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INDEX
I : INTRODUCTION
II : TYPES OF ACCOUNTS
III : NEGOTIABLE INSTRUMENTS
IV : CLEARING
V : ELECTRONIC BANKING
VI : OTHER PAYMENT AVENUES
VII : RETAIL LOANS
VIII : THIRD PARTY PRODUCTS
About Learning Made Simple Learning Made Simple is an initiative taken by few people related to corporate sector. Our aim is to provide quality education and training to those who wishes to excel in their career path. Learning Made Simple is an association working on no profit no loss basis and provide training and development in the area of Finance Management, Management Principals and Soft Skills.
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CHAPTER - I: INTRODUCTION
WHAT IS BANK? A bank is defined as a commercial institution licensed as a receiver of deposits and giver of loans – both short and long term. Section 5(1)(b) of the Banking Regulation Act, 1949 defines banking as, “the accepting for the purpose of lending or investment, of deposits from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.” . Section 5(1)( c) defines a banking company as, “any company which transacts the business of banking in India BANKING INVOLVES THEREFORE
The borrowing, raising or taking up of money; The lending or advancing of money either with or without security; The drawing, making, accepting, discounting buying, selling, collecting and dealing in bills of exchange, hundis,
promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not;
The granting and issuing of letters of credit, travelers’ cheques and circulars notes; The buying and selling of foreign exchange including bank notes; The buying and selling of bullion and specie; The acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures,
bonds, obligations, securities and investments of all kinds; The purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the
negotiating of loans and advances; The receiving of all kinds of bonds or valuables on deposit or for safe custody or otherwise; The providing of safe deposit vaults; The collecting and transmitting of money and securities; Carrying on and transacting every kind of guarantee and indemnity business; Managing, selling and realizing any property which may form the security or part of the security for any loans or
advances or which may be connected with any such security; Acting as agents for any government or local authority or any other person or persons; Contracting for public or private loans and negotiating and issuing the same; The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue,
public or private, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;
Undertaking and executing trusts; Undertaking the administration of estates as executor, trustee or otherwise; Establishing, supporting and aiding institutions funds, trusts etc. for the benefit of its present employees and
granting money for charitable purposes; Acquiring, constructing and maintaining any building for its own purpose; Selling, improving, managing, developing, exchanging, leasing, mortgaging or disposing its property; Doing all such things that are incidental or conducive to the promotion or advancement of its business; Doing all other business specified by the Central Government as the lawful business of a banking company.
Leasing and factoring has been specified as permissible for banks by the Central Government.
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SERVICES RENDERED BY BANK Acceptance of deposits Provision of credit Collection of Cheques, demand drafts, bills of exchange, promissory notes, hundis and foreign documentary
and clean bills. Purchase of local and foreign currency documentary/ clean bills, negotiation of bills under inland and foreign
letters of credit, advising of inland and foreign letters of credit established by branches and correspondents; Carrying out standing instructions for payments; Issuance of performance and financial guarantees Keeping in safe custody deeds and securities Purchase and sale of securities; Remittance of funds Collection of interest on securities, dividend on shares and collection of bills Credit transfers Issue of travelers cheques and gift cheques Acting as executors and trustees Issuance of credit cards Underwriting, acting as bankers to new issues and as bankers for refunds
KNOW YOUR CUSTOMER NORMS AT BANK It is important, in these days of drugs smuggling, terrorism, financial fraud, money laundering and arms dealing that banks know who their customers are. Banks must be comfortable with the bona fides and the integrity of their customers. The need increases as external people like general selling agents introduce a number of customers. Apart from this, in order to develop a long- term relationship, it is an imperative that the banker knows as much as possible about his customer. What does this mean?
It means that a banker should know his customers. He should know about their business and as far as possible the nature of their earnings and their moral standing.
This is why it is recommended that persons known to the bank recommend prospective customers. Even though the introducers cannot be sued or otherwise held responsible, the introducers have a moral responsibility.
This is also reinforced by the concept of relationship banking. How can you offer your client exceptional service if you do not know what he requires? You need to be able to anticipate his requirements. You can do this only if you know your customer well. The second reason is on borrowing customers. It would be very short sighted to lend to someone you do not know.
Although there was some laxity regarding the enforcement of the Know Your customer (KYC) imperative, recent happenings such as terrorism, money laundering and drug smuggling has brought the need of KYC to everyone’s focus.
Headquarters of banks, governments and by extension central banks are insisting on KYC policies being strictly adhered to.
