cell phone like a wallet. This concept is
gaining momentum in countries like Japan and other Asian
countries.
MODUS OPERANDI OF A MChq
All vital personal information that is typically stored in the
magnetic stripe on the back of a credit card is now loaded on to
the sim card in a secured format. It means that the existing sim
card on a mobile phone has to be replaced with the one that has a
128-bit encryption key, which offers a higher degree of safety
than the current sim card. The bank would supply an add-on card
that would allow customers to access this service.
While shopping, one has to give his phone number to the
merchant, who would then send on a special mobile SMS to the
server of the mobile service provider. The customer who does
shopping will, in turn, get an SMS asking him to confirm the
payment. The customer will have to enter his Personal
Identification Number (PIN) as an added security measure and
send it back as SMS confirming the amount to be paid. The
merchant and the customer will then get an SMS confirming the
completion of the transaction. The exchange of these SMS
happens within a minute.
ADVANTAGES OF A MChq
Paying through mobile phone is quicker and more convenient
than net banking since there is no need to log in on net and to
enter personalized information in it. Mobile payments are more
comfortable for small purchases. For example, to buy a product
for Rs. 50 or low one cannot use the credit cards but can use the
mobile payment conveniently. Merchants may tend to favour this
mode of payment as all they need is a mobile phone, which will
serve as a communication device, and there is no need for having
a point-of-sale (POS) terminal as required in case of using a credit
card.
LAUNCHING MChq IN INDIA
In India, the ICICI bank has come forward to offer ‘MChq'
facility to its customers in collaboration with Airtel. This facility is
being provided to ICICI Bank cardholders, who are also the
customers of Airtel. Initially, this facility would be available only
in Delhi, Mumbai, and the National Capital Regions (NCR) this
concept is at its pilot stage, and there will be a daily transaction
limit of Rs.5000 or ten transactions on the card, whichever is
exhausted first. There are no extra charges at present, but if the
concept becomes popular, some charges may be introduced later.
MODELS FOR E-BANKING
To implement E-banking effectively and augment the level of
technology the following models are suggested;
(i) Complete Centralized Solution (CCS)
(ii) Cluster Approach
(iii) High-tech Bank within Bank
COMPLETE CENTRALIZED SOLUTION (CCS)
This is an ideal branch network model on which E-banking
activities can be implemented uniformly and efficiently. Under
this model, the bank has to provide web-server and the requisite
software, which is connected to the central server. Once the
required hardware and software are set in, the customers can
access the web-server for their primary banking operations using
any standard browser at any location.
FEATURES OF CCS
The important features of CCS are as follows;
 The entire system software, data for the whole of the bank,
etc., are stored in a centralized server with its hot standby
server being placed at different locations and connected
through high speed and efficient network.
 Branches are provided online nodes to receive requests from
customers and to offer them services across the counter.
 The nodes provided at remote branches are connected
through effective satellite links with enough redundancy to
provide reliability as well as adequate bandwidth.
 The skilled manpower is required only at a centralized
location.
CLUSTER APPROACH
Under this model, computerized branches of each city are
connected with Regional processors located at each such city,
which are then connected through reliable media to a centralized
high-end server. Under this approach, it is necessary that an
integrated computerization is available at all branches so that
connectivity amongst various branches can be established
through regional clusters. Most of the branches are computerized
in an integrated way through a Network Unix Server.
FEATURES OF CCS
The essential features of the cluster approach are as follows;
 The entire branch network of the bank should be
computerized through integrated software.
 All these branches should be interconnected with regional
servers through reliable network media.
HIGH-TECH BANK WITHIN BANK
Under this model, complete computerization of all branches is
avoided. Within each bank, two different types of banks would
function concurrently viz., high-tech bank providing e-banking
facilities through select branches and traditional bank offering
traditional services through other branches. This approach
enables the banks to play a balanced role to offer state-of-the-art
service to ever-demanding customers of major cities and
simultaneously continue to offer traditional personalized services
to the mass customers who will dominate the banking scene.
FEATURES OF HIGH-TECH BANK
The features of a high-tech bank within a bank are as follows;
 Out of the entire branch network of the bank, only certain
branches are selected to offer E-banking depending upon the
customer’s needs, business potential, infrastructure facilities
available, etc.
 The accounts of all the customers in those branches should be
automated under a centralized system offering various
electronic channels, including internet banking.
 The high network customers may be encouraged to use E-
banking services through these selected branches.
 It would not impose any technological burden on customers
who do not want to enjoy E-banking services.
 The banks could get a gestation period to cover more
branches under the umbrella of a high-tech bank in a phased
manner.
ADVANTAGES OF E-BANKING
The major advantages of E-banking are as follows;
Round the clock service: E-banking facilitates the performing
of basic banking transactions by customers round the clock
worldwide. It has no restricted office hours.
Convenient banking: E-banking increases the customer’s
convenience. No personal visit to the branch is required.
Customers can perform basic banking transactions by merely
sitting at their homes/office through PC or laptop. They can get
drafts at their doorsteps through e-mail call. Thus e-banking
facilitates home banking.
Services at low cost: The operational costs have come down
due to technology adoption. The cost of transactions through
internet banking is much lesser than any other traditional mode.
Profitable banking: The increased speed of response to
customer requirements under E-banking vis-à-vis branch banking
can enhance customer satisfaction and consequently can lead to
higher profits via handling a larger number of customer accounts.
Banks can also offer many cash management products for existing
customers without causing any additional cost.
Economic to establish: E-banking converts the brick and
mortar structure of banking into click and portal structure. Banks
can have access to a greater number of potential customers
without the commitment costs of physically opening branches.
Hence there is much saving on the cost of infrastructure.
Moreover, the requirements of staff at the banks get reduced to a
great extent.
Quality banking: E-banking opens a new vista for providing
efficient, economical, and quality service to the customers. It
allows the possibility of improved quality and an extended range
of services being made available to customers.
Speed banking: The increased speed of response to customer
requirements will lead to greater customer satisfaction and
handling a large number of transactions at a lesser time. Thus it
increases the customer’s convenience to a greater extent and
facilitates better customer retention.
Service banking: E-banking creates a necessary robust
infrastructure for the banks to embark upon many cash
management products and to venture into new fields like E-
commerce, EDI, etc. Instant credit, immediate payment of utility
bills, instant transfer of funds, etc., would be made possible under
E-banking. In brief, it adds convenience to the entire banking
services apart from widening the range of services.
DISADVANTAGES OF E-BANKING
The major constraints in the implementation of E-banking are
as follows;
Heavy start-up costs: Many banks have expressed their
concern about the huge start-up cost for venturing into E-
banking. The start-up costs include;
The connection cost to the internet or any other mode of
electronic communication is vast. The network should be robust,
secured, efficient, and scalable with inbuilt redundancy.
The cost of sophisticated hardware, software, and other
related components, including Modem, Routers, Bridges,
Network Management Systems, etc.
The cost of maintenance of all types of equipment, websites,
the skill level of employees, etc.
The cost of setting up organizational activities to implement
E-banking
For successful E-banking, bankers need to develop a coherent
perspective of the role of network technologies and the
advancement of their EFT-departments with a competitive
introspection of their banking business.
Training and maintenance: The introduction of E-banking
involves 24 hours support environment, quality service to end
users, and other partners, which would necessitate a well-
qualified and robust group of skilled people to meet the external
and internal commitments. Hence the bank has to spend a lot of
time and money on training. Their retention in the organization
after such training is again one major challenge. Further, the bank
has to outsource certain functions and services to maintain the
level of standards and state of readiness. The training and
retaining of skilled manpower is a major cause of concern.
Lack of skilled manpower: It is a well-known fact that there
is an acute scarcity of web developers, content providers, and
knowledgeable professionals to route banking transactions
through the internet. In a fast-changing technological scenario,
the obsolescence of technology is fast, and hence there is always a
shortage of skilled personnel.
Security: In a paperless banking environment, many
problems of security may arise. A security threat is defined as a
circumstansive decision or event with the potential to cause
economic hardship to data or network resources in the form of
destruction, disclosure, modification of data, denial of services,
fraud, waste, and abuse. There are chances that documents such
as cheque, passbook, etc., can be modified without leaving any
visible trace of such alterations. Distortion of information are also
possible. Providing appropriate security may require a significant
initial investment in the form of application encryption
techniques, implementation of firewalls, etc. In spite of the
implementation of several security measures, the possibility of a
security breach cannot be ruled out.
Legal issues: Legal framework for recognizing the validity of
banking transactions conducted through the ‘Net' is still being
put in place. Though the initial legal framework has been devised
for E-banking activities, it is uncertain a stop what possible legal
issues may pop-up in the future is banking on the internet
progresses. What may happen if a customer's sensitive data falls
in the hands of a stranger or if his account shows a "Nil" balance
all of a sudden without his knowledge. The legal issues should
cover unauthorized access and unauthorized modification of
data, wrongful communication, and punishment to be meted out
to combat computer crimes. To prevent such internet-based
computer crimes, the country's banking legislation needs to be
made suitable provisions with a thorough consultation and
discussion with the legal and technical experts.
Technical problems: The user of E-banking needs a computer
and time to log on to the website of the bank. It means that the
target clientele is restricted to those who have a home PC or can
access the ‘Net’ through their office or a cyber café. Moreover,
phone connections are not always perfect, and on a home PC, the
modem connection often breaks off, requiring another tedious log
on. Navigating around websites on home computers is often slow
and frustrating. Moreover, the local calls are not free, and
therefore the customers have to pay every time they check the
bank balance.
Restricted business: Not all transactions can be carried out
electronically. Many deposits and some withdrawals may require
the use of postal services. Some banks have automated their front-
end process for the customers, but still largely depends upon the
manual process at the back-end. For example, internet customers
receive their statements online, but the paper statements are also
sent by their mails. Mail and distribution costs are still necessary
as the statements, cheques, etc. are still mailed to customers.
Destruction of pricing mechanism: The internet also destroys
the basic business pricing models. The internet creates perfect
market conditions where perspective consumers have access to
more information and can more readily compare rates and
financial product offerings. Now players in the field have lower
costs than old banks; hence, they can undercut the prices and
provide stiff competition to established banks. Moreover, banks
marketing programmes and products are generally based on the
product or physical location. The web allows customers to easily
compare all the products and their prices and sign-up for the
products irrespective of location.
SECURITY MEASURES
Most of the problems discussed above are like testing
problems, and hence, they can be eliminated over some time.
However, for venturing into E-banking, the following major
controls must be ensured;
 Authenticity controls to verify identify of individuals like
password, PIN, etc.
 Accuracy controls to ensure the correctness of the data flowing
across the network.
 Completeness controls to make sure that no data is missing.
 Redundancy controls to see that data is travelled and
processed only once, and there is no repetitive sending of data.
 Privacy controls to protect the data from inadvertent or
unauthorized access.
 Audit trail controls to ensure keeping the chronological role of
events that are occurred in the system.
 Existence controls to make sure that the ongoing availability of
all the system resources is the same throughout.
 Efficient controls to ensure that the system uses minimum
resources to achieve the desired goal.
 The firewall controls to prevent unauthorized users from
accessing the private network, which is connected to the
internet.
 Encryption controls to enable only those who possess a secret
key to decrypt the cyber text.
E-banking is becoming immensely popular globally, and
India is also no exception to it. The declining internet costs, falling
prices of PCs, broadband width, access through cable and digital
subscriber lines, accessing the ‘Net’ through cable TV, etc. would
encourage the boom in E-banking in India. With the globalization
of business and services, our country cannot lag in niche areas of
electronic banking. In the new global era of multi-currency, multi-
legal, and multiple regulatory systems with the freedom of E-
commerce, banks have to operate like multinational corporations
to grow and survive by adopting E-banking.
REAL-TIME GROSS SETTLEMENT (RTGS)
The RTGS, is a new system of payments that evolved in the
Indian banking environment to enable online clearing and
settlement of payments on a real-time basis across banks in
different cities. The RTGS is an upgraded technology aimed at
reducing the dependence on payments through cheques. It is
radically different from the present-day paper-based clearing
system. It permits not only net settlements between banks but
also eliminates systematic risk due to advanced technological
innovations.
MODUS OPERANDI OF RTGS
Under RTGS the payments are cleared singly and bilaterally
as they occur. When a payment message is moved through the
clearing-house, the paying bank’s account with the RBI is
simultaneously debited and credited in the receiving bank’s
account. There are no end-of-day procedures, as in the case of a
paper-based clearing. There is a certainty of payment, and the
receiving bank credit the beneficiary’s account immediately and
allow full use of funds.
ADVANTAGES OF RTGS
The major advantages of using RTGS are as follows;
The certainty of payment: All payments under RTGS are
irrevocable and final. So, the beneficiary's account can be credited
immediately. Under paper-based system, the credit may not be
given due to technical reasons such as incorrect account details,
foreign accounts, etc.
Faster collection: The RTGS would provide an opportunity to
collect funds at a faster rate due to improved technology. It has
the effect of reducing the receiver’s working capital cycle.
No settlement risk: It reduces the settlement risk since credit
to an account is final with no possibility for subsequent returns.
Better liquidity management: From the bank's point of view,
liquidity management can be improved since funds can be
seamlessly transferred across banks.
Less fraud and less processing cost: The processing costs and
the risk of frauds are higher in the case of the paper-based
clearing system. They are considerably reduced under RTGS.
Better Inventory management: Faster funds transfer
facilitates better inventory and supply chain management. With
these benefits, it is expected that volumes of transactions under
RTGS will rise, and the transaction volumes by cheque payment
will see a decline in the coming years.
NATIONAL ELECTRONIC FUND TRANSFER
National Electronic Funds Transfer (NEFT) is a nation-wide
payment system launched in November 2005 to facilitate one-to-
one funds transfer. Under this Scheme, individuals can
electronically transfer funds from any bank branch to any
individual having an account with any other bank branch in the
country participating in the Scheme.
MODUS OPERANDI OF NEFT
The remitter fills in the NEFT Application form giving the
particulars of the beneficiary (bank-branch, beneficiary's name,
account type, and account number) and authorizes the branch to
remit the specified amount to the recipient by raising a debit to
the remitter's account. (This can also be done by using net
banking services offered by some of the banks)
The remitting branch prepares a Structured Financial
Messaging Solution (SFMS) message and sends it to its Service
Centre for NEFT.
The Service Centre forwards the same to the local RBI
(National Clearing Cell, Mumbai) to be included for the next
available settlement. Presently, NEFT is settled in six batches at
09:30, 10:30, 12:00, 13:00, 15:00 and 16:00 hours on weekdays and
09:30, 10:30 and 12:00 hours on Saturdays.
The RBI at the clearing center sorts the transactions bank-wise
and prepares accounting entries of net debit or credit for passing
on to the banks participating in the system. After that, bank-wise
remittance messages are transmitted to banks.
The receiving banks process the remittance messages received
from RBI and affect the credit to the beneficiaries' accounts.
RTGS Vs. NEFT
NEFT operates on a Deferred Net Settlement (DNS) basis,
which settles transactions in batches. In DNS, the settlement takes
place with all transactions received until the particular cut-off
time. The fundamental difference between RTGS and NEFT is
that while RTGS is based on gross settlement, NEFT is based on
net-settlement. i.e., the transactions are netted (payable and
receivables) in NEFT, whereas in RTGS, the transactions are
settled individually.
For example, currently, NEFT operates in hourly batches.
There are twelve settlements from 8 am to 7 pm on weekdays,
and six settlements from 8 am to 1 pm on Saturdays. Any
transaction initiated after a designated settlement time would
have to wait till the next designated settlement time Contrary to
this, in the RTGS transactions are processed continuously
throughout the RTGS business hours. In short, to transfer large
sums of money (above Rs.2 lakh), RTGS is better and to transfer a
small amount of money (less than Rs. 2 lakh), and there is not
much urgency NEFT is better. RTGS costs more than NEFT.
SELF-ASSESSMENT
Fill in the blanks
1. ……….refers to a banking transaction routed through the
internet.
2. The provision of banking services through the extensive use
of IT without direct resource to the bank by customers is
known as ………..banking.
3. Unauthorized users accessing the private network are
prevented through ……….controls.
4. In a paperless banking transaction, many problems of
……….are involved.
True or False?
5. 24x7 banking is possible under traditional banking.
6. There are six settlements from 8 am to 7 pm on weekdays, and
three settlements from 8 am to 1 pm on Saturdays under
NEFT.
7. All payments under RTGS are irrevocable and final.
Answers: (1) E-banking (2) Virtual (3) Firewall (4) Security (5)
False (6) False (7) True
Questions
1. Define E-banking.
2. What do you mean by the cluster approach of E-banking?
3. “E-banking involves many security-related problems”-
Discuss.
4. List out the advantages of using a ‘truncated cheque.’

4.1. EMPLOYMENT OF FUNDS
BY COMMERCIAL BANKS
Employment Of Funds By Commercial Banks
The backbone of any economy can be best evaluated by the

strength and flexibility of its banking structure. The financial
services industry in India is dominated by the banking sector that
significantly contributes to the revenue of this industry. The
Indian banking industry has transformed itself from being a
sluggish business industry into a highly proactive and dynamic
one. This transformation has been realized due to the large dose
of liberalization and economic reforms of 1991 that allowed banks
to explore new business opportunities (for revenue generation),
rather than relying upon the conventional activities of borrowing
and lending.
The banking industry in the country is rapidly changing and
constantly expanding. New entrants can take advantage of the
benefits of the latest technology, and adapt business models to
leapfrog, increasing inroads from non-traditional players are
being witnessed. The intense competitive retail environment is
forcing banks to become customer-centric increasingly. Products
and pricing aims are not only at attracting new customers but also
to cross-sell through customer relationship management. Banks
are embracing technology to improve customer service, design
flexible and customized products, increase sales opportunities,
and differentiate themselves in a market where product features
are easily cloned.
SOURCES OF FUNDS
A commercial bank's main source of funds comes from the
customer's deposits, the issue of certificates of deposits, the share
capital contributed by the bank's shareholders, and the reserves
from the retained profits. The assets portfolio of a bank consists of
cash in Hand, Cash with RBI and other banks, money at call and
short notice, investments, advances, fixed assets, and other assets.
The above assets of a bank are in the order of liquidity. A brief
explanation of the assets, along with their liquidity and
profitability, is given below.
Cash in Hand: This is the most liquid of all assets. It
represents cash balances in the bank. It does not yield any return
to the bank. The amount of cash balances to be maintained
depends on the banks' estimate of the demand for withdrawals of
deposits and loans sanctioned.
Cash with RBI: Commercial banks, apart from cash in hand, a
statutorily required to keep a certain percentage of their total
deposits with the Central Bank. The excess part of the reserves, if
kept with the RBI, is a matter of decision on the part of the banks,
naturally guided by the consideration of liquidity. Normal
interest is paid on balance above statutory balance.
Cash with other Banks: Apart from cash in hand and with
RBI, to facilitate interbank transactions and for convenience, cash
is held with other banks. Normally, the balances with other banks
are current account on which no interest is paid, Apart from cash
in hand and cash with RBI, balances held with other banks
constitute the first defense for commercial banks as these can be
acquired immediately without any cost.
Money at Call and Short Notice: This is money lent by banks
to other banks, in the call money market. It is a short term asset. It
is unique in the sense that it is not subjected to any statutory
requirements against deposit liabilities. Money at call has the
attribute of high liquidity, ranking next to cash, as it is convertible
into cash without notice whereas money at short notice requires3
days’ notice to convert, it into cash. The yield is slightly in cash at
short notice as it is relatively less liquid when compared to money
at call.
Retained Earnings: A lot of commercial banks earn
retained earnings or fees to help fund their business. A retained
earning can be collected through overdraft fees, loan interest
payments, securities, and bonds. Banks also charge fees for
providing customers with services such as maintaining an
account, offering overdraft protection, and also monitoring
customers' credit scores.
USES OF FUNDS
A commercial bank’s main uses of funds are for lending to
customers and investments. But a commercial bank has to keep
substantial funds in the form of cash and short term investments
as liquid assets.
Loans and Advances: This asset occupies a significant chunk
of the total assets of a bank. It is an essential asset in a banks' asset
portfolio because of its magnitude and the interest income it
brings in. Under this item, we have (a) Bills Discounted and
Purchased and (b) Loans, Cash Credit, and Overdrafts. The first
component refers to the loans granted against the security of bills,
and they are self-liquidating. The second component includes all
other advances against the security of tangible assets and
sometimes against financial assets. After nationalization, the
lending operations were based on social welfare criterion rather
than based on profit criterion. The commercial banks were
encouraged to lend to those sectors which were neglected due to
the risk and loss involved. Forty percent of the total advances of
the banks are to be advanced to these priority sectors.
Investments: The two principal items of the asset portfolio of
commercial banks are the advances or bank credit and
investments made in government and other approved securities.
These investments earn a rate of return. But, the rate of interest is
far smaller than the interest on credit. Banks have to invest in
these securities, as they constitute a part of the Statutory Liquidity
Ratio stipulated by the RBI. Usually, the banks invest in these
government and other approved securities over and above the
statutory requirement in spite of these securities being less
profitable.
The reasons may be to have a safety margin, or if the demand
for credit is weak, they will make it up by over-investing in
government securities. But, because of the low yield, the banks
would endeavor to minimize their investment in government and
other approved securities. The profitability of commercial banks
depends on the composition of its balance sheet and the efficiency
of its operation.
Liquidity (L) Vs. Profitability (P)
L L Assets Period Borrowers Yield

