CHAPTER – 2

BANKING PRODUCTS

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 CHAPTER – 2
BANKING PRODUCTS

2.1 Concept of Banking Products

The Services, which produced by banks for customers is known as banking Products.
Monthly Interest Scheme, Farmer’s deposit Scheme, Housing Deposit Scheme,
Automatic extension deposit scheme, Loan Schemes, Currency Exchange scheme, Gold
Scheme, Locker services, Internet Banking, Tele Banking, Mobile banking, ATM, Debit
Card, Credit Card, Vehicle Loans, Car loans, Education loans, Insurance Scheme, Loan
against Share, Mutual fund scheme & etc. are included in banking products.

2.2 Types of Banking Products

Banks in India have traditionally offered mass banking products. Most common deposit
products being savings bank, current account, term deposit account and, lending
products being cash credit and term loans. Due to RBI guidelines, banks have had little
to do besides accepting deposits at rates fixed by RBI, and lend amount arrived by the
formula stipulated by RBI at rates prescribed by the latter. Prime lending rate (PLR) was
the benchmark for interest on the lending products. But PLR itself was, more often than
not, dictated by RBI. Further, remittance products were limited to issuance of Drafts,
Telegraphic Transfers, Bankers Cheque and Internal Transfer of funds. In view of
several developments in the 1990s, the entire banking products structure has undergone
a major change. As part of the economic reforms banking industry has been deregulated
and made competitive. New players have added to the competition. IT revolution, has
made it possible, to provide ease and flexibility in operations to customers. Rapid strides
in information technology have redefined the role and structure of banking in India.
Further due to exposure to global trends after Information explosion led by Internet,
customers - both Individuals and Corporate are now demanding better services with
more products from their banks. Financial market has turned into a buyer's market.
Banks are also changing with time, and are trying to become one-stop financial

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supermarkets. Market focus is shifting from mass banking products to class banking,
with introduction of value added and customized products. A few foreign and private
sector banks have already introduced customized banking products, like Investment
Advisory Services, Investment products and Tax Advisory services, Photo Credit Cards,
Cash Management services. A few banks have gone in to market mutual fund schemes.

2.2.1 Deposit Schemes

Deposits are the most important aspect in the banking sector. They collect surplus
money from the public. The deposits will be mobilized by banks. The money collected
from the public are preserved by banks and interest will be paid by the banks. The
depositors are benefited and their amount of money is safe at the banks. In this situation
the banks can earn a sum of money on the amount collected by them. The banks create
credit on the basis of deposits. The level of creation of credit depends upon the amount
of deposits. The banks have introduced Fixed Deposits, Current Deposits and Savings
Deposits, to suit the various requirements of the depositors.

2.2.2 Housing Deposit Scheme

It is a term deposit scheme for Individuals/HUFs/Partnerships/Societies & Trusts &

Association of persons. The minimum deposit in the scheme is decided with a maturity
period decided with interest rate.

2.2.3 Automatic extension deposit

Customer can order the bank, to automatically extend the deposit period. The new
period of deposit will be the same as the previous one; the new interest rate will be the
one valid at the time of extension.
Customer can choose between these two options:

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 • The deposit is extended with the interest earned, i.e. the interest earned for the
previous deposit period is added to the deposit sum; or
• Only the sum of the deposit is extended and the interest you have earned is
transferred to your settlement account.

2.2.4 Advances

Advances are the source of finance, which is provided by the banks to the companies, to
meet the short-term financial requirement. It is a credit facility which should be repaid
within one year as per the terms, conditions and norms issued by Reserve Bank of India
for lending and also by the schemes of the concerned bank. They are granted against
securities which are as under:

• Primary Security: Hypothecation of Debtors, Stock Pro-notes, etc.

• Collateral Security: Mortgage of land and buildings, machinery, etc.
• Guarantees: Guarantees given by partners, directors or promoters, etc.

2.2.5 Loans

The amount lent by the lender to the borrower for a specific purpose like the
construction of the building, capital requirements, purchase of machinery and so on, for
a particular period of time is known as Loan. These type of loans are granted by the
banks and financial institutions. It is an obligation which needs to be repaid back after
the expiry of the stipulated period.

The loan carries an interest rate on the debt advanced. Before advancing loans, the
lending institution checks the credit report of the customer, to know about his
credibility, financial position and capacity to pay. Under the loan system, credit is given
for a definite purpose and for a predetermined period. Normally, these loans are
repayable in installments. Funds are required for single non-repetitive transactions and
are withdrawn only once. If the borrower needs funds again or wants renewal of an
existing loan, a fresh request is made to the bank. Thus, a borrower is required to
negotiate every time he is taking a new loan or renewing an existing loan. Banker is at

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liberty to grant or refuse such a request depending upon his own cash resources and the
credit policy of the central bank. The Loan is classified in the following three categories.

(1) On the basis of Security:

• Secured Loan: The loan which is backed by securities is Secured Loan.

• Unsecured Loan: The loan on which no asset is pledged as security is
Unsecured Loan

(2) On the basis of Repayment:

• Demand Loan: The loan which is repaid on demand of the lender is Demand
Loan.
• Time Loan: Loan, which is repaid in full at a future specified date is Time Loan.
• Installment Loan: Loans which are to be repaid in evenly distributed monthly
installments is Installment Loan.

(3) On the basis of Purpose:

• Home Loan
• Car Loan
• Education Loan
• Commercial Loan
• Industrial Loan

Advantages of Loan System

1. Financial Discipline on the Borrower; As the time of repayment of the loan or

its installments is fixed in advance, this system ensures a greater degree of self-
discipline on the borrower as compared to the cash credit system.

