Banking Institutions

Definitions of Bank
• Indian Banking Companies Act - “Banking
Company is one which transacts the business
of banking which means the accepting for the
purpose of lending or investment of deposits
money from the public repayable on demand
or otherwise and withdrawable by cheque,
draft, order or otherwise”.
 Types of Banks
• Reserve Bank of India
• Commercial banks
• Development Banks (IDBI)
• Cooperative banks
• Specialised banks (NABARD, SIDBI)
• Indigenous Bankers
• Rural Banking
• Export Import Banks
 Indian Banking system
• The banking system of a country plays an
important role in the economic development
of any country. Banking system comprises of
the banking institutions functioning in the
country. Banking system comprises from the
central bank to all banking institutions which
are functioning and providing financial
facilities to any developmental sector like
agriculture, industries, trade, housing etc.
 Indian Banking system
• Under the Indian banking structure central bank in the name of
the Reserve Bank of India which regulates, directs and controls the
banking institutions. Separate institutions are functioning to meet
the financial requirement of the different sectors of the economy.
Indigenous bankers and moneylenders do dominant in the
unorganized sector. Regional Rural Banks are meeting the
requirement of the rural population. Cooperatives are working to
meet the requirement of medium, short and long-term credit for
agriculture sector. Development banks are meeting the business
and industrial requirements. Thus, we can say that the structure of
Indian banking system has an international level banking system
which can meet the economic requirements of globalized world.
 Indian Banking system
• The Indian banking structure has a wide and comprehensive form.
Apex institutions in the form of banking institutions are playing
important role in the country. The chief regulator of banking system
in our country is the Reserve bank of India. Industrial Development
Bank of India (IDBI) is an apex body in the industrial sector. National
Bank of Agriculture and Rural Development (NABARD) has been
working as an apex institution for the agriculture and rural
development. Import-Export Bank of India (EXIM) is an Apex body of
international trade. National Housing Bank (NHB) is an apex
institution in field of housing construction. Thus these four apex
institutions are accelerating the banking system by providing
refinance facilities to commercial banks and other financial
institutions along with other banking services.
 Reserve Bank of India (RBI)
• Objectives of RBI: The following were the objectives of RBI when it
was set up:
• To manage adequate money and credit in the country
• To maintain the stability of rupee internally and externally
• Balanced and well managed banking development in the country
• To develop well organized money market
• To provide adequate agriculture credit
• To manage public debt
• To seek international monetary co-operation
• Centralization of cash reserves of commercial banks
• To set up Government banks
• Publication of data
 Functions of RBI
• Two types of functions:
– Monetary
– Non-monetary
• Monetary
– Issuing Authority: The Reserve Bank of India
issue currency in the country. All currencies
except one rupee coin and notes and other small
coins.
– Banker of Government:
• Keeping cash balance of the Government as deposits free of
interest.
• Receiving and making payment on behalf of the Government
• Carrying out the Governments’ exchange remittances and
other banking operations.
• Helping both Central and State Governments float new loans
and management public debt.
• Making ways and means advances to the state and local
authorities.
• Acting as advisor to the Government on all monetary and
banking matters
 – Bankers’ Bank
• Custodian of foreign reserve
• Controller of credit
– It holds the cash reserves of all the scheduled banks.
– It controls the credit operations of banks.
– It controls the banking system through the system of
licensing, inspection and calling for information.
– It acts as the lender of the last resort by providing
rediscount facilities to scheduled banks.
 Functions of RBI
• Custodian of Foreign Reserves
– To administer ‘foreign exchange control’.
– To choose the exchange rate system and fix or
manage the exchange rate between the rupee and
other currencies.
– To manage exchange reserves.
– To interact with monetary authorities of other
countries and with the international financial
institutions such as IMF and World Bank.
 Controller of Credit
• RBI entrusted with the task of controlling
credit in the country. The statutory functions
of the bank have been framed in such a way as
to provide enough power to regulate the
credit –creating activities of commercial
banks. The RBI has all the instruments of
credit control which are ordinarily available to
the Central Banks, at its disposal.
 Bank Rate
• The section 49 of the RBI Act empowers the RBI
to publish the bank rate from time to time and it
defines bank rate as the “standard rate which is
prepared to buy or rediscount bills of exchange
or other commercial papers eligible for purchase.
– In India RBI administer the interest rate.
– The commercial banks are able to get other refinance
