StudyMaterial For Banking Theory Law and Practice II Year

ACADEMIC YEAR 2022-2023, SEMESTER – III
STUDY MATERIAL
BANKING THEORY LAW AND PRACTICE
STUDY MATERIAL
SEMESTER – III
ACADEMIC YEAR 2022-23
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STUDY MATERIAL
UNIT CONTENT PAGE NO

I Banker and Customer 4- 12
II Banking System 13-21
III Traditional Banking 22-37
IV Modernised Banking 38-48
V Reserve Bank of India 49-56
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STUDY MATERIAL
SYLLABUS
Unit I: Banker and Customer:
Relationship between banker and customer- General & Special relationship-Rights of the banker-
Negotiable instruments-Promissory note, Bill of exchange and Cheque (Meaning and Features) –
Proper Drawing of the cheque - Crossing (Definition and Types)-Endorsement (Definition and Kinds)-
Material alteration.
Unit II: Banking System:

Indigenous Bankers-Commercial Banks - Co-Operative Banks – Land development Banks - Industrial
Development Banks - NABARD-EXIM Banks-Foreign Exchange Banks.
Unit III: Traditional Banking:

Receiving Deposits - General Precautions - Kinds of deposits – Fixed - Current - Saving - Recurring
and Others Lending Loans and Advances - Principles of sound lending forms of advances - loan, cash
credit, overdraft and purchasing and discounting of bills. Mode of charging security - lien. pledge,
mortgage, assignment and hypothecation.
Unit IV: Modernised Banking:

Core banking - Home banking - Retail banking - Internet banking -Online banking and Offline
banking-Mobile banking-Electronic FundsTransfer - ATM and Debit Card-Smart Card - Credit Card -
E-Cash-Swift-RTGS.
Unit V: Reserve Bank of India:

Functions of Reserve Bank of India - Methods of Credit Control.
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STUDY MATERIAL
UNIT – I
BANKER AND CUSTOMER
MEANING OF BANKING
Banking includes a wide variety of financial institutions that store the money of individuals,
businesses and other entities. Banks provide financial services that help people save, manage and
invest their money.
DEFINITION - BANKING
“Banking is the business of accepting for the purpose of lending or investment, of deposits of
money from the public repayable on demand or otherwise and withdraw-able by cheque, draft, and
order or otherwise.” Indian Banking Regulation Act, 1949.
The term “bank” can refer to many different types of financial institutions — including bank and
trust companies, savings and loan associations, credit unions or any other type of institution that
accepts deposits.
BANKER AND CUSTOMER RELATIONSHIP
General Relationship
Debtor and creditor relationship: When the banker accepts deposits from the customer then the
bank becomes the debtor and the customer is the creditor. If a customer takes loans from a bank
then the customer becomes a debtor and the banks becomes a creditor.
Pledger and Pledgee relationship: when customer pledges (promises) certain assets or security
with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank
becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a
customer repays the loan.
Licensor (Lessor) and Licensee (Lessee) relationship: The relationship between banker and
customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit
locker to the customer. So, the banker will become the Licensor, and the customer will become
the Licensee.
Relationship of Trustee and Beneficiary:-
A trustee holds property for the beneficiary, and the profit earned from this property belongs
to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody,
the banker becomes a trustee of his customer. The customer is the beneficiary so the ownership
remains with the customer.
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STUDY MATERIAL
Relationship of Bailor and Bailee: The relationship between banker and customer can be that of
Bailor and Bailee. A bailment is a contract for delivering goods by one party to another to be held in
trust for a specific period and returned when the purpose is ended. Bailor is the party that delivers
property to another. Bailee is the party to whom the property is delivered. So, when a customer
gives a sealed box to the bank for safekeeping, the customer became the bailor, and the bank
became the bailee.
Relationship of Advisor and Client:-
When a customer invests in securities, the banker acts as an advisor. The advice can be given
officially or unofficially. While giving advice the banker has to take maximum care and caution.
Here, the banker is an Advisor, and the customer is a Client.
Relationship of Agent and Principal:-
The banker acts as an agent of the customer (principal) by providing the following agency
services: Buying and selling securities on his behalf, Collection of cheques, dividends, bills or
promissory notes on his behalf.
Special Relationships
Statutory Obligation to honour cheques:
When a customer opens an account there arises a contractual relationship between the banker and
the customer. As long as there is sufficient balance in the account of the customer, the banker must
honour all his cheques. However, the banker can refuse to honour the cheques only in certain cases
like wrong details.
Secrecy of customer’s account:
When a customer opens an account in a bank, the banker must not give information about the
customer’s account to others. It is one of the principal duties of the banker. There are certain
circumstances in which the banker is entitled to or required to make disclosures about a customer’s
account.
Banker’s right to claim incidental charges:
A banker has a right to charge a commission, interest or other charges for the various services given
by him to the customer. For e.g. an overdraft facility.
Law of limitation on bank deposits:
Under the law of limitation, generally, a customer gives up the right to recover the amount due at a
banker if he has not operated his account for the last 10 years. When a customer opens an account
there arises a contractual relationship between the banker and the customer.
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STUDY MATERIAL
RIGHTS OF A BANKER
Right to charge interest
Every bank in India has the right to charge interest on the loans and advances sanctioned to
customers. Interest is usually charged monthly, quarterly, semi-annually or annually.
Right to levy commission and service charges
Along with interest, banks also have the right to levy a commission and service charges for the
services rendered. The service rendered by the bank might be SMS notification service, retail
banking and so on. Banks can also debit these charges from the customer's bank account.
Right of Lien
Another important right enjoyed by banks is the Right of Lien. Banks have the right to keep goods
and securities belonging to the debtor as a security, until the loan is repaid by the debtor. Banks
have only the right to maintain the security of the debtor and not to sell.
The Right of Set-off
The banker has the right to set off customer accounts. Banks can merge a couple of accounts which
are in the name of the customer and set off the debit balance in one account with the credit
balance in the other, provided the funds belong to the customer.
Right of Appropriation
Let us consider that a customer has taken many loans from the bank and he deposits some money
in the bank without any instructions. If that amount is not sufficient to discharge all loans, the bank
has the right to appropriate the amount deposited to any loan, even to a time-barred debt. But the
customer should be informed on the same.
Right to Close the Account
If the customer’s account is not properly maintained, banks have all the right to close the account
by sending a notice to the customer. Bankers have no right to close the account, without sending a
written notice.
NEGOTIABLE INSTRUMENT
Negotiable Instruments are signed legal documents that guarantee paying a particular amount to a
person or party at a set date or on-demand. It acts as an assurance of payment or repayment that
the assignee expects. Based on the nature of the note, this document may or may not contain the
recipients’ names.
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STUDY MATERIAL
Features of Negotiable Instruments
Written documents must be used: The instruments for negotiation have to be written. That includes
notes written in-hand, printed, typed, engraved, etc.
Easily Transferable: The ability to transfer a negotiable instrument can be effortlessly and readily
transferable. There aren't any formalities or lots of paperwork in an exchange.
Payees must also be specific: The person to whom the payment will be made has to be specific.
There can also be multiple payees for a negotiable instrument. Also, the term "person" includes
artificial persons too, such as trade unions, corporate body chairman, secretaries, etc.
The time of payment must be certain: When the order requires payment at a convenient time, the
arrangement is not considered a bargain-able instrument. In this case, the period needs
confirmation even without any specific date. For instance, it's acceptable to make a payment tied to
the death of an individual since death is a specific moment.
Types of Negotiable Instruments
Promissory notes and Personal cheques are the two most popular types of negotiable instruments
examples. However, there are many kinds of paperwork that fit within this category. Here are a few
of the most popular instruments:
Bearer Bonds
They are unregistered bonds that Corporate or governments issue. As the name implies, the
bondholder will receive a coupon and principal instalment. The issuer does not keep the file of the
initial bondholder. The person who has physical possession of the bearer of the bond is an owner in
law. Thus, there is a significant possibility of loss, theft, or destruction of Bearer bonds.
Cheques
Cheques are a note containing the amount one person pays to another. It includes the bearer's
name and the account number where the funds will be taken. Additionally, it consists of the person
who is paying. Even if the cheque is unclaimed, no other person can use it to commit fraud. In
essence, cheques are the most secure method for making payments or moving money from one
person to another.
Bills of Exchange
In transactions involving both services and goods, they are legally binding documents. These bills
direct one person to pay a certain amount to another person. The person who pays the bill accepts
the exchange bill, an official contract for payment. If issued through a bank, the bill of exchange is
typically referred to as a draft from a bank. If an individual or business issues the bill, we call it a
trade draft.
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STUDY MATERIAL
Promissory Notes
If a promissory note is issued, it reveals the amount due and the interest rate and the payment due
date. Like other negotiable instruments, they are written documents that show a promise to pay
made between a payer and the recipient.
The document is filled with all relevant details, such as the interest rate, the date of issue, the
principal amount and the payee's signature. The advantage of promissory notes is that it permits
companies to access funding outside official financial institutions.
Importance of Negotiable Instruments
If we talk about negotiable instruments’ meaning, we have paramount importance in the business
world. They have always increased as a result of the development of international trade.
Transferring information between two people occurs effortlessly and without many formalities,
making it easier for its extensive application in the world of business.
The right to property that guarantees full ownership is there in this promissory right.
It's possible to make transfers by endorsement or delivery, which is the norm in commercial
transactions.
The payments are instant, thereby saving you a lot of time.
Advantages of Negotiable Instruments
The debtor doesn't need to wait until maturity to receive the cash. He can instantly opt for bill
discounting.
Accommodation bills allow business owners to get money at a lower rate of interest to pay for any
financial gaps which may result from working.
One of the major benefits of bills of exchange lies in the fact that the amount of consideration
between the debtor and creditor comes under the assumption. Therefore, we assume that the
buyer is in debt with the seller. However, the seller doesn't need to prove it. Because the creditor
acknowledges the debt, the judge will conclude that the obligation is legitimately present.
Crossing A Cheque
A crossing is an instruction to the paying banker to pay the amount of cheque to a particular banker
and not over the counter. The crossing of the cheque secures the payment to a banker. It also
traces the person so receiving the amount of cheque. Addition of words ‘Not negotiable’ or
‘Account Payee only’ is necessary to restrain the negotiability of the cheque. The crossing of a
cheque ensures security and protection to the holder. However, we can negotiate a crossed bearer
cheque by delivery and a crossed order cheque by endorsement and delivery.
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STUDY MATERIAL
Types of Cheque Crossing
General Crossing – cheque bears across its face an addition of two parallel transverse lines.
Special Crossing – cheque bears across its face an addition of the banker’s name.
Restrictive Crossing – It directs the collecting banker that he needs to credit the amount
of cheque only to the account of the payee.
Non-Negotiable Crossing – It is when the words ‘Not Negotiable’ are written between the two
parallel transverse lines.
General Cheque Crossing
In general crossing, the cheque bears across its face an addition of two parallel transverse lines
and/or the addition of words ‘and Co.’ or ‘not negotiable’ between them. In the case of general
crossing on the cheque, the paying banker will pay money to any banker. For the purpose of general
crossing two transverse parallel lines at the corner of the cheque are necessary.
Thus, in this case, the holder of the cheque or the payee will receive the payment only through a
bank account and not over the counter. The words ‘and Co.’ have no significance as such.
But, the words ‘not negotiable’ are significant as they restrict the negotiability and thus, in the case
of transfer, the transferee will not give a title better than that of a transferor.
Special Cheque Crossing
In special crossing, the cheque bears across its face an addition of the banker’s name, with or
without the words ‘not negotiable’. In this case, the paying banker will pay the amount of cheque
only to the banker whose name appears in the crossing or to his collecting agent.
Thus, the paying banker will honour the cheque only when it is ordered through the bank
mentioned in the crossing or its agent bank.
However, in special crossing two parallel transverse lines are not essential but the name of the
banker is most important.
Restrictive Cheque Crossing or Account Payee’s Crossing
This type of crossing restricts the negotiability of the cheque. It directs the collecting banker that he
needs to credit the amount of cheque only to the account of the payee, or the party named or his
agent.
Where the collecting banker credits the proceeds of a cheque bearing such crossing to any other
account, he shall be guilty of negligence. Also, he will not be eligible for the protection to the
collecting banker under section 131 of the Act.
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STUDY MATERIAL
However, such crossing will have no effect on the paying banker. This is so because it is not his duty
to determine that the cheque is collected for the account of the payee.
Endorsement
Endorsement means signing at the back of the instrument for the purpose of negotiation. The act of
the signing a cheque, for the purpose of transferring to thesomeone else, is called the endorsement
of Cheque. Section 15 of the Negotiable Instrument Act 1881 defines endorsement. The
endorsement is usually made on the back of the cheque. If no space is left on the Cheque, the
Endorsement may be made on a separate slip to be attached to the Cheque.
Definition of Endorsement
Endorsement When the maker or holder of a negotiable instrument signs the same, otherwise than
as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a
negotiable instrument, he is said to endorse the same, and is called the “endorser”.
Kinds of Endorsement
Endorsement is essentially is of two kinds - Endorsement in Blank and Endorsement in full.