2. Periodic Review of Loan Account; Whenever any loan is granted or its renewal
is sanctioned; the banker gets as opportunity of automatically reviewing the loan

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 account. Unsatisfactory loan accounts may be discontinued at the discretion of
the banker.

3. Profitably; The system is comparatively simple. Interest accrues to the bank on

the entire amount lent to a customer.

Drawbacks of Loan System

1. Every time a loan is required, it is to be negotiated with the banker. To avoid it,
borrowers may borrow in excess of their exact requirements to provide for any
contingency.

2. Banks have no control over the use of funds borrowed by the customer.
However, banks insist on hypothecation of the asset/ vehicle purchased with loan
amount.

3. Though the loans are for fixed periods, but in practice the roll over, i.e., they are
renewed frequently.

4. Loan documentation is more comprehensive as compared to cash credit system

2.2.6 Overdraft

When a customer is maintaining a current account, a facility is allowed by the bank to

draw more than the credit balance in the account; such facility is called an ‘overdraft’
facility. This facility is made available to current account holders who operate their
account through cheques.The customer is permitted to withdraw the amount of overdraft
allowed as and when he/she needs it and to repay it through deposits in the account as
and when it is convenient to him/her. Overdraft facility is generally granted by a bank on
the basis of a written request by the customer. Sometimes the bank also insists on either
a promissory note from the borrower or personal security of the borrower to ensure

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safety of amount withdrawn by the customer. Overdrafts are generally granted against
the security of government securities, shares & debentures, National Savings
Certificates, LIC policies and bank’s own deposits etc. and also on unsecured basis. The
interest rate on overdraft is higher than is charged on loan.

2.2.7 Cash Credit

Cash credit is the main method of lending by banks in India and accounts for about 70
per cent of total bank credit. Under the system, the banker specifies a limit, called the
cash credit limit, for each customer, up to which the customer is permitted to borrow
against the security of tangible assets or guarantees. Cash credit is a flexible system of
lending under which the borrower has the option to withdraw the funds as and when
required and to the extent of his needs. Under this arrangement the banker specifies a
limit of loan for the customer (known as cash credit limit) up to which the customer is
allowed to draw. The cash credit limit is based on the borrower’s need and as agreed
with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as
and when he needs money subject to the limit sanctioned. It is normally sanctioned for a
period of one year and secured by the security of some tangible assets or personal
guarantee. If the account is running satisfactorily, the limit of cash credit may be
renewed by the bank at the end of year. The interest is calculated and charged to the
customer’s account.

Advantages of Cash Credit System

1. Flexibility:

The borrowers need not keep their surplus funds idle with themselves, they can
recycle the funds quite efficiently and can minimize interest charges by depositing
all cash accruals in the bank account and thus ensures lesser cost of funds to the
borrowers and better turnover of funds for the banks.

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 2. Operative convenience:

Banks have to maintain one account for all the transactions of a customer. The
repetitive documentation can be avoided.

2.2.8 Gold Scheme

The rate of the Gold available with customer will be arrived and fixed by the bank
authorities, based on the market value, as on the date of Gold deposit scheme, and a
fixed deposit receipt, or a pass bill, will be issued by the bank to the individual. After
mature date, the Gold will be returned with interest. Generally the Gold deposit scheme
duration is 3 to 7 years. After deposit one year locking period is there. Hence before one
year the cancellation is not permitted in this deposit scheme. Only on completion of one
year, even though the duration of time is not completed the Deposit can be cancelled by
the individual. In this procedure the individual has to pay penalty. Before 3 years if the
individual has intended to come out from this scheme, 0.5%, after completion of 3 years
0.25 % penalty is chargeable to him. The interest earned on Gold deposits is very less,
but the value of the Gold as per market will be increased and also put in safe custody of
the bank.

Benefits

• Without any locker fees your Gold can be deposited safely

• Income is available on the deposit in the shape of minimum interest.
• The interest will be expected from the purview of Income Tax
• No Wealth tax & capital gain tax against this scheme
• Nomination facility is available in this Deposit scheme
• On maturity date if the individual is not interested to take back the gold, he can
be paid with cash on the market value.

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2.2.9 Safe Deposit Locker service

Bank provides Safe Deposit Locker Service to their customers. These facilities are found
in a large number in branches. Bank charge against this service, depends on the size of
the locker and the centre in which the branch is located.

2.2.10 Currency exchange Scheme

Under this scheme banks offer facility to exchange currency at decided rate to the
customers or account holders, which helps exporters, importers, tourists and make their
transaction comfortable.

2.2.11 Annuity & Retirement Scheme

It is an savings scheme by investing in it , if an individual want a fixed income over a

certain period when he/she retire, could easily get. With an annuity pension, one will get
a savings scheme that ensures regular disbursements for a period of 25 years from the
date one reach his/her early retirement age. One may set up an annuity pension up to 15
years after he/she has reached at early retirement age. It can be set up by individual or by
employer.

2.2.12 Monthly Interest Scheme

The Monthly Income Plan is tailored for those individuals, who regularly need money,
to supplement their income i.e. each month. Interest will be paid on monthly basis, at
discounted rate. Interest earned on deposit becomes another source of income. Key
Benefits, this plan does not demand any extra formalities, as concerns overdrafts and
withdrawals. Scheme provides the comfort of liquidity along with a security of money
being in safe hand.