P p
Cash - - Nil
Money at call 1 14 days Money Market 1% 2%
Bills 1 6 months Business 3% 4%
Discounted Customers
Investments 6 months 5 Capital Market 5% 6%
Years
Loans and 1 day 30 Business & 7% 10%
Advances Years Personal
Customers
Nowadays, there is a trend towards increasing the non-
interest income because keen competition among commercial
banks has decreased the spread. Banks need to maintain sufficient
cash and near liquid funds to repay depositors. However, the
problem of maintaining assets in the form of cash or near liquid
funds is that the more liquid it is, the lower the rate of interest it
earns. The highest rates of interest are charged for the most
illiquid assets, i.e., advances and loans to business and personal
customers.
EMPLOYMENT OF FUNDS
A commercial bank is a financial institution that receives the
savings of people in the form of deposits and employs it in the
form of loans, advances, and investments. To meet the increasing
responsibilities arising from the different requirements of a
developing economy, it is necessary to have a stable and viable
banking structure.
The success of a bank depends to a large extent upon its
effective management of the loan portfolio. If loans of banks are
not channelized in proper directions, they will not only adversely
affect the economic activities in the country but would also
endanger the safety of deposits and the existence of the banks
themselves. Every commercial bank creates income yielding
assets against its liabilities, keeping in view three considerations,
namely (i) safety (ii) liquidity and (iii) profitability. They guide
the lending policy of a bank.
Several significant changes have occurred in the Indian
banking system since the nationalization of 14 major commercial
banks in 1964, particularly in deposit mobilization and credit
deployment. Branches in rural areas, which hardly accounted for
20 percent of the total in 1964, account for more than 50percent of
the total offices at present.
Concerning credit deployment, the more significant changes
are in credit extended to what is now described as the priority
sectors. The emphasis of banking policy on credit deployment has
two aspects a more balanced distribution of credit among
different regions and an increased flow of credit to priority
sectors. The deregulation of lending rates has given the bank the
flexibility to price loan products based on their business strategies
and the risk profit of the borrowers. It has also lent a competitive
advantage to banks with lower cost of funds.
FACTORS AFFECTING
THE EMPLOYMENT OF FUNDS
The purchasing power of the borrowers 'increases by the
loans and advances offered by the banks. Before considering a
loan application, a bank appraises the proposal based on the
purpose of the loan demanded; viability of the proposal
submitted, and creditworthiness of the borrower. Credit is a
device for facilitating the temporary transfer of purchasing power
from an individual or an organization to another. Certain internal
and external factors greatly influence the employment of funds by
commercial banks (as loans and advances, investment, etc.) The
internal factors consist of the paid-up capital, reserves, and
deposits mobilized. The external factors include borrowing from
RBI, Refinance obtained, and credit control exercised by the RBI
like CRR, SLR, and the norms for priority sector lending.
Deposits Mobilized: Advances are mainly influenced by the
position of the deposit of the banks i.e., higher the deposits
mobilized, higher will be the advances granted. Like a chain
effect, we can expect that the increased amount of advances
granted would also increase the earning capacity of the borrower,
which in turn would bring more deposits to the banks.
Control by RBI: Next to the deposits mobilization, the
employment of funds or lending by commercial banks is greatly
influenced by the control of the reserve exercised by the RBI.
Banks are not at liberty to lend all the money that they have
mobilized as deposits. The lending capacity of the banks is
regulated and restricted by RBI by imposing on them SLR, CRR,
priority sector lending, etc. The central bank exercises such
control over bank advances to keep the inflationary trends under
control and diverts the scarce resource according to the priority
laid down by the economic policy of the country in the interest of
the society at large.
PRINCIPLES OF BANK LENDING
The banks while lending their money should follow the
following principles;
1. Liquidity: Liquidity is an essential principle of bank
lending. Banks lend for short periods only because they lent
public money which can be withdrawn at any time by depositors.
They, therefore, advance loans on the security of such assets,
which are readily marketable and convertible into cash at short
notice. A bank chooses such securities in its investment portfolio
which possess sufficient liquidity. It is essential because if the
bank needs cash to meet the urgent requirements of its customers,
it should be in a position to sell some of the securities at very
short notice without disturbing their market prices much.
There are certain securities such as central, state, and local
government bonds that are readily saleable without affecting
their market prices. The shares and debentures of significant
industrial concerns also fall into this category. But the shares and
debentures of ordinary firms are not readily marketable without
bringing down their market prices. So the banks should make
investments in government securities and shares and debentures
of reputed industrial houses.
2. Safety: The safety of funds lent is another principle of
lending. Safety means that the borrower should be able to repay
the loan and interest in time at regular intervals without default.
The repayment of the loan depends upon the nature of security,
the character of the borrower, his capacity to repay, and his
financial standing. Also, it depends upon the technical feasibility
and economic viability of the project for which the loan is
advanced.
Like other investments, bank investments involve risk. But the
degree of risk varies with the type of security. Securities of the
central government are safer than those of the state governments
and local bodies. It is very safe to invest in the securities of a
government having substantial tax revenue and high borrowing
capacity. The securities of state government and local bodies are
more reliable than those of the industrial concerns. This is
because the share and debentures of industrial concerns are tied
to their earnings, which may fluctuate with the business activity
in the country.
3. Diversity: In choosing its investment portfolio, a
commercial bank should follow the principle of diversity. It
should not invest its surplus funds in a particular type of security
but in different kinds of securities. It should choose the shares
and debentures of different kinds of industries situated in
different regions of the country.
The same principle should be followed in the case of state
governments and local bodies. Diversification aims at minimizing
the risk of the investment portfolio of a bank. The principle of
diversity also applies to the advancing of loans to varied types of
firms, industries, businesses, and trades. A bank should follow
the maxim: "Do not keep all eggs in one basket." It should spread
its risks by giving loans to various trades and industries in
different parts of the country so that the risk is effectively
distributed.
4. Stability: Another essential principle of a bank’s
investment policy should be to invest in those stocks and
securities which possess a high degree of confidence in their
prices. The bank cannot afford any loss on the value of its
securities. It should, therefore, invest its funds in the shares of
reputed companies where the possibility of a decline in their
prices is remote.
Government bonds and debentures of companies carry fixed
rates of interest. Their value changes with changes in the market
rate of interest. But the bank is forced to liquidate a portion of
them to meet its requirements of cash in cash of financial crisis.
Otherwise, they run to their full term of 10 years or more, and
changes in the market rate of interest do not affect them much.
Thus bank investments in debentures and bonds are more stable
than in the shares of companies.
5. Profitability: This is the cardinal principle for investing by
a bank. It must earn sufficient profits. It should, therefore, invest
in such securities, which was sure a fair and stable return on the
funds invested. The earning capacity of securities and shares
depends upon the interest rate and the dividend rate and the tax
benefits they carry.
It is mostly the government securities of the center, state, and
local bodies that carry the exemption of their interest from taxes.
The bank should invest more in such securities rather than in the
shares of new companies, which also carry tax exemption. This is
because shares of new companies are not safe investments.
MEASURING THE
SOUNDNESS OF FUNDS EMPLOYED
The soundness of the fund employed by commercial banks
can be measured by various tools as discussed below;
Credit/Deposit Ratio (CD Ratio): The credit/deposit ratio
(CDR) of commercial banks reflects the growth in funds deployed
towards loans and advances against the total deposits mobilized.
The CDR of commercial banks is a measure of the utilization of
resources by the banking system. It indicates the extent to which
the depositors' money is invested in loans and advances. Higher
the CDR of a bank, more excellent will be its profitability as the
loans and advances are the most important revenue fetching
items in a commercial bank. The CD Ratio can be measured using
the formula;
CD Ratio = × 100
Example: Loans and advances Rs. 7496 Cr, Deposits Rs. 17156 Cr
CD Ratio = × 100 = 43.69
Credit/Investment/Deposits Ratio (CID Ratio): The primary

source of funds to a commercial bank is the mobilization of
deposits. These deposits should be utilized in the form of
advances and investments by the banks. Traditionally, the CD
Ratio is a parameter to assess the efficiency of the utilization of
funds. In the changed milieu, instead of a higher C/D Ratio, it is
the efficiency of the fund's utilization, i.e., Credit +
Investment/Deposit Ratio (C+I D) that has got its importance.
The CID Ratio can be measured using the formula;
CID Ratio=× 100
Example: Loans and advances Rs. 7496 Cr, Investments Rs.
7728 Cr, Deposits Rs. 17156 Cr
CID Ratio = × 100 = 88.73
Priority Sector Lending Ratio (PSL Ratio): The first

operationally significant step taken by the government after
nationalization was the identification of certain sectors (mainly
agriculture, SSI, retail trade, small business, road and water
transport operations, self-employed and professionals, exports
and education) as priority sectors which were to be given loans at
concessional terms and credit allocation was deliberately changed
in favour of these sectors.
RBI exercises tight control and supervision over the banks,
aimed at containing the expansion in total bank credit in absolute
terms. It also decides the borrowers to whom credit was to be
given on absolute terms. Such direction includes the lending of 40
percent of the total loanable funds to these priority sectors. The
CID Ratio can be measured using the formula;
PSL Ratio = × 100
Example: Loans and advances Rs. 7496 Cr, Priority Sector
Advances Rs. 1781 Cr.
PSL Ratio = × 100 = 23.76
Average Yield in Advances Ratio (AYA Ratio):The Average
yield on advances (AYA) is one of the parameters to assess the
performance of commercial banks. It is arrived by adding the
advances at the beginning of the year and the end of the year and
divided by 2. The AYA of the bank should be higher than the
Average Cost of Deposits (ACD) It can be calculated using the
following formula;
Average Advances =
Average Advances = × 100
Example: Average advances Rs. 7496 Cr, Interest Discount
Earned Rs. 802 Cr. AYA Ratio = × 100 = 10.70
The efficient management of funds by commercial banks

primarily includes raising of funds and their use in the manner
that generates revenues sufficient to meet the operational as well
as financial costs and contributes a reasonable return on capital.
Thus, the objective of earning profits shall be fulfilled by an
appropriate design of funds management on sound commercial
principles, as discussed above.
SELF-ASSESSMENT
Fill in the blanks
1. ………… is a device for facilitating the temporary transfer of
purchasing power from an individual or an organization to
another.
2. Currently ………. percent of the total advances of the banks
are to be disbursed to the priority sectors.
3. The CDR of commercial banks is a measure of the ………..by
the banking system.
Answers: (1) Credit (2) Forty (3) Utilization of resources
Questions
1. What are the various sources and uses of funds in a commercial
bank?
2. How would you measure the soundness of funds employed by
a commercial bank?