facilities. Therefore they do not with to go to the RBI
to rediscount their instruments.
 Open market operation
• In India open market operation refers to the
purchase and sale of Govt. securities by the
RBI from/to the public and banks on its own
account.
 Variable reserve requirements
• The RBI has been given power to control
credit through its positions as the bankers’
bank. The reserve under section 42 with RBI
will be Cash Reserve Ratio and Statutory
Liquidity Ratio.
• CRR: It is a weapon at the disposal of the RBI
control credit. Present CRR is 4%. If CRR is
decreased then there will be more cash with
the banks and they will be able to provide as
loan to the borrowers. If CRR is high then
more bank money will be parked with the RBI
and less amount will be available for providing
as loan.
• SLR: It is another method of influencing the
lending policies of commercial banks. All
commercial banks have to maintain liquid
assets in the form of cash, gold and other
approved securities equal to not less than
permitted amount. Present SLR is 18.75%.
• Supervisory Functions
– To issue licences for the establishment of new banks.
– To issue licences for setting up of bank branches.
– To prescribe for banks, the minimum requirements regarding capital and
resources, the transfer of reserve fund and maintenance of cash reserve and
other liquid assets.
– To inspect the organisational set up: branch expansion, mobilisation of
deposits, investments, credit portfolio management, region wise performance,
profit planning, manpower planning, training and so on regarding banks.
– To investigate into complaints, irregularities and fraud in respect of banks.
– To check improper investments and injudicious advances by the banks.
– To control appointment, re-appointment, termination of chairman/ chief
executive officer of private sector banks.
– To approve/ force amalgamation.
 Non-Monetary Function
• Promotional Function
• Supervisory
 Opening of a bank
• Requires license issued by RBI
• Minimum capital requirement for a new banking company is Rs.200
crores
• The promoter contribution is restricted to 10-40 per cent
• Private participation is now permitted
• Industrial houses are permitted to take upto 10 per cent stake in the
capital which includes the investment by interconnected companies also
• The promoters and the investor companies are not allowed to avail
credit facilities from the bank in which they have invested.
 Opening of a Bank
• NBFCs are permitted to convert into banking companies, provided
their capital is not less than Rs.200 crores
• The net worth has to be increased to Rs.300 crores in three years
• The NBFC applying for conversion should have a credit rating of
AAA or its equivalent in the year before they apply to RBI for
conversion into commercial banking venture
• The promoters have to bring down their stake to 40 percent
including the stake by non-resident investors which should not
exceed 20 per cent.
• These banks are required to maintain a capital adequacy ratio of 10
per cent on a continuous basis from the start of their operations
 Capital Adequacy Ratio
• What is Capital Adequacy Ratio – CAR?
• The capital adequacy ratio (CAR) is a measurement of a bank's
available capital expressed as a percentage of a bank's risk-
weighted credit exposures. The capital adequacy ratio, also
known as capital-to-risk weighted assets ratio (CRAR), is used
to protect depositors and promote the stability and efficiency
of financial systems around the world. Two types of capital are
measured: tier-1 capital, which can absorb losses without a
bank being required to cease trading, and tier-2 capital, which
can absorb losses in the event of a winding-up and so provides
a lesser degree of protection to depositors.
 CAR
• The capital adequacy ratio is calculated by
dividing a bank's capital by its risk-weighted
assets. The capital used to calculate the capital
adequacy ratio is divided into two tiers.
• CAR=(Tire 1 Capital+Tire2 Capital)/Risk
Weighted Assets
 Tire 1 Capital
• Tier-1 capital, or core capital, consists of equity
capital, ordinary share capital, intangible assets
and audited revenue reserves. Tier-1 capital is
used to absorb losses and does not require a bank
to cease operations. Tier-1 capital is the capital
that is permanently and easily available to cushion
losses suffered by a bank without it being
required to stop operating. A good example of a
bank’s tier one capital is its ordinary share capital.
 Tire 2 Capital
• Tier-2 capital comprises unaudited retained
earnings, unaudited reserves and general loss
reserves. This capital absorbs losses in the
event of a company winding up or liquidating.
Tier-2 capital is the one that cushions losses in
case the bank is winding up, so it provides a
lesser degree of protection to depositors and
creditors. It is used to absorb losses if a bank
loses all its Tier-1 capital.
 Risk Weighted Assets
• Risk-weighted assets are used to determine
the minimum amount of capital that must be
held by banks and other institutions to reduce
the risk of insolvency. The capital requirement
 is based on a risk assessment for each type of
bank asset. For example, a loan that is secured
by a letter of credit is considered to be riskier