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2.2.13 Insurance linked saving bank account

The entire account holder under this scheme gets, the benefit of accident insurance
coverage decided at the bank‘s cost and also Hospitalization cover for reimbursement of
hospitalization expenses arising out of accident with decided limit at the bank‘s cost. For
Availing the benefits under this facility, The current/savings bank deposits account is
holding the minimum balance of Rs.10, 000/-for the period of 90 days prior to the date
of accident and also the age of the depositor is above 10 years and below 70 years as at
the date of the accident, resulting in either permanent disability as here in after defined
or death is eligible for this purpose providing necessary documents to the satisfaction of
the Bank. If the Depositor hold more than one current/savings bank deposit account or
both the accounts in the Bank under this scheme the insurance eligibility is for only one
current or savings bank deposit account which is beneficial to the depositor.

2.2.14 Non Residence Indians (NRI) Services

NRI Banking refers to bank accounts that an NRI can operate in India. These accounts
can only be opened and operated with institutions, which have authorization from RBI to
provide such services. In India, Banking Sector offers a wide range of NRI banking
Services like investments, home loans, mutual funds, trading, money transfer &
insurance.

2.2.15 International Banking

“International Banking” can be defined as a sub-set of commercial banking transactions

and activity having a cross-border and/or cross currency element. International Banking
assists traders to expand their business and trade activities beyond the boundaries of a
nation. Banking Sector provides International Services like Trade Finance, Project
Export Finance, Correspondent Banking, Merchant Banking, Exporter Gold Card
Treasury and etc. services to their customers.

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2.2.16 Cash Reserve Ratio

Cash reserve Ratio (CRR) in India is the amount of funds that the banks have to keep
with RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out the
excessive money from the banks.

2.2.17 Statutory Liquidity Ratio (SLR)

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the
minimum percentage of deposits that the bank has to maintain in form of gold, cash or
other approved securities. Thus, we can say that it is ratio of cash and some other
approved to liabilities (deposits). It regulates the credit growth in India.

2.2.18 Tele-banking

Telephone banking is innovative form of electronic banking, introduced by banks, which

allows its customers to perform transactions over the telephone. It carries the concepts of
24 hours banking to the customer’s home or business place. Tele- banking service
function baised on the voice processing facility available with the bank computers. The
caller generally a customer of the bank will be able to call the bank any time and inquire
balances or transactions history, and to transfer funds to between accounts. In this
system computers at the bank end is connected to a telephone linked with modem. The
voice processing facility provided in the software identifies the caller, by keyword and
provides him services with suitable reply whenever necessary. Some banks use a
telephone answering machine, in which case the services not really ‘Tele-banking’ per
se, but simply a telephone answering machine system.

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Tele-banking is offered by the banks through a technology, known as Interactive Voice
Response Service (IVRS). Besides delivering information related to the customer’s
account, bank provide the following information under Tele-banking services

• Information on deposit interest rates

• Information on location of branches and ATM
• Receiving of following forms by fax or e-mail:
• Debit card application form
• Travel currency card application form
• Registration form for LIC premium payment through ATM.
• BSNL bill payment registration form
• Exchange declaration form etc.,

Apart from Tele-banking, another system, and simple and for limited service is also
available- known as voice mail facility. There are several foreign banks now offering
very advanced touch- tone telephone answering services which route the customers call
directly to the department concerned of the bank. It also allows the customers to leave
the message for the concerned desk or department if the person is not available. In this
system each service representative has his or her ‘voice-mail’ postbox in which message
are stored and retrieved on return of the deak’s person.

2.2.19 Personal Computer Banking

Personal Computer banking (PC) is a fast growing area in electronic banking. PC

banking lets customer’s access information on their accounts through a Dial-up
connection with their bank. Customer can perform basically all the transactions that are
available with telephone banking. They also have the ability, to download information
and process in their own financial management software.

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2.2.20 Mobile Banking

Mobile banking refers to provision and availment of banking and financial services, with
the help of mobile telecommunication devices. Mobile Banking is otherwise known as
M-Banking or SMS banking and more. It is a mobile service that is used to check the
account balance, payments, transactions, etc using mobile devices like Mobile Phone or
PDA (Personal Digital Assistant). The previous way for mobile banking was provided
through SMS. European Banks were first to introduce mobile banking services to the
customers. The services provided in mobile banking are:

(1)Account information:

It includes mini statements, account history, alerts, accessing to card & loan statement,
mutual funds, management of pension plan & insurance policy, cheque status, ordering
of cheque books, checking of balance, PIN change, blocking of stolen cards, and
payment date for due.

(2)Transfers, deposits, payments & withdrawals:

It includes handling of micro payment, fund transfer in domestic & international, mobile
recharge, process of Bill payments & commercial payment, banking agent withdrawal &
deposit, and Peer- payment.

(3) Support:

It includes coverage of insurance, credit request, mortgage approval, and request for
check books and ATM card, location of ATM‘s, email, submission of complaints,
tracking and data messages exchanging.

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(4) Investment:

It carries quotes on real time stocks, services of portfolio management, mobile banking,
and personalized alerts & security price notifications.

(5) Content service:

It has loyalty based offers, location related services, and some basic information like
weather & news updates.

Advantages of Mobile Banking:

• Easy operation,
• High security,
• Reliability, and
• Scalability.

2.2.21 M-cheque

'M-cheque' facility that would enable its customer to transact using mobile phone.
Plastic cards will not be the only mode for cashless transaction; mobile phones are set to
catch up the same. This is how it would work: a customer could visit a merchandiser
with his M-cheque enable mobile and purchase products. The merchandiser would call
up the associated unit with the customer's mobile number.