4.2. TYPES OF SECURITIES
Types of Securities
Banks collect surplus funds available with the general public

by way of deposits and lend the same to the needy individuals or
legal entities for their personal use or investment purposes.
Banks, before advancing loans and advances to their customers,
should make sure that it will get the loan back in time. Since
many borrowers default in repaying loans, borrowers need to
deposit assets or give a guarantee as a testimony of the assurance
of repayment.
This asset or guarantee is called the security of credit. Security
is something of value given to a lender by a borrower to
support his or her intention to repay. In the case of a mortgage,
the security is the property that the loan is being used to
purchase. Oxford Dictionary of Finance and Banking defines the
term security as “an asset or assets to which a lender can have
recourse if the borrower defaults on any loan repayments.”
Hence security is what the borrower puts up to guarantee
repayment of the loan. It may include tangible, intangible assets,
or even a personal guarantee. Such secured advances provide a
sense of protection to the banker as it creates a charge over the
securities in his favour. In case of non-payment, the banker is
entitled to dispose of them and realize his debt.
CANNONS OF A GOOD SECURITY
The cannons of good banking security are as follows;
The validity of the title: When a customer submits any asset
as security for a loan, the banker must ascertain the validity of the
title of the borrower. If he gets a defective title, he cannot enforce
his right against the debtor. Also, it must be duly transferred to
the bank by executing appropriate documents.
Liquidity of the asset: The asset submitted as security must
have good liquidity. i.e., it should be readily marketable without
any loss. Therefore the banker should accept only liquid assets
such as manufactured goods, raw materials, gold, etc.
Stable in value: The value of the security should be steady
and stable. It should not fluctuate widely.
Transferable: The security should be easily transferable. For
example, a document of title to goods is easily transferable by
endorsement and delivery, while in the case of immovable
property, it is difficult.
Clean and marketable: The security should have a clear title
and should be free from encumbrances. It the title is not clear,
charging of security becomes defective, and disposal of the
property on a subsequent date would become difficult.
Free from disabilities: A banker should see before accepting,
that the security is free from any disability. For example, he
should not accept securities crippled with certain limitations such
as partly paid-up shares, LIC policy without surrender value, etc.
The banker does not lend to the full value of the security
offered by the borrower. He retains a margin over it. The margin
is the difference between the market value of the security
provided and the loan granted. Banks keep different percentages
of margin on different assets. For example, a higher margin is
maintained for equity shares than preference shares. Generally,
25percent on preference shares and 40% on equity shares are
retained as margin. In the case of government securities, gold
bullion or gold ornaments, etc. 5% to 10% may be retained.
If the borrower fails to repay the debt within the time
specified, the banker after serving a reasonable notice, can sell the
securities and recover his dues. If the banker is unable to recover
the full amount from the sale proceeds, he can file a suit against
the borrower for the recovery of the balance within three years
from the date of sanction of the advance.
TYPES OF SECURITIES
The different types of assets accepted as securities for a bank
loan are as follows;
GOODS AS SECURITY
In the past, commercial banks did not consider goods as
security for bank loans for various reasons such as difficulties in
storage, transportation, risk of deterioration, etc. However, now,
more than 60% of the total bank advances are secured against
manufactured goods and agricultural produces.
Precautions: A banker while granting loans against goods
should take the following precautions;
1. The banker should ascertain the integrity of the borrower to
avoid any fraudulent dealings. For example, when he offers
100 bags of paddy as security, it is impossible to check all bags.
2. He should ascertain the title of the borrower to the goods by
inspection of the original invoice or cash memos.
3. He should see that the loan is not given for the speculative
purpose
4. He should have adequate market knowledge for the said
goods so that in case of default, he may quickly dispose of the
goods.
5. The goods must be kept in a safe and secured godown till the
time of repayment, and the banks’ name board may be affixed
outside.
6. Goods should be insured against all known risks upto their full
market value.
7. A charge may be created over the goods either by pledge or by
hypothecation. In the pledge, the goods or title to it is
delivered to the banker. When the borrower defaults, the
banker is entitled to sell the goods pledged, after issuing him a
reasonable notice.
In the case of hypothecation, neither the goods nor its
possession is transferred to the banker. Only a written
undertaking is taken from the borrower that the said good would
not be charged to any other bank until the current hypothecation
is discharged.
ADVANTAGES & DISADVANTAGES
Advantages: Goods as security have the following
advantages;
1. Goods are readily marketable and better than a bill of
exchange.
2. Goods are safe and reliable securities as they have a ready
market.
3. Loans against goods are made only for a short period because
of the seasonal character. Funds are not locked up for a long
time.
4. Evaluating the price of goods is easy as market trends and
reports are available for rice, wheat, pulses, etc. in newspapers.
5. Generally, banks accept necessary goods such as rice, sugar,
wheat, etc. as securities, whose price does not fluctuate widely.
Disadvantages: Goods have the following disadvantages;
1. Agricultural produces has a higher risk of deterioration.
2. The absence of proper standardization and branding may give
ample scope for fraud and adulteration. For example, rice of
various varieties may be mixed up.
3. Difficult to arrange a safe godown for storage and
supervision.
4. In the case of non-repayment of loans, disposing of goods of
large quantities in a short period would be much difficult for
a banker.
5. Transportation cost of carrying goods to other markets is high.
DOCUMENTS OF TITLE TO GOODS
AS SECURITY
The bankers, while giving loans against goods, in most cases,
instead of taking the possession of the goods, accept only the
documents of title to goods (such as a bill of lading, warehouse
receipt, etc.) as security. These documents are used in the
ordinary course of business as proof of the possession or control
of goods represented by the documents. They confer on the
bonafide possessor either a right to receive goods represented by
such documents or to transfer them by endorsement and delivery.
Thus the document of title to goods itself is a symbol of goods.
The delivery of such a document, if endorsed, is equivalent to the
delivery of goods themselves. The documents are as follows;
BILL OF LADING AS SECURITY
The bill of lading is an important document used in foreign
trade. It is issued and signed by the master or by the authority of
the master of the ship. It serves as proof of the receipt of goods on
board. The shipping company undertakes to deliver the goods, in
the like manner and conditions as received, to the consignee or
his order.
In the bill of lading, the shipper undertakes to transport the
goods specified in the document to the destination. So it is a
contract of affreightment. It is not a negotiable instrument. But it
can be transferred by mere endorsement and delivery. The
delivery of the bill of lading is universally recognized as the
symbol of goods and its endorsement and delivery as the
symbolical delivery of goods.
Bills are usually drawn in sets of three on condition that “one
being accomplished its purpose, the others are to stand void.” To
avoid the risk of loss in transit, two copies are sent by two
different mails, and the shipper retains one copy. The person
presenting one of the three copies to the captain can take delivery
of the goods.
Precautions: A banker while granting loans against the bill of
lading should take the following precautions;
1. The banker should take all copies of bill of lading. Otherwise,
the customer may present anyone copy and take delivery.
2. The document should be endorsed in blank, and bankers need
not pay any freight and other charges on goods.
3. The banker should verify whether the consignee fully pays
the freight charges. Otherwise, the captain will have a right of
lien.
4. He should also check whether the insurance policy covering
all marine risks accompanies the bill of lading.
WAREHOUSE RECEIPT AS SECURITY
A warehouse keeper’s receipt or certificate is a document
issued by a warehouse keeper acknowledging that the goods
described therein are held on behalf of the person named therein
and awaits for his further instructions. It is merely a deposit
receipt and hence not transferable. Where a receipt is not
transferable, the banker should get a new receipt in his name.
Precautions: A banker while granting loans against a
warehouse receipt should take the following precautions;
1. The banker should not grant loans against warehouse receipts
issued by an unlicensed warehouse.
2. He should send an intimation in duplicate and request the
warehouse keeper to sign, acknowledge, and to return duly.
3. He must satisfy himself about the storage conditions of goods
by inspecting the warehouse.
4. He should obtain a declaration from the borrower that the
goods described therein are his own, and he will not take
delivery of the same by furnishing an indemnity or otherwise.
5. He should ensure that the goods under consideration are
insured and the premia, rent, and other charges are fully paid.
DELIVERY ORDER AS SECURITY
A delivery order is an order addressed by the owner of the
goods to the proprietor of a dock or warehouse, where the goods
are lodged, to deliver some or all the goods to a specified person
or his order. Till the delivery of goods is obtained, the ownership
of such goods vests with the person in whose name the goods
were originally lodged. The holder of the delivery order must
either take delivery of the goods or obtain a warrant or receipt
from the warehouse keeper or get his title to goods registered in
the books of the warehouse keeper. Otherwise, there is the
possibility of a second delivery order being issued, in the
cancellation of the first order.
Precautions: A banker while granting loans against a delivery
order should take the following precautions;
1. The banker should ascertain the reliability and respectability of
the borrower as well as the company issuing the delivery
order.
2. He should verify that the delivery order has been issued in
respect of goods stored in the warehouse and the order stands
registered in the name of the pledger.
3. He should get the delivery order registered in his name and
ensure that the order does not remain outstanding for a long
time.
RAILWAY RECEIPT AS SECURITY
A railway receipt is a document issued by the railway
company acknowledging the receipt of the goods and
undertaking to carry the goods delivered to a place mentioned
therein. It is not a negotiable instrument, but it can be transferred
by endorsement and delivery. The consigner draws a bill of
exchange on the consignee and gets it discounted with the
banker. The borrower encloses the railway receipt to his bill and
thus makes it a documentary instrument. The banker hands over
the railway receipt to the consignee either on payment or
acceptance of the bill.
Precautions: A banker while granting loans against a railway
receipt should take the following precautions;
1. The bill of only well-established parties should be discounted.
2. The railway receipt should be carefully examined to ensure
that it is genuine and not forged.
3. It should be duly endorsed in favour of the bank.
4. The bank should ensure adequate insurance cover, mainly
where the railway receipt covers consignments of perishable
and combustible goods; it should be insured for the full value.
5. He should ensure that there is no undue lag between the
dispatch of the goods and the negotiation of the bill
accompanied by the railway receipt.
6. If the receipt is not made out in the name of the bank as
consignee, the negotiating bank should instruct the collecting
bank to give notice to the railways (about the bank’s lien on the
goods) and not deliver the goods without the production of the
railway receipt.
7. If the railway receipt indicates that the goods are defective or
defectively packed or if the ‘freights are not fully paid,’ strictly
no advance should be given.
DOCK WARRANTS AS SECURITY
A dock warrant is a document issued by a dock company in
exchange for goods received. The document acknowledges and
describes the goods received. The dock company undertakes to
deliver them to the person named therein. The document can be
transferred by endorsement and delivery.
Precautions: A banker while granting loans against a dock
warrant, he should take the following precautions;
1. The integrity of a dock warrant as security depends on the
integrity and financial position of the borrower and the dock
company.
2. The banker should get himself registered as the owner of the
goods or should lodge with the dock company a ‘Stop order’ to
prevent the unauthorized dealing with the goods.
3. The banker should also ensure whether the company has any
lien on the goods for rent and other charges due.
GOVERNMENT SECURITIES
The principal forms of government securities are as follows;
Stock: A stockholder is given a certificate indicating the
amount of a specified loan held by him. The name of the
stockholder is entered in the books of the public debt office. The
certificates are not transferable by endorsement.
Bearer Bonds: A bearer bond certifies that the bearer is
entitled to the certain sum specified on the date indicated. The
bearer of the bonds possesses ownership. The title to the bonds is
transferred by mere delivery without any formality.
Promissory Notes: A promissory note contains a promise of
the President of India in case of Central Government and by the
Governor of the State in case of state government securities to pay
a specified sum of money to the holder of the note or to the last
endorsee on a specified date or after specific notice according to
terms of issue. It is a negotiable instrument in which the title may
be passed to others endorsement and delivery.
CORPORATE SECURITIES
The principal forms of corporate securities comprise the
ownership securities such as equity shares and preference shares and
creditorship securities such as debentures.
Advantages: Shares as security have the following
advantages.
1. Stocks and shares can be easily realized if the borrower is
unable to repay the debt.
2. Securities usually enjoy the stability of value. Gilt-edged
securities are less susceptible to changes even in times of
recession.
3. Investigation of the title involves no complication, as in the
case of real estates. The minimum and straightforward
formalities to be observed, facilitate the transfer of securities
easy and cheap.
4. Income received by way of dividend or interest can be
appropriated towards the debt, which automatically reduces
the liability of the borrower.
5. The market value of these securities can be readily ascertained
from quotations given in stock exchange reports or
newspapers.
Precautions: A banker while granting loans against equity
shares or preference shares, he should take the following
precautions;
1. The banker should ascertain the integrity of the issuing
company, its efficiency, goodwill, etc. by checking their
balance sheet, profit and loss account, etc.
2. The banker should select safe securities. Cumulative
preference shares are more reliable than ordinary shares.
3. No advance should be given against the partly paid shares or
against the unquoted securities which are not dealt with any
stock exchange.
4. No advance should be given against the shares of a private
company as their Articles of Association restricts the right of
the shareholders to transfer the shares.
5. The banker should see that the security offered for a loan is
included in the approved list.
6. The banker should create a charge over the securities in his
favour either by legal title or by equitable title.
DEBENTURES AS SECURITY
A debenture is a document issued by a company as evidence
of debt. It is an acknowledgment of the company’s indebtedness
to its holders. It may carry a predetermined rate of interest
payable at regular intervals. The principal is generally payable on
maturity, varying up to ten years. The amount of debenture is
usually secured by a fixed or floating charge on the company’s
assets.
Advantages: Debentures as security have the following
advantages.
1. Debentures give prior claims on the profits and assets of the
company.
2. Debentures are easily marketable.
3. The value and title of the borrower could be ascertained easily.
4. The transfer of debentures involves minimum expenses.
Precautions: A banker while granting loans against
debentures should take the following precautions;
1. The banker should prefer only secured debentures. Unsecured
debentures are considered only when the company is highly
creditworthy.
2. He should see whether the debentures are devoid of any prior
charge. Also, he should obtain a separate memorandum of
deposit duly signed by the authorized officer of the company
so that he may sue the company if required.
3. He should verify if the charge created on the assets is duly
registered with the Registrar of Companies within 30 days of
the creation of charge.
4. He should also check the borrowing powers of the company
and also whether the debentures are drawn in compliance with
the provisions of Memorandum of Association and the Articles
of Association.
5. It is also essential to inspect the company’s Register of
Mortgages and Charges and the Register kept by the Registrar of
Joint Stock Companies to see whether any prior charges have
been made. If registered securities are deposited, he should get
them transferred to his name.
MISCELLANEOUS SECURITIES
Banks may accept different assets such as (i) Land and
building, (ii) LIC Policies, (iii) Fixed deposit receipts, (iv) Book
debts (v) Supply bills, and (iv) Gold ornaments as security for a
bank loan.
LAND AND BUILDING AS SECURITY
Risks involved: The risks involved in accepting land and
building as security are as follows;
1. It is difficult to ascertain the title of the borrower to the
property to be mortgaged as the changes in ownership due to
frequent partitions or sale of land are not properly recorded.
2. Valuation of land and building is difficult, and the bank has to
rely on the surveyors, engineers, etc.
3. Since loans are given for a longer period, the banker finds it
difficult to meet current demands from customers.
4. A lot of formalities such as preparation of mortgage deed, its
registration, payment of stamp duty, etc. are to be completed.
5. Difficult to realize debt quickly in case the banker wants to
dispose of it when the borrower fails to repay the loan.
6. Also, the creation of a legal mortgage on land and building is a
costly affair.
Precautions: The banker while accepting land and buildings
as security should take the following precautions;
1. The banker should ascertain the financial capability of the
borrower as the real security is not the land and building but
only the business stability and financial soundness of the
borrower.
2. Valuation of the asset should be made with the help of
experienced architects and surveyors.
3. He should ensure that the borrower has a clear and absolute
title to the property by examining the title deeds.
4. He should also ascertain whether the property is freehold or
leasehold. A freeholder is the absolute owner of the estate and
has the power to deal with the asset whichever the way he
likes, whereas the leaseholder has to deal only within the
terms of the lease.
5. The loan is not given to the full value of the asset. A high
margin is maintained on the asset value as such assets are less
liquid, prone to price fluctuations, etc.
6. He should ensure that the asset is insured to the full value of
the property, and the borrower fully pays the insurance
premia, house tax, and other charges.
7. If the banker is satisfied with the title deed, value of the
property, insurance, etc. he may get the asset mortgaged
(legal or equitable) in the name of the bank.
LIFE INSURANCE POLICY AS SECURITY
Life insurance is a contract between a person known as
insured and the insurance company called the insurer. The
insurance company undertakes to pay, to the person for whose
benefit the insurance is made, a certain sum of money or annuity
on the death of the person whose life is insured. A life insurance
policy may be an(i) whole life policy or an (ii) endowment policy.
In a whole life policy, the premia are paid throughout the life
of the insured person, and the policy amount becomes payable on
the death of the insured only. In case of an endowment policy, the
premia area payable during the stated period or till death
whichever is earlier. The policy money is payable on the expiry of
the period or on the death of the insured, whichever is earlier.
Precautions: The banker while accepting a life insurance
policy as security should take the following precautions;
1. The banker should prefer endowment policy as it matures
within the stipulated time.
2. He should see that the holder of the policy has an insurable
interest in the life of the assured, especially when a policy is
taken by a third party on the life of another individual, for
example, parent vs. child, the employer on the employee, etc.
3. He should verify whether the age is admitted by the insurance
company, as at the time of payment of the claim, the company
would demand to satisfy itself with the age of the insured.
4. He should ensure that the policy is in force, has no
encumbrance, and the premiums are paid up to date. The
policy should accompany the last premium receipt.
5. The surrender value should be ascertained from the insurance
company before the advance is considered. Also, a 10% to 15%
margin is to be maintained on the surrender value.
6. The borrower must assign the policy in favour of the banker
either by endorsement on the policy itself or by making a
separate document properly stamped and executed by the
insured.
FIXED DEPOSITS RECEIPT AS SECURITY
The fixed deposit receipts repayable after the expiry of a
certain period are excellent security to obtain bank loans. The
depositor who is in urgent need of money can seek loans by
pledging the fixed deposit receipt. It has no problem such as price
fluctuation, creation of charge, etc.
Precautions: The banker while accepting fixed deposit receipt
as security should take the following precautions;
1. The banker should grant advance only to the person in whose
name the deposit stands. If it stands in two or more names, the
advance can be given only after obtaining a letter of authority
duly signed by all.
2. No advance can be given in the name of a minor. In
exceptional cases, it can be given in a minor’s name only after
obtaining a declaration from the guardian stating that the
amount will be utilized for the benefit of the minor.
3. Banks may allow advances on the security of the third party
fixed deposit receipts issued by their bank. The banker should
get the receipt duly discharged by the owner of the receipt and
a letter of request signed by him authorizing the bank to hold
the receipt as security for the advance.
4. Advances may also be given on the fixed deposit receipts
issued by another branch of the same bank. He should
ascertain that no lien is already noted against the deposit
receipt. After the advance is made, the banker should intimate
the issuing branch to note and confirm its lien. Also, a letter
should be taken from the borrower addressed to the issuing
branch to remit the proceeds to the lending branch on the
maturity of the deposit.
5. No advance should be given on the fixed deposit receipts
issued by another bank.
6. The accepted FD receipts should be discharged by the
depositor putting his signature across the revenue stamp. Also,
the banker should obtain a memorandum of pledge signed by
the borrower, which authorizes him to appropriate the amount
of deposit on maturity towards the loan account.
7. The bank’s lien should be noted in the fixed deposit receipt
and ledger and also on the face of the receipt under the
signature of an authorized bank officer.
8. As per the RBI directive, the rate of interest chargeable on loan
against the FD receipt should be at least 2% more than the rate
of interest payable on such a deposit.
9. The advances against FD receipts are automatically adjusted
on maturity from the proceeds of the deposits. If it is paid in
advance, the receipt may be returned to the borrower after the
cancellation of the discharge thereon.
BOOK DEBTS AS SECURITY
Book debts are debts owing to a business concern. They
represent the money due for goods sold or service rendered to
some persons or money due under a bill. Sometimes a customer
may seek an advance on the security of his book debts, which are
not considered to be actionable claims in India. Section 130 of the
Transfer of Property Act, permits the assignment of an actionable
claim to anyone except to a judge, a legal practitioner, or an
officer of a court of justice. Book debts are suitable securities for a
bank advance because of the following reasons;
 The value of a security depends only on the ability of debtor’s
repaying capacity.
 The value may be reduced by the debtor’s right to set-off
against the customer.
 The probable bad debts may also bring down the value of the
security.
 There are difficulties and delays in realizing the debts.
Precautions: The banker while accepting book debts of
reputed and most reliable businessmen as security, should take
the following precautions;
1. The banker must get himself satisfied with the validity of the
claim and the solvency of the party owing money to the
borrower.
2. He should get a legal assignment of the book debt, in his
favour. No specific form is necessary. It may be a simple form
of an order addressed to the debtor asking him to pay the debt
to the banker.
3. He should forward a notice of assignment to the debtor to
make him aware.
4. He should also take an undertaking from the borrower that he
will hand over the amounts directly received from the debtor
to him.
5. When a book debt of a joint-stock company is accepted, a
charge must be registered with the Registrar of Joint Stock
Companies.
GOLD ORNAMENTS AS SECURITY
Advance against gold ornaments is profitable and at the same
time, dangerous too. Earlier banks were restricted from lending
against such securities under the Gold Control Act, 1968.
However, now commercial banks and many private financial
institutions lend money against gold ornaments.
Precautions: The banker while accepting gold ornaments as
security, should take the following precautions;
1. The banker must lend money against gold ornaments only to
his customers. The non-customers asking for a loan against
gold ornaments should be introduced appropriately to ensure
their bonafide ownership to such ornaments.
2. He should ensure that the pledger is the absolute owner of the
jewels.
3. If possible stone-studded ornaments should be avoided.
4. Sufficient margin (generally up to 25%) should be retained.
5. A demand promissory note is to be obtained from the
borrower in addition to the ornaments.
6. On repayment of the loan, security pledged is to be returned to
the borrower. He should get an acknowledgment to the effect
that the ornaments were returned intact.
7. If the borrower fails to repay, he may put the jewels to
auction, after giving him sufficient notice. If the sale proceeds
fall short of the outstanding loan, he may proceed against the
borrower on the strength of the demand promissory note.
SUPPLY BILLS AS SECURITY
Government and semi-government bodies are the biggest
buyers of goods. They invite tenders from the public for the
supply of goods. A party whose bidis accepted gets an order for
the supply of goods. Similarly, the government contract work is
given to contractors by inviting tenders. The supplier dispatches
the goods to the departments concerned by rail or road after
getting an inspection note certified by a government officer. After
that, the supplier prepares a bill for the goods supplied by him.
Such bills are known as supply bills. There are two types of bills,
namely the (i) interim bill for 80% to 85% of the value of goods
supplied and (ii) final bill for the remaining value. Usually,
interim bills are submitted as security for a bank loan.
The railway receipt or bill of lading for the relative goods is
sent directly by the supplier to the relative department, and the
bill for the amount is sent for collection through a bank. It is on
the basis of this bill the supplier seeks an advance from the bank.
Supply bills are not bills of exchange. They represent a debt
arising out of a bonafide supply of goods.
Precautions: The banker while accepting supply bills as
security should take the following precautions;
1. The banker must lend against the supply bills of the only
reliable and reputed borrower.
2. The original contract entered between the government and
borrower should be scrutinized to ascertain the terms and
conditions and also to know whether the borrower has
complied with those conditions.
3. He should get an irrevocable power of attorney executed by the
borrower in his favour authorizing him to collect the bills in
respect of supplies referred to that. Also, he should get it
registered with the government department concerned.
4. He should obtain an undertaking from the borrower to pay the
bank the amount of bill, if any, received by him directly.
5. The bank should receipt the supply bills on a revenue stamp. It
should also be endorsed by the supplier in favour of the
banker or his order.
6. He should maintain an adequate margin (10% to 25%)
7. The bills should be forwarded to the respective department for
payment together with a covering letter stating about the
bank’s advance against the same.
8. The banker should keep a watch on the payment of supply
bills. If it remains unpaid for a longtime the advance should be
cancelled, and the borrower should be asked to make the
payment.
SELF-ASSESSMENT
Fill in the blanks
1. The bill of lading is an important document used in
……….trade.
2. A debenture is a document issued by a company as an
evidence of ……….
3. ……… are the debts owing to a business concern, for goods
sold or service rendered by it.
True or False?
4. The bill of lading is a negotiable instrument.
5. In a whole life policy, the insurance premia area payable
during the stated period or till death, whichever is earlier.
Answers: (1) Foreign (2) Debt (3) Book debts (4) False (5) False
Questions
1. Discuss the cannons of good security.
2. Examine the advantages and disadvantages of accepting
goods as security.
3. What is a bill of lading? What are the precautions to be taken
before accepting it as security?
4. What are the risks involved in accepting land and buildings as
security? List out the precautions to be taken in this case.

4.3. MODE OF CREATING CHARGES
Mode of Creating Charges
A wide range of securities such as goods, shares, life policies,

and title deeds are offered to banks as cover for a loan. In case the
borrower is unable to repay the loan, the banker can fall back
upon the securities. To make the securities available to the
banker, in case a customer defaults, a charge should be created on
the asset offered as the security. Creating a charge means, making
it available as a cover for an advance. The method of charging
should be legal, perfect, and complete. The usual ways of creating
charges are as follows; (i) Lien, (ii) Pledge, (iii) Mortgage, (iv)
Assignment, (v) Hypothecation.
LIEN
Lien is the right of a creditor to retain the properties
belonging to the debtor until the debt due to him is repaid. Lien
gives a person only a right to retain the possession of the goods
and not the power to sell them. A banker’s lien is a general lien
which tantamount to an implied pledge. It confers upon the
banker the right to sell the securities after serving reasonable
notice to the borrower. A lien may be a particular lien or a general
lien.
A particular lien confers a right to retain the goods in
connection with which a particular debt arose. i.e., it applies to
one transaction or certain transaction only. In contrast, a general
lien or a banker’s lien gives a right to a person to retain the
goods not only in respect of a particular debt but also in respect of
the general balance due from the owner of the goods to the
person exercising the right of lien. Since it extends to all
transactions, it is more extensive than a particular lien.
A BANKER’S LIEN
A Banker’s Lien is always a general lien. A banker has a right
to exercise both kinds of lien. His general lien confers upon him
the right to retain the securities in respect of the general balance
due to the customer. A banker can exercise his right of lien in the
following circumstances;
 There must not be any agreement inconsistent with the right of
lien.
 The property must come into the hands of a banker in his
capacity as a banker.
 The possession should be lawfully obtained in his capacity as a
banker.
 The property should not be entrusted to the banker for a
specific purpose.
SPECIAL FEATURES OF A BANKER’S LIEN
A banker’s lien as an implied pledge: A lien not only gives a
banker the right to retain the goods and securities but also to sell
them (in exceptional circumstances) to recover his dues when the
customer does not take any step to clear his arrears even after
given a notice with reasonable time. This right of sale usually is
available only in case of pledge, and therefore, a banker’s lien is
considered to be an implied pledge.
Lien on negotiable and quasi negotiable securities: A banker
has a lien on all securities entrusted to him in the capacity of a
banker. The right of banker’s lien applies even to instruments that
are not the property of the customer. It is so because the banker
becomes a holder in due course, provided he has acted in good
faith. The same is applicable for quasi negotiable instruments
such as the policy of insurance, share certificates, etc.
No general lien on safe custody deposits: Bankers (as a
bailee) receive valuables such as sealed boxes, parcels, securities,
documents, and jewellery for safe custody. Such articles are left
with the bankers for a specific purpose, and they have no general
lien on such safe custody deposits. However the banker can
exercise his particular lien on them for the locker charges due.
No lien on documents entrusted for a specific purpose:
When bankers (as a trustee) are entrusted a bill of exchange or
money or any other document for a special purpose, they cannot
extend their right of lien on such items. It is so because when they
are entrusted for a specific purpose, a banker becomes a trustee
until that purpose is fulfilled. Hence he cannot avail of his right of
lien.
No lien on articles left by mistake: A banker cannot exercise
any lien in respect of the property (jewellery, securities, etc.),
which comes into his hands by mistake as they unlawfully came
into his hands.
Securities not taken back after repayment of the loan: A
banker can exercise a lien on securities not taken back after
repayment of loan because these securities are supposed to be
redeposited with him.
Bonds and coupons: Lien applies to bonds and coupons that
are deposited for collection, as the banker is merely acting as a
collecting agent. However, if the bonds and coupons are left in
safe custody, a banker’s lien cannot cover them.
No lien until the due date of loan: When a specific amount is
given as loan for a definite period, a lien arises until the due date,
as no debt arises till that date. Similarly, a banker cannot retain
any money belonging to the customer against the discounted bills
which have not yet been matured as no liability arises till the date
of maturity.
No lien on deposits: A banker has a lien upon the deposit
account of a customer in respect of a loan account due to the same
customer. However he has a right to set off one account against
the other. A banker has no lien on a stolen bond given for safe if
the real owner claims it before the sale is effected. Similarly, he
has no lien on the security of the fixed deposit receipt, which has
not been endorsed and discharged on maturity.
Negative lien: In case of a negative lien or non-possessory
lien, the securities do not have the creditor. But the debtor gives
an undertaking that he will not create any charge on those
securities in question (until the loan is repaid), without the prior
approval of the creditor. Such a letter of the undertaking must be
duly stamped.
PLEDGE
Section 172 of the Indian Contract Act 1872 defines a pledge
as, “the bailment of goods as security for payment of a debt or
performance of a promise.” Thus we know that, (i) a pledge occurs
when goods are delivered for getting advance, (ii) the goods
pledged will be returned to the owner on repayment of the debt,
and (iii) the goods serve as security for the debt. A pledge may be
in respect of goods, stocks, shares, documents of title to goods,
and any other movable property. The person who transfers the
goods is called pledger, and to whom it is transferred is called the
pledgee.
ESSENTIALS OF PLEDGE
Delivery of goods: Delivery of goods is essential to complete
a pledge. It may be physical or symbolic. A physical delivery
means the physical transfer of goods from a pledger to the
pledgee, whereas a symbolic delivery requires no actual delivery
of goods. Instead the possession of goods must be transferred to a
pledgee by (i) delivery of the warehouse key in which the goods
are stored, (ii) delivery of the document of title of goods like bill
lading, railway receipt etc, (iii) delivery of transferable warehouse
warrant if the goods are kept in a public warehouse.
Transfer of ownership: The ownership of goods remains with
the pledger. The possession of the goods vests with pledgee till
the loan is repaid.
Right in case of failure to repay: if the pledger fails to repay
within the stipulated time, the pledgee may (i) sell the goods
pledged after giving a clear, specific and reasonable notice, (ii) file
a civil suit against the pledger for the amount due, (iii) file a suit
for the sale of the goods pledged and the realization of money
due to him.
RIGHTS OF A BANKER AS A PLEDGEE
 The pledgee has the right to retain the goods until he obtains
dues in debt, interest and other expenses for its possession
and preservation.
 The pledgee can retain goods only for the particular debt and
not for any other debt.
 He can claim any extraordinary expenses incurred by him for
the preservation of goods.
 If the pledger fails to repay, the pledgee may (i) file a suit to
recover the amount, (ii) sue for sale of goods, (iii) sell the
goods after giving reasonable notice.
 If a third person wrongfully deprives the pledgee of the use of
the possession of the goods bailed, he has the remedies
against the third person as the owner would have had. The
pledgee may file a suit for conversion or damage.
 If the pledgee suffers any damage as a result of non-disclosure
of any fault by the pledger, the latter is responsible for it.
 If the pledgee suffers loss, when the title of the pledger to the
goods pledged is defective, the pledger shall be responsible.
DUTIES OF A BANKER AS A PLEDGEE
 The pledgee is bound to take that much care of the goods
pledged in which an ordinary prudent man would make of
his goods under similar circumstances.
 The pledgee must make use of the goods pledged according
to the agreement between the two parties. If he makes any
unauthorized use, the pledger is entitled to terminate the
contract and may claim damages, if any.
 The pledgee must deliver the goods to the pledger on
repayment of the debt.
 Also, he should deliver to the pledger any increase or profit
which may have occurred from the goods bailed (Ex:
dividend on shares)
 The pledgee is responsible for the pledger for any loss,
destruction, or deterioration of the goods if the goods are not
returned at the proper time.
MORTGAGE
A mortgage is a method of creating a charge on immovable
properties like land and building. Section 58 of the Transfer of
Property Act, 1882 defines a mortgage as, “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 agreement which may give rise to a
pecuniary liability”.
CHARACTERISTICS OF MORTGAGE
 A mortgage can be done on an immovable property such as
land and things attached to the land, such as buildings, trees,
etc.
 A mortgage is a transfer of an interest in specific immovable
property (Ex: the right to redeem the property mortgaged)
 The objective of a mortgage must be to secure a loan or
performance of a contract, which results in monetary
obligation. Transfer of property made for other purposes (ex:
to liquidate old debt) is not a mortgage.
 The property mortgaged should be a specific one, which can
be identified by size, location, boundaries, etc.
 The actual possession may be rest with the mortgager.
 The mortgagee releases his interest in the property on
repayment of all dues by the mortgager.
 If the mortgager fails to repay, the mortgagee gets the right to
recover the debt out of sale proceeds of the property.
FORMS OF MORTGAGE
Section 58 of the Transfer of Property Act contains the
following six mortgages;
Simple mortgage: The mortgager does not deliver the
possession of the property but binds himself personally to pay the
money. If he fails to repay, the mortgagee does not have the right
to sell the property. Instead, he may apply to the court for
permission to sell the property or may file a suit for recovery of
the total debt.
Mortgage by conditional sale: The mortgager ostensibly sells
the property to the mortgagee on the conditions, (i) the sale shall
become void on payment of debt, (ii) the mortgagee will
retransfer the property on repayment, (iii) the sale shall become
absolute if the mortgager fails to repay on certain date, (iv) the
mortgagee has no right of sale but can sue for foreclosure (loss of
right to possess)
Usufructuary mortgage: The mortgager delivers the property
or binds himself to deliver the property to the mortgagee. The
mortgagee can neither sue for foreclosure nor the sale of the
property but can only retain the property until he gets all dues.
He is entitled to receive the rents and profits relating to the
mortgaged property until the debt is fully repaid, and
appropriate the same in place of the interest due or principal or
the both.
English mortgage: The mortgager binds himself to pay the
mortgage money on a certain date and also transfers the property
absolutely to the mortgagee so that the mortgagee is entitled to
take immediate possession of the property. The property is
retransferred on repayment of debt. On failure of repayment, the
mortgagee can sell the property without court permission.
Deposit of title deeds mortgage (equitable mortgage): The
debtor delivers to a creditor or his agent the document of title to
immovable property, to create a security thereon. Such mortgages
are restricted to towns of Chennai, Mumbai, Kolkata and other
towns notified by the state government for this purpose in the
Official gazette. It does not require any registration.
Anomalous mortgage: A mortgage that does not fall in any of