and requires more capital than a mortgage
loan that is secured with collateral.
 Why capital adequacy is required
• The reason minimum capital adequacy ratios (CARs)
are critical is to make sure that banks have enough
cash to absorb a reasonable amount of losses
before they become insolvent and consequently
lose depositors’ funds. The capital adequacy ratios
ensure the efficiency and stability of a nation’s
financial system by lowering the risk of banks
becoming insolvent. Generally, a bank with a high
capital adequacy ratio is considered safe and likely
to meet its financial obligations.
 Opening of a Bank
• These newly started banks have to lend up to 40 percent
to priority sector as applicable to other domestic banks
• They are required to open at least 25 per cent of their
branches in rural and semi-urban areas
• They are not permitted to start mutual fund or
subsidiary before they complete three years from the
date of commencement
 Opening of a Bank
• Reserve Bank of India conducts inspection to confirm the following
aspects, before considering the request for opening a bank:
– Ability to meet the claims from depositors
– Conduct of business is not detrimental to the interest of the present or future
depositors
– General character of the proposed management is not prejudicial to the interest of
general public or depositors
– Adequacy of capital structure and prospects for earnings
– Carrying the business is in the interest of the public
– Issuing the license would not be prejudicial to the operation and consolidation of the
banking system
– Carrying on the banking business will not be prejudicial to the interest of public or
depositors.
 Opening of new branches
• Assessment of potentiality for a new branch
• Preference for unbanked areas identified by the state
government
• Scanning the area
• Competitor analysis
• Compliance with the laws/ norms of the local authority
• Banks to present a medium term strategy regarding their
branch expansion to RBI.
 Opening of new branches
• RBI will look into the following aspects before approving the strategy:
– Financial condition and history of the banking company
– The general character of its management
– Adequacy of capital structure and earning prospects
– Public interest dimensions
• The nature and scope of banking facilities provided by banks to common
persons, lending policies and efforts to promote financial inclusion
• Banking policies like minimum balance, ‘no frill account’, grievance redressal
mechanism etc.
• Need for competition
• Compliance with regulatory norms, corporate governance, risk management,
internal control mechanism etc.
 Opening of new branches
• After examining these vital issues, RBI will give approval on an annual
basis
• Annual branch expansion policy submitted to RBI should be with the
approval of directors
• The plan should cover opening, shifting, merger, closing and opening of
ATM centers
• Substitution of branches is considered on a case to case based on the
merit
• If a bank want to open a branch in an underbanked area, request can
be placed before RBI any time during a year which will considered on a
case to case basis
 Opening of new branches
• Banks are permitted to set up Central Processing Centres/ Back
Offices/ Service Branches exclusively to attend to back office
functions such as data processing, verification and processing of
documents, issuance of cheque books, demand drafts etc. on
requests received from other branches and other functions
incidental to banking business
• Service branches are not permitted to interact with customers
• These branches cannot be converted into general banking branches
• Proposals for such branches/offices also form part of the annual
branch expansion plan submitted to RBI.
 Shifting of branches
• Banks are permitted to shift their branches from one
location to another location in the same centre without the
approval of RBI except in the following cases:
– Shifting of a sole rural branch to outside the centre which would
make the centre unbanked area where District Consulting
Committee (DCC) has approved the shifting.
– Shifting to centers which are served by more than one commercial
banks including Regional Rural Banks (RRBs) outside the block.
 Shifting of branches
• Banks should also comply with the following conditions:
– Shifting of rural branches
• A rural branch can be shifted only to another rural branch
• A branch in an underbanked area can be shifted only to another underbanked area
– Shifting of branch outside the block
• The branch should be in existence for five years or more and are incurring losses
consecutively for the last three years
• Branches located at centers prone to certain natural risks such as, floods, landslides
or likely to be submerged due to construction of dams or affected by any natural
calamities etc. can be shifted to another centre
• Branches functioning in places where law and order problem, insurgency or terrorist
activities pose threat to bank personnel and property can be shifted
• Branches where the premises occupied by the bank are in a dilapidated condition or
burnt/destroyed and no suitable premises are available at the centre etc.
– Shifting of branches should be reported to the Regional Office of RBI
Organisational Structure
Board of Directors