2.2.22 Digi cash

Digital cash is a system of purchasing cash credits in relatively small amounts, storing
the credits in computer, and then spending them when making electronic purchases over
the Internet. Theoretically, digital cash could be spent in very small increments, such as
tenths of a cent (U.S.) or less. Most merchants accepting digital cash so far, however,
use it as an alternative to other forms of payment for somewhat higher price purchases.

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There are several commercial approaches to digital cash on the Web. Among these are
Cash from Digicash and Cyber cash. Digital cash can also be stored on an electronically
sensitive card. See smart card and micro payment.

2.2.23 SMS Banking

For customers who desire to avail only information based banking services, Bank has
introduced SMS banking for balance enquiry, mini statement, Cheque status from the
registered mobile number. This is a very simple and easy to use product that a customer
can start using without any registration process.

2.2.24 On-line Banking

Online banking may be defined as the direct linking of an operation to a computer

system, so that any time stimulus provided by that operation or equipment is
immediately accepted by the computer system. This means that when a transaction is
entered by the user, the computer knowledge’s it and updates the related files, which are
affected by the particular transaction so that, before the next transaction is produced, the
files in the computer already contain the updated data.

2.2.25 Net cash

Net cash is a new way to buy and sell online. Its cash instead of credit, so no concerns
about spending more than you can afford and no worries about card.

2.2.26 Point of Sale Terminal and on-line banking

Point of Sale Terminal consist of two key components - a computer terminal that is
linked on-line to computerised customer information files in a bank and a plastic
magnetically encoded transaction card that identifies customer to the computer. During a

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transaction the customer’s account is debited and the retailer’s account is credited by the
computer for the amount of purchase.

Home Banking is becoming popular in India both in the corporate banking sector as well
as personal banking Sectors.

(A) Corporate Banking:

Remote banking has become very popular among corporate customers especially big
business/industrial houses, which are already automated. More and more banks are
providing customers terminals right in the customer’s office, which will facilitate the
customers to operate the account without physically coming to the bank. For grtting this
type of servicing from the banks, which have this facility, the customer requires a
computer, a telephone connection and a modem. Morever, any of these items need not
be dedicated for this purpose and could be utilized only at the time of performing
banking transactions there by do not involve any addition investments.

At present by utilizing remote banking facility, corporate customers will be able to get
the following servicing

• Getting there current balance or getting their statement of accounts for any
pre-defined period.
• Ordering cheque books.
• Ordering inter-Bank and Inter-Bank fund transfers. Instructing stop payments of
cheque.
• International remittances.
• Opening letter of credits.

By obtaining a special SWIFT (Society for worldwide Inter-bank Financial

Telecommunication), authentication facility in arrangement with their bankers,
customers will be able to directly prepare messages in the SWIFT format by sitting in

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their office, transfer the particulars in the respective templates to their bankers. The
bankers will directly authenticate the transaction there by the entire transaction is
complicated across the global within minute.

(b) Personal Banking

By using Tele-banking facility, customers can dial up the branch’s designated telephone
number, which is connected to the computer and he, by dialings his identification
number will be able to get the connectivity to the branch’s designated computer. The
software provided in the machine will be interactive with the customer asking him to
dial the coad number of the service required by him and suitably answers him. A
customer can have access to his balance, and also can place other order for statement of
accounts, cheque books and few selected services through this tele-banking.

The customers who are having modems and a personal computer at home can have
direct connectivity with the branch’s computer through telephone line, and can obtain
similar services, besides some additional services Iike transferring the statement of his
account from the branches’ computer to his own personal computer. The number of
services offered, at present though is limited.

2.2.27Trade Finance

Banks play a vital role in providing financial assistance and also comfort levels to the
traders through their financing called as “Trade Finance”. Trade finance is granted in the
form of fund based finance and non- fund based finance to enable the traders in their
trading activities. The borrower may be a manufacturer or trader a who require working
capital and term finance for his production and managing his cash flows. Apart from
these type of loans, wherein the banker allows the borrower to draw down actual funds,
banks also extend credit facility in the form of non -fund based facilities, called non fund
based limits like letters of credit, bank guarantees

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2.2.27 Virtual Banking

The Virtual Banking is the provision of accessing the banking and related services
online without actually going to the bank branch/office in person. Simply, availing the
banking services through an extensive use of information technology without any
requirement for the physical walk-in premises is called as virtual banking.

Virtual banking enables a customer to pay bills online, check account details, secure
loans, withdraw and deposit money anytime as per the convenience. Some common
forms of virtual banking are, ATMs, use of magnetic ink character recognition code
(MICR), Electronic clearing service scheme, electronic fund transfer scheme, RTGS,
computerized settlement of clearing transactions, centralized fund management schemes,
etc.

2.2.28 Demat account

Demat account, popularly used short name for dematerialized account, is something you
would require in case you wish to online purchase and sale of securities such as stocks,
mutual funds, gold EFTs, etc. Although you have the option of receiving securities in
physical or demat mode, it would be advisable for you to receive the dematerialized
form of your security.

2.2.29 Automatic Teller Machines (ATM);

The introduction of Automatic teller machines has given facility to the bank customers
for banking beyond the banking hours. ATMs have gained prominence as a delivery
channel for banking transactions in India. ATM is a device that allows customers who
have an ATM card to performed routine banking transactions without interacting with a
human teller. Entire ATM network is now available to customers from any bank for
transactions for no fee at all, irrespective of the banks in which they have their accounts.
ATM (Automated Teller Machine) facilitates the customer to do Banking transactions

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such as Cash withdrawal, balance enquiry, obtaining mini-statement, transfer of funds
between his/her own accounts etc. ATMs are currently becoming popular in India that
enables the customers to withdraw their money 24 hours a day and 7 days a week.

