Introduction to Banking

By
VVG SANKAR
Overview
• Banker – Customer Relation
• Different Customer Types
• Types Deposits
• Negotiable Instruments
• Special Provisions
• Lending Principles
• Fund based Advances
• Collaterals
• Exports
• Non fund based advances
• Letter of Credit
• Bank Guarantee
• Non-performing Assets
• Ancillary Services
Banker – Customer
Relationship
Ø Debtor-Creditor - Deposits
Ø Creditor-Debtor - Loans
Ø Bank as a Trustee - Safe deposit/margin money
Ø Bailee-Bailor - Safe deposit/margin money
Ø Agent-Principal – Remittance/Collection of
Cheques
Ø Lessor and Lessee ( Licensor and Licensee ) –
Safe Deposit Lockers
Ø Indemnified and Indemnifier ( Indemnity holder
and indemnifier ) – Duplicate Demand
Draft/Fixed Deposit Receipt
Different Customer Types

ü Individuals
ü Joint Account
ü Hindu Undivided Family
ü Minor
ü Proprietor
ü Partnership Firm
ü Limited Company
ü Trusts
ü Cooperative Society
ü Government and Public Bodies
Types of Deposits

• Demand Deposit
üSavings Bank Account
üCurrent Account
üCall Deposit
• Term Deposit
üFixed Deposit
üSocial Security Deposit
üCumulative Deposit
üRecurring Deposit
üPigmy Deposit
üCumulative Annuity Deposits
Special Deposits
v Certificate of Deposit
Ø Purpose : To mobilise bulk deposits from market
Ø Interest rate : At competitive rates of interest-market
related. Fixed or floating.
Ø Who can issue : Scheduled Commercial banks-except RRBs
and all India FIs.
Ø Amount : Min. Rs. 1 lac and in multiples of lac.
Ø Maturity : Min : 15 days Max : 12 Months ( in case of Fis
minimum 1 Year and maximum 3 years)
Ø Investors : Individuals ( other than minors), Corporations,
Companies, Trusts, Associations etc.
Ø Pre-mature – not allowed.
Ø Transfer – Endorsement and delivery .
Ø Loan : Against collateral of CD not allowed.
Ø Issued at a discount to face value.
Ø
Negotiable instruments
Ø Section 6 Defines Cheque :
ü Is a bill of exchange
ü Drawn on a specified Banker
ü Payable on demand
ü Includes electronic image of a truncated
cheque
ü And a cheque in the electronic form.
Ø Bill of Exchange is an instrument
ü in writing
ü containing an unconditional order
ü Signed by the maker
ü directing a certain person to pay
ü a certain sum of money only
ü On a specified date
ü to or to the order of a specified person or to
Negotiable Instruments Act 1881
ü Sec 10 : Payment in due course
ü Sec 15 : Endorsement
ü Sec 16 : Endorsement in Blank – bearer cheque
ü Sec 17 : Endorsement in full – order cheque
ü Sec 18 : Amount in Figures and Words differ.
ü Sec 31 : Drawee bank is liable to honour the cheque drawn on its account
ü Sec 50 : Restrictive endorsement
ü Sec 52 : Without recourse endorsement
ü Sec 85 (1) : Protection for payment on forged endorsement of order cheque
ü Sec 85(2) : Protection for payment on forged endorsement of bearer cheque
ü Sec 85(A) : Protection for payment on forged endorsement of a Draft
ü Sec 89 : Protection to paying bank for material alteration, not visible/subsequently
altered
ü Sec 123 : ChequeCrossing – With or without “Not negotiable” no impact
ü Sec 124 : Crossed specially to Banker
ü Sec 126 : When specially crossed – paying banker to pay only to the collecting
banker
ü Sec 127 : When crossed to more than one Bank, if not a collecting agent, payment
to be refused
ü Sec 128 : Paying Bank looses protection, if it violates the provision mentioned in
Sec 127
ü Sec 129 : Paying banker is liable to the true owner, if it violates sec 127 and 128
Special Provisions
v Clayton’s Rule - The order in which the credit entry will
set off the debit entry is the chronological order.
Ø Rule operates in case of death or insolvency or insanity of a
borrower or joint borrower or a partner in a firm.
Ø To stop operation of the rule – Banker stops the operations
in the old account and opens the new account in the
name of the reconstituted firm.
v U/s 31 of NI Act – Bank is under obligation to honour the
cheques issued by the customer if stipulated
conditions are fulfilled, except in the following cases :
Ø Garnishee Order – an order issued by a court on the request
of a creditor for attachment of funds of the
judgementdebtor available with his bank – called
Garnishee. All existing deposits after right of set-off is
available. Amount deposited after order can not be
adjusted through Garnishee order.
Ø Attachment order – Income tax attachment order, Wealth
Tax Act, Sales Tax Acts of different states, DRT Act. It is
applicable on all deposits present/amount received
subsequently, FDs will be remitted on maturity. On
Lending Principles

Ø Safety
Ø Liquidity
Ø Profitability
Ø Purpose
Ø Diversification of Risks
Ø Security
•
 Fund based advances
Type of Finance Purpose Security