According to Section 16 of the Negotiable Instrument Act, 1881, If the endorser signs his name only,
the endorsement is said to be “in blank”, and if he adds a direction to pay the amount mentioned in
the instrument to, or to the order of, a specified person, the endorsement is said to be “in full”, and
the person so specified is called the “endorsee” of the instrument. There are some other kinds
which are constitutional but not very popular which are given below:
Endorsement in Blank / General : An endorsement is said to be blank or general when the endorser
puts his signature only on the instrument and does not write the name of anyone to whom or to
whose order the payment is to be made.
Endorsement in Full / Special : An endorsement is 'special' or in 'full' if the endorser, in addition to

his signature also mention the name of the person to whom or to whose order the payment is to be
made. There is direction added by endorse to the person specified called the endorsee, of the
instrument who now becomes its payee entitled to sue for the money due on the instrument.
Conditional Endorsement: The conditional endorsement is negotiation which takes effect on the
happening of a stated event, or not otherwise. Section 52 of the Negotiable Instrument Act 1881
provides - The endorser of a negotiable instrument may, by express words in the endorsement,
exclude his own liability thereon, or make such liability or the right of the endorsee to receive the
amount due thereon depend upon the happening of a specified event, although such event may
never happen.
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STUDY MATERIAL
Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all
intermediates endorsers are liable to him.
Illustrations
(a) The endorser of a negotiable instrument signs his name, adding the words “without recourse”.
Upon this endorsement, he incurs no liability.
(b) A is the payee and holder of a negotiable instrument. Excluding personal liability by an
endorsement, “without recourse”, he transfers the instrument to B, and B endorses it to C, who
endorses it to A. A is not only reinstated in his former rights but has the rights of an endorsee
against B and C.
Restrictive Endorsement : Restrictive endorsement seeks to put an end the principal characteristics
of a Negotiable Instrument and seals its further negotiability. This may sound a little unusual, but
the endorsee is very much within his rights if he so signs that its subsequent transfer is restricted.
This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the
drawer losing his money.
Endorsement Sans Recourse :
Sans Recourse which means without recourse or reference.As such a when the property in a
negotiable instrument is transferred sans recourse, the endorser, negatives his liability and excludes
himself from responsibility to all subsequent endorsees. It is one of the commonest form of
qualified endorsement and virtually prohibits negotiation since the endorser says in effect.
Facultative Endorsement:
Facultative Endorsement is an endorsement where the endorser waives some right to which he is
entitled. For example, the endorsee is liable to give notice of dishonor to the endorser and normally
failure to give notice will absolve the endorser from his liability.
Material Alteration
The term ‘material alteration‘indicates alteration or change in the material parts of the instrument.
It may be defined as any change, which alters the very nature of the instrument. Thus, it is the
alteration, which changes and destroys the legal identity of the original instrument and causes it to
speak a different language in legal effect from that which it originally spoke.
A material alteration makes the instrument void, i.e., inoperative and affects the rights and
obligations of the parties to the instrument. It, however, does not affect one who becomes a party
to an instrument subsequent to its material alteration, if any.
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STUDY MATERIAL
Constitutes a Material Alteration
Every alteration or change on a negotiable instrument cannot be established as material alteration

and would not necessarily vitiate the instrument or affect the rights and obligations of the parties
thereto.
The Negotiable Instruments Act is silent on the subject as to what constitutes a material alteration.
Courts of Law in India in this regard have followed the English Common Law, which held that
anything, which has the effect of altering the legal relations between the parties, the character of
the instrument, or the sum payable, amounts to a material alteration.
Accordingly, an alteration can be termed as material alteration if it is such that it alters or attempts
to alter the character of the instrument and affects or attempts to affect the contract, which the
instrument contains. It may arise not only by means of altering, changing, or erasing a certain thing
already written on the instrument, but also by a new insertion.
Instances of Material Alteration
The following are considered as material alteration.
1. Alteration of the date of the instrument
2. Alteration of the amount payable
3. Alteration in time of payment
4. Alteration of the place of payment
5. Alteration of rate of interest or any change of party thereto, if any
6. Tearing of the material part of the instrument
7. Where a bill is accepted generally, the insertion of a place of payment
8. Addition of a new party to the instrument
9. Addition of words to a bill of exchange endorsed in blank so as to convert the same into special
endorsement.
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STUDY MATERIAL
UNIT-2
BANKING SYSTEM
Meaning
Indigenous banking system is the system of banking that involves private firms or individuals who
act as banks by providing financial services such as loans and accepting deposits. Indigenous
banking system is made up of indigenous bankers who do not fall under the purview of the
government.
Functions of Indigenous Bankers
The indigenous bankers perform a number of banking and non-banking functions which are
explained as under:
The indigenous bankers accept deposits from the public which are of current account and for a fixed
period. Higher interest rate is paid on fixed account than on current account. Entries relating to
deposits received, amount withdrawn and interest paid are made in the pass-books issued to the
clients. The indigenous bankers also get funds from the commercial banks, friends, relatives and
even from each other.
The indigenous bankers advance loans against security of land, jewellery, crops, goods, etc. Loans
are given to known parties on the basis of the promissory notes. Loans given on the security of land
and buildings are based on mortgages registered with the Registrar of the area.
The indigenous bankers also provide remittance facilities to their clients. This is done by writing a
finance bill to their branches, if they have at other place, or to some other indigenous banker, with
whom they have such arrangements.
They finance both wholesale and retail traders within the country and thus help in buying, selling,
and movement of goods to different trading centres.
They indulge in speculation of food and non-food crops, and other articles of consumption.
They act as commission agents to firms.
MEANING OF COMMERCIAL BANKS:
A commercial bank is a financial institution which performs the functions of accepting deposits from
the general public and giving loans for investment with the aim of earning profit.
In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do
banking business to earn profit.
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FUNCTIONS OF COMMERCIAL BANKS
The two most distinctive features of a commercial bank are borrowing and lending, i.e., acceptance
of deposits and lending of money to projects to earn Interest (profit). In short, banks borrow to
lend. The rate of interest offered by the banks to depositors is called the borrowing rate while the
rate at which banks lend out is called lending rate.
The difference between the rates is called ‘spread’ which is appropriated by the banks. Mind, all
financial institutions are not commercial banks because only those which perform dual functions of
(i) accepting deposits and (ii) giving loans are termed as commercial banks. For example post offices
are not bank because they do not give loans. Functions of commercial banks are classified in to two
main categories—(A) Primary functions and (B) Secondary functions.
Deposits are of three types as under:
(i) Current account deposits:
Such deposits are payable on demand and are, therefore, called demand deposits. These can be
withdrawn by the depositors any number of times depending upon the balance in the account. The
bank does not pay any Interest on these deposits but provides cheque facilities. These accounts are
generally maintained by businessmen and Industrialists who receive and make business payments
of large amounts through cheques.
(ii) Fixed deposits (Time deposits):
Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are
deposits for a fixed term, i.e., period of time ranging from a few days to a few years. These are
neither payable on demand nor they enjoy cheque facilities.
They can be withdrawn only after the maturity of the specified fixed period. They carry higher rate
of interest. They are not treated as a part of money supply Recurring deposit in which a regular
deposit of an agreed sum is made is also a variant of fixed deposits.
(iii) Savings account deposits:
These are deposits whose main objective is to save. Savings account is most suitable for individual
households. They combine the features of both current account and fixed deposits. They are
payable on demand and also withdraw able by cheque. But bank gives this facility with some
restrictions, e.g., a bank may allow four or five cheques in a month. Interest paid on savings account
deposits in lesser than that of fixed deposit
Deposits which can be withdrawn on demand by depositors are called demand deposits,
Demand deposits do not carry interest whereas time deposits carry a fixed rate of interest.
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STUDY MATERIAL
Demand deposits are highly liquid whereas time deposits are less liquid,
MEANING OF CO-OPERATIVE BANKS
A co-operative bank is known as to be one of the financial entity which belongs to their members
and at the same time they are its owners and also are the customers of the bank.
Objective Of Co-operative Banks
It helps those people who have been less resources or whoever not financially strong. It also
promotes a habit of thrift, savings and mutual help. The main focus of co-operative banks is to come
up with a low cost financially on the basis of the principal of mutual help.
Earning profit is not a taboo however its motive is non-profit, the motive can not be the profit
earning, however, there is no restriction on gaining the profit out of the activities and facilities
provided by the Co-operative banks to its customers.
Functions Performed By The Co-operative Banks
Co-operative banks work and function only on one simple rule “One member one vote”. It is more
democratic than the commercial banks, co-operative banks perform all the basic functions that a
commercial bank performs. Co-operative banks have a federal structure. Co-operative banks act as
an agent to its customers, it accepts cheques and draft from their customers, lends money to other
co-operative societies and banks at comparatively less interest rate.
Following are the functions performed by the co-operative banks:
1. Primary Urban Co-operative Bank (PUCBs)
This type of Co-operative banks provide their services to mainly urban areas of India, they mainly
provide advances in shares and debentures to the small businessmen and also provide these small
businessmen loans with extension in credit facilities.
2. District Central Co-operative Bank (DCCBs)-
These type of banks provide their services to the district or local area. They make and implements
the policies at a district level and also provide credit facilities to the PACs and PUBCs.
3. Primary Agriculture Credit Society (PACs)-
PACs are a type of Co-operative bank which provides loans to its customers with less complexity,
they also motivate their customers to learn to save their money through deposits. It also provides
the benefits and development of the large society.
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4. State Co-operative Banks (SCBs)-
SCBs are governed by NABARD and acts as supervisor to the DCCBCs.
5. Land Development Banks (LDBs)-
These banks help in fulfilling the needs and requirements of the agricultural sector and provide
credit in local areas and also perform all the general and basic functions of a bank. This type of bank
motivates and helps in the increase in agricultural production in our country.
MEANING DEVELOPMENT BANK
“A development bank may be defined as a financial institution concerned with providing all types of
financial assistance (medium as well as long-term) to business units in the form of loans,
underwriting, investment and guarantee operations and development in general and industrial.”
Features of a Development Bank
A development bank has the following features or characteristics:
A development bank does not accept deposits from the public like commercial banks and other
financial institutions who entirely depend upon saving mobilization.
It is a specialized financial institution which provides medium term and long-term lending facilities.
It is a multipurpose financial institution. Besides providing financial help it undertakes promotional