This system is known as ‘Any Time Money’ or ‘Anywhere Money’ because it allows
the customers, to withdraw money from the bank from any of its ATMs round the clock
even on Sundays and National holidays. Through this facility, customers of the bank are
not restricted to remain a customer of the branch where the account is maintained.

Services Offered Through ATM

Following are the important services offered by the Indian banks through their ATM
• Cash and Cheque deposit
• Transfer of funds between accounts
• Printing of mini-statement
• Paying of insurance premium
• Balance enquiry
• Product information
• Change of Personal Identification Number (PIN) Ordering of Cheque book
• Receipt of cash
• Recharge of prepaid mobile card
• Option for mobile banking etc.

Advantage of ATMs:

(a)To the Customers

• ATMs provided 24 hours, 7 days a week and 365 days a year service.
• Service is quick and efficient.
• Privacy in transaction.
• Free from errors.

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 • On networking, the cardholder can asses cash and services at any location
regardless of where he maintains account in the banker’s branch.
• Wider flexibility in withdrawals.
• Fund transfer across the branches/banks up to Rs. 10,000/- per day through any
banks ATM machine.
• Anywhere banking facility.

(b) To Banks

• Alternative to extend banking hours.

• Crowding at bank counter considerably reduced. Service is cheaper, if there are
sufficient large numbers of transactions.
• Alternative to new branches and to reduce operating expenses.
• Cash transportation and cash handling is avoided.
• ATMs can be located in any convenient location in the city.
• Can be installed in any form as well unit, window unit or lobby unit.
• Relieves bank employees to focus on more analytical and innovative work.
• Increased market penetration.

2.2.30 Internet banking

Internet Banking is an improvement over PC (Personal Computer) banking. This is

because Internet banking is done over a highly accessible public network. The bank can
set up their systems, much the same as PC Banking. It is accessible to anyone using the
internet, not just the bank’s customers. Internet banking allows customers to conduct
financial transactions on a secure website operated by their retail or virtual bank. The
common features fall broadly into several categories

(1) Transactional (e.g., performing a financial transaction such as an account to account

transfer, paying a bill, wire transfer, apply for a loan, new account, etc.)

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 • Payments to third parties, including bill payments and telegraphic/wire transfers
• Funds transfers between a customer's own transactional account and savings
accounts
• Investment purchase or sale
• Loan applications and transactions, such as repayments of enrollments

(2) Non-transactional (e.g., online statements, cheque links, co browsing, chat)

• Viewing recent transactions

• Downloading bank statements, for example in PDF format
• Viewing images of paid cheques
• Financial Institution Administration
• Management of multiple users having varying levels of authority
• Transaction approval process

The Internet Provides bank with the ability to deliver products and services to
consumers at a cost that is lower than any existing method of delivery. Internet banking
is easy to use and cost effective.

2.2.31 MICR and OCR Clearing System

The two types of technology being adopted in clearing are the Magnetic Ink Character
Recognition (MICR) and Optic Character Recognition (OCR) technology. This is also
known as Automated Clearing System (ACS). In India, MICR technology is used in
clearing of cheques. Under this system, specific type of paper is used for printing the
cheques. These cheques are processed in a high- speed machine. The cheques should
conform to the required specification as laid down. MICR cheques have two white bands
one at the top and another at the bottom. In these bands, the details of the Cheque are
encoded with special magnetic ink. These bands should be free from any marking or
impression. Further, the cheques should not be folded in between and either end should

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be free from any tabs. Cheque number, centre code and transaction code are usually
printed at the time of printing the Cheque itself. Before presentation of the Cheque only
the amount column is required to be encoded.

2.2.32 Card Based Payment Systems

There are three types of card based payment system.

1. Credit card
2. Debit card and
3. Smart card

(1) Credit Card

A Credit card is an instrument of payment, which enables the cardholder to obtain either
goods or services from merchants where arrangements have been made to reimburse the
merchant. Cash card is also issued in addition to the credit card to enable the cardholder
to use an ATM and draw cash up to the specified limit. The outstanding amount is
payable by the cardholder to the bank which carries a fixed amount of interest also.
A Credit card is a source of revolving credit. A number of parties are involved in credit
card transactions and there is a contract between the card issuer and cardholder whereby
the cardholder is allowed to make use of the card at specified retail outlets, called
Merchant Establishment (ME), to pay for the goods and services. There is also another
separate agreement between the card organization and the Merchant Establishments.
When a credit cardholder makes purches from specified retail outlets the retail outlets
make out bills to the account of the cardholder and obtain payment from the card
organization, which in turn makes a monthly bill to the bank which issued the card. The
bank makes payment to the debit of customer’s account subsequently. The whole
process takes about 15 to 27 days and during the period the cardholder enjoys credit.
The credit card is a pay-later product as the holder is charged much after the purchase.
Credit cards can also be issued as a co-branded card by a bank promoted jointly with
another non-financial institution.

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Benefits of Credit Cards

• The credit cardholder has the flexibility and convenience to use, at home or
abroad to meet his requirements. It is less time consuming and carries better
value then traveler’s cheque. It provides automatic and instant credit to the
cardholder. The customer need not carry cash and is empowered to spend
wherever and whenever he wants with his credit card within the fixed limits
prescribed by bank.

• For the merchant establishment it is a guaranteed payment. It results in increased

sales, immediate cash payment and greater security.