Normal KYC Documents Proof for Photo-ID : Pan Card, Driving License, Passport, Voters ID Card, ID proof of Govt Servants etc. Residence Proof: Electricity Bill, Telephone Bill, Bank Statement, Passbook, Driving License etc.
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BANKING SECTOR HIGHLIGHTS (INDIA) In India, there are 84 commercial banks, which account for about 81 per cent (total assets) of the financial
sector at end-March 2006; over 3000 cooperative banks, which account for 11 per cent; and 133 Regional Rural Banks, which account for 3 per cent.
The capital adequacy ratio has increased to 12.4 per cent for scheduled commercial banks as at end March 2006, which is much above the international norm.
Commercial banks’ net profits remained at 0.9 per cent of total assets during 2004-05 and 2005-06, up from 0.16 per cent in 1995-96.
The ratio of NPLs to total loans of scheduled commercial banks, which was as high as 15.7 per cent at end-March 1997, declined steadily to 3.3 per cent by end-March 2006.
The net non-performing assets declined to 1.2 per cent of net advances during 2005-06 from 2.0 per cent in 2004-05. According to the preliminary financial results available for most of the banks for the year 2006-07, the financial soundness has improved further.
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CHAPTER II - TYPES OF ACCOUNTS DEPOSIT ACCOUNTS
The acceptance of deposits and maintenance of these deposits is the core activity of banks. It is arguably the most important function as without deposits banks will not have funds to invest or lend.
The relationship between a banker and a customer begins when the customer opens an account and deposits an amount in that account.
As customers have different needs, bankers offer different types of deposit accounts. TYPES OF DEPOSIT ACCOUNTS The different types of deposit accounts a customer can place his money in are:
Demand deposits Fixed or time deposits
DEMAND DEPOSITS
Demand deposits are those deposits where the money deposited is available to the depositor on demand. There are two types of demand deposit accounts. These are:
o Current Accounts. This is defined by the Reserve Bank as “a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount and shall also be deemed to include other deposit accounts that are neither savings deposit nor term deposit.”
o Savings Accounts. A savings account has been defined as “ a deposit account …..Which is subject to the restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the bank during any specified period.”
FIXED DEPOSIT A Fixed or Time Deposit is defined as “a deposit received by a bank for a fixed period and which is withdrawable only after the expiry of the said fixed period and shall also include deposits such as recurring, cumulative, annuity, reinvestment deposits, cash certificates and so on.” OPENING OF DEPOSIT ACCOUNTS
By opening a deposit account, an individual who has no other account with the bank, begins a relationship. The beginning of a relationship imposes several obligations on a banker. He must therefore be careful regarding whose accounts he opens.
An account can be opened by anyone who can enter into a valid contract. Minors may open an account jointly with their guardians. Bankers may allow minors to open savings accounts in their single name and operate the account. These will be savings accounts and minors will not be permitted to overdraw these accounts. This is to inculcate banking habits.
WHO PLACES THEIR FUNDS IN DEPOSIT ACCOUNTS? Deposits are opened by those who have funds in hand. These include:
Individuals; Sole Proprietorships; Hindu Undivided Families (HUF); Partnerships; Trusts; Associations / Societies and Clubs;
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Limited Companies. Persons who are not permitted to open accounts are those who cannot enter into a contract such as persons of unsound mind. CURRENT ACCOUNT Definition
This is defined by the Reserve Bank as “a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount and shall also be deemed to include other deposit accounts that are neither savings deposit nor term deposit.”
A current account is opened usually for commercial or business purposes where there are a large number of transactions.
It is a running and active account and there are no restrictions on the number of transactions and the amount of transactions.
Who opens current accounts? Current accounts are opened by those who have commercial interests and have the need to issue many cheques. These include:
Individuals; Sole Proprietorships; Hindu Undivided Families (HUF); Partnerships; Trusts; Associations / Societies and Clubs; Limited Companies.
Opening of a current account
The RBI has advised banks to incorporate a certificate in account opening forms confirming the identity, occupation and address of the prospective customer signed by the introducer.
Several banks permit accounts to be opened by a “self introduction.” This is by the person opening the account depositing a cheque drawn by him on another bank where he maintains an account. Banks consider this an acceptable risk. However, this does not give the banker and comfort with regard to the moral standing of the person.
SAVINGS ACCOUNT
Savings accounts have been defined as “ a deposit account …..Which is subject to the restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the bank during any specified period”.