WorkingCapital /Cash Working Capital Hypothecation of

Credits Goods
Term Lending Purchase of Fixed Mortgage of Land and
Assets / Machinery / Building /
Land & Building Charge on Fixed
Machinery

Export Credit Pre-shipment Credit Hypothecation of Goods

marked for Export

Post-Shipment Credit

Bills Financing FX Bills Discounting / Documents

Purchasing
Modes of Collaterals
Working Capital Loan

• A short-term loan which provides money to buy earning

assets. It is the money required for day-to-day
operations of an enterprise.
ØUsed to purchase raw materials
ØPayment of wages to employees
ØMeet the expenses towards Electricity,
Water Consumption, Transportation etc.
ØPayment to meet expenses incurred on
production, selling and administration
• Working Capital is computed based on operating cycle.
ØOperating cycle is the time taken to get
the money released from raw materials,
finished goods, AR
Term Loan

• Money borrowed, which are repayable before a fixed

date, normally for a period of over one year, for the
purchase of Fixed Assets like Land, Building,
Machinery, are called Term Loans.
• Based on the term/tenor of the loan, they are classified
normally as below :
ØShort-Term Loan - 1 Year to 3 Years.
 Ex : Consumer Loan, Gold Loan, Crop/Dairy
Loan
ØMedium Term Loan – 3 to 7 Years.
 Ex : Loans to Bore wells, Tractor,
Transportation Vehicles
ØLong Term Loan – Over 7 Years
 Ex : Manufacturing companies like Sugar
Export Credit

• Loan given for the purpose of Exports.

Ø Pre-Requisites :
üConfirmed Export Order.
üGoods should be permitted for Exports.
üWith LC is preferred.
üWithout LC is at Exporters risk – requires
more caution.
• Pre-Shipment Finance
Ø Loan given to procure raw materials, goods required for
exports.
Ø These are also called as Packing Credit finance and can be
in Local currency or Foreign Currency.
• Post-Shipment Finance
Ø Finance given making export, by way of Bill purchase/
Discount is known as Post-shipment finance.
Pre-Shipment Advance - Process Flow

3. G oods
S h ip p e d
1 . C o n tra ct
shipment Credit

Seller/Beneficiary
Buyer/Applicant
4 . D o cu m e n ts
2 Pre -

4 . Pa ym e n t
5 . R e im b u rse m e n ts

S e lle r’ s B a n k / B u ye r’ s B a n k /
A d visin g B a n k LC Issu in g
B ank
Non-Fund Based Advances
• LC - Letters of Credit – document issued by a bank :
Ø Guarantee the payment – on satisfying terms and
conditions specified in the document.
Ø Issued at the request of an importer ( Buyer )
Ø Exporter ( seller ) is assured of the payment on satisfying
the conditions mentioned.
• BG - Bank Guarantee - An indemnity letter issued by a bank :
Ø Guarantee to pay the beneficiary a certain sum, on failure
of an event specified in the document.
• DPG – Deferred Payment Guarantee – Is a type of BG, where in
multiple payments on different future dates are Guaranteed.
ü Both LC and BG are ‘Off Balance Sheet’ items and will not form
Banks Asset/Liability, on its issue. When payment is due, if the
applicant fails to pay on devolment, Bank makes the payment to
the beneficiary and recovers from the applicant.
•

•
Le tte r o f C re d it

Process Flow

3. G oods
S h ip p e d
1 . C o n tra ct

Seller/Beneficiary Buyer/Applicant
5.
Pa ym e n t
4 . D o cu m e n
4 . D o cu m e n ts 2 . LC
2 . LC A d vise d
A p p lica tio n
6 . Pa ym e n t
2 . LC Issu e d

6.
R4e. imD obcu
u rse B u ye r’ s B a n k /
m emn etsn ts
S e lle r’ s LC Issu in g
B ank / B ank
B a n k G u a ra n te e

Process Flow

1 . C o n tra ct

Beneficiary Applicant
3. 2 . A p p lica tio n
G
Iss u a ra
ue n te
d e

A d visin g B a n k
Non Performing Assets
Definition: An asset when ceases to generate income for the Bank in


the preceeding 90 days on the date of balance sheet is treated as

NPA.
v Term Loan – Interest and/or Principal installment remain overdue
for a period of more than 90 days.
v Crop Loan – Principal/Interest remain overdue for one/two crop
seasons, for long duration / short duration crops respectively.
v Overdue – OD/CC – balance remains more than sanctioned limit for
a period of more than 90 days or no credits/ credits not
sufficient to cover interest debited during the same period.
v Income Recognition
Ø Full interest accrued on advances against TD,NSC,KVP,LIC etc
Ø Full Interest accrued on other advances, if recovered before 90
days.
Ø Fees and commission received upfront, on accrual basis for the
completed period
v Asset Classification
Ø Standard
Ø Sub-standard – Asset which has remained a NPA for less than 12
months.
Ancillary Services

Ø Demand Draft
Ø Bankers’ Cheque
Ø Mail Transfer
Ø Telegraphic Transfer
Ø Traveller’s Cheques
Ø NEFT
Ø RTGS
Ø Tax Collection/Bill Payment
Ø Safe Lockers
Ø Safe Custody
Ø Portfolio Management
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 Any Questions ?
THANK YOU