• For the banks, credit cards generate income from the card fees and interest
charges from cardholders and service fees from retail outlets. It brings greater
efficiency. It is a marketing tool as credit card users also use other banking
products

(2) Debit Cards

A debit cards is a payment card used to obtain cash, goods and services automatically
debiting the payment to the cardholder’s bank account immediately and, therefore, it is
essentially a pay-now product. In a debit card when the holder makes a purchase, the
merchant establishment swips the card on an electronic data capture machine, which
then debits the bank account of the cardholder. This means that the merchant
establishment gets the credit immediately. A clints needs to have bank account if he
wants to have a debit card. In the debit card the limit of the cardholder will be the
amount of funds which he has in his account. The customer can never overspend
because the system will reject any transaction that exceeds the balance in his account
and the bank will never face default because the amount spend is debited immediately
from the customer’s account.

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Debit cards and credit cards differ in some significant ways. In the case of a credit card,
the issuer offers credit and overdraft facilities. This facility is not available with a debit
card, which will only debit payments from existing and available funds within the
cardholders account. A credit cardholder therefore has a monthly bill to pay in every
month that the card is used. If they don‘t pay that bill, high interest charges are applied.
A debit card holder is free from the hassle of paying those bills and from the risk of
building up large debts to credit card companies.

Benefits of Debit Cards

• There is no need to carry cash by the cardholder.

• It is quick and less complicated then using a cheque.
• It can also be used for withdrawal of cash.
• It’s holders can have a record of the transactions in his bank statement which will
enable him to plan and control the expenditure.
• It can be issued to any individual without assessing credit worthness.

(3) Smart Cards

A smart card, also known as Stored Value Card, is a pay-before product. Smart card is
also known as a Chip Card which holds personal information about the cardholder and
can be used with a personal identification number (PIN). It has a magnetic strip to read
pre-recorded information in the card.

Smart card is a new generation portable computer. Embedded in the smart card is a
microcomputer chip giving it intelligence and a memory capacity far beyond today’s
magnetic strip cards, which can be used in many applications, and is small enough to be
carried around at all times. Smart card can be programmed to do any risk within its
processing power and memory capacity. Smart cards are prepaid cards giving
entitlement to use of goods or services. Each time the card is used, the value of the
goods or services received is reduced from the value on the card.

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Advantages of Smart card

• Since the smart card incorporates a secure identification system, it is possible to

safely use these cards in an off-line mode. This means that the cost of
telecommunication lines, the transaction processing hardware and software, and
the secure power supplies are completely avoided.

• The system can have ‘manual ATMs’: the terminal performs the card processing
and security functions, printing a slip, which authorises the cashier to make the
payment manually. These ‘manual ATMs’ can be installed in bank branches,
shops, railway stations, airports, shopping centers, etc. Since the operator is not
responsible for the payment authorization, but only for the cash counting and
hand over the function can be provided by an out sider. In case the bank still
wants automatic ATMs to be used, these are available with smart card’s readers.

• The smart card can be used for cash deposit as well as cash withdrawal at
‘manual ATMs’. This allows a person who has excess cash in hand (for example
while travelling) to deposit it into the card and then withdraw it when required.
This makes the smart card work like an instant traveler’s cheque. This would
really be useful for the people who travel between the metropolitan cities and the
smaller towns buying and selling goods. Instead of carring cash, they can carry
the cash, they can carry the card, thereby safeguarding from theft or loss.

• Multinational Banks are issuing two different kinds of cards known as national
and international cards. In national cards the payment can be made only in the
currency of the cardholder’s country. In international cards payment can be made
in foreign currency.

• The smart card can store data and cannot be misuses by any unauthorized person
either physically or electronically. Unlike conventional magnetic strip card,
which can easily erased or copied, smart card has a protected and much larger

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 memory. Smart card also has confidential memory zones holding secret user
information.

2.2.33 Electronic Fund Transfer (EFT)

Electronic Funds Transfer (EFT) is a system of transferring money from one bank
account directly to another without any paper money changing hands. One of the most
widely-used EFT programs is Direct Deposit, in which payroll is deposited straight into
an employee's bank account, although EFT refers to any transfer of funds initiated
through an electronic terminal, including credit card, ATM, Fedwire and point-of-sale
(POS) transactions. It is used for both credit transfers, such as payroll payments, and for
debit transfers, such as mortgage payments. Transactions are processed by the bank
through the Automated Clearing House (ACH) network, the secure transfer system that
connects all U.S. financial institutions. For payments, funds are transferred
electronically from one bank account to the billing company's bank, usually less than a
day after the scheduled payment date. The growing popularity of EFT for online bill
payment is paving the way for a paperless universe where checks, stamps, envelopes,
and paper bills are obsolete. The benefits of EFT include reduced administrative costs,
increased efficiency, simplified bookkeeping, and greater security. However, the number
of companies who send and receive bills through the Internet is still relatively small.

2.2.34 Electronic Clearing Services

Indian banks are competing with one another to offer new products and services to their
customers. Banking services and products in India witnessed transformation on a large
scale in the last few years. Technology has played a significant role in facilitating the
transformation in the banking sector. Electronic clearing service is one of the new
electronic banking services.

ECS is a mode of electronic funds transfer, from one bank account to another bank
account, using the services of a clearing house. This is normally for bulk transfers, from

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one account to many accounts or vice versa. This can be used both, for making
payments like distribution of dividend, interest, salary, pension and etc. by institutions or
for collection of amounts, for purposes such as payments to utility companies like
telephone, electricity or charges such as house tax, water tax etc. or for loan installments
of financial institutions/banks or regular investments of persons.