Chairman & Managing Director

Executive Director Company Secretary Chief Vigilance Officer

Chief General Managers

General Managers

Deputy General Managers

Assistant General Mangers

Chief Managers

Senior Managers

Managers (MM)

Managers/ Officers (JM )

Clerks/Cashiers/ Data Entry Operators

Subordinate Staff (Class IV)

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 Organisational Structure
• Board of Directors should represent various areas of specialisation as defined
under Section 10A of Banking Regulations Act, 1949
• 51 per cent of the Board should be persons having professional knowledge
and practical experience in the specific areas mentioned under the above
provision of BR Act.
• Appointment of Board of Directors requires approval RBI as well as
Shareholders
• While appointing new directors a nomination committee constituted by the
Board for this purpose scrutinize the nomination, verify their antecedents and
confirm that they are eligible to appointed as directors as per RBI norms

38
 Organisational Structure
• The nomination together with the recommendation of the Board should
be submitted to RBI for approval and got approved by the general body
also
• Not less than two directors should be persons having special knowledge or
practical experience in respect of agriculture and rural economy,
cooperation or small scale industry.
• Not less than two third of the directors are required to retire by rotation
who can be re-elected
• No director shall hold office for more than 8 years
• Directors of banks are prohibited from holding position as directors in
companies, other banks and financial institutions.
• The directors are not eligible for any remuneration other than the sitting
fee and reimbursement actual expenditure towards travel and
accommodation
39
Organisation of Zonal Office
Zonal Head
(General Manager/ Dy. General Manager)

Dy. General Manager/Asst. General Manager/Chief Manager

Asst. General Manager/Chief Manager

Chief Managers/Senior Managers

Senior Managers/Managers

Managers/Dy. Managers

Officers

Other operating staff

40
Organisation of Regional Office

Regional Head
(Dy. General Manager/Asst. General Manager/Chief
Manager)
Asst. General Manager/Chief Manager/Senior
Managers
Chief Manager/Senior
Manager

Managers

Dy. Managers

Officers

Other Operating Staff

41
Organisation of Zonal Office
Zonal Head
(General Manager/ Dy. General Manager)

Dy. General Manager/Asst. General Manager/Chief Manager

Asst. General Manager/Chief Manager

Chief Managers/Senior Managers

Senior Managers/Managers

Managers/Dy. Managers

Officers

Other operating staff

42
 Organisation of Branches
• Classification according to size:
– Scale VI Branches (Exceptionally Large)

– Scale V Branches (Large Branches)

– Scale IV Branches (Metro and Urban Branches)

– Scale III Branches

– Scale II Branches

– Scale I Branches

43
 Organisation of Branches
• Classification according to functions:
– Agricultural Branch
– Industrial Finance Branch
– Corporate Branch
– Overseas Branch
– SSI Branch
– Commercial Branch
– Main Branch
– NRI Branch

44
 Organisation of Branches
• Classification according to functions:
– Personal Banking Branch
– Asset Recovery Branch
– Service Branch
– Offshore Branch
– Overseas/Foreign Branch
– Specialized Branches

45
 Organisation of Branches
• Classification for foreign exchange dealings:
– Only branches designated by RBI can deal in foreign exchange
– Branches are classified into 3 categories based on their status for
dealing foreign exchange
• Category A: Dealing, trading, maintaining currency positions, maintaining
overseas bank accounts, exchange rate management, submission of
returns to RBI, etc., but normally no direct transaction with customers.
• Category B: Handling all customer transactions such as
purchase/negotiation of export documents, handling import transactions,
making remittances, purchase and sale foreign exchange, submission of
returns to RBI etc.
• Category C: Can transact foreign exchange through Category A or Category
B branches.

46
Organisation of Branches
Branch Head
(General Manager/ Dy. General Manager/Asst.
General Manager/Chief Manager/Senior
Manager/Manager)

Section Heads

Section Officers

Other Operating
Staff

47
 Functions of Branches
Deposit Section:
Handling all types
of deposits Customer

4 5 6
1

Savings Current Term

Cashier Account Account Deposits

2
3 3 3

Officer

48
 Functions of Branches
Customer

8 8
5
1
Cashier Loan Clerk
ling
and nd 7 4

n :H sa
n
ctio Loa Credit Officer 6

it S e of
s
red ype ces
C ll t n
• a dva 2
A 3

Manager

49
 Functions of Branches
Other Services
Customer
1
1
1 Collection Section
4

Cashier Remittance Section Deposits Section

2
3 2

Officer

50
 Functions of Branches
Single Window System
Customer

1 2 3 4

Officer

51
 Functions of Branches
• Relationship Banking
– Services of one officer is made available to customers for assisting
them in the banking operations
– Generally certain number of customers are allotted to a single
official
– May I help counter
– Telephone banking
– Door-step banking

52
 Functions of Branches
• Back Office Functions
– Maintenance of books of accounts and records
– Preparation of returns
– Balancing of accounts
– Reconciliation of bank accounts etc.