the above-said five types of mortgages could be called as an
anomalous mortgage. Usually, it is made by a combination of 2 or
more of the above-said mortgages and can be effected according
to the terms and conditions as agreed by the mortgager and the
mortgagee.
RIGHTS OF MORTGAGER
 Right of redemption: The mortgager has a right to redeem
the property on repayment of debt on the due date.
 Accession to property: During the possession of the property,
if the mortgagee has voluntarily made any improvement in it,
the mortgager is entitled to all such additions or improvement
on redemption, unless there is any contract to the contrary.
 Right to transfer to the third party: The mortgager may
require the mortgagee to transfer the property to a third party
instead of retransferring to him.
 Right to inspection: The mortgager has the right to inspect
and make copies of all documents of title in the custody of
mortgagee.
RIGHTS OF MORTGAGEE
 Right to sue for money: The mortgagee has the right to file a
suit for money when (i) the mortgager binds himself to repay,
(ii) the property is wholly or partly destroyed, security
rendered is insufficient, (iii) mortgagee is deprived wholly or
partly his security by wrongful act of the mortgager, (iv)
mortgager fails to deliver the property as agreed.
 Right to sale: In case of simple, English, and equitable
mortgage, the mortgagee has the right to sell the property
after filing a suit and getting a decree from a court. As per
Section 69 of the Transfer of Property Act, under certain
circumstances, a mortgagee has the right of sale even without
court intervention.
 Right of foreclosure: The mortgagee has a right to obtain a
court decree for foreclosure against the mortgager, where the
mortgager is debarred of his right to redeem the property.
This is allowed in (i) a mortgage by a conditional sale and (ii)
anomalous mortgage.
 Right of accession to property: If any addition is made to the
mortgaged property, the mortgagee is entitled to such
addition for security provided there is no contract to the
contrary.
 Right of possession: The mortgagee is entitled to the
possession of the mortgaged property as per the terms of the
mortgage deed. Such a right is available in the usufructuary
mortgage.
SUB-MORTGAGE
A sub-mortgage is created when the mortgagee gives the
mortgaged property as security for the advance. The mortgaged
security is the property of the mortgagee, and so he has the right
to remortgage for securing loans. The sub-mortgage is placed in
the position of the original mortgagee and entitled to receive the
mortgage money, sue for the property, and realize the security.
Therefore, a sub-mortgage is also known as ‘mortgage of the
mortgagee.’
A borrower can legally create any number of mortgages on
his property. But the mortgage will rank in priority according to
the dates of the mortgage. For example, a property is mortgaged
on 1st January 2019 in favour of A for Rs.10, 000, 1st February 2019
in favour of B for Rs.9, 000 and 1st March 2019 in favour of C for
Rs.8000, Mr. C, by redeeming the prior mortgage of A, is not
entitled to tack to the first mortgage. As per Section 93 of Transfer
of Property Act, no subsequent mortgagee by paying off a prior
mortgage acquires any priority in respect of his original security.
ASSIGNMENT
Assignment means the transfer of any existing or future right,
property, or debt by one person to another person. The person
who assigns the property is called the assignor, and the person to
whom it is transferred is called the assignee. Usually, assignments
are made of actionable claims such as book debts, insurance
claims, etc. In the banking business, a borrower may assign to the
banker (i) the book debts, (ii) money due from the government
department and, (iii) insurance policies.
Assignments can be (i) legal assignments or (ii) equitable
assignments. A legal assignment is an absolute transfer of
actionable claims. The assignor informs his debtor in writing
intimating the assignee’s name and address and signs the
document. The assignee also gives notice to the debtor and seeks
confirmation of the balance due. The assignee can sue in his name
or can give a good discharge for the debt without the concurrence
of the assignor. An equitable assignment is one that does not
fulfill all the above requirements.
HYPOTHECATION
The mortgage of moveable properties (such as goods, raw
materials, goods in progress, etc.) for securing a loan is called
hypothecation or ‘Open Loan Facility.' For example, borrowing
against stocks in a godown, showroom, motor vehicles, vans, etc.,
is made more accessible under this method. The significant
characteristics of hypothecation are as follows;
 It applies to movable goods, machinery, book debts, etc.
 The possession and ownership remain with the borrower.
 A deed of hypothecation creates a charge.
 The borrower gives an undertaking to provide the right to
possession to the bank when required.
 The borrower submits the stock statements periodically.
 The banker has a right to inspect the security at any time.
PRECAUTIONS
TO BE TAKEN BY A BANKER
The banker should take the following precautions in case of
hypothecation;
 He must get the stock statements periodically with the
borrower’s declaration for the title to goods, quantity, quality,
etc.
 An undertaking from the borrower that he has not
hypothecated the same property to any other bank.
 He must obtain a letter of hypothecation containing several
clauses to protect his interest under all circumstances.
 He should insist on the borrower to insure the goods against
all risks and the policy endorsed/assigned in the bank’s
favour.
 A board reading “Stock Hypothecated to X Bank” should be
displayed in the place where goods are stored.
LAYAWAY SALE
The layaway sale is the sale of any merchandise, allowing the
buyer to pay some amount initially and settle the full price later
before taking possession. In the interim, the seller earmarks the
item for the buyer for delivery on an agreed future date upon full
payment being made. The essential features are as follows;
 It is applicable to mostly for items traded by large retail
stores.
 The buyer does not have cash resources for the full down
payment, and hence only some initial cash is paid.
 An undertaking is executed by the buyer to settle the full
amount on a future date.
 Till the full payment is made, the seller keeps the selected
items separate from other saleable goods.
 Initial cash payment, which may be made is free of any
interest payment by the seller.
 On full payment, the goods are handed over to the buyer.
Banks would not lend against stocks under layaway sale form
credit risk angle. However, since large retailers would encourage
the layaway sale, the banks, while extending working capital
finance to such borrowers, should take exceptional care both at
the pre-sanction as well as post-disbursement monitoring and
control stages. The layaway sale is reportedly working well in
many countries in retail business. It is expected to suit well to the
Indian conditions also. The bank lending system cannot overlook
the element of layaway sales. The provisions of ‘agreement for
sale’ can be applicable for layaway sale in India as they provide
the scope of transfer at a later time.
SELF-ASSESSMENT
Fill in the blanks
1. Creating a ………means, making it available as a cover for an
advance.
2. ……….. is the right of a creditor to retain the properties
belonging to the debtor until the debt due to him is repaid.
3. A Banker’s Lien is always a ………. lien.

True or False?
4. The person who transfers the goods is called pledger, and to
whom it is transferred is called the pledgee.
5. A mortgage is a method of creating a charge on immovable
properties like land and building.
6. An equitable assignment means an absolute transfer of
actionable claim.
Answers: (1) Charge (2) Lien (3) General (4) True (5) True (6) False
Questions
1. What is a lien? List out the distinctive features of a banker’s
lien.
2. Discuss the rights and duties of a banker as a pledgee.
3. What are the various forms of mortgage?

4.4. BANK GUARANTEE
Bank Guarantee
Generally, loans and advances are made against tangible

securities. When a customer has no tangible security to offer or
when the security submitted is inadequate, a guarantee is
demanded by the banker. Section 126 of the Indian Contract Act,
1872 defines a contract guarantee as “a contract to perform the
promise or discharge the liability of a third person in case of his default.”
A guarantee is a promise by a third person to the lender for
the present or future debt of the borrower. The person who gives
the guarantee is called a surety or guarantor. The person to whom
the guarantee is given is called a creditor or beneficiary. The
person in respect of whose default the guarantee is given is called
the principal debtor.
ESSENTIAL FEATURES OF A GUARANTEE
The essential features of a contract of the guarantee are as
follows;
 The guarantor is liable when the principal debtor fails to repay.
 A guarantee may be either in oral or written. But banks,
however, would do not accept a verbal guarantee.
 A guarantee may be either (i) a specific guarantee or (ii) a
continuing guarantee.
 A specific guarantee covers a single transaction that comes to
an end when the specific promise is fulfilled.
 A continuing guarantee can be revoked at any time by the
surety as to future transactions by serving a notice. However,
the guarantee would bind him to all previous transactions.
 Like any other contract, a guarantee must be supported by
lawful consideration between three parties creditor, principal
debtor, and surety.
 The parties to the contract of guarantee must be competent to
enter into a contract.
 The contract must be entered into with free consent, i.e.,
without coercion, undue influence, fraud, misrepresentation,
or mistake for a lawful object. Such a guarantee is voidable.
INDEMNITY
A contract indemnity is defined as, “a contract by which one
party promises to save the other from the loss caused to him by
the conduct of the promise himself or by the conduct of any other
person.” The person who makes such a promise is called the
indemnifier, and the other person is called the indemnified or
beneficiary. For example, X, who has lost a fixed deposit receipt
issued by Canara Bank, may claim the amount by furnishing an
indemnity bond. By this act, X promises to reimburse the bank
any loss that may be caused to it for paying the amount without
the receipt. The contract of fire insurance and marine insurance
are contracts of indemnity.
DIFFERENCE BETWEEN
GUARANTEE AND INDEMNITY
Number of parties: In case of guarantee, there are three
parties’ namely principal debtor, creditor, and surety, whereas an
indemnity has only two parties, namely indemnified and
indemnifier.
Number of contracts: In case of guarantee, there are two
contracts, one between the principal debtor and the creditor, and
the second between the surety and the creditor whereas, in a
contract of indemnity, there is only one contract between the
indemnifier and the beneficiary.
Request: In case of guarantee, the guarantor undertakes his
obligation at the request, express or implied of the principal
debtor, no such request is necessary for respect of an indemnity.
Nature of liability: In a contract of guarantee, the liability of
the principal debtor is primary, and that of surety is secondary.
The person giving an indemnity is primarily and independently
liable.
Purpose of contracts: A contract of guarantee is to provide
necessary security to the creditor against the loan, but a contract
of indemnity is generally made for reimbursement of loss.
Right of parties: The surety has the right to recover from the
principal debtor the amount paid by him, but a contract of
indemnity is generally made for reimbursement from anybody
else.
Nature of risk: The surety agrees to discharge the existing
liability of the principal debtor. So, it is a subsisting risk. The
indemnifier promises to save the indemnified against the risk of
loss happening in the future. So it is a contingent risk.
RIGHTS OF A GUARANTOR
A guarantor has the following rights;
Right to revoke continuing guarantee: The surety has the
right to withdraw at any time a continuing guarantee as to future
transactions, by giving notice of such revocation to the creditor. It
may also get revoked on the death of the guarantor if there is no
contract to the contrary.
Right of subrogation: When the principal debtor defaults, the
surety discharges the liability to the creditor and gets all rights
possessed by a creditor against the debt. This is called the right of
subrogation.
Right to claim indemnity: In every contract of guarantee,
there is an implied promise by the principal debtor to indemnify
the surety. The surety has the right to recover from the principal
debtor the amounts which he has rightfully paid under the
contract of guarantee.
Right to know the extent of liability: The guarantor can call
upon the creditor to inform him of the amount for which he is
liable. The creditor can inform the amount up to which he is
responsible, but he should not disclose the account of the
principal debtor.
Right against co-sureties: When two or more persons stand
as sureties for the same debt, they are termed as co-sureties. All
they are liable as between themselves, to pay each an equal share
of the whole debt, or for that part of which remains unpaid by the
principal debtor.
LIABILITIES OF A GUARANTOR
Where the parties to the contract do not agree as to the extent
of the liability or the surety does not put up any limit on his
liability at the time of entering into a contract, the liability of the
surety will be co-extensive with that of the principal debtor.
Whatever amount a creditor can legally claim from the principal
debtor, including interest, damage, etc., the same amount can be
recovered from the surety. The liability of the surety arises
immediately on the default of the principal debtor. The creditor is
not bound to give any notice to this effect.
DISCHARGE OF SURETY
A surety is discharged from his liability in the following cases;
Death of a surety: The death of the surety brings an end to a
continuing guarantee. Notice of death need not be given to the
creditor.
Discharge on the variation of terms: The guarantor is
discharged from his liability on variation in terms of the contract
between the principal debtor and the creditor, provided such
variation has been made without the surety’s consent.
Discharge by the release of the principal debtor: The surety
is discharged by any contract between the creditor and the
principal debtor by which the principal debtor is released or by
any act or omission of the creditor the legal consequences of
which will discharge the principal debtor.
Discharge by composition: If the creditor makes a
composition with the principal debtor or gives times to repay or
agrees not to sue the principal debtor, the surety is discharged,
unless the guarantor agrees to such composition.
Discharge by creditors’ acts or omissions: If the creditor does
any act which is inconsistent with the rights of the surety or fails
to do his duties, resulting in surety’s eventual remedy against the
principal debtor is impaired, the surety is discharged.
Loss of security: When the creditor loses or parts with any
security given to him at the time of contract of guarantee, without
the consent of the surety, the latter is discharged from the liability
to the extent of the value of the security
RIGHTS OF A CREDITOR AGAINST SURETY
A creditor has the following rights against the surety;
 As soon as the liability arises, the creditor is entitled to
demand immediate payment from the surety. He can sue the
surety even without proceeding against the principal debtor.
 The creditor is entitled to exercise his right of general lien
either on balance in the account of the surety or on the
securities in his possession.
 If the surety becomes insolvent, the creditor has the right to
recover the dues even from the estate of the insolvent surety.
 In the case of co-sureties, the creditor is at liberty to proceed
against anyone of them for the whole debt.
PRECAUTIONS TO BE TAKEN
Precautions to be taken while accepting guarantee are as
follows;
1. The banker should enquire about the financial position, ability
to redeem promise, and the integrity of the proposed
guarantor.
2. He should examine the capacity of the guarantor to enter into
a contract of guarantee.
3. The banker should not approach any person to give a
guarantee for an advance given to any borrower.
4. A banker should prefer a continuing guarantee to a specific
guarantee. He may even ask the customer to deposit some
collateral securities if the guarantee covers only a part of the
loan.
5. The execution of the contract of guarantee follows the
banker’s satisfaction over the surety’s financial stability and
capacity to contract. The letter of guarantee should be signed
in the presence of an officer of the bank.
6. A guarantee is not a contract of "Uberrimae Fidei." So, the
banker is under no obligation to disclose the material facts
about the borrower voluntarily.
7. However he should be prepared to explain specifically and
accurately when the surety asks any question regarding
nature and effect of any clause given in the contract.
8. In the case of joint and several liabilities, no advance should
be made until the signatures of all the proposed guarantors
are obtained.
9. The banker from the guarantor should obtain periodical
confirmation of the guarantee.
10. When a banker receives notice of death, insanity or insolvency
of the principal debtor, he must close the account of the
principal debtor and should demand the payment from the
guarantor.
11. In case the guarantor is dead, the banker should break the
principal debtor’s account and open a new account to avoid
the operation of the rule of Clayton’s case.
GUARANTEES AND
INDEMNITIES GIVEN BY BANKS
Bankers issue guarantees of various types on behalf of their
customers to third parties. The guarantees issued by banks are of
two types, namely (i) money guarantee and (ii) performance
guarantee.
A money guarantee is a promise by the banker to pay the
money due by the customer to a third party in the event of failure
to pay on the due date as agreed by the customer. Such
guarantees are issued for deferred payment installments in case
of import of machineries from foreign countries. For example, the
exporters may agree to accept from importers 10% to 20% of the
value with the order and the balance in installments over some
time. The bank guarantees the payment of such installments. This
facility is now extended to indigenous manufacturers of
machineries also.
A performance guarantee is given to the government or
public bodies on behalf of contractors in the event of non-
fulfillment of the contract. Banks provide indemnities for
shipping companies or transport companies for the release of
goods in the absence of documents, in case of goods arrive before
the receipt of such documents.
SELF-ASSESSMENT
Fill in the blanks
1. A guarantee is a promise by a ……....to the lender, for the
present or future debt of the borrower.
2. A ………..guarantee covers a single transaction which comes
to an end when the promise givenis fulfilled.
3. The contract of fire insurance and marine insurance are
contracts of ………..
True or False?
4. The person to whom the guarantee is given is called a surety.
5. When the principal debtor defaults, the surety discharges the
liability to the creditor and gets all rights possessed by a
creditor against the debt. This is called the right of
subrogation.
6. A guarantee is a contract of “Uberrimae Fidei.”
Answers: (1) Third-person (2) Specific (3) Indemnity (4) False (5)
True (6) False
Questions
1. Define guarantee. What are the essential features of a
guarantee?
2. Distinguish between guarantee and indemnity.
3. List out the rights of a creditor against the surety.
4. What precautions should a banker take before accepting a
guarantee?
4.5. THE BASEL NORMS
The Basel Norms
Banks lend to different types of borrowers, and each carries its