There are two types of Electronic clearing service

(a) Electronic Credit Clearing Service

(b) Electronic Debit Clearing Service

(a) Electronic Credit Clearing Service

RBI introduced the Electronic Clearing Services in April, 1995. It is simple, reliable and
cost effective solution for bulk and repetitive payment transactions like salary, pension,
interest, commission, dividend and etc. through banks. The customers who want to avail
ECS facility have to get them registered with the sponsor bank. The sponsor bank will
forward a copy of registration form to the controlling authority for ECS (e.g. Reserve
Bank of India) after allotting a registration number. Customers , who have to make bulk
payments to a large number of beneficiaries, prepare the credit instructions on the
magnetic media and submit the same to controlling authority through their bankers, who
process the data, arrives at inter-bank settlement and provide bank and branch wise
reports, containing the details of payments to facilitate fast payment to the beneficiaries.
Clearing house debits the account of the bank effecting payment and credits to the
account of destination bank i.e. the accounts of the bank where the beneficiaries of the
transactions maintain their accounts.

(b) Electronic Debit Clearing Service

Electronic Debit Clearing Service was introduced by the RBI in August, 1994.
Electronic Debit Clearing covers the payments of bills to utility companies like

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telephone and electricity bills etc. where consumers are large in numbers. These Utility
companies are collecting their periodical bills from their customers. Under this facility,
the customers on receipt of the bill from utility company and having satisfied himself of
correctness can approach the banker and authorise the bank branch to debit his account
for the amount of the bill and transfer the amount to the bank account of the utility
company. The bank in turn will prepare a consolidated floppy file of all such transfers
through a tabletop MICR reader and tenders to the clearing house who would debit the
individual bank and credit to the account of the utility company.

2.2.35 Electronic Benefit Transfer

Government of India as well as various State Governments is implementing a number of

welfare schemes, which transfers benefits through Scheme Implementing Department
(SID), to the Bank account of the beneficiary. The beneficiary can then withdraw from a
branch/ ATM/PoS terminal and use it for his personal consumption or could even utilise
the Merchant point-of-sale terminal infrastructure to make purchases through Debit
Card. Such transfer into the account of the beneficiary is referred to as Electronic
Benefit Transfer (EBT). While the benefit of schemes like MNREGA are being
transferred directly into the bank accounts all over the country, the State Government are
being persuaded to ensure transfer of as many as 32 schemes into the account of the
beneficiaries directly. This includes all schemes of scholarships, old age pension etc.
Substantial progress has been made in all States.

2.2.36 Electronic Bill Payment (EBP)

By using EBP service you can bid goodbye to queues and paper work. Electronic/Online
bill paying services offer a variety of bill management and payment features to make
your life simpler and more efficient. The services vary in what they offer, so make sure
the service you pick can fill your needs. Below are the criteria to evaluate online bill
paying services.

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(1) Bill Management

Bill management features keep you on target for paying your bills on time. They should
offer different alerts that tell you when your bills arrive, are due and are paid. You
should be able to view the details of your bill regardless of its format. Other handy
features include a bill payment calendar and online notes.

(2) Payment Features

Online bill paying services include a variety of payment features. Some pay anyone you
would normally pay with check and others only pay those who accept electronic
payments. The service should allow you to choose which payments you want to pay
each month and which you want paid automatically. Account types and which banks you
can use to pay your bills vary depending on the service.

(3) Ease of Use/Setup

Online bill paying services should be easy to setup and use, otherwise they don‘t provide
the convenience they promise. You should have to enter your payee and account
information only once.

2.2.37 Electronic Cheque

E-Cheques are a mode of electronic payments. This technology was developed couple of
years ago by a consortium of Silicon Valley IT researchers and merchant bankers and
since then has been promoted by many of the financial bodies. E-cheques work the same
way as paper cheques and are a legally binding promise to pay. The payment system
uses digitally signed XML (Extensible Markup Language) documents that provide
mechanism to authenticate parties to a transaction. E-cheques are defined using FSML
(financial services markup language) which allows for addition and deletion of

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document blocks, signing, co-signing, endorsing, etc. Faster clearance is possible by
using an e-cheque, which is an image of the real one. As a result, cheques will not have
to be physically moved from the collection centre to the clearance centre, reducing both
time and cost.

2.2.38 Electronic invest

E-Invest account is more than a brokerage account. It offers you a unique 3-in-1 feature,
which integrates your Brokerage, Bank and one or more Demat accounts. This means
that you can buy and sell shares and forget about the hassles of settlements. Transfers of
shares from/to your Demat account and transfer of money from/to your Bank account
take place automatically with no paperwork. Online investing is just a click away and
settlements are no longer a problem.

2.2.39 Electronic Funds Transfer at Point of Sale (EFTPOS)

An Electronic Funds Transfer at the Point of Sale is an online system, that allows
customers to transfer funds instantaneously, from their bank accounts to merchant
accounts, when making purchases (at purchase points). A Point of Sale uses a debit card
to activate an Electronic Fund Transfer Process.

Increased banking productivity results from the use of EFTPOS to service customers
shopping payment requirements instead of clerical duties in handling cheques and cash
withdrawals for shopping. Furthermore, the system continues after banking hours and
hence continual productivity for the bank even after banking hours. It also saves
customers’ time and energy, in getting to bank branches or ATMs for cash withdrawals,
which can be harnessed into other productive activities

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2.2.40 Real Time Gross Settlement (RTGS)

Real Time Gross Settlement (RTGS) is the centralized payments system. RBI introduced
RTGS system with a view to enhance the efficiency of the Cheque clearing system.
RTGS system, introduced in India since March 2004, is a Interlink Research Analysis
system through which electronics instructions can be given by banks to transfer funds
from their account to the account of another bank. The (RTGS) system is maintained
and operated by the RBI, and provides a means of efficient and faster funds transfer
among banks facilitating their financial operations. RTGS system indicates funds
transfer mechanism where transfer of money takes place from one bank to
another on a ‘Real time’ and on ‘Gross’ basis. This is the fastest possible money
transfer system through the banking channel. Settlement in ‘Real Time’ means
payment transaction is not subjected to any waiting period. The transactions are
settled as soon as they are processed. Therefore, money can reach the beneficiary
instantaneously and the beneficiary’s bank has the responsibility to credit the
beneficiary’s account within two hours.