• In modern banking, these functions are automatically

taken care of by the operating system installed in the
computers

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 Functions of Branches
• Core Banking
– Data stored at a central place
– Accounts can be accessed from any branches using password protection
– Data can be accessed by controlling offices for generating various reports
and returns
– Books of accounts and records are posted updated instantly
– Back to be created
– Banks also create disaster recovery centres

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 Functions of Branches
• Core Banking
– The system has some problems also
• Less human intervention
• More chances of committing frauds
• Difficulty in unearthing frauds
• Connectivity through leased line- line speed can affect data transfer
• Customers may have to wait for transacting if connectivity is lost
due to technical fault
• Technical problems may affect smooth banking operations.

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 Commercial banking
• There are two types of functions of a
commercial bank:
– Primary function
• Accepting deposits
• Lending money
– Secondary function
 Types of bank account
• In deposit terminology, the term Bank Account
refers to a Financial arrangement between a
Depositor or debt holder and a Bank.
• Classification of bank account
– Savings bank account
– Current bank account
– Fixed bank account
– Recurring bank account
 Advantages of savings bank account
• Saving account encourages savings habit among
salary earners and others who have fixed
income.
• It enables the depositor to earn income by way
of interest.
• It helps the depositor to make payment by way
of cheques.
• The bank offers number of services to the saving
bank account holders.
 Features of savings bank account
• The main objective of saving account is to promote savings.
• There is no restriction on the number and amount of deposits.
• Withdrawals are allowed subject to certain restrictions.
• The money can be withdrawn either by cheque or withdrawal
slip.
• The rate of interest payable is very nominal on saving accounts.
• Saving account is of continuing nature. There is no maximum
period.
• No minimum amount has to be kept on saving account.
• No loan facility is provided against saving account.
 Features of Fixed deposit account
• The main purpose of fixed deposit account is to enable the individuals to earn
a higher rate of interest on their surplus funds (extra money).
• The amount can be deposited only once. For further such deposits, separate
accounts need to be opened.
• The period of fixed deposits ranges between 15 days to 10 years.
• A high interest rate is paid on fixed deposits. The rate of interest may vary as
per amount, period and from bank to bank.
• Withdrawals are not allowed. However, in case of emergency, banks allow to
close the fixed account prior to maturity date. In such cases, the bank deducts
1% (deduction percentage may vary) from the interest payable as on that date.
• The depositor is given a fixed deposit receipt, which depositor has to produce
at the time of maturity.
• The deposit can be renewed for a further period.
 Advantages of Fixed Deposit account
• Fixed deposit encourages savings habit for a longer period of time..
• Fixed deposit account enables the depositor to earn a high interest
rate. The rate of interest on fixed deposits is paid on given rate of
interest after the date of maturity but if customer requests, quarterly
interest can also be paid.
• The depositor can get loan facility from the bank.
• On maturity the amount can be used to make purchases of assets.
• The bank can get the funds for a longer period of time.
• The bank can lend such funds for short term loans to businessmen.
• Fixed deposits indirectly boost economic development of the country.
• The bank can also invest such funds in profitable areas.
• This account can be opened joint account also.
 Features of Current Account
• The main objective of current bank account is to enable
the businessmen to conduct their business transactions
smoothly.
• There is no restriction on the number and amount of
deposits. There is also no restriction on the withdrawals.
• Generally banks do not pay any interest on current
account. Nowadays, some banks do pay interest on
current accounts.
• Current account is of continuing nature and as such
there is no fixed period.
 Advantages of Current Account
• Current account enables businessmen to conduct his business transactions
smoothly.
• The businessmen can withdraw any amount at any time from their current
accounts. There are also no restrictions on withdrawals.
• The businessmen can make direct payment to their creditors with the help of
cheques.
• The bank collects money on behalf of its customers and credits the same to
their accounts.
• Current account enables the account holder to obtain overdraft facility.
• The creditors of the account holder can get credit-worthiness information of
the account holder through interbank connection.
• Current account facilitates the industrial progress of the country. Without the
help of this account, businessmen would have faced a number of difficulties in
running their business.
 Principles of Lending
• Safety: The most important rule for
granting/lending loans is the safety of funds. This
is so because the banks earn income through
these loans and advances. In case the bank does
not get back the loans granted by it, it might fail.
A bank cannot and must not sacrifice the safety
of its funds to get higher rate of interest. Banks
must ensure the creditworthiness of the
borrower before lending.
 Continued
• Liquidity: The second important principle of
granting loan is liquidity. Liquidity means possibility
of converting loans into cash without loss of time
and money. Funds with the bank out of which he
lends money are payable on demand or short
notice. As such a bank cannot afford to block its
funds for a long time. Hence the bank should lend
only for short-term requirements like working
capital. The bank cannot and should not lend for
long-term requirements, like capital.
• Return or Profitability: Return or profitability
is another important principle. The funds of
the bank should be invested to earn 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.