activities also. It helps an enterprises from planning to operational level.
It provides financial assistance to both private as well as public sector institutions.
The role of a development bank is of gap filler. When assistance from other sources is not sufficient
then this channel helps. It does not compete with normal channels of finance.
Development banks primarily aim to accelerate the rate of growth. It helps industrialization specific
and economic development in general
The objective of these banks is to serve public interest rather than earning profits.
Development banks react to the socio-economic needs of development.
Development Banks in India
Working capital requirements are provided by commercial banks, indigenous bankers, co-operative
banks, money lenders, etc. The money market provides short-term funds which mean working
capital requirements.
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STUDY MATERIAL
The long term requirements of business concerns are provided by industrial banks, and the various
long term lending institutions which are created by government. In India these long term lending
institutions are collectively referred as development banks. They are:
Industrial Finance Corporation of India (IFCI), 1948
Industrial Credit and Investment Corporation of India (ICICI), 1955
Industrial Development of Bank of India (IDBI), 1964
State Finance Corporation (SFC), 1951
Small Industries Development Bank of India (SIDBI), 1990
Export Import Bank (EXIM)
Small Industries Development Corporation (SIDCO)
National Bank for Agriculture and Rural Development (NABARD).
In addition to these institutions, there are also institutions such as Life Insurance Corporation of
India, General Insurance Corporation of India, National Housing Bank, Unit Trust of India, etc., which
are providing investment funds.
Functions of IDBI
(a) Direct Assistance – IDBI gives direct assistance by way of project loans, underwriting of and
direct subscription to industrial securities, soft loan, technical refund loans and equipment refund
loans. In direct assistance, it resembles IFCI and ICICI. Various direct finance schemes of IDBI are as
follows:
Modernisation Assistance Schemes for all industries.
Textile Modernisation Fund Scheme.
Technical Development Fund Scheme.
Venture Capital Fund Scheme.
Energy Audit Subsidy Scheme.
Equipment Finance for Energy Conservation Scheme.
Equipment Finance Scheme.
Foreign Currency Assistance Scheme.
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(b) Indirect Assistance – IDBI can assist industrial concerns in an indirect manner also, that is,
through other institutions. The Bank finances those banks and financial institutions which are
lending to industrial concerns. Further, the bank can subscribe to stocks, shares, bonds or
debentures of the IFCI, the State Financial Corporations or any other notified financial institutions
and thus increase their financial resources and enable them to provide larger assistance to industry.
IDBI grants indirect assistance in the following ways :
(c) Special Assistance – The IDBI Act has provided for the creation of a special fund known as the
Development Assistance Fund. This fund is to be used by IDBI to assist those industrial concerns
which are not able to secure funds in the normal course because of low rate of return.
(d) Foreign Currency Requirements – IDBI raises foreign funds from international money markets
and funding organisation and makes them available to those industrial units which need them.
(e) Small Scale Industries – The IDBI has shown a particular interest in the development of s
NABARD
National Bank for Agriculture and Rural Development or NABARD is the main regulatory body in the
country’s rural banking system and is considered as the peak development finance institution which
is established and owned by the government of India. This bank aims to provide and regulate credit
to the rural areas, which will be a first step towards enhancing the rural development in the
country.
NABARD has been given many responsibilities related to the formulation of policies, planning, and
operations in agriculture and financial development. NABARD carries these responsibilities
efficiently and works towards promoting and developing man industries in the rural areas like the
agriculture industry, cottage industries, other small scale industries, and rural crafts in an effort to
create better infrastructure and better employment opportunities for the people living in these
regions.
The Government of India established this bank considering all the guidelines of the National Bank
for Agriculture and Development Act of 1981. To put it in simple terms, you can say that the
National Bank for Agriculture and Rural Development or NABARD is the main and specific bank of
the country for agriculture and rural development.
Formation of NABARD
NABARD's establishment took place on 12 July 1982 as a central regulating body for agriculture
financing and rural section. The government of India established NABARD under the outlines of the
National Bank for Agriculture and Rural Development Act 1981.
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What is the role of NABARD?
Being the main regulatory body for agriculture and rural development, the National Bank for
agriculture and rural development or NABARD has many important roles to play. These roles are as
follows:
The National Bank for Agriculture and Rural Development or NABARD provides investment and
production credit for various developmental activities and projects taking place in rural areas, which
will help enhance rural development and facilitate rural prosperity. As this bank is the center or the
main financing agency for all such developmental projects, the responsibility falls on the bank to
ensure that the projects receive the proper financing and promotion.
The responsibility of coordinating all the financing activities in the rural areas with all institutions
involved in the developmental projects falls on the NABARD. It has to stay in touch with all major
institutions, including the Indian government, Reserve Bank of India or RBI, state governments, or
any other major institutions that may be a part of the ongoing agriculture or rural development
activities.
NABARD takes action towards monitoring, formulating strategies for the rehabilitation
schemes, restructuring credit institutions and training personnel, etc., through making an
improvement in the credit delivery system’s absorptive capacity and building a strong institution
with an aim to achieve the same.
The National Bank refinances all the financial institutions that finance the rural development
projects for Agriculture and Rural Development or NABARD as it is the specific bank for looking after
all agriculture and rural developments in the country.
After the bank has refinanced a developmental project or activity taking place in the rural region,
the responsibility of monitoring and evaluating the project or activity also falls on the NABARD.
NABARD keeps all the client institutions in check and provides training facilities to all the institutions
that are working towards rural upliftment or want to work for rural development in the future.
Along with all the above roles, the National Bank for Agriculture and Rural Development also keeps
the portfolio of the Natural Resource Management Programmes.
NABARD also helps Self-Help Groups or SHGs through its SHG bank linkage programme that will
boost the activities of SHGs in the rural areas and will be a helpful step in the rural development.
Functions of NABARD
Now that we have seen what NABARD stands for and the roles that it has to perform, let us go
through the functions performed by the bank. In an effort to keep up with its roles, the National
Bank for Agriculture and Rural Development undergoes four central functions. These four central
functions performed by the NABARD are—credit functions, financial functions, supervisory
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functions, and development functions. To understand all these four functions performed by the
NABARD, let’s go through all of them one by one.
Credit functions As the main provider of credit facilities in rural areas, the National Bank for
Agriculture and Rural Development or NABARD performs the credit functions. Under these
functions, the bank provides, regulates, and monitors the credit flow in the rural parts of the nation.
Financial functions NABARD has many client banks and institutions that help and assist in the
developmental activities in rural areas. By performing the financial functions, the National Bank for
Agriculture and Rural Development or NABARD provides loans to these client banks and institutions
like handicraft industries, food parks, processing units, artisans and many more.
Supervisory functions As already discussed above, NABARD is the apex institution that looks after
agriculture and rural development. This is why the responsibility of monitoring and regulating all
the development activities and projects fall on this institution. Given this role, the NABARD
performs supervisory functions in which it has to keep a check on all the client banks, institutions,
credits and non-credits societies that are a part of the developmental tasks taking place in the rural
areas.
Development Functions As you must be pretty much aware by now that the primary role of the
National Bank for Agriculture and Rural Development or NABARD is to focus on developing
sustainable agriculture and promote rural development, the bank performs development functions
in an effort to stay true to this role. Under developmental functions, the NABARD helps rural banks
prepare action plans for the developmental activities.
EXIM BANK
EXIM Bank or Export-Import Bank of India is India's leading export financing institute that engages
in integrating foreign trade and investment with the country's economic growth. Founded in 1982
by the Government of India, EXIM Bank is a wholly-owned subsidiary of the Indian Government.
The Export-Import Bank of India, commonly known as the EXIM bank, was set up on January 1, 1982
to take over the operations of the international finance wing of the IDBI and to provide financial
assistance to exporters and importers to promote India’s foreign trade. It also provides refinance
facilities to the commercial banks and financial institutions against their export-import financing
activities.
Important functions of the EXIM Bank are as follows:
Financing of export and import of goods and services both of India and of outside India.
Providing finance for joint ventures in foreign countries.
Undertaking merchant banking functions of companies engaged in foreign trade.
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Providing technical and administrative assistance to the parties engaged in export and import
business.
Offering buyers’ credit and lines of credit to the foreign governments and banks.
Providing advance information and business advisory services to Indian exports in respect of
multilaterally funded projects overseas.
During the year 1994-95, the EXIM Bank introduced the ‘Clusters of Excellence’ programme for up-
gradation of quality standards and obtaining ISO 9000 certification in various parts of the country.
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UNIT-3
TRADITIONAL BANKING
The most significant distinction between traditional banking and online banking is the existence of a
physical location. A traditional bank has national and regional headquarters, as well as branches
throughout the countries in which it operates. Many conventional banks have their own ATMs with
their own logos. Smaller conventional banks may band together to run a large number of branches
in order to cut expenses. Traditional banks were first preferred for their convenience and face-to-
face customer service, as well as their local branches.
According to a 2016 Global Consumer Banking Survey, 60 percent of customers in 32 countries