A savings account is meant to encourage savings and is focused on individuals By opening an account an individual begins a relationship with the bank.
Who opens these accounts?
Individuals open savings accounts. The customer must be made aware that if his balances exceed Rs. 50,000 or his advances exceed Rs.
100,000, no further transactions will be permitted till full KYC (Know Your Customer) procedures are completed. The customer should be made aware when either balance touches 80 percent of the amount permitted.
Savings accounts cannot be opened in the name of government departments except in the case of certain specified institutions such as primary cooperative credit societies financed by the government, khadi and village industries board and societies registered under the Societies Registration Act 1860.
The RBI has also asked banks to make available a “basic no frills account” either with nil or very low minimum balances that would make such accounts accessible to vast sections of the population.
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FIXED DEPOSIT ACCOUNT
A fixed or time deposit is defined as “a deposit received by a bank for a fixed period and which is withdraw-able only after the expiry of the said fixed period and shall also include deposits such as recurring, cumulative, annuity, reinvestment deposits, cash certificates and so on.”
In short, fixed deposits are: o Placed with the bank for a fixed period. o It is repayable on the expiry of that period. o The rates offered on these are higher than on savings accounts as the banker knows in advance when
repayment has to be made. Pre-liberalization (prior to 1992) the Reserve Bank stipulated the rates banks may offer customers. Now banks
are permitted to fix their own rates on fixed deposits of different maturities. Changes in rates are to be decided by the board of directors or a body/ group authorized by the board. Banks must disclose in advance the schedule of interest rates that they offer on deposits. The minimum period a fixed deposit may be placed is 7 days.
Who opens fixed deposits? Those who have funds in hand open fixed deposits. These include:
Individuals; Sole Proprietorships; Hindu Undivided Families (HUF); Partnerships; Trusts; Associations / Societies and Clubs; Limited Companies.
Interest
Interest is paid on fixed deposits placed with banks. Banks are free to determine the rate of interest that may be paid on fixed deposits. The rates must be approved
by the board or a body to whom the board has delegated this responsibility to. Banks may offer deposits on a floating rate (Variable Rates) Interest should be paid at quarterly or longer rests. Interest is normally paid on the maturity of the deposit. Interest can be paid monthly by discounting the quarterly interest. Interest is calculated on the daily balance. On deposits of less than 3 months or where the quarter is incomplete interest should be paid on the number of
days reckoning the year at 365 days. In leap years some banks have calculated interest on 366 days. The Reserve Bank, in this instance, leaves it to
the bank to determine how interest is to be calculated. Interest is credited only if it is one rupee or more. Scheduled banks with deposits of less than Rs. 25Cr are permitted to give, at their discretion, an additional
0.5% Banks are permitted to pay their employees an additional 1% interest. This is subject to a declaration from the
employee that the money belongs to him. Additional interest of 1% is also payable to retired employees (but not those who have resigned) and the
spouse of a deceased retired employee. Additional interest of 1% per annum may be paid to an association or fund whose members are employees of
the bank. Additional interest of 1% per annum may also be paid to the chairman and executive director of the bank during
their tenure. All transactions including the payment of interest should be rounded off to the nearest rupee.
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The Reserve Bank permits banks to offer senior citizens a higher rate of interest on their deposits. Public sector banks may pay additional interest of 1.28% per annum over the normal rate of interest on
deposits over 2 years to Armed Forces funds if these deposits are not linked with payment of insurance premium.
Tax deduction: Banks are to deduct tax at source on interest paid in excess of Rs. 5000 per annum to any depositor. This is not per deposit but per individual. Therefore if an individual has 5 deposits and the aggregate interest earned on these is Rs. 7000 though in each individual deposit, interest does not exceed Rs. 2000, tax must be deducted at source.
NON-RESIDENT ACCOUNTS Non-resident bank accounts may be:
Rupee accounts Foreign currency accounts
RUPEE ACCOUNTS
The different types of rupee accounts a non-resident may have are: o Non-resident (ordinary) (NRO) account o Non-resident external (NRE) account.
There were two other types earlier – the Non-resident Non Repatriable (NRNR) and the Non-resident Special Rupee (NRSR) account. These have been discontinued with effect from April 1, 2002 and September 30, 2002 respectively.
NON-RESIDENT (ORDINARY) ACCOUNT
The account that an Indian has in India is converted to an NRO account when he emigrates or goes abroad to work except if he goes to Nepal or Bhutan.