• Diversification: ‘One should not put all his eggs in one
basket’ is an old proverb which very clearly explains this
principle. A bank should not invest all its funds in one
industry. In case 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 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 loan for unproductive
purposes. The bank may grant loan to meet
working capital requirements. However, after
nationalisation of banks, the banks have started
granting loans to meet long-term requirements.
• 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
from the sale of security. In case of unsecured loans, the chances of bad
debts will be very high. Security conditions are different in different
banks.
• Margin Money: In case of secured loans, the bank should carefully
examine and value the security. There should be sufficient margin
between the amount of loan and the value of the security. If adequate
margin is not maintained, the loan might become unsecured in case the
borrower fails to pay the interest and return the loan. The amount of loan
should not exceed 60 to 70% of the value of the security. If the value of
the security is falling, the bank should demand further security without
delay. In case he fails to do so, the loan might become unsecured and the
bank may have to suffer loss on account of bad debt.
• National Interest: Banks were nationalised in India to have social
control over them. As such, they are required to invest a certain
percentage of loans and advances in priority sectors viz., agriculture,
small scale and tiny sector, and export-oriented industries etc. Again,
the Reserve Bank also gives directives in this respect to the
scheduled banks from time to time. The banks are under obligations
to comply with those directives.
• Character of the Borrower: Last but not the least, the bank should
carefully examine the character of the borrower. Character implies
honesty, integrity, credit-worthiness and capacity of the borrower to
return the loan. In case he fails to verify the character of the
borrower, the loans and advances might become bad debts for the
bank.
 Loans
• Demand Loan:- A Demand Loan is a loan which is
repayable on demand by the bank. In other words, it is
repayable at short-notice. The entire amount of demand
loan is disbursed at one time and the borrower has to pay
interest on it. The borrower can repay the loan either in
lump sum (one time) or as agreed with the bank. Such
loans are normally granted by banks against security. The
security may include materials or goods in stock, shares of
companies or any other asset. Demand loans are raised
normally for working capital purposes, like purchase of
raw materials, making payment of short-term liabilities.
• Term Loans : Medium and long term loans are called term
loans. Term loans are granted for more than a year and
repayment of such loans is spread over a longer period. The
repayment is generally made in suitable instalments of a fixed
amount. Term loan is required for the purpose of starting a
new business activity, renovation, modernization, expansion/
extension of existing units, purchase of plant and machinery,
purchase of land for setting up of a factory, construction of
factory building or purchase of other immovable assets.
These loans are generally secured against the mortgage of
land, plant and machinery, building and the like.
• Cash Credit: Cash credit is a flexible system of lending
under which the borrower has the option to withdraw
the funds as and when required and to the extent of his
needs. Under this arrangement, the banker specifies a
limit of loan for the customer (known as cash credit
limit) up to which the customer is allowed to draw. The
cash credit limit is based on the borrower’s need and as
agreed with the bank. Against the limit of cash credit,
the borrower is permitted to withdraw as and when he
needs money subject to the limit sanctioned.
• Over Draft: Overdraft facility is more or less similar to ‘cash credit’
facility. Overdraft facility is the result of an agreement with the bank by
which a current account holder is allowed to draw over and above the
credit balance in his/her account. It is a short-period facility. This facility
is made available to current account holders who operate their account
through cheques. The customer is permitted to withdraw the amount of
overdraft allowed as and when he/she needs it and to repay it through
deposits in the account as and when it is convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written
request by the customer. Sometimes the bank also insists on either a
promissory note from the borrower or personal security of the borrower
to ensure safety of amount withdrawn by the customer. The interest rate
on overdraft is higher than is charged on loan.
• Discounting of Bills Apart from sanctioning loans and advances, discounting of
bills of exchange by bank is another way of making funds available to the
customers. Bills of exchange are negotiable instruments which enable debtors to
discharge their obligations to the creditors. Such Bills of exchange arise out of
commercial transactions both in inland trade and foreign trade. When the seller
of goods has to realize his dues from the buyer at a distant place immediately or
after the lapse of the agreed period of time, the bill of exchange facilitates this
task with the help of the banking institution. Banks invest a good percentage of
their funds in discounting bills of exchange. These bills may be payable on
demand or after a stated period. In discounting a bill, the bank pays the amount
to the customer in advance, i.e. before the due date. For this purpose, the bank
charges discount on the bill at a specified rate. The bill so discounted, is retained
by the bank till its due date and is presented to the drawer on the date of
maturity. In case the bill is dishonoured on due date the amount due on bill
together with interest and other charges is debited by the bank to the customers.
 Secondary functions
• Agency services
• General utility services
 Agency services
• Collection of bills, drafts and cheques for their customers.
• The execution of standing orders, i.e. payment of
commercial bills, collection of dividend and interest
coupons, payment of insurance premium, rents and