own risk. They give the deposits of the public as well as the
money raised from the market through equity and debt. The
intermediation activity exposes the banks to a variety of risks,
including the risk of non-recovery. Very often, we hear the cases
of big banks collapsing due to their inability to sustain such risk
exposures. Therefore, it becomes essential for the banks to keep
aside a certain percentage of capital as security against the
risks. The BASEL norms mainly aim to guide the banks in
tackling such risks.
The Basel norms refer to the broad supervisory standards
formulated by the Basel Committee on Banking Supervision
(BCBS) The BCBS is an international banking regulatory
committee established by the Governors of the Central Banks of a
group of 10 countries (initially) in 1974. The present Chairman of
the BCBS is Stefan Ingves, who is the Governor of the Central
Bank of Sweden. The objectives of the BCBS are as follows;
 to gain a better understanding of the challenges faced by
modern banking system in terms of risk and risk
management,
 to eliminate the risks systematically and to enable them to
function properly,
 to frame adequate supervisory and regulatory standards and
guidelines to help the banking system of the member
countries and,
 to ensure no foreign bank escapes from such supervision.
The Committee's Secretariat is located at the Bank for
International Settlements (BIS) in Basel, Switzerland. However,
the BIS and the Basel Committee are not the same. They remain
two distinct entities. The set of the agreement by the BCBS, which
mainly focuses on risks to banks and their financial system is
called Basel Accords or Basel Norms. The purpose of the accord is
to ensure that financial institutions have enough capital on
account to meet obligations and to absorb unexpected losses.
India is also a member of the BCBS. In fact, on a few
parameters, the RBI has prescribed more stringent norms as
compared to the norms prescribed by BCBS. Till date the BCBS
has announced 3 BASEL accords as described below;
BASEL ACCORD I
In 1988, the BCBS introduced the capital measurement system
called Basel Capital Accord (also called Basel I) It focused
entirely on credit risk. It defined the capital and structure of risk
weights for banks. Banks with an international presence were
required to hold capital equal to 8% (4% each from tier I and tier
II capital) of their risk-weighted assets (RWA) The RWA means
the assets with different risk profiles. For example, an asset-
backed by collateral would carry lesser risk as compared to the
personal loans which have no collateral. In 1996, the accord was
amended to include market risk.
However, the Basel Accord I did not recognize the
operational risk or the risk exposure that arises due to the
credibility of borrowers. The assets of banks were classified into
five categories according to their credit risk, carrying the risk
weights of;
 0% (cash, bullion, a home country debt like Treasuries)
 20%(securitizations such as mortgage-backed securities (MBS)
with the highest AAA rating)
 50% (municipal revenue bonds, residential mortgages)
 100% (most corporate debts)
 Some assets were not given the rating.
India adopted Basel-I guidelines in 1999.The twin objectives
of Basel Accord-I were as follows;
1. To ensure capital adequacy in the international banking system
2. To create a more level playing field in a competitive
environment.
BASEL ACCORD II
Following the South East Asian currency crisis, the Basel
Committee met on June 1999 and came up with Basel II. In 2004,
the Basel II guidelines were published by the BCBS, which were
considered to be the refined and reformed version of Basel I
Accord. Short term funds played a significant role in the Asian
currency crisis. Accordingly, risk weights were adjusted under
Basel II. Brings order, discipline, and safety to banking
institutions. Involves complex calculations based on huge data. It
provides several a number of approaches for risk measurement.
Flexibility for banks to choose an approach in line with their risk
profile. Incentives for stronger and more accurate risk
measurement. The guidelines were based on three parameters as
shown below;
1. Banks should maintain a minimum capital adequacy
requirement of 8% of risk assets.
2. Banks were needed to develop and use better risk
management techniques in monitoring and managing all
three types of risks, namely the credit risk; market risk, and
operational risk.
3. Banks need to mandatorily disclose their risk exposure, etc. to
the central bank.
The Basel Capital Accord-II focused on three pillars as shown
below;
BASEL-
II
Pillar I Pillar II Pillar III

Minimum Supervisory Disclosure &
Capital Review Market
Requirement Process Discipline
3. PILLARS OF SOLVENCY
Minimum capital requirement: Capital adequacy,
supervisors can impose additional capital, early intervention by
regulators in case of problem, Technical requirements Investment
rules and ALM- Capital rules, etc.
Supervisory review process: Internal Control & Sound
Management Supervisory Intervention.
Disclosure & market discipline: Disclosure of information
such as capital structure, capital adequacy, and different types of
risk, frequent, forward looking, and relevant.
MINIMUM CAPITAL REQUIREMENT BASEL II
Banks can choose from different methods namely;
(i) Credit risk,
(ii) Market risk, and
(iii) Operational risk.
MEASUREMENT OF CREDIT RISK
Standardized Approach: Useful for less sophisticated banks,
Concept of capital ratio, Numerator is the amount available, and
Denominator is the measure of risk faced by the bank, Risk
weights 0, 20%, 50%, 100%, 150%
Internal Ratings Based Approach: Prime objectives of the IRB
approach are, (i) Allocation of capital based on internal ratings,
(ii) More sensitivity to drivers of credit risk. Encouraging banks to
continue to improve their internal risk management process.
Foundation level: Segments portfolios according to bank’s
criteria, Apply formula to determine the capital ratio for each
segment, Banks indicate only Probability of Default (PD) and loss
in each segment, Supervisory estimates other components of loss.
Advanced level: Banks provide estimates of Loss Given
Default (LGD) and Exposure at Default (EAD) and maturity,
Requirement of reliable database, Probability of default
Likelihood that customers will default in the next 12 months.
Exposure at default the expected amount of exposure at the point
of default, Loss given default Likely financial loss associated with
the default, Banks can use their internal estimates of borrower
creditworthiness to assess credit risk, Credit risk = Exposure x
Probability of Default x Loss given Default.
MEASUREMENT OF MARKET RISK
Standardized approach and internal models approach.
Market Risk: Interest rate-sensitive position (General market
risk, Duration or Maturity method, Specific market risk, Net
position x weight factor)
Equity instruments: General market risk 8% of net position
per market and for Specific market risk 8% of net position per
issue.
Precious metals 10% of net position
Currencies 10% of all net long/ short positions whichever is
greater
Commodities 20% of net position per commodity group
+ 3% of net position of all commodity groups
MEASUREMENT OF OPERATIONAL RISK
Any risk not characterized as market risk or credit risk is
called an operational risk. For example, (i) Risk arising out of
human or technical error, (ii) Settlement or payment risk, (iii)
Business interruption risk, (iv) Inadequate systems, controls,
processes, (v) Fraud.
Such risk exists almost anywhere in the organization, and it
can be a high occurrence low value or low occurrence of high
value. The different types of operational risks are as follows;
Based on causes: People-oriented, Process-oriented,
Technology- oriented, External
Based on effect: Legal liability, Regulatory compliance and
taxation penalties, Loss or damage to assets
Based on the event: Internal fraud, External fraud

(Employment practices and workplace safety, Clients, products
and business practices, Business disruption and systems failures,
Execution, delivery, and process management. This operational
risk can be measured using any of the following three
approaches; (i) Basic indicator approach, (ii) Standardized
approach, and (iii) Advanced measurement approach.
Basic Indicator Approach: Capital allocation is based on a
single indicator (Gross income as a proxy for operational risk,
Regulatory norm (%) X Gross income) Easy to implement,
Limited responsiveness to firm-specific needs and characteristics,
Applicable for smaller size domestic banks.
Standardized Approach: More complicated than basic
indicator approach, better able to reflect the different risk profiles
across banks, within each business line, a broad indicator can be
chosen, Bank activities segregated into eight business lines. Split
gross income into business lines, Multiply average gross income
for three years by the regulator stated beta, In a simplified
approach, split gross income across traditional banking
(commercial and retail) and other activities. The business line
percentage is as follows;
Corporate finance 18%
Payment and settlement 18%
Trading and sales 18%
Agency services 15%
Retail banking 12%
Asset management 12%
Commercial banking 15%
Retail brokerage 12%
Advanced Measurement Approach: Bank uses internal
measurement using both quantitative and Qualitative criteria;
internal loss data is used in determining required capital.
Qualitative criteria: Independent function, Involvement of
Board, Reporting of exposure and loss experience, Documentation
of risk management system.
Quantitative criteria: Stress testing, approximate risk
measurement, Expected loss, and unexpected loss, Minimum five
years of the observation period of internal loss data.
BASEL ACCORD–III
In December 2010, the Basel III guidelines were published by
the BCBS in response to the financial crisis of 2008.These accords
dealt with the risk management aspects of the banking sector. It is
considered to be the global regulatory standard aimed at
promoting a more resilient banking system in the member
countries by focusing on four vital banking parameters viz.
capital adequacy, leverage, funding, and market liquidity.
OBJECTIVES OF BASEL ACCORD-III
 To improve the banking sector’s ability to absorb shocks
arising from financial and economic stress, whatever be the
source.
 To improve risk management and governance
 To strengthen transparency in bank disclosures
3. PILLARS OF SOLVENCY
1.Enhanced minimum capital & liquidity requirement:
Minimum Regulatory Capital Requirements based on Risk-
Weighted Assets (RWAs): Maintaining capital calculated through
credit, market, and operational risk areas.
2. Enhanced supervisory review process: Regulating tools/
frameworks for dealing with peripheral risks that banks face.
3. Enhanced risk disclosure & market discipline: Increasing the
disclosures that banks must provide to increase the transparency
of banks.
MAJOR CHANGES IN BASEL III
Better capital quality: One of the critical elements of Basel III
is the introduction of a much stricter definition of capital. Better
quality capital means a higher loss-absorbing capacity. This, in
turn, will mean that banks will be stronger, allowing them to
better withstand in periods of stress.
CAPITAL ADEQUACY RATIO (CAR)

Capital Adequacy Ratio = Total Capital RWA* 100
Total Capital: Tier 1 + Tier 2Capital
Tier 1 capital: The Tier 1 capital or core capital consists of paid up
capital, statutory reserves, other disclosed free reserves, capital
reserves which represent surplus arising out of the sale proceeds of
the assets and other intangible assets.
Tier 2 capital: The Tier 2 capital or subordinate capital consists of the
undisclosed reserves, revaluation reserves, general provisions and
loss reserves, hybrid debt capital instruments such as bonds, long
term unsecured loans, debt capital instruments etc.
Risk Weighted Assets (RWA): This would mean the assets with
different risk profiles; we know that the personal loans are more risky
than the housing loan, so with different types of loans the risk
percentage on these loans also varies.
CRAR: Capital to Risk Weighted Asset Ratio
Capital conservation buffer: Another critical feature of Basel

III is that banks are required to hold a capital conservation buffer
of 2.5%. The aim of asking to build a conservation buffer is to
ensure that banks maintain a cushion of capital that can be used
to absorb losses during periods of financial and economic stress.
Countercyclical buffer: This has been introduced to increase
capital requirements in good times and decrease the same in bad
times. The buffer will slow banking activities when it overheats
and will encourage lending when times are tough and bad. The
buffer will range from 0% to 2.5%, consisting of the common
equity or other fully loss-absorbing capital.
Minimum common equity and tier 1 capital requirements:
The minimum requirement for common equity (the highest form
of loss-absorbing capital) has been raised from 2% to 4.5% of total
risk-weighted assets. The overall Tier 1 capital requirement,
consisting the equity and other qualifying financial instruments,
would be increased from the current minimum of 4% to 6%.
Leverage ratio: A review of the financial crisis of 2008 has
indicated that the value of many assets fell quicker than assumed.
Thus Basel III included a leverage ratio to serve as a safety net. A
leverage ratio is a relative amount of capital to total assets (not to
the RWA) The Basel III norms limit the amount of debt a bank can
owe even further. This is called the Leverage Ratio. This is
especially applicable for banks that trade in high-risk assets like
derivatives.
Liquidity ratios: Capital is money that is invested in assets
like equity or government bonds. This money, therefore, is not
readily available for day-to-day activities. During the crisis, the
value of investments can fall suddenly as it happened in 2008.
This means the capital a bank holds can fall during times of need.
Therefore the BASEL III asked the banks to hold liquid money.
This is measured by the Liquidity Coverage Ratio, a ratio of the
liquid money to total assets. This should be equal to the banks'
net outflows during a 30-day stress period. The new Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were
introduced in 2015 and 2018, respectively.
Systemically important financial institutions (SIFI): As part
of the macro-prudential framework, systemically important banks
are expected to have loss-absorbing capability beyond the Basel
III requirements. Options for implementation include capital
surcharges, contingent capital, and bail-in-debt.
BASEL NORMS IMPLEMENTATION IN INDIA
Basel III guidelines are aimed at to improve the ability of
banks to withstand periods of economic and financial stress as the
new guidelines are more stringent than the earlier requirements
for capital and liquidity in the banking sector. Complying with
BASEL III norms is not an easy task for Indian banks, as they
would have to increase their capital, liquidity, and also to reduce
their leverage. This could affect the profit margins for Indian
banks.
When banks keep aside more money as capital or liquidity, it
will reduce their capacity to lend money. Loans are the most
significant source of profits for the banks. Further banks in India
would have to meet both the LCR of BASEL as well as the
Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
norms of RBI simultaneously, which would be a challenging task.
This means more money would have to be set aside that can bring
further stress in their balance sheets.
The government of India is scaling disinvesting its holdings in
PSBs to 52 percent. The government has infused Rs. 58,600 crore
between 2011 and 2014 in the state-owned banks. Finance
Minister Arun Jaitley in the Budget speech had said that "to be in
line with Basel-III norms, there is a requirement to infuse Rs. 2, 40,000
crores as equity by 2018 in our banks." To meet this huge capital
requirement, we need to raise many additional resources.
The Reserve Bank of India (RBI) introduced the norms in
India in 2003. It now aims to get all commercial banks BASEL-III
compliant by March 2019. So far, India's banks are compliant with
capital needs. On average, India's banks have around 8% capital
adequacy. This is lower than the capital needs of 10.5% (after
taking into account the additional 2.5% buffer) The BASEL
Committee credited the RBI for its efforts in this direction.
SELF-ASSESSMENT
Fill in the blanks
1. Basel I accord mainly focused on the ………risk.
2. Basel II accord required the banks to develop better risk
management techniques to monitor all the three types of risks,
namely the …………, ……….., and ……..….
3. Any risk not characterized as market risk or credit risk is
called an ………. risk.
4. The formula for calculating Capital Adequacy Ratio (CAR) is
…….…..
True or False?
5. A leverage ratio is a relative amount of capital to Risk-
Weighted Assets.
6. As per the BASEL-III norms, the liquidity coverage ratio
should be equal to the banks’ net outflows during a 30-day
stress period.
Answers: (1) Credit (2) Credit risk; Market risk, Operational risk.
(3) Operation risk (4) Total Capital RWA* 100 (5) False
(6) True
Questions
1. What are the objectives of BCBS?
2. Write a short note on three pillars of solvency.
3. How is the Credit risk measured?
4. How is the Operational risk measured?

4.6. FINANCIAL SECTOR REFORMS
Financial Sector Reforms
The introduction of financial sector reforms in India is

primarily marked up with the announcement of the New
Economic Policy (NEP) in June 1991. Immediately after the
announcement of the NEP, the government had appointed a
high-level Committee on Financial System (CFS) popularly
known as Narasimham Committee "to examine all aspects
relating to the structure, organization, function, and procedures
of the financial system." The Committee submitted its main report
in November 1991, with a large number of reforms in the
financial sector.
The reforms introduced were multidimensional in approach
and aimed to make changes on many fronts. It was a complete
break away from the earlier policy approach which was
characterized by extensive government control over private
sector, excessive protection to domestic industries and a
restrictive approach to foreign investment, administered interest
rates, directed lending, capital control, weak banking structure,
lack of proper accounting and lack of transparency in operations
of major financial market participants.
OBJECTIVES OF FINANCIAL REFORMS
The primary objective of financial sector reforms was "to create
an efficient, competitive, and stable financial sector that could stimulate
economic growth." Some other objectives are;
 To develop a market-oriented, world-integrated, autonomous
&transparent financial system.
 To promote competition by creating level playing fields and
facilitating free entry and free exit for institutions and market
players.
 To bring about effectiveness, accountability, profitability,
balanced growth, operational economy, flexibility,
professionalism, and de-politicization in the financial sector.
 To rationalize the interest rate structure to offer the customers
a reasonable level of positive real interest rates. i.e., to
dismantle the ‘administered system of interest rates.’
 To build a financial infrastructure relating to supervision,
audit, technology, and legal matters.
 To modernize the instruments of monetary control to make
them more suitable for the conduct of monetary policy in a
market economy, i.e., to increase the reliance on indirect or
market incentives based instruments rather than direct or
physical instruments of monetary control.
(i) SYSTEMIC POLICY REFORMS
Under the systemic policy reforms, most of the interest rates
in the economy were deregulated. The system of administered
interest rates was largely dismantled, and the structure of interest
rates was also simplified. The critical reforms under this category
were as follows;
Statutory Liquidity Ratio: The pre-emption of banks’
resources through the Statutory Liquidity Ratio (SLR) in favour of
the government was brought down, and the rate of return on SLR
securities is maintained by and large at market rates. The SLR on
incremental Net Domestic and Time Liabilities (NDTL) of banks
was reduced from 38.5 percent in 1991-92 to 25 percent in 1995-96.
Cash Reserve Ratio: The incremental Cash Reserve Ratio
(CRR) of 10 percent was removed, and the average CRR was also
reduced from 15 percent in 1991-92 to 10 percent in 1995-96. The
CRR on NRE deposits outstanding as on 27.10.1995 was reduced
from 14 percent to 10 percent, and the CRR on the increase in
NRE deposits after that was removed. The CRR of FCNR (B) and
NRNR deposit accounts were also removed.
Capital Adequacy Norms: The capital adequacy norms for
Banks and Financial Institutions (BFIs) and all other market
intermediaries were introduced. The BASEL Committee
framework for capital adequacy was adopted.
Board of Financial Supervision: The Board of Financial
Supervision (BFS) with an advisory council and an independent
department of supervision was established in RBI to supervise the
banks, financial institutions, and non-banking financial
companies from April 1995.
CAMEL Reporting System: A Supervisory Reporting System
was introduced in February 1995 to focus on critical areas such as
Capital adequacy, Asset quality, Management, Earnings, and
Liquidity (CAMEL)
Recovery of Bank Debts: The Recovery of Debts Due to
Banks and Financial Institutions (RDD-BFIs) Act, 1993 was
introduced to set up Special Recovery Tribunals to facilitate
quicker recovery of loan arrears.
TBs Replaced with WMA: The agreement between the
Government of India and the RBI for using the system of Ad hoc
Treasury Bills (TBs) for automatic monetization of the budget
deficit was abolished, and the same was replaced by the method
of Ways and Means Advances (WMAs) from April 1, 1997.
Liberalization-Privatization-Globalization (LPG): As a part
of the ‘Liberalization' effort, the public sector banks were allowed
to diversify ownership by law subject to 51 percent holding of
government RBI. The SBI, IFCI, and IRBI were converted into
public limited companies. Also, the IDBI Act of 1963 was
amended to allow the IDBI to raise paid-up share capital up to 49
percent from the public and to induct private participation in its
Board of Directors. As a part of the ‘Privatization' effort, the
private sector was allowed to set up banks, mutual funds, money
market mutual funds, insurance companies, etc. As a part of
‘Globalization' effort, the foreign banks were liberally permitted to
open branches.
Securities and Exchange Board of India: The Capital Issues
(Control) Act. 1947 was repealed and the office of the Controller
of Capital Issues was abolished. Instead, the Securities and
Exchange Board of India (SEBI) was made as the statutory body
in February 1992,armed with the necessary authority and power
to regulate and reform the capital market.
The convertibility clause is no longer obligatory in the case of
assistance sanctioned by the term lending institutions. All India
Development Banks introduced the floating interest rate on
financial aid (linked to the interest rate on 364 days TBs) The
amendment of the RBI Act, 1997, required all Non-Banking
Financial Companies (NBFCs) with net owned funds of Rs.25
lakh and more to register with the RBI.
OTCEI and NSE: The Over The Counter Exchange of India
(OTCEI) and the National Stock Exchange (NSE) with nationwide
stock trading and electronic display, clearing, and settlement
facilities were established and were made operational.
Monetary Policy: The twin objectives of ‘maintaining price
stability’ and ‘ensuring availability of adequate credit to productive
sectors of the economy to support growth’ continue to govern the
stance of monetary policy, though the relative emphasis on these
objectives has varied depending upon the importance of
maintaining an appropriate balance.
There has been a move from direct instruments (such as
administered interest rates, reserve requirements, selective credit
control, etc.) to indirect instruments (such as open market
operations, purchase, and re-purchase of government securities)
for the conduct of monetary policy. A technical advisory
committee on monetary policy with outside experts has been set
up to review the macroeconomic and monetary developments
and advise the RBI on the stance of monetary policy.
Reflecting on the increasing development of the financial
market and greater liberalization, the use of broad money as an
intermediate target was de-emphasized, and a multiple indicator
approach has been adopted. A separate financial market
department within the RBI has been created. Emphasis is being
put on the development of multiple instruments to transmit
liquidity and interest rate signals in the short term in a flexible
and bi-directional manner.
Inter-linkage between Segments: Inter-linkage between
various segments of the financial market, including the money
market, government security market, and forex market
instruments, has been increased. The forex market has been
deepened, and the autonomy of authorized dealers (ADs) has
been increased. The market for government securities was
deepened by making interest rates as market-related. Auction of
government securities was also introduced. A pure inter-bank call
money market has been developed. The non-bank participants
were allowed to participate in other money market instruments.
Liquidity Adjustment Facility: The Liquidity Adjustment
Facility (LAF) was introduced, which operates through the ‘repo'
and ‘reverse repo' auctions to effectively provide a corridor for
short term interest rate. The LAF has emerged as a tool for both
liquidity management as well as a signaling device for the interest
rate in the overnight market. The Delivery versus Payment (DVP)
system was introduced for deepening the repo market. The Open
Market Operations (OMOs) were used to deal with overall
market liquidity situation, especially those emanating from
capital flows.
Market Stabilization Scheme: The Market Stabilization
Scheme (MSS) was introduced as an additional instrument to deal
with the enduring capital inflows without affecting the short term
liquidity management role of LAF.
Primary Dealers: The Primary Dealers (PDs) were introduced
in the government securities market to play the role of the market
maker. Also, the Securities Contracts Regulation Act (SCRA) was
amended to create the regulatory framework.
Clearing Corporation of India Limited: A risk-free credible
yield curve has been developed in the government securities
market as a benchmark for related markets. The Clearing
Corporation of India Limited (CCIL) has been set up to ensure
risk-free payments and systems in government securities.
(ii) BANKING SECTOR REFORMS