stated they would prefer to visit a physical branch or speak with a live person to buy a new financial
product or get advice. Traditional banks may appear more trustworthy than banks that do not have
physical locations due to their emphasis on in-person client service. This is especially true when a
customer opens a new account.
Traditional banking is a financial institution dedicated to the management of money that its clients
deposit in the bank’s custody, while the bank, on the other hand, uses that money to provide loans
to individuals or businesses (charging them interest).
Traditional banking is resistant to cyber threats. Many cases involving e-banking have recently
surfaced. Traditional banking is now more secure than e-banking, which is a tempting target for
hackers.
Traditional Banking consists of 3 components:
Capital
Deposits
Loans
1. Capital
is traditional banking’s main pillar. All banks are built on a capital base. This capital money is then
wisely transformed into loans, resulting in job creation and economic growth.
2. Deposits
Once the money has been invested, it is backed by the accumulation of deposits, which serve as
individual and commercial savings and liquid cash reserves. The Federal Deposit Insurance
Corporation of the United States ensures deposits up to $250,000. (FDIC).
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3. Loans
The sum of capital and FDIC-insured deposits that serve as a basis for determining how much
money can be released in loans.
Significance of traditional Banking
Commercial banks play a vital role in the economy. They not only provide a necessary service to
consumers. But they also assist in the creation of capital and liquidity in the market.They maintain
liquidity by borrowing monies from their customers’ accounts and lending them out to others.
Commercial banks help to create credit, which leads to increased production, employment, and
consumer spending, all of which help to grow the economy.
As a result, commercial banks are extensively regulated by their country’s or region’s central bank.
Central banks, for example, impose reserve requirements on commercial banks. This means that
banks must maintain a specific percentage of their consumer deposits at the central bank as a
safety net in case the general public withdraws funds in a rush.
Types of Bank Deposits
A bank account serves a lot of purposes for anyone in the process of financial planning, the three
most important ones being safety, convenience, and savings. Traditionally in India, we have four
major types of Bank Deposits, namely Current Accounts, Savings Accounts, Recurring Deposits, and
Fixed Deposits, each with varying advantages.
However these days, some banks have also introduced many new products, which combine the
features of two or more types of bank deposits like 2-in-1 Deposits, Power Saving Deposits, Smart
Deposits, etc.With the introduction of new products, there have been cases of increasing fraud in
the bank accounts as well. To safeguard yourself from these frauds read this Banking awareness
book that includes detailed information about managing your bank account.
Savings Account
Recurring Deposit
Current Account
Fixed Deposit
Types of bank deposits
Savings Account
A savings account can be opened with a bank or financial institution, to earn interest on the balance
maintained.This account should be opened with the objective of storing money in electronic form.
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These days, most savings accounts can be used for multiple purposes like paying bills, quick
transactions, easy credit, etc.
It offers high liquidity and is very popular among the masses. It does, however, have cash
withdrawal and transaction limits to promote digital payments. Banks provide an interest rate that
is only slightly higher than inflation, so it is not very optimal for investment. The interest provided
by Public sector bank is only 4%, however, some of the private banks like Yes Bank and Kotak Bank
offers interest between 6-7%.
Some banks also offer special savings accounts for the various sections of society, like women,
senior citizens, children, etc. Each come with their own interest rates and withdrawal limits.To
choose appropriate savings to account for yourself, it is best that you research well these types
before you make your decision.
Recurring Deposit
It is a special type of term deposit where you do not need to deposit a lump sum savings rather a
person has to deposit a fixed sum of money every month (which can be as low as Rs 100 per
month). You should choose a recurring deposit when you want to inculcate the habit of saving
regularly and you don’t have a lump-sum amount to set aside.
The interest rates on these accounts range from 5% – 7%, and varying rates are offered to senior
citizens. These accounts have maturities ranging from 6 months to 120 months. You can also give a
standing order to the bank to withdraw a fixed sum of money from your saving account on every
fixed date and the same is credited to the RD account. However, the bank may charge some penalty
for delay in paying the installments.
Another unique feature of this account is that you can take a loan worth 80-90% of your deposit by
using this deposit itself as collateral. There are no premature withdrawals allowed in the account,
but for a penalty, you can close the account before the maturity date of the deposit.
Current Account
A current account is a special type of account that has lower restrictions than a savings account
when it comes to withdrawals and transactions. It is also known as a demand deposit account and it
is meant for businessmen to conduct their business transactions smoothly.
These accounts should only be opened by you if you are a small business person who has multiple
monetary transactions on a daily basis.These are the most liquid deposits and there are no
restrictions on the number and the number of transactions in a day.
Banks also offer overdraft facilities on these, i.e., they let account-holders withdraw more money
than there is in the account.Moreover, there is no minimum balance required to be maintained
here, unlike other bank accounts.
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With the advancement of digital payments, banks also offer the best online banking facilities to
these accounts, which has helped them contribute more to developing businesses in the economy.A
disadvantage of these accounts is that banks do not pay any interest on these accounts. Also, these
accounts also charge hefty fees for their services and maintenance.
Fixed deposit
A fixed deposit (FD) is an investment avenue offered by banks, financial institutes, and Non-Banking
Financial Companies (NBFCs)_that offers guaranteed returns with an interest rate ranging between
5%-9%. It gives higher interest than a regular savings account and offers a wide range of tenures
ranging from 7 days to 10 years.
You should try out a fixed deposit account when you want to build your habit of investing but your
risk appetite is quite low since it offers guaranteed returns.You may or may not have a separate
bank account to open a fixed deposit with the bank. These days, banks also offer FDs which allow
for tax exemptions of up to ₹1,50,000 per year under section 80C of the Income-tax Act, 1961.
Another benefit with FDs is that all interest amounts below ₹40,000 are tax-free. Interest amounts
above ₹40,000 are subjected to Tax Deducted at Source (TDS).Just like a recurring deposit, you
cannot make any premature withdrawals, but you can prematurely shut down the deposit. You may
be charged some penalty in case of early closure of the FD account.
However, with the focus of the government to have a bank account for everyone under the scheme
of Pradhan Mantri Jan DhanYojana, you can open up a bank account for free if you do not have one
and enjoy various facilities offered by banks.
Principles of Sound Lending
A banker must be extra careful while granting loans. A banker should take the following
precautions:
1. Safety
The most important golden rule for granting loans is the safety of funds.The main reason for this
that the very existence of the bank is dependent upon the loans granted by him.In case the bank
does not get back the loans grated by it, it might fail.A bank cannot and must not sacrifice the safety
of its fund to get a higher rate of interest.
2. Liquidity
The second important golden rule of the grant loan is liquidity. Liquidity means the possibility of
converting loans into cash without loss of time and money.Needless to say, the funds with the bank
out of which he lends money are payable on demand or short notice.As such a bank cannot effort to
block its funds for a long time.Hence, the bank should lend only short term requirements like
working capital.The bank cannot and should not lend for long term requirements, like fixed capital.
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3. Return or Profitability
It is another important principle. The funds of the bank should be invested to earn the highest
return, so that it may pay a reasonable rate of interest to its customers on their deposits,
reasonably good salaries to its employees and a good return to its shareholders.However, a bank
should not sacrifice either safety or liquidity to earn a high rate of interest.Of course, if safety and
liquidity in a particular case are equal, the banker should lend its funds to aa person who offers a
higher rate of interest.
4. Diversification
One should not put all his eggs in one basket is a proverb which very clearly explains this principle.A
bank should not invest all its funds in one industry. Incase that industry fails, the banker will not be
able to recover his loans.Hence, the bank may also fail. According to the principle of diversification,
the bank should diversify its investments in different industries and should give loans to different
borrowers in one industry.It is less probable that all the borrowers and industries will fail at one and
at the same time.
Object of Loan
A banker should thoroughly examine the object for which his client is taking loans.This will enable
the bank to assess the safety and liquidity of its investment. A banker should not grant loans for
unproductive purposes or to buy the fixed assets.The bank may grant loans to meet working capital
requirements.However, after the nationalization of banks, the banks have started granting loans to
meet loan term requirements.As per prudent banking policy, it is not desirable because of term
lending by banks a large number of banks had failed in Germany.
6. Security
A banker should grant secured loans only. In case the borrower fails to return the loan, the banker
may recover his loan after realizing the securing.In the case of unsecured loans, the chances of bad
debts will be very high.However, the bank may have to relax the condition of security in order to
comply with the economic policy of the government.
7. Margin Money
In the case of secured loans, the bank should carefully examine and value the security.There should
be a sufficient margin between the number of loans and the value of the security.If an adequate
margin is not maintained, the loan might become unsecured in case the borrower fails to pay the
interest and return the loan.
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Forms of Advances in Banking
Cash credit
Overdraft
Loans
Demand loan vs. term loan
Secured vs. unsecured loan
Participation loan or consortium loan
Purchasing and discounting bills
These types of advances are explained below.
Cash Credit
Cash Credit is an arrangement by which the customer can borrow money up to a certain limit
known as the ‘cash credit limit.’ Usually, the borrower is required to provide security in a pledge or
hypothecation of tangible securities. Sometimes, this facility is also provided against personal
security. This is a permanent arrangement, and the customer need not draw the sanctioned amount
at once but draw the amount as and when required. He can put back any surplus amount which he
may find with him. Thus cash credit is an active and running account to which deposits and
withdrawals may be affected frequently.
Interest is charged only for the amount withdrawn and not for the whole amount approved. If the
customer does not use the cash limit to the foil extent, the bank makes a commitment charge. This
charge is imposed on the un-utilized portion of cash credit only.Cash credit provides an elastic form
of borrowing since the limit fluctuates according to the needs of the business. Cash credits are the
most favorable mode of financing by large commercial and industrial concerns.
Overdraft
Oxford Dictionary of Finance and Banking defines overdraft as “a loan made to a customer with a
cheque account at a bank or building society, in which the account is allowed to go into debt,
usually up to a specified limit.”
According to the Cambridge Advanced Learner’s Dictionary, overdraft means “an amount of money
that a customer with a bank account is temporarily allowed to owe to the bank or the agreement
which allows this.”
The Economist defines an overdraft as “a credit facility that allows borrowers to draw upon it (up to
a specified limit) as and when they need to. Borrowers pay only for what they use”.
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Overdraft is an arrangement between a banker and his customer by which the latter is allowed to
withdraw over and above his credit balance in the current account up to an agreed limit. This is only
a temporary accommodation usually granted against security.The borrower can draw and repay any
number of times, provided the total amount overdrawn does not exceed the agreed limit. The
interest is charged only for the amount drawn and not for the whole amount sanctioned.
A cash credit differs from an overdraft in one respect. Cash credit is used for the long-term by
businesses in regular business, whereas overdraft is made occasionally and for a short
duration.Banks sometimes grant unsecured overdrafts for small amounts to customers having a
current account with them. Such customers may be government employees with fixed incomes or
traders. Temporary overdrafts are permitted only where a reliable source of funds is available to a
borrower for repayment.
Loans
As defined in Oxford Dictionary of Finance and Banking, the loan is the “money lent on condition by
a bank that it is repaid, either in installments or all at once, on agreed dates and usually that the
borrower pays the lender an agreed rate of interest (unless it is an ail interest-live loan).”
Oxford Dictionary of Finance and Banking defines a bank loan as “a specified sum of money lent by
a bank to a customer, usually for a specified time, at a specified rate of interest.”
According to Cambridge Advanced Learner’s Dictionary, a loan means “a sum of money which is
borrowed, often from a bank, and has to be paid back, usually together with an extra amount of
money that you have to pay as a charge for borrowing.”
W. Kocli defines loans as “a formal agreement between a bank and borrower to provide a fixed
amount of credit for a specified period.”
Ease of loan, the banker advances a lump sum for a certain period at an agreed rate of interest- The
entire amount is paid on occasion either in cash or by credit in his current account, which he can
draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the
money from his account or not.
The loans may be repaid in installments or at the expiry of a certain period. The loan may be made
with or without security.Once repaid in full or in part, a loan cannot be withdrawn again by the
customer. In case a borrower wants a further loan, he has to arrange for a fresh loan.
Demand Loan Vs. Term Loan
The loan may be a demand loan or a term loan.A demand loan is payable on demand. It is for a
short period and is usually granted to meet the working capital needs of the borrower.Term loans
may be medium-term or long-term. Medium-term loans are granted for a period ranging from one
year to five years for vehicles, tools, and equipment.Long-term loans are granted for capital
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expenditures such as the purchase of land, construction of factory building, purchase of new
machinery, and modernization of plant.
Secured Vs. Unsecured Loan
According to section 5(e) of the Bank Companies Act, 1991, “Secured loan or advance means such a
loan or advance as made against the security assets, the market value of which is not at any means
less than the amount of such loan or advance and unsecured loan or advance is that loan or
advance or part of it does not require sanctioning against the security.”
Participation Loan or Consortium Loan
One loan is granted by more than one financing agency, termed a participation or consortium loan.
Such participation becomes necessary where either the risk involved is too large for one or more of
the participating institutions to take individually or there are administrative or other difficulties in
servicing and following up the loan.
Purchasing and Discounting Bills
Bills of exchange, as defined in the Negotiable Instruments Act, 1 SSI, is “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay (on-
demand or at a fixed or determinable future time) a certain sum of money only to, or to the order
of, a certain person or the bearer of the instrument.”
Banks grant advances to their customers by discounting bills of exchange. The net amount, after
deducting the amount of interest/discount from the amount of the installment, is credited to the
account of the customer.In this form of lending, the interest is received by the banker in advance.
Banks sometimes purchase the bills instead of discounting them.Bills accompanied by the
document of title to goods such as bills of lading or railway receipt are purchased by the bankers.In
such cases, the banker grants a loan in the form of overdraft or cash credit against the security of
the bills.
The term ‘bill purchased’ seems to imply that the bank becomes the purchaser or owner of such
bills. But in almost all cases, the bank holds the bill only as a security for the advance
Modes of Charging Security
Lien
Pledge
Hypothecation
Mortgage
Assignment
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Lien: Lien means the right to retain the goods of the borrower until the debts are repaid.
Pledge: Pledge is the bailment of goods as security for payment of a debt. Only movable goods can
be pledged.
Hypothecation: Hypothecation creates on equitable charge on movable property without