periodic subscription to clubs and societies.
• Conduct of stock exchange transactions such as purchase
and sale of securities for the customers.
• Acting as executors and trustees.
• Providing income tax services
• Conduct of foreign exchange business.
 General utility services
• Banks provide many services for their
customers-
– Safe keeping of valuables
– Issue of commercial letters of credit and travelers’
cheques
– Collecting trade information from foreign
countries for their customers
– Arranging business tours
– Providing suitable investment advices
 Services of banks in modern time
• Teller services
• Credit cards
• Debit cards
• Automated Teller Machine (ATM)
 Credit card vs debit card
• 1. Credit card is pay later product, but debit card
is pay now.
• 2. All most 50 days time the customer is getting to
repay the money for credit card but for debit card
they are not getting any time at all.
• Interest and other charges are very high in case of
credit card but incase of debit card it is very low.
• Minimum balance is not required for credit card
but it is necessary for debit card.
 Modern technology in banking
• Electronic fund transfer system
• Internet banking
• Anywhere Anytime banking
• Mobile banking
 Classification of loans
• Personal loan
• Car loan
• Housing loan
• Business loan
• Education loan
 Problem
• Suppose you would like to take a loan from a
bank. The loan amount is Rs. 10,00,000. Rate
of interest of the bank is 12%. Time period for
the loan is 12 years. What will be the annual
installment of the loan. Prepare the loan
amortization schedule. Bank is saying you to
provide the installment in the beginning of the
year instead of at the last of the month.
Should you accept the offer?
 Non-Performing Assets
• Performing Assets (Standard Assets): Standard Asset is one which does not disclose any
problems and which does not carry more than normal risk attached to the business. Such an
asset is Performing Asset (PA) and should not be an NPA.
• NON PERFORMING ASSETS (NPA): With a view to moving towards international best practices
and to ensure greater transparency, „90 days‟ overdue* norms for identification of NPAs have
been made applicable from the year ended March 31, 2004. As such, save and except certain
relaxations mentioned for Tier I Banks and Tier II Banks as defined below, with effect from
March 31, 2004, a non-performing asset shall be a loan or an advance where:
– Interest and/or installment of principal remain “overdue”* for period of more than 90 days in respect of a
Term Loan.
– The account remains Out of Order for period of more than 90 days, in respect of an Overdraft/Cash Credit
(OD/OS).
– The bill remains overdue for a period of more than 90 days in the case of Bills purchased and discounted.
– In the case of agricultural loans, other than direct finance to farmers for Agricultural purposes,
identification of NPAs would be done on the same basis as non-agricultural advances.
– Any amount to received remains overdue for a period of more than 90 days in respect of other accounts
 Tier I Banks
• Interest and/or installment of principal remain overdue for a
period of more than 180 days in respect of a Term Loan.
• The account remains „out of order‟ for a period of more
than 180 days in respect of an Overdraft/Cash Credit
(OD/OS).
• The bill remains overdue for a period of more than 180 days
in the case of bill purchased and discounted.
• Any amount to be received remains overdue for a period of
more than 180 days in respect of other accounts.
• Tier II Bank (all UCBs other than Tier I Banks) shall classify
their loan accounts as NPA as per 90 days norm as hitherto.
 Standard Assets
• Standard Asset is one which does not disclose
any problems and which does not carry more
than normal risk attached to the business.
Such an asset should not be an NPA.
 Sub – Standard Assets
• With effect from March 31, 2005 an asset would be classified as substandard if it
remained NPA for a period less than or equal to 12 months. In such cases, the
current net worth of the borrowers/guarantors or the current market value of
the security charged is not enough to ensure recovery of the dues to the banks in
full. In other words, such assets will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
• An asset where the terms of the loan agreement regarding interest and principal
have been renegotiated or rescheduled after commencement of production,
should be classified as substandard and should remain in such category for at
least 12 months of satisfactory performance under the renegotiated or
rescheduled terms. In other words, the classification of an asset should not be
upgraded merely as a rescheduling, unless there is satisfactory compliance of
this condition.
 Doubtful assets
• With effect from March 31, 2005 an asset is required to be
classified as doubtful, if it has remained NPA for more than 12
months. For Tier I banks, the 12-months period of classification
of a substandard asset in doubtful category will be effective
from April 1, 2008. As in the case of substandard assets,
rescheduling does not entitle the bank to upgrade the quality
of an advance automatically. A loan classified as doubtful has
all the weaknesses inherent as that classified as substandard,
with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known
facts, conditions and values, highly questionable and
improbable.
 Loss Assets
• A loss asset is one where loss has been identified
by the bank or internal or external auditors or by
the Co-operation Department or by the Reserve
Bank of India inspection but the amount has not
been written off, wholly or partly. In other words,
such an asset is considered un-collectible and of
such little value that its continuance as a
bankable asset is not warranted although there
may be some salvage or recovery value.
 Residential Mortgage Backed Securities (RMBS)
• RMBS is a process of securitisation of housing loan
installments introduced at the initiative of NHB.
• The primary lender (Originator) sells the pool of housing loan
mortgages to a Special Purpose Vehicle (SPV).
• SPV converts these mortgages into tradable financial
instruments known as Residential Mortgage Backed
Securities.
• NHB guarantees the RMBS.
• RMBS is a source for fee based income