Non-residents may open accounts designated as NRO for receiving monies in Indian rupees Bangladeshis and Pakistanis require RBI approval to open this account. The monies in these accounts represents rupee funds/ earnings in India. These can be savings, current, recurring or fixed deposit accounts. These may be opened jointly with Indian residents or other non-residents.
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Credits may be from foreign remittances, travelers’ cheques, foreign currency, proceeds of foreign currency non-resident (FCNR) deposits or non-resident external (NRE) deposits or all legitimate dues in India like rents, dividends and the like.
Account holders should give an undertaking that the credits and debits in the account will be in accordance with Reserve Bank of India (RBI) regulations.
Funds from these accounts are not normally repatriable unless specifically permitted by RBI such as current income.
Remittances made would be after deduction of applicable taxes. Interest on savings accounts is at the same rate as resident accounts. Upto $1 million can be repatriated for education, sale proceeds of immoveable property, medical expenses and
the likes. This can also be used to pay on monies spent on International Credit Cards.
NON-RESIDENT (EXTERNAL) ACCOUNT
This has to be opened with convertible foreign exchange. Withdrawals are permitted for local payments, transfer to NRE/ FCNR accounts and investments permitted by
the RBI. The intent of these accounts is to help individual non-residents to place their funds in Indian rupees to meet
expenses in India or to make investments. The accounts may be savings accounts or term deposits. Monies in this account are freely repatriable. Only foreign remittances, travelers’ cheques/ foreign currencies or proceeds of NRE deposits or FCNR
Deposits should be deposited in this account. No rupee funds should be credited to this account. Joint accounts are permitted provided all account holders are NRIs. A resident Indian cannot be a joint account
holder. NRE Savings holders can withdraw savings deposits at any time and therefore banks should not mark any lien
on these deposits. Power of attorney holders can operate the account for local payments and approved investments. Repatriable term deposits can be made in the normal course for a minimum period of one year and a maximum
of three years. Loans against term deposits can be availed of for personal/ business purposes. However, loans against term
deposits cannot be taken for re-lending, agriculture/ plantation or for investments in real estate Interest on savings accounts will be at domestic savings deposit rate (3 1/2% p.a..) On NRE fixed deposits for one to three years the interest rate should not exceed the LIBOR/Swap rates for the
US dollar of the corresponding maturity plus 75 basis points. The LIBOR/ SWAP rates as on the last working day of the preceding month would form the base for fixing ceiling rates for the interest rate. The interest rate for three year deposits will apply in case maturity exceeds three years.
Interest should be rounded to two decimal points. Can be freely converted to foreign currency non-resident (FCNR (B)) Deposits. Premature closing of NRE term deposits for investment in resident foreign currency (RFC) account does not
attract the provisions relating to premature withdrawal. FOREIGN CURRENCY ACCOUNTS The different types of Foreign Currency accounts a non-resident may have are:
Foreign Currency (Non-resident) Deposit Accounts (FCNR (B)). Temporary Foreign Currency Accounts.
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FOREIGN CURRENCY (NON-RESIDENT) DEPOSIT ACCOUNTS (FCNR (B)) Non-resident Indians, persons of Indian origin/ nationality, residing outside India are eligible to open FCNR (B)
accounts. The currencies that these deposits may be maintained are the US dollar, the British pound sterling, the Euro,
the Japanese yen, the Australian dollar and the Canadian dollar . Interest earned on these accounts is also in foreign currency and tax-free. FCNR (B) deposit accounts are term deposits and are held by banks for maturities between one year and five
years. Repatriation of funds in foreign currencies is permitted. A FCNR (B) deposit account may be opened by non-residents:
o In foreign currency or o By an inward remittance in convertible foreign currency through normal banking channels (The
remittances should normally be received in the designated currency in which the account is to be opened) or
o By tendering traveler’s cheque while on a visit to India or o By funds received in rupees to the account a non-resident bank maintains in India with the bank (vostro
account) or By funds that are of a repatriable nature (per RBI regulations) or
o By transfer from an existing NRE/FCNR (B) account. Only Authorized Dealers/Authorized Banks are permitted to accept deposits. The interest earned on such deposits can be repatriated as it is considered current income. These funds can also be credited to non-resident external (NRE) savings accounts. The RBI will not provide any exchange rate guarantee to banks for deposits of any maturity. The maturity proceeds will be payable in the same currency. There will, thus, be no foreign exchange
fluctuations risk. The main reason for opening these accounts are to protect savings from depreciation in the value of the rupee. The funds can be repatriated abroad freely.