possession. However, the hypothecation deed provides that the banker will have the right to take
the goods hypothecated in its possession if the the need arises.
Mortgage: A mortgage is a conveyance of an interest in property (land or any immovable property)

for securing a debt. A legal mortgage is created by a registered deed and gives the mortgagee the
right of sale in case of default of the borrower.
Assignment: Assignment is transfer of ownership from one person/authority to another

person/authority.
Set-off: Set-off means the total or partial merging of a claim of one person against another in a
counter claim by the latter against the former.
1. Lien
Lien is the right of a creditor to retain the properties belonging to the debtor until 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 unless such a right is expressly conferred by statute or by custom or by usage. A banker’s lien is
a general lien which is tantamount to an implied pledge. It confers upon the banker the right to sell
the securities after serving reasonable notice to the borrower
Kinds of Lien
A particular lien applies to one transaction or certain transactions only.
General 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 form the owner of the goods to the person exercising the
right of lien. It extends to all transactions.
Negative Lien
Negative Lien: In case of negative lien. The possession of the security is with the debtor himself,
who promises not to create any charge over them until the loan is repaid.
Banker’s Lien
A banker’s lien is always a general lien. A banker has a right to exercise both kinds of lien. A banker’s
lien is treated as an implied pledge: It must be noted that a banker’s lien is generally described as an
implied pledge. It means that a lien not only gives a right to retain the goods but also gives a right to
sell the securities and goods of the customer after giving a reasonable notice to him. When the
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customer does not take any steps to clear his arrears. This right of sale is normally available only in
the case of pledge. That is why lien is regarded as an implied pledge.
2 Pledge:
Section 172 of contract Act, 1872, defines a pledge as, the ‘bailment of goods as security for
payment of a debt or performance of a promise.” Only movable goods can be pledged. From the
above definition we observe that,
A pledge occurs when goods are delivered for getting advance,The goods pledged will be returned
to the owner on repayment of the debt,The goods serve as security for the debt.The person who
transfers the goods is called pledger and to whom it is transferred is called the pledgee.
Essentials of pledge
Delivery of goods:
Delivery of goods is essential to complete a pledge. The delivery may be physical or symbolic.
Physical delivery refers to physical transfer of goods from a pledger to the pledgee. Symbolic
delivery requires no actual delivery of goods. But the possession of goods must be transferred to a
pledgee. This may be done in any one of the ways:
Delivery of the key of the warehouse in which the goods are stored.
Delivery of the document of title to goods like bill of lading, Railway receipt, Warehouse warrant
etc.
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, pledgee may,sell the goods pledged after
giving reasonable notice,File a civil suit against the pledger for the amount due,File a suit for the
sale of the goods pledged and the realization of money due to him. When the pledgee decides to
exercise the right of sale, he must issue a clear, specific and reasonable notice.
Precaution and general guidelines for pledgee
The godown must be in good condition and well-constructed.Godown must be effectively under
Bank’s control.Name board of the bank should be placed outside and inside of the godown.Letter
from the party for free accesses to the godown by bank personnel (Bank’s prescribed form) to be
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obtained.Letter of disclaimer from the owner of godown is to be obtained if the godown is rented
one.Godown keeper and godownChowkider are to be posted for receiving/ delivery and to ensure
security of the goods.Insurance of godown is to be done against all risks. Bank clause should be
inserted.Periodical Inspection by the authorized person of the bank (monthly/fortnightly) should be
conducted.Value of stocks must be determined at landed cost/invoice cost/market price whichever
is lower as per Head office guideline (circulars).Restricted item must not be accepted for pledge.
Deliveries and rotations of the stocks is to be made as per existing rules/procedures and terms and
conditions contained in the sanction advice.Market value of the goods pledged should be
ascertained frequently in order to retain proper margin and allow withdrawals within drawing
power. No upward revaluation without H.O. approval.Pledged goods must be stocked properly to
facilitate counting and checking.Stock report card on each stock mentioning Nos. of bales, bags,
cases etc. must be maintained.
In case of chemicals, drugs and medicines the date of expiry should be written and technical
personnel must be employed to ensure its quality.
Accepting goods for pledge
Before accepting the goods for pledge, banker should be satisfied that proposed pledge goods
contain the attributes of a good security.
In the matter of pledge banks may be cheated in one or more of the following manners:
Pledge of spurious goods.
Inflating the value of goods.
Pledging the goods to more than one bank by using various entrances to the godowns.
Fraudulent removal of goods with the connivance / due to the negligence of the bank’s staff.
Pledge of goods belonging to a third party.
Attributes of a good Tangible security
Marketability
Easy ascertainment of value
Stability of value
Storability
Cost and labor of supervision
Transportability
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Durability
Ascertainment of title
Easy transfer of title
Absence of contingent liability.
Yield
Documents required for Pledge:
Demand promissory note.
Agreement for pledge.
Letter of continuity.
Letter of arrangement
Insurance policy covering all risks.
Invoice of goods pledged (for imported goods).
Latest stock report.
Letter of disclaimer
Other documents as per sanction letter.
3 Hypothecation:
Hypothecation creates on equitable charge on movable property without possession. The mortgage
of movable property for securing loan is called Hypothecation. In other words, in case of
hypothecation, a charge over movable properties like goods, raw materials, goods in progress is
created. Hypothecation is a charge against property for an amount of debt where neither
ownership nor possession is passed to the creditor. Though the borrower is in actual physical
possession, the constructive possession remains with the Bank as per the deed of hypothecation.
The borrower holds the possession not in his own right as the owner of the goods but as the agent
of the Bank. Being only an equitable charge on movable property without possession,
hypothecation facility is risky as clean advances. So it is granted only to parties of undoubted
means with the highest integrity. Moreover, bankers insist upon for giving some sort of collateral
securities.
Features of Hypothecation:
Charge against a property for an amount of debt,
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Goods remains in the possession of the borrower,
Borrower binds himself to give possession of the hypothecated goods to the Bank when called upon
to do so.
It is a floating charge.
It is rather precarious.
Being only an equitable charge on movable property without possession, hypothecation facility is
risky as clean advances. So it is granted only to parties of undoubted means with the highest
integrity.
Precaution and general guidelines for Hypothecation:
As goods under hypothecation remains in the possession of the borrower, extra care has to be
exercised to see that the bank’s security is complete, adequate, safe and available at times when
required. The banker should take the following precautions:
He must get stock statements periodically which contain a declaration by the borrower regarding
his title to goods and correctness of the quality, quantity etc.
On the basis of the statement, he should inspect the stock and books of accounts of the borrower.
An undertaking from the debtor in writing, stating that he has not hypothecated the same goods to
any other bank must be obtained.
The banker should get a letter of hypothecation containing several clauses to protect his interest
under all circumstances.
The banker should insist on the borrower insuring the goods against the risks. He should also get it
endorsed and assigned in his favour.
A board reading “Stock Hypothecated to X Bank” should be displayed in the place where the goods
are stored.
In case of hypothecation bank may be cheated in the following ways:
The borrower declares wrongly the capacity of the storing place. A false platform between the loose
stocks is erected. The borrower creates a hollow square in the middle of stocks. Kind of fraud is
generally committed by the borrowers who have either built-up confidence with the bank or where
the branch managers and other officials at the branch office have been got around by such
borrowers.
Often the borrower with intention to cheat the bank resorts to dumping deteriorated/obsolete
stocks in between the good stocks. The borrower mixes inferior quality liquids or water with good
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liquids and commits fraud. The device is generally adopted by parties dealing in chemicals or
oils.The borrower stores stocks of different qualities in the godown and cheats the bank. In such
cases borrowers store goods of qualities different from these declared in lodgment memos.
4. Mortgage
The transferor is called a ‘mortgagor’, the transferee a ‘mortgagee’, the principal money and
interest of which payment is secured for the time being are called ‘mortgage money’, and the
instrument (if any) by which the transfer is effected is called a ‘mortgage deed’.A mortgage is a
method of creating charge on immovable properties like land and building.
Section 58 of the Transfer of Property Act 1882, define a mortgage as follows: “A mortgage is the
transfer of an interest in specific immovable property for the purpose of securing the payment of
money advanced or to be advanced by way of loan, an existing or future debt, or the performance
of an engagement which may give rise to a pecuniary liability.”
Characteristics of a Mortgage:
A mortgage can be effected only on immovable property. Immovable property includes land,
benefits that arise out of land and things attached to earth like trees, buildings and machinery. But
a machine which is not permanently fixed to the earth and is shift able from one place to another is
not considered to be immovable property.
A mortgage is the transfer of an interest in the specific immovable property. This means the owner
transfers some of his rights only to the mortgagee. For example, the right to redeem the property
mortgaged.The object of transfer of interest in the property must be to secure a loan or
performance of a contract which results in monetary obligation. Transfer of property for purposes
other than the above will not amount to mortgage. For example, a property transferred to Liquidate
prior debt will not constitute a mortgage.
The property to be mortgaged must be a specific one, i.e., it can be identified by its size, location,
boundaries etc.The actual possession of the mortgaged property is generally with the
mortgager.The interest in the mortgaged property is re-conveyed to the mortgager on repayment
of the loan with interest due on.In case, the mortgager fails to repay the loan, the mortgagee gets
the right to recover the debt out of the sale proceeds of the mortgaged property.
Forms of Mortgages
Section 58 of the transfer of Property Act enumerates six kinds of mortgages:
Simple mortgage.
Mortgage by conditional sale.
Usufructuary mortgage.
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English mortgage.
Mortgage Ly deposit of title deeds.
Anomalous mortgage.
Rights of Mortgager
Rights of Redemption
Accession to Mortgaged Property:
Right to Transfer to Third Party
Right to Inspection and Production of Documents
Rights of Mortgagee
Right to sue for mortgage money:
Right of sale:
Right of foreclosure:
Right of accession to property:
Right of possession:
Sub-Mortgage
A sub-mortgage is created when the mortgagee gives the mortgaged property as security for
advance. The mortgaged security is the property of the mortgagee and so he has the right to re-
mortgage for securing loans. The sub-mortgagee is placed in the position of the original mortgagee
and entitled to receive the mortgage money, sue for the property and realise, the security.
Therefore, a sub-mortgage is also known as ‘mortgage of mortgagee.’
5. Assignment
Assignment means transfer of any existing or future right, property or debt by one person to
another person.The person who assigns the property is called assignor and the person to whom it is
transferred is called assignee.Usually assignment are made of actionable claims such as book debts,
insurance claims etc.
In banking business, a borrower may assign to the banker
i) The book debts,
ii) Money due from government department