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 Reverse Mortgage
• Reverse Mortgage is a facility introduced by the Government of India to
extend financial assistance to aged senior citizens who are in their last leg
of their life and do not have dependents to look after them.
• The scheme is offered to persons above 62 years owning residential
property and living alone.
• Under this scheme, the residential property is mortgaged to a bank which
releases funds to the borrower monthly.
• Unlike the mortgage loans, there is no monthly repayments, instead the
financial institution will pay the borrower monthly.
• The borrower and spouse can continue to stay in the house
• The maximum period of the loan is 15 years.

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 Reverse Mortgage
• If the borrower survives beyond 15 years, the bank will stop the monthly
payments, but will permit him/her to continue to stay in the house.
• The loan can also be availed in lump sum according to the financial needs
of the borrower
• In the event of the demise of the borrower, the bank will allow the spouse
to continue to stay in the house and the periodical payments will be made
to the spouse till the expiry of the maximum period or death of the spouse
whichever is earlier.
• After the death of the last survivor, the bank will sell the mortgaged house
and liquidate the loan. The balance if any will be given to the legal heir.
• The borrower, if so desired, can prepay the loan without paying any penal
interest.

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•
Reverse Mortgage
NHB is extending refinance facility to Housing Finance Companies/banks against the
Reverse Mortgage
• NHB also guarantee the periodical payments to the senior citizens by the banks/HFCs.
• The loan need be repaid only after the death of the last survivor or sale of the borrower
or the borrower moving out of the house permanently.
• The loan amount depends on the borrower’s age, value of the property and the lending
institution’s interest rate.
• The valuation of the mortgage property is done based on actuarial calculations and
revalued every 5 years.
• The property should be free from all encumbrances.
• Borrower can use the loan amount for repair/renovation of the house, medical expenses
etc.
• The borrower has to pay the insurance premium and property taxes.

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 Socio economic development of the
commercial banks
• Promote capital formation
– Accepting deposits
– Distribution of loans
• Optimum utilization of resources
• Financing of priority sectors
• Promote Balanced Regional Development
• Expansion of credit