2.2.41 National Electronic Fund Transfer (NEFT)

Like RTGS, National Electronic Fund Transfer (NEFT) is also the centralized payments
systems. NEFT is an important, vital and convenient delivery channel. For the purpose
of encouraging the people to increasingly adopt this channel and to enable them transact
through NEFT at anytime convenient to them, the extent of coverage of NEFT and
RTGS has been extended to all licensed banks through the sub-membership route.
Public Sector Banks could offer their systems to enable these cooperative banks and
Regional Rural Banks to provide the remaining payment products such as Automatic
Teller Machines, point-of-sale (POS) transactions, Credit and Debit Cards to their
customers.

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2.2.42Electronic Commerce and Banking

The global e-commerce activities include the interaction of traders (buyers/importers

and sellers/exporters) with banks and counterparties, manufacturers, service providers
etc., Banks across the globe provide payments and settlements services thereby enable
the rapid growth of global e-commerce. “e marketing” or cyber marketing is an
important segment of e commerce

2.2.43 Non Fund Based services

There are three types of Non fund based services like, Bank Guarantees, Letter of Credit
and Co-acceptance facilities.

Bank Guarantees

As part of Non-fund based facilities, banks issue guarantees on behalf of their clients. A
Bank Guarantee is a commitment given by a banker to a third party, assuring her/ him to
honour the claim against the guarantee in the event of the non- performance by the
bank’s customer. A Bank Guarantee is a legal contract which can be imposed by law.
The banker as guarantor assures the third party (beneficiary) to pay him a certain sum of
money on behalf of his customer, in case the customer fails to fulfill his commitment to
the beneficiary.

Letter of Credit

A Letter of Credit is issued by a bank at the request of its customer (importer) in favour
of the beneficiary (exporter). It is an undertaking/ commitment by the bank,
advising/informing the beneficiary that the documents under a LC would be honoured, if
the beneficiary (exporter) submits all the required documents as per the terms and
conditions of the LC.

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Co-acceptance facilities:

Sometimes in business deals on credit basis, buyers are required to offer adequate
comforts to the sellers such as bank guarantee or co-acceptance of bills by the bankers.
Bank of Baroda offers co-acceptance of bills facility to the top rated clients.

2.3 Why are Banks entering in to insurance Sector?

With Globalization and intense competition banks are seeing the spreads- the difference
between their borrowing and lending rates- come down sharply. Banks have responded
by trying to use their reach and customer base to increase their fee based Income.
Insurance is an ideal option as banks feel they fulfill the three major requirements for a
successful Insurance business viz. asset management and investment skills, distribution
and capital adequacy. Banks would also like to fulfill all the financial needs of their
customers.

2.4 Customers’ Satisfaction

In banking sector, customer satisfaction is basically a state of mind of the customer.

Bank offers their products and services to their customers. The customer chooses
between various offerings products and Services. Customer Satisfication is the ability of
banking services to meet the expectations of the customer. The value is a combination of
quality, service and price. Value increases with quality and service and decreases with
price. Satisfaction reflects a person's judgment resulting from a product's perceived
performance with respect to his/her expectation. Satisfaction can be said as a function of
expectation and performance.

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 S = f (E, P)
Where, S = Satisfication
E = Expectation and
P = Performance Perceived

E>P Dissatisfied
E=P Satisfied
E<P Delight

If E > P, then it indicate that customer are not satisfied with performance of banking
services. E = P indicates that customers are satisfied with performance of banking
services. Similarly, E < P Shows that customers are highly satisfied with performance of
banking services.

2.5 Nonperforming Assets of Banking Sector

The Concept of Nonperforming Assets was first time introduced by Narasimham

Committee during 17th December, 1991. Nonperforming Asset (NPA) is a loan or
advance for which the principal or interest payment remained overdue for a period of 90
days. The loan is shifted to Non-performing asset, when bank will give credit facility to
borrower, but borrower made default on payment of principal amount with rate of
interest, which adversely affects income off the bank. NPA reduces the profit of the
banks. NPA are problematic for financial institutions, since they depend on interest
payments for income.

In accordance with asset classification norms brought in with effect from March 31,
2004, a non-performing asset (NPA) is a loan or an advance, where

• Interest and /or installment of principal remain overdue for a period of more
than 90 Days in respect of a Term Loan,

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 • The account remains 'out of order' for a period of more than 90 days, in respect
of an Overdraft/ cash credit (OD/CC)

• The bill remains overdue for a period of more than 90 days in the case of bills
Purchased and discounted,

• Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purpose, and

• Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

• No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for

more than 91days

Types of NPA

There are two types of NPA.

• Gross Nonperforming Assets and
• Net Nonperforming Assets.

Gross NPA refers to all NPA on a bank’s balance sheet irrespective of the provisions
made. It consists of all the non standard assets like as sub-standard, doubtful, and loss
assets. Net NPA is gross NPA less provisions. Gross NPA is a better indicator than net
NPA since the former does not include the endogenous provisioning process; this is
because banks make provisioning for NPAs according to their capacities. During last
few years, net NPA of most of Cooperative bank remain zero. Therefore researcher takes
only Gross NPA for present study.

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