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iii) Insurance policies
Type of Assignment
Assignment may be two types
Legal Assignment: A legal Assignment is an absolute transfer of actionable claim. It must be in

writing signed by the assignor. The assignor informs his debtor in writing intimating the assignee’s
names and address. The assignee also gives a notice to the debtor and seeks a confirmation of the
balance due.
Equitable assignment: An equitable assignment is one which does not fulfill all the above
requirement.
In case of legal assignment, the assignee can sue in his own name. A legal assignee can also give a
good discharge for the debt without the concurrence of the assignor
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UNIT - IV
MODERNISED BANKING
CORE BANKING
Core banking is a back-end system that connects multiple branches of the same bank together to
deliver operations like loan management, withdrawals, deposits and payments in real-time.The
term CORE stands for Centralized Online Real-time Environment, which implies that
the customer can experience the bank as a single entity, regardless of their location – with the aim
to provide more independence for the customers in terms of using their accounts and conducting
transactions from any location in the world.
A core banking system comprises back-end servers that handle standard operations like interest
calculation, passbook maintenance, and withdrawal.When a customer withdraws money from a
branch or an ATM, the application sends a request to the centralized data center, which then
processes the request and authenticates the operation.The data center contains the database, an
application server, a web server, and a firewall to protect the system from malware attacks. Banks
can host their data center locally or on the cloud.
FEATURES
Customer-On Boarding.
Managing deposits and withdrawals.
Transactions management
Interest. Calculation and management.
Payments processing (cash, cheques /checks, mandates, NEFT, RTGS etc.).
Customer relationship management (CRM) activities.
Designing new banking products.
Loans disbursal and management.
Accounts management
Establishing criteria for minimum balances, interest rates, number of withdrawals allowed and so
on.
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ADVANTAGES
The entire range of banking products including savings, deposit accounts etc are available from any
location
Accessibility through multiple channels, including mobile banking and web
Accurate, timely and actionable information about customer relations
Single view between bank and customers
Redefining the concept of ‘anywhere, anytime’ banking.
LIMITATIONS
Technical downtimes can disrupt regular banking operations, thereby frustrating clients.
Using a core banking system can introduce a single point of failure that affects all branches
simultaneously in the case of a cyberattack.
Modern core banking systems can be expensive to buy and maintain, especially for small and
medium-sized banks.
Legacy core banking software can leave the entire infrastructure vulnerable to system failure. The
modernization effort will also cost a lot of money.
HOME BANKING
Home banking refers to the process of accessing banking services without needing to visit a physical
branch location in person. Home banking lets you conveniently manage many of your personal
finances remotely. It allows you to perform various financial transactions, often with the click of a
button via the web, mobile app, or telephone.
This type of on-the-go banking gives you the opportunity to bank from your home, office, or
anywhere you have a secure phone or internet connection. In addition, home banking provides you
with direct access to all of your bank-account information, so you can do practically everything with
your account that a bank teller can do, or more.
ADVANTAGES
Real-time money management
Greater convenience
Often offered as a free service
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DISADVANTAGES
Increased difficulty reaching customer service
Risk of security breaches
RETAIL BANKING
The banking that takes place between your personal bank and you is nothing but retail banking. All
the banking services that you enjoy from your bank including your personal accounts, saving
accounts, loans and even online banking services fall under retail banking.
Retail banking is the banking that is for the retail customers of the bank, which includes the general
population and not large or multinational institutions. Even when you are availing banking services
online, you are connecting with your bank on some level, making it a part of retail banking as
well.Retail banking helps you to meet your day to day needs by services like debit cards, credit
cards, online withdrawals and deposits and many other benefits.
Certain services like withdrawals and deposits can also be availed online as well as in the nearest
branch of your bank. Online retail banking has made the transfer of money and retailing easier for
the retail customers.
INTERNET BANKING
Internet Banking, also known as net-banking or online banking, is an electronic payment system
that enables the customer of a bank or a financial institution to make financial or non-financial
transactions online via the internet. This service gives online access to almost every banking service,
traditionally available through a local branch including fund transfers, deposits, and online bill
payments to the customers.
Internet banking can be accessed by any individual who has registered for online banking at the
bank, having an active bank account or any financial institution. After registering for online banking
facilities, a customer need not visit the bank every time he/she wants to avail a banking service. It is
not just convenient but also a secure method of banking. Net banking portals are secured by unique
User/Customer IDs and passwords.
FEATURES
Provides access to financial as well as non-financial banking services
Facility to check bank balance any time
Make bill payments and fund transfer to other accounts
Keep a check on mortgages, loans, savings a/c linked to the bank account
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Safe and secure mode of banking
Protected with unique ID and password
Customers can apply for the issuance of a chequebook
Buy general insurance
Set-up or cancel automatic recurring payments and standing orders
Keep a check on investments linked to the bank account
ADVANTAGES
24×7 Availability
Convenience of initiating financial transactions
Proper Track of Transactions
Non-financial Transactions
Time Efficient
DISADVANTAGES
May Be Complicated for Beginners To Understand
No Online Banking Without Internet Access
Transaction Security
Securing Your Password
ONLINE BANKING
Online banking, also known as internet banking, describes online systems that provide users access
to their personal bank account information and functions, including but not limited to account
transactions and balances.
Practically every major bank offers its customers the option to sign up for online banking. Online
banking is increasingly popular with customers thanks to its convenience. The service helps
customers keep track of their spending so that they don’t overdraft their accounts or spend too
much money. Customers can sign into online banking anywhere that they have internet access and
a computer. Some of the financial tasks customers can complete using online banking include:
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Viewing account balances
Researching account transactions
Paying bills
Transferring money between accounts
Obtaining old bank statements
Completing basic account maintenance
One of the most common services that comes with online banking is an online bill-pay function.
With it, account holders have the ability to pay their bills without ever having to write checks. To
pay a bill, the customer only needs a few pieces of information, including the payee’s address and
any account number associated with the payee. Depending on the recipient of the check, the bank
may transfer the funds electronically or mail an actual check. Customers can even set up recurring
payments for their regular monthly bills.
Banks advise their customers to keep their login information confidential to protect their finances.
When signing into online banking, customers should use a secure internet connection. Many banks
offer a two-step security process that requires customers to verify their identities before the online
system grants them access to account information; customers are encouraged to utilize this option
if possible to keep their details safe.
OFFLINE BANKING
It is also known as traditional banking. In offline banking customers have to come to the premises of
bank branch to transact their basic banking operations. Secrecy of customers can be maintained.
Personal contact of customers can be possible. It consumes more time and resources of the bank.
Banking operations are to be performed within the banking hours.
MOBILE BANKING
M-banking refers to the use of the internet and mobile technology to bring financial services to
customers. Customers use m-banking through a USSD, SMS, or mobile app to access banking
services. As a result, it has eliminated the customers’ need to visit the bank branch for every other
financial necessity.
Busy lifestyle and, more recently, the COVID pandemic have forced people to opt for mobile
banking. Round-the-clock banking services at the fingertips provide customers with an easy, quick,
and hassle-free experience. At the same time, banks also benefit from a reduction in operating
costs due to savings in time and resources.
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Though beneficial, m-banking is exposed to security threats like hacking that raise safety concerns
among customers. In order to secure transactions, banks keep updating the security features of
their m-banking app regularly. In addition, they also use a virtual private network (VPN), biometric
login, and two-step OTP-based verification to ensure safety of customers.
To access m-banking, customers must download the bank’s m-banking app from the app store.
Then, proceed to create an online account to register for the same. It involves answering some
questions, selecting a username and password, and setting up security preferences. After that, set
an MPIN to be used every time a transaction is made.
Once the bank verifies the credentials, the customer becomes the registered user and can perform
all the financial transactions using the mobile app. It includes shopping online, paying utility bills,
making account information inquiries, transferring funds, using forex-related services, and booking
tickets.
FEATURES
Features
Accessibility
Security
Transferability
Investment Management
Digital Payments
Customer Service
ADVANTAGES
Offers 24-hour accessibility to banking
Saves time
Provides a convenient way of making fund transfers and payments
Enables easy tracking and monitoring of bank accounts
Facilitates quick reporting of any illegal transaction or fraudulent activity
Allows swift redressal of consumer complaints
Increase request processing speed
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Makes online shopping possible
Allows trouble-free management of investments
Sends notification of bill or loan payments
Encourages customers to stay indoors during a pandemic
Eliminates the need to carry cash all the time
Reduces chances of theft
DISADVANTAGES
Causes inconvenience for less tech-savvy account holders
Removes human touch from banking
Raises security concerns and online fraud
Results in delays or losses in transactions due to mistakes
Gives rise to comprehension issues due to the complex app interface
Makes follow up on fraud reports difficult
Delays service requests in case of internet issues
ELECTRONIC FUNDS TRANSFER
Introduced in 1990 by the Reserve Bank of India (RBI), Electronic Fund Transfer (EFT) is the transfer
of funds via electronic channels. EFT allows intra-bank and inter-bank transfers in a time-saving and
cost-effective manner. Today, EFT has been replaced by a more efficient payment system – the
National Electronic Fund Transfer, widely known as NEFT.
An electronic funds transfer (EFT), or direct deposit, is a digital movement of money from one bank
account to another. These transfers take place independently from bank employees. As a digital
transaction, there is no need for paper documents. EFT has become a predominant method of
money transfer since it is a simple, accessible, and direct method of payment or transfer of funds.
As businesses increase their usage of EFT, paper checks become obsolete due to expense, slower
expedition, and overall effort.
An EFT transfer is usually very straight forward. There are two parties: the sender of funds, and the
receiver of funds. Once the sender initiates the transfer, the request channels through a series of
digital networks originating from either the internet or a payment terminal, to the sender’s bank,
and then to the receiver’s bank. Senders can be anyone from an employer, to a business, to an
individual paying a vendor for a service such as electricity. Likewise, recipients can be entities like
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employees, goods suppliers, retailers, and utility companies. Most payments are cleared, that is
complete, within a couple days.
ADVANTAGES
24 x 7 Availability
Real-Time Transfers
Nation-wide accessibility
Zero Cost
Versatile Payment System
ATM
The term ATM stands for automated teller machine. It is an electronic device that is used by only
bank customers to process account transactions. The users access their accounts through a special
type of plastic card that is encoded with user information on a magnetic strip. The strip contains an
identification code that is transmitted to the bank’s central computer by modem. The users insert
the card into ATMs to access the account and process their account transactions. The automated
teller machine was invented by John Shepherd-Barron in the year 1960.
By using an automated teller machine or ATM we can perform different financial transactions such
as cash deposits, withdrawals, transfer funds, information of account, ATM PIN change, and also
linking the Aadhaar number to the bank account so that the interaction between the bank staff and
the customer can be reduced.
The automated teller machine (ATM) is an automatic banking machine (ABM) that allows the
customer to complete basic transactions without any help from bank representatives. There are
two types of automated teller machines (ATMs). The basic one allows the customer to only draw
cash and receive a report of the account balance. Another one is a more complex machine that
accepts the deposit, provides credit card payment facilities and reports account information.
INPUT DEVICES
Card Reader
Keypad
OUTPUT DEVICES
Speaker
Display Screen
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Receipt Printer
Cash Dispenser
DEBIT CARD
A debit card is a payment card that lets you make secure and easy purchases online and in person
by drawing money directly from your checking account. You're not borrowing from a line of credit
like you would with a credit card; the money on your debit card is your own. You can also use a
debit card to access your cash at ATMs.
In addition to cash registers and ATMs, debit cards work with mobile payment platforms like Apple
Pay, Samsung Pay and Google Pay.
CREDIT CARD
A credit card is a type of credit facility, provided by banks that allow customers to borrow funds
within a pre-approved credit limit. It enables customers to make purchase transactions on goods
and services. The credit card limit is determined by the credit card issuer based on factors such as
income and credit score, which also decides the credit limit.
The credit card information includes credit card number, cardholder’s name, expiration date,
signature, CVC code, etc. The best part about a credit card is that it is not linked to a bank account.
So, whenever you swipe your credit card, the amount is deducted from your credit card limit, not
your bank account. You can use it to pay for food, clothes, take care of medical expenses, travel
expenses, and other lifestyle products and emergency services.
ADVANTAGES
Hassle-free shopping experience
No need to carry cash
Rewards, cashback, and offers
Easy cash withdrawal
Widely accepted
Meet emergencies
Improves credit score
CASH
In providing a simple definition of eCash, also known as electronic cash, it is a digital money product
that provides a way to pay for products and services without resorting to paper or coin currency.
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eCash is an evolutionary product that has its roots in other payment concepts. Others have noted
that checks were essentially the same idea because they have involved stating that an amount will
be taken from one account and then placed in another.
During this process, no currency is actually transferred. Instead, banks take care of changing the
amounts in both accounts to reflect the transaction. eCash removes the bank from the payment
equation but essentially does the exact same thing as a check.
An eCash user will download the electronic money from their bank account and store this on their
hard drive. When they are ready to use the electronic cash to pay an Internet merchant or
shareware provider, the same software is then used to take the amount from their eCash “wallet”
and add it to the merchant’s “wallet.”
The e-cash goes through an e-cash bank so that the transaction can be verified. The merchant or
shareware provider can then choose to pay their expenses with this eCashor upload it to a
traditional bank account for use later. Transactions do not incur a fee except for a small amount
charged by the e-cash company. This makes it ideal for smaller online transactions than any other
payment method.
SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a messaging system that
runs on a network of financial institutions. It is used by thousands of banks worldwide to
communicate information on financial transactions in a secure and standardized way.
SWIFT is used to communicate money transfers between two banks. When two banks have a
relationship (commercial accounts with each other), the transfer is done as soon as the SWIFT
message has been received. The money from one's personal account is transferred to the other
person's account via the banks' commercial accounts. The banks take a fee.
If the two banks do not have a relationship, an intermediary bank will facilitate the process. For
that, you will be charged an additional fee.
If there are two currencies involved in the transfer, one of the banks will do the currency exchange.
RTGS
The full-form of RTGS is ‘Real-Time Gross Settlement’. Allowing the transfer of money and/or
securities instantaneously, it is a perpetual process which settles payments across banks on an
individual basis. It does not net debits with credits, covering the books of a central bank.
Managed and run by the country’s central bank, RTGS payments are non-revocable and final.
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FEATURES
 It facilitates the real-time transfer of funds online.