The main objective of banking sector reforms is to improve
the allocative efficiency of resources through operational
flexibility, improved financial viability, and institutional
strengthening. It mainly involves a two-pronged approach, first
to gradually increase the level of competition with a focus on
better supervisory and prudential norms within banks and
secondly to improve the legal framework and technological
system in banking. The essential reforms initiated in the banking
sector are listed below;
CRR and SLR: These ratios of CRR and SLR have been
gradually lowered from 15 percent and 38.5 percent in 1990 to 6.5
percent and 25 percent respectively in 2008. This would ensure
that a greater amount of resources are available with banks for
commercial loans and thus would have a positive impact on their
profitability.
Administered Interest Rates: The number of administered
interest rates on commercial bank advances was reduced from
more than 20 in 1989-90 to 2 in 1994-95. Banks have been
provided with full freedom to determine lending rates for loans
above Rs. 0.2 million and all deposits rates except savings and the
non-resident Indian deposit rate, which are fixed by the RBI.
Prudential Norms: A set of prudential norms i.e., capital
adequacy, income recognition, asset classification and
provisioning norms for NPAs, exposure norms, accounting norms
has been stipulated to provide transparency to the financial
reporting and improve public confidence in the banking system.
Measures have been initiated to strengthen risk management
through recognition of different components of risk, assignment
of risk-weights to various asset classes, and limits on the
deployment of the fund in sensitive activities.
KYC and AML: ‘Know Your Customer’ (KYC) and ‘Anti
Money Laundering’ guidelines require the banks to be familiar
with their customers and their monetary dealings better so that it
can administer their accounts carefully and hence reduces the risk
in banks.
BASEL Norms: The roadmap for BASEL II and III,
introduction of capital charge for market risk, higher graded
provisioning for NPAs, guidelines for ownership and
governance, securitization and debt re-structuring norms, etc.
have been introduced. As part of the new supervisory strategy, an
independent Board for Financial Supervision (BFS) has been
established. The Board focuses on off-site and on-site inspections
and regulation of the internal control system of banks.
CAMEL Norms: Capital adequacy, quality of Assets, quality
of Management, Earnings, Liquidity, and Sensitivity to market
risks (CAMELS) based supervisory rating system has been
introduced as a move towards the risk-based supervision and
consolidated supervision of financial conglomerates.
Statutory Audit: The statutory audit focused on the analysis
of internal control. There is an enhanced emphasis on corporate
governance through the recasting of the role of statutory auditors
and ‘fit and proper’ test for directors and due diligence on
important shareholders.
Operational Autonomy& Transparency Norms: Operational
autonomy has been granted to the public sector banks. The SBI
and other nationalized banks were allowed to access capital from
the equity market up to 49 percent of their paid-up capital.
Transparent norms have been specified for entry of Indian private
sector banks, foreign and joint-venture banks and insurance
companies in the banking sector.
Guidelines for M&A: The guidelines for mergers and
amalgamation of banks and Non-Bank Financial Companies
(NBFCs) have been specified to allow the establishment of
financial conglomerates that offer a variety of financial services.
Banks are allowed diversify product portfolio and business
activities.
Improved Institutional and Legal System: To improve the
institutional and legal system that governs banks, the reforms
paved way to setup of Lok Adalats (people’s court), debt recovery
tribunals (DRTs), asset reconstruction companies (ARCs),
settlement advisory committees, corporate debt restructuring
mechanism etc have been introduced for quicker recovery or
restructuring of bank’s loans.
SARFAESI and CIBIL: The promulgation of Securitization
and Reconstruction of Financial Assets and Enforcement of
Securities Interest (SARFAESI) Act, 2002, and its subsequent
amendments have ensured the creditor rights to recover loans.
The Credit Information Bureau of India Limited (CIBIL) has been
set up for information sharing on defaulters of bank loans.
Banking Ombudsman Scheme: This was introduced in 1995
to appoint 15 ombudsmen by the RBI ‘to look into and resolve’
customer grievances quickly and inexpensively. Most of the
recommendations given by the Goiporia Committee in this
connection were implemented.
Interest Rate Reforms: The interest rates on commercial bank
loans above Rs. 2 lakh- domestic term deposits above two years
and non-resident (external) rupee accounts (NRNR) deposits
were decontrolled. The interest rates on deposits and advances of
all co-operative banks, including the urban co-operative banks
were deregulated. Banks were allowed to set their interest rates
on post-shipment export credit for over 90 days.
Prudential Norms: Prudential norms for income recognition,
classification of assets, and provisioning for bad debts for
commercial banks, including the Regional Rural Banks (RRBs),
and financial institutions (FIs), were introduced. They are
required to adopt uniform and sound accounting practices in
respect of these matters and the valuation of investments. Banks
are required to mark, to market the securities held by them.
Performance Obligations and Commitments: The RBI
obtained the ‘Performance Obligations and Commitments’ (PO &C)
from each bank. The quantifiable performance parameters
contained in the PO&C emphasized increased, still, low-cost
deposits, quality lending, increased profit, improved staff
productivity, etc. to prevent the banks from facing problems such
as erosion of equity, low/no profit, etc. The non-fulfillment of
PO&C entailed penalty in the form of high CRR/SLR; stoppage of
RBI refinance facility; stoppage of capital contribution by the
government, etc.
Freedom to Banks: Banks were required to maintain
transparency in making their balance sheets and full disclosure in
keeping with the International Standard Accounts Committee.
Banks were given freedom to open, shift and swap branches and
to open extension counters as per market need. The perceived
constraints on banks such as prior credit authorization, inventory
and receivables norms, obligatory consortium lending, and curbs
in respect of project finance were relaxed.
The budgetary support was extended for the recapitalization
of weak public sector banks. Banks were given the freedom to fix
their forex open position limits subject to the RBI approval. The
‘loan system' was introduced for the delivery of bank credit. Banks
were required to bifurcate the maximum permissible bank
finance into ‘loan component' (short term working capital loan)
and ‘cash credit component,' and the policy of progressively
increasing the share of the former was also introduced. The other
reforms include;
 Operational autonomy was given to the public sector banks.
Public ownership was reduced by allowing the public sector
banks to raise capital from the equity market up to 49 percent
of their paid-up capital.
 Transparent norms were issued for the entry of private sector
foreign joint venture banks and insurance companies in India.
 Permission for foreign investment in the financial sector in the
form of foreign direct investment (FDI) and portfolio
investment was given.
 The roadmap was developed for the presence of foreign
banks, and guidance was issued for mergers and
amalgamation of private sector banks and the NBFCs.
 Guidelines on ownership and governance in private sector
banks were developed.
 The sharp reduction of pre-emption through reserve
requirement, market-determined pricing for government
securities, disbanding of administered interest rates with a
few exceptions, and enhanced transparency and disclosure
norms to facilitate market discipline were introduced.
 Pure inter-bank call money market, auction-based ‘repo and
reverse repo’ for short term liquidity management, facilitation
of improved payments and settlement mechanism was
introduced.
 Significant advancement in dematerialization and markets for
securitized assets has been developed.
Risk Recognition and Control: Phased implementation of
international best practices and norms on risk-weighted capital
adequacy requirements, accounting, income recognition,
provisioning, and exposure were introduced. Measures such as
recognition of different components of risk, assignment of risk
weights to various asset classes, norms on connected lending, risk
concentration, application of market to market principle for an
investment portfolio, and limits on the deployment of funds in
sensitive activities have been introduced to strengthen the risk
management.
Internal Audit & CG: The role of statutory auditors was re-
casted with increased internal control by way of strengthening
the internal audit. The corporate governance was strengthened by
enhancing due diligence on important shareholders and by
conducting fit and proper tests for directors.
Electronic Technology: Electronic technology has been
introduced for bank transactions, settlement of accounts,
bookkeeping, and all other related functions. The pace of banks
computerization has been enhanced. The Core Banking Systems
(CBS) has been initiated in the number of banks to allow
customers to avail banking facilities from any branch of the bank
any time anywhere. Screen-based trading in government
securities has been introduced.
The new instruments and services such as credit
cards, telebanking, ATMs, retail Electronic Funds Transfer (EFT)
and Electronic Clearing Services (ECS) have allowed the
development of an efficient and speedy retail payment and
settlement systems. The INFINET has been set up as the
communication backbone for the financial sector. The Negotiated
Dealing System (NDS) has been introduced for screen-based
trading in government securities. Besides the real-time gross
settlement (RTGS) system has also been introduced.
New Disclosure Norms: The new disclosures norms require
the greater volume of information to be disclosed as notes on
Accounts in their balance sheets. These include significant
profitability and financial ratios, details of capital structures, as
well as movements in non-performing loans, movements in
provisions, advances to sensitive sectors, to mention a few. The
range of disclosures has gradually been expanded over the years
to promote market discipline.
Financial Inclusion: Financial inclusion means providing
wider access and better quality of banking services to the larger
section of society. Bank nationalization has been quite successful
in broadening the area coverage of banks. However, due to the
emphasis on commercial considerations, banks tend to exclude a
large section of the population, especially rural or urban poor,
people in the unorganized sector, etc. RBI has urged banks to
review existing banking practices and adopt simplified
procedures to provide banking services to small users.
Internet Banking: Internet banking enables a customer to do
banking transactions through the bank’s website on the Internet.
This is also called virtual banking, or net banking, or anywhere
banking. The important advantages to internet banking
customers are that it offers convenience and quick processing of
transactions. There are growing numbers of banks that operate
online due to cost advantages compared to traditional banks and
reduce traditional geographical barriers in reaching to the
customers. Mobile banking means performing a banking
transaction like performing balance checks, account transactions,
payments, etc. via a mobile device such as mobile phones. Mobile
banking today is most often performed via SMS.
An assessment of the banking sector reforms shows that
banks have experienced strong balance sheet growth in terms of
improved financial health, capital adequacy, and asset quality in
the post-reform period. The technological improvements have
also enabled competitiveness and productivity gains.
(iii) STOCK MARKET REFORMS
Listing Requirements: The norm of 5 shareholders for every
Rs.1 lakh of new issues of capital and ten shareholders for every
Rs. One lakh of the offer for sale prescribed as an initial and
continuing listing requirement. The payment of any direct or
indirect discounts or commissions to persons receiving firm
allotment is prohibited now. The stock exchanges were required
to disclose, carry forward position ‘scrip wise & broker wise' at the
beginning of the carry-forward session. A ceiling of Rs. 10 crores
was imposed on stock market members doing the business of
financing the carry forward transactions.
Debt Issues: The debt issues not accompanied by an equity
component are permitted to be sold entirely by the book building
process only. The housing finance companies considered to be
registered for issue purposes, provided they are eligible for
refinance from the National Housing Bank. The issuers were
allowed to list the debt securities on stock exchanges without
their equity being listed. The mutual funds were allowed to
underwrite public issues.
Depositories Acts: The Depositories Act, 1996, has been
passed to provide a legal framework for the establishment of
depositories to record ownership details in book-entry form and
to facilitate dematerialization (DEMAT) of securities. The
Depositories Related Laws (Amendment), 1997 issued through an
Ordinance will now allow the banks, mutual funds, and IDBI to
dematerialize their scrip.
Trading Requirements: The stock lending scheme without
attracting capital gains was introduced by which the short sellers
were allowed to borrow securities through an intermediary
before making such sales. The stock exchanges were asked to
modify the listing agreements to provide for the payment of
interests by companies to investors from the 30 thday of the closure
of the public issue.
All stock exchanges were required to institute the buy-in or
auction process. The stock exchanges were also asked to collect
100 percent daily margins on the notional loss of a broker for
every scrip, to restrict the gross traded value to 33.33 times the
broker’s base minimum capital, and to impose quarterly margins
based on concentration ratios.
Screen-Based Trading System: The stock exchanges were
modernized with an electronic trading system. The Bombay Stock
Exchange (BSE) has started its online trading system, BOLT. The
BSE and other transactions with the screen-based trading system
were allowed to expand their trading terminals to locations where
no stock exchange exists and to others subject to an
understanding with the local stock exchange. Both the short and
long sales are required to be disclosed to the exchange at the end
of each day, and they are to be regulated through the imposition
margins.
Grading of IPOs: The SEBI has framed guidelines relating to
disclosure of grading of the Initial Public Offer (IPOs) by the
issuer companies who may want to opt for grading of their IPOs
by the rating agencies. If the issuer companies choose for grading,
then they are required to disclose the grades, including the
unaccepted ones, in the prospectus. The SEBI has issued
directions for the issuing companies, relating to the qualified
institutions’ placement to pave the path for a ‘fast and cost-effective’
way of raising resources from the Indian securities market.
PAN made Compulsory: To strengthen the KYC norms in the
cash market and to generate a reliable audit trail, the Permanent
Account Number (PAN) was made mandatory for all transactions
in the cash market, w.e.f., January 1, 2007. The PAN was made
compulsory for all DEMAT accounts opened after April 1, 2006,
about all categories including minors, trusts, foreign corporate
bodies, banks, corporates, FIIS, and NRIs. For DEMAT a/c
opened before this date, time for PAN verification was extended
till December 31, 2006.
Derivatives Business: The procedure for re-introduction of
derivatives contracts and modified position limits were reviewed
by the Secondary Market Advisory Committee (SMAC) The
Derivatives Market Review Committee was also set up to carry
out a comprehensive review of developments and to suggest
future directions for the derivatives market in India.
Investment Limits for FIIs and MFs: The investment limit for
FIIs in government securities (including TBs) was raised from
USD 2 billion to USD 2.6 billion by the RBI. The list of eligible
investment categories of FIIs was enlarged to allow more
participation in the Indian securities market. The SEBI Board has
approved the draft guidelines for Real Estate Mutual Funds
(REMFs), which have investment objectives to invest directly or
indirectly in real estate property and shall be governed by the
provisions and guidelines under SEBI (MF) Regulations.
Emphasis had been put on the development of multiple
instruments to transmit liquidity and interest rate signals in the
short term in a flexible and bi-directional manner.
(v) GOVERNMENT SECURITIES MARKET REFORMS

Treasury Bills Reforms: A 364 days Treasury Bill (TB)
replaced the 182 days TB in 1992-93, and the same is being sold by
fortnightly auction since April 1992. The auction of 91 days TB
commenced from Jan 1993. The system of automatic monetization
of fiscal deficit through the issue of ad hoc TBs was phased out.
Funding of the TB auction into fixed coupon dated securities at
the option of holders has been introduced from April 19, 1993.
The 91 days TB was introduced for managing liquidity and
benchmarking. The zero-coupon bonds, floating-rate bonds,
indexed capital bonds were issued, and exchange-traded interest
rate futures were introduced. The OTC interest rate derivatives
like IRS FRAs were introduced.
No Administered Rates: An auction-based system for price
discovery replaced the administered interest rates on government
securities. Also, the maturity period for new issues of central
government securities was shortened from 20 to 10 years and that
for state government securities from 15 to 10 years. Six new
instruments, namely the zero-coupon bonds, tap stock, partly
paid government stock, instrument combining the features of tap
and partially paid stocks, floating-rate bonds, and the capital
indexed bonds, have been introduced in the government
securities market.
The state governments and provident funds were allowed to
participate in the 91 days TB auctions on a non-competitive basis
from August 1994. A scheme of the auction of government
securities from RBIs own portfolio as a part of its open market
operations was announced in March 1995. With effective from
April 1, 2006, the RBI has withdrawn from participating in
primary market auctions of government paper. A system of
Delivery Vs. Payment (DVP) in Subsidiary General Ledger (SGL)
transactions was introduced in Bombay in July 1995.
Primary Dealers: The Primary Dealers (PDs) were introduced
as market makers in the government securities market. For
ensuring transparency in government securities trading, the
Delivery Vs. Payment (DVP) settlement was introduced. The
banks have been permitted to undertake Primary Dealer business
while PDs are being allowed to diversify their business. The
institutions of primary dealers (PDs) in government securities
market were established, and guidelines for them were issued in
March 1995.
Repo and Reverse Repo: The repurchase agreements (repo)
were introduced as a tool for short term liquidity adjustment.
Subsequently, the Liquidity Adjustment Facility (LAF) was
introduced. The LAF operates through ‘repo and reverse repo
auctions’ and provide a corridor for short term interest rate. The
LAF has emerged as a tool for both liquidity management and
also signaling device for interest rates in the overnight market.
The second LAF (SLAF) was introduced in November 2005.The
reverse repo facility with RBI in government dated securities
extended to Discount and Finance House of India (DFHI) and
Securities Trading Corporation of India (STCI)The repo status has
been granted to the state government securities to improve the
secondary market liquidity.
Market Stabilization Scheme: The market stabilization
scheme (MSS) has been introduced, which has expanded the
instruments available to the RBI for managing the enduring
surplus liquidity in the system. The short sales in government
securities have been permitted in a calibrated manner while the
guidelines for ‘when issued’ market have been issued recently.
The outright sale of central government dated securities that
are not owned have been permitted subject to the same being
covered by outright purchase from the secondary market within
the same trading day subject to certain conditions.
The foreign institutional investors (FIIs) were allowed to
invest in government securities subject to certain limits. The risk-
free payments and settlement system in government securities
was introduced by setting up of the Clearing Corporation of India
Limited (CCIL) The trading of government securities on stock
exchanges for promoting, retailing in such securities was
introduced. Also, the non-banks were allowed to participate in
the repo market. The recent measures include the introduction of
NDS-OM and T+1 settlement norms.
(VI) EXTERNAL FINANCIAL MARKET REFORMS
Flexible Exchange Rate System: The flexible exchange rate
system was introduced, and the exchange controls were largely
dismantled. The Foreign Institutional Investors (FIIs) are allowed
to access to Indian capital market on registration with SEBI. They
were permitted to invest up to 10 percent in the equity of any
company, to invest in unlisted companies, to set up pure (100%)
debt funds, and to invest in government securities. The foreign
endowment funds, university funds, foundations, and charitable
trusts societies are allowed to register as FIIs.
Euro Issues: The companies were permitted to retain euro-
issue proceeds as foreign currency deposits with banks and
public financial institutions in India. They were also permitted to
remit the funds into India in anticipation of the use of funds for
general corporate restructuring and working capital needs. The
euro issues are now treated to be direct foreign investments
(DFIs) in the issuing companies. The restrictions of the number of
issues to be floated by a company/group of companies in a given
year were also removed.
 The Indian companies were permitted to access international
capital markets through various instruments, including the
euro-equity issues.
 The Union Budget 1997-98 proposed the replacement of
Foreign Exchange Regulation Act (FERA), 1973 by the Foreign
Exchange Management Act (FEMA), to facilitate easy capital
flows.
 The progress achieved in the current account convertibility of
rupee encouraged the subsequent introduction of capital
account convertibility also.
 The rate of long term capital gains (LTCG) tax on portfolio
investments by NRIs was reduced from 20 percent to 10
percent and brought on par with the rate for FIIs.
 The NRIs, OCBs, FIIs were permitted to invest up to 24 percent
in the equities of Indian companies engaged in all activities
except those of agriculture and plantation.
 In case of medium and long term external commercial
borrowings (ECBs) on lending of the proceeds of development
finance institutions (DFIs) to different borrowers at different
maturities were permitted.
 The corporates, railways, and telecommunications were
permitted to utilize the foreign currency proceeds up to USD 3
million for incurring rupee expenditure with a minimum
simple maturity of 3 years.
 The telecommunication, oil exploration and development
companies (excluding refineries) were permitted to raise ECBs
at a minimum of ‘5 years average maturity’ instead of 7 years
even for borrowings exceeding USD 15 million equivalent.
 The exporters were permitted to raise ECBs for meeting the
project related rupee expenditure up to the equivalent of USD
15 million or the average annual exports of 3 previous years,
whichever is lower.
 All infrastructure and Greenfield projects are permitted to
avail of the ECBs to the extent of 35 percent of the project cost
(50 percent in case of telecom sector projects)
 The banks, financial institutions, and the NBFCs registered
with the RBI were made eligible for the GDR issue without
making any reference to the end-user.
 The RBI has created a single-window agency for the receipt
and disposal of proposals for overseas investments by Indian
companies.
 The Foreign Investment Promotion Board (FIPB) was
reconstituted as the Foreign Investment Promotion Council
(FIPC) to promote the FDIs in India.
 The exchange rate regime was enhanced from a ‘single
currency, fixed exchange rate system’ to a ‘basket of currencies,
market-determined floating exchange rate system.’
 The convertibility of rupee for current account transactions
with acceptance of Article VIII of the Articles of Agreement of
the IMF was adopted.
 De facto full capital account convertibility for non-residents
and calibrated liberalizations of transactions were undertaken
for capital account purposes in the case of residents.
 The rupee-foreign currency swaps markets were developed.
Also, additional hedging instruments such as foreign currency-
rupee options were introduced.
 The authorized dealers (ADs) were permitted to initiate a
trading position, borrow and invest in an overseas market
subject to certain specifications and ratifications by the boards
of the respective banks.
 The banks were permitted to fix the interest rates on non-
resident deposits, subject to certain specifications, use
derivative products for asset-liability management (ALM), and
to fix overnight open position limits and gap limits in the
foreign exchange market, subject to ratification by the RBI.
 Various participants such as exporters, Indians investing
abroad, FIIs etc., were permitted to avail the forward cover and
to enter into swap transactions without any limit subject to
genuine underlying exposure.
 The FIIs and NRIs were permitted to trade in exchange-traded
derivative contracts subject to certain conditions.
 The foreign-exchange earners were permitted to maintain
foreign currency accounts. The residents are permitted to open
such accounts within the general limit of USD 25000 per year.
RAGHURAM RAJAN COMMITTEE RECOMMENDA-