 It is a safe and secure means of sending and receiving money.
 RTGS is reliable as it is maintained by the Reserve Bank of India (RBI).
 It is used for high-value transactions. The minimum RTGS limit is ₹2 lakh.
 Fees and charges depend on the RTGS transaction amount.
 RTGS timings differ from one bank to another.
 RTGS can be done online via net banking or by visiting your bank’s branch.
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UNIT V
RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) is the apex financial institution of the country’s financial
system entrusted with the task of control, supervision, promotion, development and planning. RBI
is the queen bee of the Indian financial system which influences the commercial banks’
management in more than one way
In 1921, the Imperial Bank of India was established to perform as Central Bank of India by the
British Government. But unfortunately Imperial Bank failed to show its performance up to the mark
and didn’t achieve any success as the Central Bank. So, Government required setup of brand new
central bank. In 1st April 1935, Reserve Bank of India was setup. In January, 1949, RBI was
nationalized
The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s bank.
The RBI controls the monetary and other banking policies of the Indian government.
Key functions of RBI are, banker’s bank, the custodian of foreign reserve, controller of credit
and to manage printing and supply of currency notes in the country.Reserve Bank of India (RBI) is
the central bank of the country. RBI is a statutory body. It is responsible for the printing of currency
notes and managing the supply of money in the Indian economy.
In the beginning, the headquarters of RBI was established in Calcutta. However, soon after, in
1937, it was permanently shifted to Mumbai.
The first Governor of RBI was Osborne Smith, The first Indian governor of RBI was C D
Deshmukh. As of October 2021, the Governor of the Reserve Bank of India is Mr Shaktikanta Das.
He is the 25th RBI Governor The capital of the RBI shall be ` 5 Crore.
Offices, branches & agencies:
The RBI shall establish offices in Bombay, Calcutta, Delhi and Madras and may establish
branches or agencies in any other place in India with the previous sanction of the Central
Government.
Central Board of Directors [Section 8] : The Central Board shall consist of the following
Directors, namely:
(a) A Governor and not more than 4 Deputy Governors to be appointed by the Central
Government.
(b) 4 Directors to be nominated by the Central Government, 1 from each of the 4 Local Boards.
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(c) 10 Directors to be nominated by the Central Government.
(d) 2 Government officials to be nominated by the Central Government.
Thus, Central Board consists of total 21 persons.
Governor & Deputy Governors: The Governor & Deputy Governors shall devote their whole-
time to the affairs of the RBI. They are entitled to receive salaries and allowances determined by the
Central Board, with the approval of the Central Government.
The main purpose of the RBI is to conduct consolidated supervision of the financial sector in
India, which is made up of commercial banks, financial institutions, and non-banking finance firms.
Functions of RBI (Central bank)
I.Main functions of RBI:
1.Issue of Currency Notes:
The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee
note and coins of smaller denomination. These currency notes are legal tender issued by the RBI.
Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not
only to issue and withdraw but even to exchange these currency notes for other denominations. It
issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills
and promissory notes and government of India bonds.
2. Banker to other Banks:
The RBI being an apex monitory institution has obligatory powers to guide, help and direct other
commercial banks in the country. The RBI can control the volumes of banks reserves and allow
other banks to create credit in that proportion. Every commercial bank has to maintain a part of
their reserves with its parent's viz. the RBI. Similarly, in need or in urgency these banks approach
the RBI for fund. Thus, it is called as the lender of the last resort.
3. Banker to the Government:
The RBI being the apex monitory body has towork as an agent of the central and state governments.
It performs variousbanking function such as to accept deposits, taxes and make payments on
behalfof the government. It works as a representative of the government even at theinternational
level. It maintains government accounts, provides financial adviceto the government. It manages
government public debts and maintains foreignexchange reserves on behalf of the government. It
provides overdraft facility to the government when it faces financial crunch.
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4. Exchange Rate Management:
It is an essential function of the RBI. In order to maintain stability in the external value of
rupee, it has to prepare domestic policies in that direction. Also, it needs to prepare and implement
the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to
maintain the exchange rate stability, it has to bring demand and supply of the foreign currency (U.S
Dollar) close to each other.
5. Credit Control Function:
Commercial bank in the country creates credit according to the demand in the economy. But
if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles.
On the other credit creation is below the required limit then it harms the growth of the economy.
As a central bank of the nation the RBI has to look for growth with price stability. Thus, it regulates
the credit creation capacity of commercial banks by using various credit control tools.
6. Supervisory Function:
The RBI has been endowed with vast powers for supervising the banking system in the country.
It has powers to issue license for setting up new banks, to open new branches, to decide minimum
reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct
the commercial banks in India. It can have periodical inspections an audit of the commercial banks
in India.
II. Developmental / Promotional Functions of RBI:
1. Development of the Financial System:
The financial system comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the rapid economic
development of the nation. The RBI has encouraged establishment of main banking and nonbanking
institutions to cater to the credit requirements of diverse sectors of the economy.
2. Development of Agriculture:
In an agrarian economy like ours, the RBI has to provide special attention for the credit need of
agriculture and allied activities. It has successfully rendered service in this direction by increasing
the flow of credit to this sector. It has earlier the Agriculture Refinance and
DevelopmentCorporation (ARDC) to look after the credit, National Bank for Agriculture and Rural
Development (NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance:
Rapid industrial growth is the key to faster economic development. In this regard, the adequate
and timely availability of credit to small, medium and large industry is very significant. In this regard
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the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd.
IDBI, SIDBI and EXIM BANK etc.
4. Provisions of Training:
The RBI has always tried to provide essential training to the staff of the banking industry. The RBI
has set up the bankers' training colleges at several places. National Institute of Bank Management
i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to
mention.
5. Collection of Data:
Being the apex monetary authority of the country, the RBI collects process and disseminates
statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This
data proves to be quite useful for researchers and policy makers.
6. Publication of the Reports:
The Reserve Bank has its separate publication division. This division collects and publishes data
on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It
includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks
India., etc. This information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits:
As an apex organization, the RBI always tries to promote the banking habits in the country. It
institutionalizes savings and takes measures for an expansion of the banking network. It has set up
many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-
1982, NHB-1988, etc. These organizations develop and promote banking habits among the people.
During economic reforms it has taken many initiatives for encouraging and promoting banking in
India.
8.Promotion of Export through Refinance:
The RBI always tries to encourage the facilities for providing finance for foreign trade especially
exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit
Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export
purpose.
III.Supervisory Functions of RBI:
1.Granting license to banks:
The RBI grants license to banks for carrying its business. License is also given for opening
extension counters, new branches, even to close down existing branches.
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2. Bank Inspection:
The RBI grants license to banks working as per the directives and in a prudent manner without
undue risk. In addition to this it can ask for periodical information from banks on various
components of assets and liabilities.
3. Control over NBFIs:
The Non-Bank Financial Institutions are not influenced by the working of a monitory policy.
However, RBI has a right to issue directives to the NBFIs from time to time regarding their
functioning. Through periodic inspection, it can control the NBFIs.
4. Implementation of the Deposit Insurance Scheme:
The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits
of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI
work to implement the Deposit Insurance Scheme in case of a bank failure.
METHODS OF CREDIT CONTROL:
The following points highlight the two categories of methods of credit control by central
bank.
The two categories are:
I. Quantitative or General Methods
II. Qualitative or Selective Methods.
I. Quantitative or General Methods:
1. Bank Rate Policy:
The bank rate is the rate at which the Central Bank of a country is prepared to re-discount the
first class securities.
It means the bank is prepared to advance loans on approved securities to its member banks.
As the Central Bank is only the lender of the last resort the bank rate is normally higher than
the market rate.
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STUDY MATERIAL
For example:
If the Central Bank wants to control credit, it will raise the bank rate. As a result, the market rate
and other lending rates in the money-market will go up. Borrowing will be discouraged. The raising
of bank rate will lead to contraction of credit.Similarly, a fall in bank rate mil lowers the lending
rates in the money market which in turn will stimulate commercial and industrial activity, for which
more credit will be required from the banks. Thus, there will be expansion of the volume of bank
Credit.
2. Open Market Operations:
This method of credit control is used in two senses:
(i) In the narrow sense, and
(ii) In broad sense.
In narrow sense the Central Bank starts the purchase and sale of Government securities in the
money market. But in the Broad Sense the Central Bank purchases and sales not onlyGovernment
securities but also of other proper and eligible securities like bills and securities of private concerns.
When the banks and the private individuals purchase these securities they have to make payments
for these securities to the Central Bank.This gives result in the fall in the cash reserves of the
Commercial Banks, which in turn reduces the ability of create credit. Through this way of working
the Central Bank is able to exercise a check on the expansion of credit.
3. Variable Cash Reserve Ratio:
Under this system the Central Bank controls credit by changing the Cash Reserves Ratio. For
example If the Commercial Banks have excessive cash reserves on the basis of which they are
creating too much of credit which is harmful for the larger interest of the economy. So it will raise
the cash reserve ratio which the Commercial Banks are required to maintain with the Central Bank.
This activity of the Central Bank will force the Commercial Banks to curtail the creation of credit in
the economy. In this way by raising the cash reserve ratio of the Commercial Banks the Central Bank
will be able to put an effective check on the inflationary expansion of credit in the economy.
Either variable cash reserve ratio or open market operations:
From the analysis and discussions made above of these two methods of credit, it can be said that
the variable cash reserve ratio method is superior to open market operations on the following
grounds:
(1) Open market operations is time consuming procedure while cash reserves ratio produces
immediate effect in the economy.
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STUDY MATERIAL
Open market operations can work successfully only where securities market in a country are well
organized and well developed.While Cash Reserve Ratio does not require such type of securities
market for the successful implementation.
II. Qualitative or Selective Method of Credit Control
The qualitative or the selective methods are directed towards the diversion of credit into particular
uses or channels in the economy. Their objective is mainly to control and regulate the flow of credit
into particular industries or businesses.
The following are the important methods of credit control under selective method:
1. Rationing of Credit.
2. Direct Action.
3. Moral Persuasion.
4. Method of Publicity.
5. Regulation of Consumer‘s Credit.
6. Regulating the Marginal Requirements on Security Loans.
1. Rationing of Credit:
Under this method the credit is rationed by limiting the amount available to each applicant. The
Central Bank puts restrictions on demands for accommodations made upon it during times of
monetary stringency.In this the Central Bank discourages the granting of loans to stock exchanges
by refusing to re-discount the papers of the bank which have extended liberal loans to the
speculators. This isan important method of credit control and this policy has been adopted by a
number of countries like Russia and Germany.
2. Direct Action:
Under this method if the Commercial Banks do not follow the policy of the Central Bank, then the
Central Bank has the only recourse to direct action. This method can be used to enforce both
quantitatively and qualitatively credit controls by the Central Banks. This method is not used in
isolation; it is used as a supplement to other methods of credit control.Direct action may take the
form either of a refusal on the part of the Central Bank to rediscount for banks whose credit policy
is regarded as being inconsistent with the maintenance of sound credit conditions. Even then the
Commercial Banks do not fall in line, the Central Bank has the constitutional power to order for
their closure.This method can be successful only when the Central Bank is powerful enough and has
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STUDY MATERIAL
cordial relations with the Commercial Banks. Mostly such circumstances are rare when the Central
Bank is forced to resist to such measures.
3. Moral Persuasion:
This method is frequently adopted by the Central Bank to exercise control over the Commercial
Banks. Under this method Central Bank gives advice, then request and persuasion to the
Commercial Banks to co-operate with the Central Bank is implementing its credit policies.If the
Commercial Banks do not follow or do not abide by the advice or request of the Central Bank no
gross action is taken against them. The Central Bank merely was its moral influence and pressure
with the Commercial Banks to prevail upon them to accept and follow the policies.
4.Method of Publicity:
In modern times, Central Bank in order to make their policies successful, take the course of the
medium of publicity. A policy can be effectively successful only when an effective public opinion is
created in its favor.Its officials through news-papers, journals, conferences and seminar‘s present a
correct picture of the economic conditions of the country before the public and give a prospective
economic policies. In developed countries Commercial Banks automatically change their credit
creation policy. But in developing countries Commercial Banks are being lured by regional gains.
Even the Reserve Bank of India follows this policy.
5. Regulation of Consumer’s Credit:
Under this method consumers are given credit in a little quantity and this period is fixed for 18
months; consequently credit creation expanded within the limit. This method was originally
adopted by the U.S.A. as a protective and defensive measure, there after it has been used and
adopted by various other countries.
6. Changes in the Marginal Requirements on Security Loans:
This system is mostly followed in U.S.A. Under this system, the Board of Governors of the Federal
Reserve System has been given the power to prescribe margin requirements for the purpose of
preventing an excessive use of credit for stock exchange speculation.This system is specially
intended to help the Central Bank in controlling the volume of credit used for speculation in
securities under the Securities Exchange Act, 1934.
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ACADEMIC YEAR 2022-2023, SEMESTER – III

BANKING THEORY LAW AND PRACTICE

ACADEMIC YEAR 2022-23

UNIT CONTENT PAGE NO

Unit II: Banking System:

Unit III: Traditional Banking:

Unit IV: Modernised Banking:

Unit V: Reserve Bank of India:

BANKER AND CUSTOMER RELATIONSHIP

Relationship of Trustee and Beneficiary:-

Relationship of Advisor and Client:-

Relationship of Agent and Principal:-

Statutory Obligation to honour cheques:

Secrecy of customer’s account:

Banker’s right to claim incidental charges:

Law of limitation on bank deposits:

Right to charge interest

Right to levy commission and service charges

The Right of Set-off

Right to Close the Account

Types of Negotiable Instruments

Importance of Negotiable Instruments

The payments are instant, thereby saving you a lot of time.

Advantages of Negotiable Instruments

General Cheque Crossing

Special Cheque Crossing

Restrictive Cheque Crossing or Account Payee’s Crossing

Endorsement is essentially is of two kinds - Endorsement in Blank and Endorsement in full.

Endorsement in Full / Special : An endorsement is 'special' or in 'full' if the endorser, in addition to

Endorsement Sans Recourse :

Every alteration or change on a negotiable instrument cannot be established as material alteration

Instances of Material Alteration

The following are considered as material alteration.

1. Alteration of the date of the instrument

2. Alteration of the amount payable

3. Alteration in time of payment

4. Alteration of the place of payment

5. Alteration of rate of interest or any change of party thereto, if any

6. Tearing of the material part of the instrument

7. Where a bill is accepted generally, the insertion of a place of payment

8. Addition of a new party to the instrument

Functions of Indigenous Bankers

They act as commission agents to firms.

MEANING OF COMMERCIAL BANKS:

Deposits are of three types as under:

(i) Current account deposits:

(ii) Fixed deposits (Time deposits):

(iii) Savings account deposits:

MEANING OF CO-OPERATIVE BANKS

Objective Of Co-operative Banks

Functions Performed By The Co-operative Banks

Following are the functions performed by the co-operative banks:

1. Primary Urban Co-operative Bank (PUCBs)

2. District Central Co-operative Bank (DCCBs)-

3. Primary Agriculture Credit Society (PACs)-

SCBs are governed by NABARD and acts as supervisor to the DCCBCs.

5. Land Development Banks (LDBs)-

MEANING DEVELOPMENT BANK

Features of a Development Bank

A development bank has the following features or characteristics:

It is a multipurpose financial institution. Besides providing financial help it undertakes promotional

It provides financial assistance to both private as well as public sector institutions.

Development banks react to the socio-economic needs of development.