TIONS ON FINANCIAL REFORMS
 The RBI should formally have a single objective, to stay close
to a low inflation number, or within a range in the medium
term, and move steadily to a single instrument, the short term
interest rate (repo and reverse repo) to achieve it.
 Steadily open up investment in the rupee corporate and the
government bond markets to foreign investors after a clear
monetary policy framework is in place.
 Allow more entry to private well-governed, deposit taking,
small finance banks offsetting their higher risk from being
geographically focused by requiring higher capital adequacy
norms, a strict prohibition on related party transactions, and
lower allowable concentration norms.
 Make significant efforts to create the supervisory capacity to
deliver the greater monitoring these banks will need initially
and put in place a tough, prompt corrective action regime that
ensures that these banks do not become public charges.
 Liberalize the banking correspondent regulation so that a
wide range of local agents can serve to extend financial
services. Use technology both to reduce costs and to limit
fraud and misrepresentation.
 Offer priority sector loan certificates (PSLCs) to all entities
that lend to eligible categories in the priority sector. Allow
banks that undershoot their priority sector obligations to buy
the PSLC and submit it towards the fulfillment of their target.
 Liberalize the interest rate that institutions can charge,
ensuring credit reaches the poor, but require (i) full
transparency on the actual effective annualized interest cost of
a loan to the borrower (ii) periodic public disclosure of
maximum and average interest rates charged by the lender to
the priority sector (iii) only loans that stay within a margin of
local estimated costs of lending to the poor eligible to PSLCs.
 Sell small, underperforming public sector banks, possibly to
another bank or to a strategic investor to gain experience with
the process and gauge outcomes.
 Free the banks to set up branches and ATMs anywhere. Bring
all regulations of trading under SEBI.
 Encourage the introduction of markets that are currently
missing, such as exchange-traded interest rate and exchange
rate derivatives.
 Stop creating investor uncertainty by banning markets. If
market manipulation is the worry, take direct action against
those suspected of manipulation.
 Create the concept of one consolidated membership of
exchange for qualified investors, instead of the current need
to obtain memberships for each product traded. Consolidated
membership should confer the right to trade all the
exchange’s products on a unified trading screen with
consolidated margining.
 Encourage the setting up of ‘professional’ markets and
exchanges with a higher-order size, that is restricted to
sophisticated investors based on net worth and financial
knowledge, where more sophisticated products can be traded.
 Create a more innovation-friendly environment, speeding up
the process by which products are approved by focusing
primarily on concerns of systemic risk, fraud, contract
enforcement, transparency, and inappropriate sales practices.
The threshold for allowing products on professional
exchanges or over the counter markets should be lower, so
that experimentation can take place.
 Allow greater participation of foreign investors in domestic
markets. Increase the participation of domestic investors by
reducing the extent to which regulators restrict an
institutional investor’s choice of investments.
 Move gradually instead of a ‘prudent man’ principle where
the institutional investor is allowed to exercise judgment
based on what a prudent man might deem to be appropriate
investments emphasis providing access to suitable equity-
linked products to the broader population as a part of the
inclusion agenda.
 A financial sector oversight agency (FSOA) should be set up
by statute to focus on supervision. The committee
recommended setting up of the Financial Development
Council (FDC) with the Finance Minister as the Chairman.
The main focus of this council would be macro risk
assessment and developmental issues. The FSOA will be the
secretariat for the council.
 Set up an office of the Financial Ombudsman (OFO)
incorporating all such offices in existing regulators, to serve as
an interface between the household and industry.
 It recommends strengthening the capacity of the Deposit
Insurance and Credit Guarantee Corporation (DICGC) to both
monitor risk and resolve a failing bank, instilling a more
explicit system of prompt corrective action and making
deposit insurance premia more risk-based.
 The committee outlines a number of desirable attributes of a
bankruptcy code in the Indian context, many of which are
aligned with the recommendations of the Irani Committee. It
suggests an expedited move to legislate the needed
amendments to company law.
NEW ECONOMIC POLICY 1991

The year 1991 is an essential
landmark in the economic history of post-Independent India.

The country went through a severe economic crisis triggered
by a serious Balance of Payments situation. The crisis was
converted into an opportunity to introduce some fundamental
changes in the content and approach to economic policy. The
response to the crisis was to put in place a set of policies
aimed at stabilization and structural reforms. While the
stabilization policies were aimed at correcting the weaknesses
that had developed on the fiscal and the Balance of Payments
fronts, the structural reforms sought to remove the rigidities
that had entered into the rigidities that had entered into
various segments of the Indian economy. Former Prime
Minister Manmohan Singh is considered to be the father of
the New Economic Policy of India.The main objectives of New
Economic policy (NEP) launched on July 24, 1991, by the then
Union Finance Minister Dr. Manmohan Singh were as
follows;
1. The main objective was to plunge the Indian economy into
the arena of ‘Globalization and to give it a new thrust on
market orientation.’
2. The NEP intended to bring down the rate of inflation and
to remove imbalances in payment.
3. It intended to move towards a higher economic growth
rate and to build sufficient foreign exchange reserves.
4. It wanted to achieve economic stabilization and to convert
the economy into a market economy by removing all
kinds of unnecessary restrictions.
5. It wanted to permit the international flow of goods,
services, capital, human resources, and technology,
without any restrictions.
6. It wanted to increase the participation of private players in
all sectors of the economy. That is why the reserved
numbers of sectors for the government were reduced to 3
as of now.
The thrust of the New Economic Policy has been towards

creating a more competitive environment in the economy as a
means of improving the productivity and efficiency of the
system. This was to be achieved by way of introducing
Liberalization-Privatization and Globalization (LPG) in the
Indian economy.
LIBERALIZATION MEASURES
 Commercial banks were allowed to determine the rate of
interest independently without RBI Intervention.
 The investment limit of the small scale industries was
raised to Rs. 1 crore so that the SSIs could upgrade their
machinery and improve their efficiency.
 Indian industries were freely allowed to buy capital goods
(machines and raw materials) from foreign countries to do
their holistic development.
 Before the NEP regime, the government used to fix the
maximum limit of production capacity for each industry
beyond which no industry was allowed to produce. Now
they were allowed to produce as per market demand and
to reduce the cost of production whichever way they
found suitable.
 As per the Monopolies and Restrictive Trade Practices Act
1969, all companies having assets worth Rs. 100 crore or
more were called MRTP firms and were subjected to
several restrictions. Now, these firms have not to obtain
prior approval of the Govt. for taking an investment
decision.
 Private-sector industries had to obtain a license from
Govt. for starting a new venture. Under NEP, they (except
the industries producing Liquor, Cigarette, Defence
equipment, Industrial explosives, Drugs, and other
Hazardous chemicals, were freed from licensing and other
restrictions.
PRIVATIZATION MEASURES
 Indian Govt. started selling shares of several PSU’s (ex:
Maruti Udyog Ltd) to private sector as the limit of these
the private sector allowed to acquire ownership in PSU’s
was raised from 45% to 55%.
 The Govt. has started the process of disinvestment in
those PSU’s which had been running into loss due to
under-utilization of capacity and political interference. It
means that Govt. has been selling out these industries to
private sector. Govt. has sold enterprises worth Rs. 30,000
crores to the private sector.
 The number of industries reserved for the public sector
was reduced from 17 to 3 (Transport and railway; Mining
of atomic minerals and Atomic energy)
GLOBALIZATION MEASURES
 Customs duties and tariffs imposed on imports and
exports were reduced gradually to make the Indian
economy attractive to global investors.
 All controls on foreign trade have been liberalized, and
open competition was encouraged.
 Partial Convertibility of Indian currency was permitted up
to a specific extent to ensure an adequate flow of foreign
currency through Foreign Institutional Investment (FII)
and Foreign Direct Investment (FDI)
 The equity limit of foreign capital investment has been
raised from 40% to 100% percent.
SELF-ASSESSMENT
Fill in the blanks
1. …….... Committee is related to the implementation of the
banking ombudsman scheme.
2. The online trading system of the Bombay Stock Exchange
(BSE) is known as ……...
3 The auction of 91 days TB in government securities market
commenced from……..
True or False?
4. The Committee on Financial System (CFS) set-up followed by
the introduction of the new economic policy in India, is
popularly known as Sivaraman Committee.
5. The non-fulfillment of ‘Performance, Obligations and
Commitments’ entailed penalty in the form of high CRR SLR;
stoppage of RBI refinance facility; stoppage of capital
contribution by the government, etc.
6. Under the stock market reforms, the debt issues not
accompanied by an equity component are permitted to be
sold entirely by the book building process only.
Answers: (1) Goiporia (2) BOLT (3) January 1993 (4) False (5)
True (6) True
Questions
1. What are the objectives of financial sector reforms?
2. List the various banking sector reforms introduced under the
NEP regime.
3. Examine the impact of stock market reforms in security
trading in India.

4.7. BANKING OMBUDSMAN
SCHEME
Banking Ombudsman Scheme
An ombudsman is an official who investigates complaints and

mediates fair settlements, especially between aggrieved parties.
The term ombudsman was first used in Sweden in 1809, with the
Parliamentary Ombudsman being first appointed by the
government. The Reserve Bank of India first introduced the
Banking Ombudsman Scheme on 14th June 1995. In 2002, RBI
repealed this scheme and introduced the modified "Banking
Ombudsman Scheme 2002," which was once again modified on
1st January 2006.
RBI appoints the Ombudsman, who are required to resolve
complaints relating to the deficiency of certain services in banks.
This scheme applies to the whole of India to all banks such as
commercial banks, regional rural banks, and also scheduled
primary cooperative banks. RBI has issued a directive in this
regard to all banks as per powers vested in Section 35A of the
Banking Regulation Act to comply with the provisions of the
scheme. Since it is directive, banks are bound to abide by the
same, failing which the RBI can penalize them.
The applicability of the scheme can be suspended to any bank
for any period, as decided by the RBI (Article 2) As per Article 15
of the scheme all banks are required to display the purpose and
salient features of the scheme, and also the name and address of
the Banking Ombudsman in all branches and office premises in
such places so that it is put to notice of the public visiting the
bank premises. The RBI is also empowered under the scheme to
make provisions in case any difficulty is faced in its
implementation (Article 16)
The banks are also required to make available for perusal a
copy of the scheme in every branch with the designated officer for
this purpose. A notice stating that such copy is available with the
designated officer should also be displayed. Banks should
provide a copy of the scheme on request made by the customer
after collecting a nominal fee. They are also required to appoint
nodal officers at their Zonal Regional Offices and inform their
names to the respective Banking Ombudsmen. They should
display the contact details of such nodal officers for the
information of the public. These officers are required to furnish
information to the Banking Ombudsmen in respect of complaints
filed against the bank.
APPOINTMENT OF AN OMBUDSMAN
As per the Article 4 of the scheme, the RBI has to appoint one
or more of the officers in the rank of Chief General Manager or
General Manager as the Banking Ombudsman to carry out the
functions entrusted to them under this scheme as Ombudsman
can be appointed for a period of three years at a time (Article 4)
The office of the Ombudsman will be located at such a place as to
be specified by the RBI. By June 2007, RBI had appointed Banking
Ombudsman in 15 Centers.
To expedite the disposal of the companies, the Banking
Ombudsman can hold sittings in any place in the area of his
jurisdiction as may be considered necessary and proper by him
(Article 5) The RBI will provide the required staff to the
Secretariat of the Ombudsman. The salary of the Ombudsman
and the cost of his Secretariat will be borne by the RBI (Article 6)
The RBI will specify the geographical jurisdiction to which the
authority of each Ombudsman will extend (Article 7) The
Banking Ombudsman is the quasi-judicial authority that has
powers to summon the parties, banks, and the complainant.
POWERS AND DUTIES OF AN OMBUDSMAN
The Banking Ombudsman will (i) receive complaints relating
to deficiency in banking services, (ii) facilitate the settlement of
these complaints through the conciliation and mediation between
the bank and the aggrieved party, and (iii) if necessary, will pass
awards for this purpose which are to be complied by the bank.
GROUNDS OF COMPLAINT
Chapter V of the earlier scheme, which provided power to the
Ombudsman to act as an arbitrator, has been repealed, and
therefore under the new scheme, the Ombudsman is not required
to perform the same. He will hear complaints relating to
deficiency of service in the following cases;
 Collection of cheques: Delay in the collection of cheques and
also non-payment of cheques drafts bills.
 Issue of drafts: Failure to issue or delay in issuance of the draft
banker cheque or pay orders.
 Remittances: Non-payment or delay in payment of inward
remittances.
 Cash receipt: Non-acceptance of small denomination notes
coins or charging a commission for this purpose.
 Working hours: Non-adherence to prescribed working hours
by branches.
 Guarantee: Failure to honour a guarantee or letter of credit as
committed by banks.
 Banking services: Failure to provide or delay in providing
banking services as promised in writing by a bank or its direct
selling agents.
 Deposit account opening: Complaints about the refusal of
opening accounts without any valid reason.
 Deposit account operation: Complaints about the delay non-
credit of proceeds non-observance of RBI’s directive on rate of
interest on any SB CA or any other account.
 Deposit account closure: Forced closure of deposit account
without due notice. Refusal to close or delay in closure of
deposit accounts.
 Non-resident deposits: Complaints from NRI’s concerning
their deposit account in India.
 Receipts of export proceeds: Delay in receipt of export
proceeds or delay in the handling of export bills or collection
bills provided such complaint pertains to bank’s operation in
India.
 ATM/ Debit card and Credit card operations: Non-adherence
to the instructions given by the RBI on ATM Debit card and
Credit card operations.
 Service charges: Levying charges without prior notice to the
customer.
 Pension: Non-disbursement or delay in disbursement of
pension.
 Taxes: Refusal to accept taxes or delay in receiving taxes.
 Government securities: Refusal or delay in issuing, servicing,
or making redemption of government securities.
 Non-adherence to RBI directives: Violation of guidelines
issued by the RBI about any banking or related services.
 Loans and advances: Complaints related to, (i) non-observance
of RBI’s directive on interest rate, (ii) non-observance of
prescribed time schedule for disposal of loan applications, (iii)
non-accepting of loan application without furnishing valid
reasons, (iv) non-observance of any other directions or
instructions of the RBI with respect to loans.
 Any other case: The Banking Ombudsman can also deal with
any other case as may be specified by RBI from time to time.
As per the amendment made from 5 th February, 2009
complaints can also be lodged for (i) non-adherence to the
provisions of the fair practice for lenders, (ii) non-adherence to
the provisions of the Code of Bank’s Commitment to Customers,
(iii) non-observance of RBI’s guidelines on engagement of
recovery agents, (iv) matters related to internet banking.
Now the Banking Ombudsman can award compensation not
exceeding Rs. One Lakh in case of complaints arising out of credit
card operations. The scheme now provides an easy to fill
application format for lodging complaints.
PROCEDURE FOR FILING COMPLAINT
The complaint has to be made in writing by the person
aggrieved or by his authorized representative. The scheme
specially debars any advocate to act as an authorized
representative to lodge the complaint and to appear for the
hearing. The complaint can be made in the prescribed format
given in Annexure A to this scheme though it is not mandatory. A
complaint can be made even in a plain paper. The complainant
has to file copies of documents (if any) which he proposes to rely
upon and a declaration that the complaint is maintainable. No fee
or court fee is required to be paid for filing such a complaint.
A complaint can also be made through electronic means, and
a printout of the same will be taken on record. A complaint
covered under this scheme received by the Government or the
RBI can also be entertained by the Ombudsman if forwarded to
him.
A complaint can be made with the Banking Ombudsman only
if a written representation has been made to the bank and the
bank had rejected the complaint or no reply is received by the
complainant one month after the bank received his representation
or the complainant is not satisfied with the reply given by the
bank. The complaint has to be made within one year from the
date of receipt of the reply from the bank or where no reply is
received within one year and one month from the date of
representation to the bank.
Further, the complaint has to be made within the limitation
period of the claim. The Ombudsman will not entertain any
complaint if it relates to a subject matter for which any processing
is pending in any court/tribunal/ arbitrator or any other forum
or a decree/order/award has been passed. The Ombudsman also
has the power to reject any complaint if he feels it is desirable to
do so. His decision in this regard will be final and binding on the
complainant and the bank.
PROCESS OF SETTLEMENT
 No fee: There is no fee required for preferring any complaint.
 Notice by Ombudsman: The Ombudsman has to send a copy
of the complaint to the branch or office named in the
complaint under advice to the nodal officer of the bank and
will try to settle the complaint through an agreement between
the bank and the complainant by conciliation or mediation.
 Appointment of Nodal Officers: Each bank covered under
this scheme is required to appoint nodal officers at their
regional offices zonal offices and inform the respective offices
of the Banking Ombudsman. The nodal officers will be
responsible for representing the bank and furnishing
information in respect of complaints filed against the bank.
 Reply from the bank: If the complaint could not be redressed
by agreement within one month from the date of receipt of the
complaint, the Ombudsman will give a reasonable
opportunity to both the bank and the complainant to present
their point and then pass an award.
 Calling for information: The Banking Ombudsman can call
from the bank any information or certified copies of any
document relating to the complaint. Where a bank fails to
submit such information, he can draw the inference that the
information, if provided, would be unfavourable to such a
bank.
 Passing Award: The award may direct the bank for specific
performance of its obligation and orpay compensation to the
complainant for the loss suffered by him. The amount of
compensation should not exceed the amount of direct loss
suffered by the complainant subject to a maximum amount of
Rs.10 lakh. The Ombudsman will send a copy of the award to
both the bank and the complainant.
 Credit Card Complaints: In case of complaints related to
credit card operations, the amount of compensation can be up
to Rs. 1 Lakh and will be determined after taking into account
the loss of time, harassment, mental anguish suffered by the
complainant.
 Acceptance from the complainant: After receipt of the copy
of the award, the complainant has to submit a letter of
acceptance to the bank to the effect that he accepts the award
in full, and final settlement of his claim. He is required to
submit this letter within 15 days from the date of receipt of
the copy of the award by him.
 Extension of time: The Ombudsman may extend the 15 days'
time limit given for submitting the acceptance letter for
further 15 days. If the complainant fails to provide the letter of
acceptance within these 30 days from the date of receipt of the
award, the award will lapse.
 Compliance by the bank: The bank within 30 days of the date
of receiving the letter of acceptance will have to comply with
the award and intimate about such compliance to the Banking
Ombudsman.
REJECTION OF COMPLAINT AND APPEAL
Rejection: The Ombudsman can reject a complaint at any
stage, if it appears to him that the complaint is frivolous,
malafide, without sufficient cause or any such reason mentioned
in clause 13 of the scheme.
Appeal: The appeal can be made by the complainant or by the
bank. The complainant can appeal within 30 days from the date of
receipt of the communication of the award (if he is not satisfied
with the award) or the rejection of the complaint. Similarly, the
bank can also appeal within 30 days from the date of receipt of
the letter of acceptance from the complainant (reduced from 45
days to 30 days) A bank should appeal only with the previous
sanction of the Chairman, in his absence, the Managing Director
or the Executive Director or the Chief Executive Officer or any
other officer of equal rank. The Appellate Authority, in either of
the above cases, when satisfied on the genuineness of the cause of
delay for not making the appeal, can allow time for a further
period not exceeding 30 days to make the appeal.
SELF-ASSESSMENT
Fill in the blanks
1. RBI appoints the ………..who would resolve the complaints
relating to the deficiency of certain services in banks.
2. An Ombudsman can be appointed for a period of ………..years
at a time.
3. An Ombudsman can award compensation not exceeding
Rs………… in case of complaints arising out of credit card
operations.
4. The complainant can appeal within …….. from the date of
receipt of the communication of the award (if he is not
satisfied with the award) or the rejection of the complaint.
True or False?
5. The RBI will bear the salary of the Ombudsman and the cost
of his Secretariat.
6. The Banking Ombudsman is the quasi-judicial authority that
has powers to summon the parties, banks, and the
complainant.
7. The bank within 60 days from the date of receiving the letter
of acceptance will have to comply with the award and
intimate about such compliance to the Banking Ombudsman.
Answers: (1) Ombudsman (2) Three (3) One Lakh (4) 30 Days (5)
True (6) True (7) False
Questions
1. List out the grounds of complaints an ombudsman would
hear relating to the deficiency of services in banks.
2. Elaborate the procedure for filing a complaint with an
Ombudsman?
3. Discuss the process of settlement under the Banking
Ombudsman Scheme.

427
Future Value Interest Factor Table

Table A: Future Value Interest Factors for Rs. 100 Compounded at k Percent for n Periods: FVIF k,n = (1 + k) n
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.2000 1.2400 1.2500 1.3000
2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 1.2996 1.3225 1.3456 1.4400 1.5376 1.5625 1.6900
3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 1.4815 1.5209 1.5609 1.7280 1.9066 1.9531 2.1970
4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305 1.6890 1.7490 1.8106 2.0736 2.3642 2.4414 2.8561
5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 1.9254 2.0114 2.1003 2.4883 2.9316 3.0518 3.7129
6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820 2.1950 2.3131 2.4364 2.9860 3.6352 3.8147 4.8268
7 1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526 2.5023 2.6600 2.8262 3.5832 4.5077 4.7684 6.2749
8 1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584 2.8526 3.0590 3.2784 4.2998 5.5895 5.9605 8.1573
9 1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040 3.2519 3.5179 3.8030 5.1598 6.9310 7.4506 10.604
10 1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946 3.7072 4.0456 4.4114 6.1917 8.5944 9.3132 13.786
11 1.1157 1.2434 1.3842 1.5395 1.7103 1.8983 2.1049 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359 4.2262 4.6524 5.1173 7.4301 10.657 11.642 17.922
12 1.1268 1.2682 1.4258 1.6010 1.7959 2.0122 2.2522 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345 4.8179 5.3503 5.9360 8.9161 13.215 14.552 23.298
13 1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980 5.4924 6.1528 6.8858 10.699 16.386 18.190 30.288
14 1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348 6.2613 7.0757 7.9875 12.839 20.319 22.737 39.374
15 1.1610 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590 3.1722 3.6425 4.1772 4.7846 5.4736 6.2543 7.1379 8.1371 9.2655 15.407 25.196 28.422 51.186
16 1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522 3.4259 3.9703 4.5950 5.3109 6.1304 7.0673 8.1372 9.3576 10.748 18.488 31.243 35.527 66.542
17 1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588 3.7000 4.3276 5.0545 5.8951 6.8660 7.9861 9.2765 10.761 12.468 22.186 38.741 44.409 86.504
18 1.1961 1.4282 1.7024 2.0258 2.4066 2.8543 3.3799 3.9960 4.7171 5.5599 6.5436 7.6900 9.0243 10.575 12.375 14.463 26.623 48.039 55.511 112.455
19 1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 4.3157 5.1417 6.1159 7.2633 8.6128 10.197 12.056 14.232 16.777 31.948 59.568 69.389 146.192
20 1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697 4.6610 5.6044 6.7275 8.0623 9.6463 11.523 13.743 16.367 19.461 38.338 73.864 86.736 190.050
21 1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406 5.0338 6.1088 7.4002 8.9492 10.804 13.021 15.668 18.822 22.574 46.005 91.592 108.420 247.065
22 1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304 5.4365 6.6586 8.1403 9.9336 12.100 14.714 17.861 21.645 26.186 55.206 113.574 135.525 321.184
23 1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405 5.8715 7.2579 8.9543 11.026 13.552 16.627 20.362 24.891 30.376 66.247 140.831 169.407 417.539
24 1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724 6.3412 7.9111 9.8497 12.239 15.179 18.788 23.212 28.625 35.236 79.497 174.631 211.758 542.801
25 1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274 6.8485 8.6231 10.835 13.585 17.000 21.231 26.462 32.919 40.874 95.396 216.542 264.698 705.641
30 1.3478 1.8114 2.4273 3.2434 4.3219 5.7435 7.6123 10.063 13.268 17.449 22.892 29.960 39.116 50.950 66.212 85.850 237.376 634.820 807.794 *
35 1.4166 1.9999 2.8139 3.9461 5.5160 7.6861 10.677 14.785 20.414 28.102 38.575 52.800 72.069 98.100 133.176 180.314 590.668 * * *
36 1.4308 2.0399 2.8983 4.1039 5.7918 8.1473 11.424 15.968 22.251 30.913 42.818 59.136 81.437 111.834 153.152 209.164 708.802 * * *
40 1.4889 2.2080 3.2620 4.8010 7.0400 10.286 14.974 21.725 31.409 45.259 65.001 93.051 132.782 188.884 267.864 378.721 * * * *
50 1.6446 2.6916 4.3839 7.1067 11.467 18.420 29.457 46.902 74.358 117.391 184.565 289.002 450.736 700.233 * * * * * *
428
Table B: Future Value Interest Factors for Rs. 100 Annuity Compounded at k Percent for n Periods: FVIFA k,n =[(1+k)n1]k
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
1 1.0000 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.2000 1.2400 1.2500 1.3000
2 2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1100 2.1200 2.1300 2.1400 2.1500 2.1600 2.2000 2.2400 2.2500 2.3000
3 3.0301 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 3.3421 3.3744 3.4069 3.4396 3.4725 3.5056 3.6400 3.7776 3.8125 3.9900
4 4.0604 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 4.7097 4.7793 4.8498 4.9211 4.9934 5.0665 5.3680 5.6842 5.7656 6.1870
5 5.1010 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6.2278 6.3528 6.4803 6.6101 6.7424 6.8771 7.4416 8.0484 8.2070 9.0431
6 6.1520 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 7.9129 8.1152 8.3227 8.5355 8.7537 8.9775 9.9299 10.980 11.259 12.756
7 7.2135 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 9.7833 10.089 10.405 10.730 11.067 11.414 12.916 14.615 15.073 17.583
8 8.2857 8.5830 8.8923 9.2142 9.5491 9.8975 10.260 10.637 11.028 11.436 11.859 12.300 12.757 13.233 13.727 14.240 16.499 19.123 19.842 23.858
9 9.3685 9.7546 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 14.164 14.776 15.416 16.085 16.786 17.519 20.799 24.712 25.802 32.015
10 10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 16.722 17.549 18.420 19.337 20.304 21.321 25.959 31.643 33.253 42.619
11 11.567 12.169 12.808 13.486 14.207 14.972 15.784 16.645 17.560 18.531 19.561 20.655 21.814 23.045 24.349 25.733 32.150 40.238 42.566 56.405
12 12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 22.713 24.133 25.650 27.271 29.002 30.850 39.581 50.895 54.208 74.327
13 13.809 14.680 15.618 16.627 17.713 18.882 20.141 21.495 22.953 24.523 26.212 28.029 29.985 32.089 34.352 36.786 48.497 64.110 68.760 97.625
14 14.947 15.974 17.086 18.292 19.599 21.015 22.550 24.215 26.019 27.975 30.095 32.393 34.883 37.581 40.505 43.672 59.196 80.496 86.949 127.913
15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 34.405 37.280 40.417 43.842 47.580 51.660 72.035 100.815 109.687 167.286
16 17.258 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.950 39.190 42.753 46.672 50.980 55.717 60.925 87.442 126.011 138.109 218.472
17 18.430 20.012 21.762 23.698 25.840 28.213 30.840 33.750 36.974 40.545 44.501 48.884 53.739 59.118 65.075 71.673 105.931 157.253 173.636 285.014
18 19.615 21.412 23.414 25.645 28.132 30.906 33.999 37.450 41.301 45.599 50.396 55.750 61.725 68.394 75.836 84.141 128.117 195.994 218.045 371.518
19 20.811 22.841 25.117 27.671 30.539 33.760 37.379 41.446 46.018 51.159 56.939 63.440 70.749 78.969 88.212 98.603 154.740 244.033 273.556 483.973
20 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275 64.203 72.052 80.947 91.025 102.444 115.380 186.688 303.601 342.945 630.165
21 23.239 25.783 28.676 31.969 35.719 39.993 44.865 50.423 56.765 64.002 72.265 81.699 92.470 104.768 118.810 134.841 225.026 377.465 429.681 820.215
22 24.472 27.299 30.537 34.248 38.505 43.392 49.006 55.457 62.873 71.403 81.214 92.503 105.491 120.436 137.632 157.415 271.031 469.056 538.101 *
Banking Operations
23 25.716 28.845 32.453 36.618 41.430 46.996 53.436 60.893 69.532 79.543 91.148 104.603 120.205 138.297 159.276 183.601 326.237 582.630 673.626 *
24 26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.497 102.174 118.155 136.831 158.659 184.168 213.978 392.484 723.461 843.033 *
25 28.243 32.030 36.459 41.646 47.727 54.865 63.249 73.106 84.701 98.347 114.413 133.334 155.620 181.871 212.793 249.214 471.981 898.092 * *
30 34.785 40.568 47.575 56.085 66.439 79.058 94.461 113.283 136.308 164.494 199.021 241.333 293.199 356.787 434.745 530.312 * * * *
35 41.660 49.994 60.462 73.652 90.320 111.435 138.237 172.317 215.711 271.024 341.590 431.663 546.681 693.573 881.170 * * * * *
36 43.077 51.994 63.276 77.598 95.836 119.121 148.913 187.102 236.125 299.127 380.164 484.463 618.749 791.673 * * * * * *
40 48.886 60.402 75.401 95.026 120.800 154.762 199.635 259.057 337.882 442.593 581.826 767.091 * * * * * * * *
50 64.463 84.579 112.797 152.667 209.348 290.336 406.529 573.770 815.084 * * * * * * * * * * *
429
Present Value Interest Factor Table

Table C: Present Value Interest Factors for Rs. 100 Discounted at k Percent for n Periods: PVIFk,n=1(1 + k) n
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8333 0.8065 0.8000 0.7692
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.6944 0.6504 0.6400 0.5917
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.5787 0.5245 0.5120 0.4552
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.4823 0.4230 0.4096 0.3501
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4019 0.3411 0.3277 0.2693
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3349 0.2751 0.2621 0.2072
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.2791 0.2218 0.2097 0.1594
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2326 0.1789 0.1678 0.1226
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.1938 0.1443 0.1342 0.0943
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.1615 0.1164 0.1074 0.0725
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149 0.1954 0.1346 0.0938 0.0859 0.0558
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869 0.1685 0.1122 0.0757 0.0687 0.0429
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625 0.1452 0.0935 0.0610 0.0550 0.0330
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413 0.1252 0.0779 0.0492 0.0440 0.0254
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 0.1079 0.0649 0.0397 0.0352 0.0195
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1883 0.1631 0.1415 0.1229 0.1069 0.0930 0.0541 0.0320 0.0281 0.0150
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1696 0.1456 0.1252 0.1078 0.0929 0.0802 0.0451 0.0258 0.0225 0.0116
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1528 0.1300 0.1108 0.0946 0.0808 0.0691 0.0376 0.0208 0.0180 0.0089
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1377 0.1161 0.0981 0.0829 0.0703 0.0596 0.0313 0.0168 0.0144 0.0068
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 0.0868 0.0728 0.0611 0.0514 0.0261 0.0135 0.0115 0.0053
21 0.8114 0.6598 0.5375 0.4388 0.3589 0.2942 0.2415 0.1987 0.1637 0.1351 0.1117 0.0926 0.0768 0.0638 0.0531 0.0443 0.0217 0.0109 0.0092 0.0040
22 0.8034 0.6468 0.5219 0.4220 0.3418 0.2775 0.2257 0.1839 0.1502 0.1228 0.1007 0.0826 0.0680 0.0560 0.0462 0.0382 0.0181 0.0088 0.0074 0.0031
23 0.7954 0.6342 0.5067 0.4057 0.3256 0.2618 0.2109 0.1703 0.1378 0.1117 0.0907 0.0738 0.0601 0.0491 0.0402 0.0329 0.0151 0.0071 0.0059 0.0024
24 0.7876 0.6217 0.4919 0.3901 0.3101 0.2470 0.1971 0.1577 0.1264 0.1015 0.0817 0.0659 0.0532 0.0431 0.0349 0.0284 0.0126 0.0057 0.0047 0.0018
25 0.7798 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0736 0.0588 0.0471 0.0378 0.0304 0.0245 0.0105 0.0046 0.0038 0.0014
30 0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0437 0.0334 0.0256 0.0196 0.0151 0.0116 0.0042 0.0016 0.0012 *
35 0.7059 0.5000 0.3554 0.2534 0.1813 0.1301 0.0937 0.0676 0.0490 0.0356 0.0259 0.0189 0.0139 0.0102 0.0075 0.0055 0.0017 0.0005 * *
36 0.6989 0.4902 0.3450 0.2437 0.1727 0.1227 0.0875 0.0626 0.0449 0.0323 0.0234 0.0169 0.0123 0.0089 0.0065 0.0048 0.0014 * * *
40 0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0668 0.0460 0.0318 0.0221 0.0154 0.0107 0.0075 0.0053 0.0037 0.0026 0.0007 * * *
50 0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0339 0.0213 0.0134 0.0085 0.0054 0.0035 0.0022 0.0014 0.0009 0.0006 * * * *
Banking Operations
430
Table D: Present Value Interest Factors for Rs. 100 Annuity Discounted at k Percent for n Periods: PVIFA=[11/(1+k)n]k
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8333 0.8065 0.8000 0.7692
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5278 1.4568 1.4400 1.3609
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.1065 1.9813 1.9520 1.8161
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.5887 2.4043 2.3616 2.1662
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 2.9906 2.7454 2.6893 2.4356
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.3255 3.0205 2.9514 2.6427
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.6046 3.2423 3.1611 2.8021
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 3.8372 3.4212 3.3289 2.9247
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.0310 3.5655 3.4631 3.0190
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.1925 3.6819 3.5705 3.0915
11 10.368 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.3271 3.7757 3.6564 3.1473
12 11.255 10.575 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.4392 3.8514 3.7251 3.1903
13 12.134 11.348 10.635 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 4.5327 3.9124 3.7801 3.2233
14 13.004 12.106 11.296 10.563 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 4.6106 3.9616 3.8241 3.2487
15 13.865 12.849 11.938 11.118 10.380 9.7122 9.1079 8.5595 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 4.6755 4.0013 3.8593 3.2682
16 14.718 13.578 12.561 11.652 10.838 10.106 9.4466 8.8514 8.3126 7.8237 7.3792 6.9740 6.6039 6.2651 5.9542 5.6685 4.7296 4.0333 3.8874 3.2832
17 15.562 14.292 13.166 12.166 11.274 10.477 9.7632 9.1216 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 4.7746 4.0591 3.9099 3.2948
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.3719 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 4.8122 4.0799 3.9279 3.3037
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.6036 8.9501 8.3649 7.8393 7.3658 6.9380 6.5504 6.1982 5.8775 4.8435 4.0967 3.9424 3.3105
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.8181 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 4.8696 4.1103 3.9539 3.3158
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.2922 8.6487 8.0751 7.5620 7.1016 6.6870 6.3125 5.9731 4.8913 4.1212 3.9631 3.3198
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.4424 8.7715 8.1757 7.6446 7.1695 6.7429 6.3587 6.0113 4.9094 4.1300 3.9705 3.3230
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.5802 8.8832 8.2664 7.7184 7.2297 6.7921 6.3988 6.0442 4.9245 4.1371 3.9764 3.3254
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.7066 8.9847 8.3481 7.7843 7.2829 6.8351 6.4338 6.0726 4.9371 4.1428 3.9811 3.3272
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 4.9476 4.1474 3.9849 3.3286
30 25.808 22.396 19.600 17.292 15.372 13.765 12.409 11.258 10.274 9.4269 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 4.9789 4.1601 3.9950 3.3321
35 29.409 24.999 21.487 18.665 16.374 14.498 12.948 11.655 10.567 9.6442 8.8552 8.1755 7.5856 7.0700 6.6166 6.2153 4.9915 4.1644 3.9984 3.3330
36 30.108 25.489 21.832 18.908 16.547 14.621 13.035 11.717 10.612 9.6765 8.8786 8.1924 7.5979 7.0790 6.6231 6.2201 4.9929 4.1649 3.9987 3.3331
40 32.835 27.355 23.115 19.793 17.159 15.046 13.332 11.925 10.757 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 4.9966 4.1659 3.9995 3.3332
50 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.9148 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 4.9995 4.1666 3.9999 3.3333

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BANKING

New Royal Book Company

First Published : 2020

Published by Imran Mirza and Mirza Furqan Beg for

The backbone of any economy can be best evaluated by the

1.1. Banking System in India.......................................................1

A banking system is a group or network of institutions that

REGIONAL RURAL BANKS

“The monetary policy is nothing but the conscious policy of

Dear Money Policy: This policy is adopted when there exists

NON-DISCRETIONARY FISCAL POLICY

MONETARY POLICY Vs FISCAL POLICY

NATIONALISATION OF COMMERCIAL BANKS

The Banking Regulation Act, 1949, primarily govern the

CORPORATE GOVERNANCE FOR NBFCs

INTERNATIONAL SUPERVISORY CO-OPERATION

The Reserve Bank of India (RBI) is India's central bank, which

CHAPTER I: PRELIMINARY (SECTIONS 1- 2)

Bank Reserve Bank of India constituted under

CHAPTER II: INCORPORATION,

Protection of action taken in good faith: As per Section 43A

The Banking Regulation Act 1949, which came into effect on

The concept of insuring deposits kept with banks received

LEGAL FRAMEWORK AND OBJECTIVES

Account Type Account Holders Max. Insurance Cover

Account (3) 1st A/c Holder "B" Max Insurance up to Rs.

Account (4) 1st A/c Holder "A" Max Insurance up to Rs.

Account (7) 1st A/c Holder "A" The account will be

HOW DOES AN ASSET RECONSTRUCTION

6. If there are more than one secured creditors, the decision

A nonperforming asset (NPA) refers to a classification for

The term money laundering refers to the process of showing

Section 4 of the Act provides that an offense of money

(A) Types of transactions for which the records registers are

These registers/records must contain the details regarding

The “Banking System” in any country would work

Credit Control Method

The quantitative controls are indirect whereas the qualitative

QUANTITATIVE METHODS OF CREDIT CONTROL

KNOW YOUR CURRENCY

Malayalam, Marathi, Nepali, Odia, Punjabi, Sanskrit, Tamil,

DEMONETISATION OF INDIAN CURRENCY (2016)

Queues outside a bank to exchange demonetized Demonetized ₹500 and ₹1000banknotes

On 8 November 2016, the Government of India announced

Commercial Banks are those profit-making institutions that

Reserve Bank of India

Scheduled Banks Non Scheduled Banks

Commercial Banks Co-operative Banks Local Area Banks

Public Sector Banks State Co-op. Banks Coastal Area Bank,

Private Sector Banks: The banks in which private individuals

3. Purchase and sale of shares and securities on behalf of the

The term “Banking” is defined in Section 5 (b) of the Banking

6. Purchaser of DD/MT/TT & Issuing Agent Principal

Tournier Vs National Provincial & Union Bank of England

Means of Customer Code Words

Rs.5 lakhs to Rs.10 lakhs Good means

ISSUE OF GARNISHEE ORDER

Garnishee Order Attachment Order

ATTACHMENT ORDERS UNDER OTHER STATUTES

PAYMENT OF INTEREST ON FREEZED ACCOUNTS

Powers to draw/endorse cheque: The power to draw/

Commercial banks offer choices to their customers to open

Transfer to Inoperative Unclaimed Balance A/c: SB accounts

CURRENT ACCOUNT: WHO CAN OPEN IT?