The account can be held jointly with another non-resident of Indian origin. A loan against the deposits held in this account is also permissible subject to certain constraints as to its
utilization. This includes a stipulation that the loan cannot be used for the purpose of investment in India or for re-lending or for investment in arm houses/ real estate.
TEMPORARY FOREIGN CURRENCY ACCOUNTS.
Organizers of international seminars, conferences, conventions etc. are permitted to open temporary foreign exchange account. These accounts are operated for the receipt of the delegate fee and payment towards expenses including payment to special invitees abroad. Authorized dealers can open such an account subject to the organizers obtaining the prior approval from the concerned Administrative Ministry of Government of India.
Credits to these accounts:
All inward remittances in foreign currency towards registration fees payable by overseas delegates, grant, sponsorship fees and donations, received from abroad, in connection with the conference, convention, etc.
Debits to these accounts:
Payment to foreign/special invitees attending the conference, etc., on the specific invitation of the organizers, towards travel, hotel charges, etc., and honorarium to foreign guest speakers;
Remittance towards refund of registration fees to foreign delegates and unutilized sponsorship/grant amount, if any;
Bank charges, if any; Conversion of funds into rupees.
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All other credits/debits would require the prior approval of the Reserve Bank of India. The Account should be closed immediately, after the conference/event is over
ASBA AND ITS IMPLICATIONS
ASBA stands for Application Supported by Blocked Amount. This is the facility wherein if an investor is applying for Initial Public Offer (IPO), Rights issue or FPO made
through book building issue, then he / she don’t need to make the payment. Instead, the amount will be blocked in the investor’s account and the amount is deducted once shares are allotted to investor. The investor in the mean time gets the interest on the amount used in the issue.
Security and Exchange Board of India (SEBI) approved this facility in India on July 30, 2008 to hasten the process of allotment of shares and to avoid unnecessary delays in listing. This facility will discourage the usage of cheques which are time consuming while processing.
Using this facility, the investor also don’t need to worry about the refund as the investment is in their own account as well as the form for applying for the issue becomes simpler.
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CHAPTER III - NEGOTIABLE INSTRUMENTS THE ACT The Negotiable Instruments Act is based upon English Common Law relating to promissory notes, bills of exchange and cheques. It is a codification of English Common law with some changes made to it that are specific to India. Definition
A negotiable instrument means a promissory note, bill of exchange or cheque payable to order or bearer. Justice K. C. Willis defines a negotiable instrument as “one the property in which is acquired by anyone who
takes it bona fide and for value notwithstanding any defect of title in the person from whom he took it.” Thomas in his book “Commerce; its theory and practice” defines it as “one which is by a legally recognized
custom of trade or by law, transferable by delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes free from equities to a bona fide transferee for value, notwithstanding any defect in the title of the transferor.”
Parties
Any person who is capable of entering into a contract and to bind himself can make, accept or negotiate a negotiable contract. Additionally it can be drawn, accepted and negotiated by an authorized agent on behalf of the principal.
A person not capable of entering into a contract cannot bind himself by being a party to a negotiable instrument. Therefore minors, lunatics, insolvents and others who cannot enter into a contract cannot be party to negotiable instruments.
Characteristics
Free transferability. Transfer can be by delivery if it is a bearer instrument or by endorsement and delivery if it is payable to order.
Title to transferee. Transferees who take the instrument bona fide and for valuable consideration get good title despite any defect in title of transferor.
Entitlement to sue. The holder can sue in his own name. Presumptions
Consideration: Every negotiable instrument is made or drawn for a consideration. Date: That the negotiable instrument was drawn on the date shown on the face of it. Acceptance before maturity: That the bill of exchange was accepted before it became overdue (matured). Transfer before maturity: That the negotiable instrument was transferred before its maturity. Order of the Endorsements: That the endorsements are made in the order that they appear. Stamping of the instrument: That the instrument has been properly stamped. Holder is holder in due course: That the holder is a holder in due course except where the instrument has been
obtained, by means of fraud or an offence, from its lawful owner. Proof of dishonor: If a suit is filed upon an instrument which has been dishonored the Court shall on the
submission of proof presume the fact of dishonor unless it is disproved. Rules of estoppels Holders of negotiable instruments are estopped (cannot)…
Deny original validity of the document. The maker and drawer are responsible for the existence of the instrument and cannot deny its validity.
Deny capacity of the payee to indorse. The maker cannot deny the capacity of payee to indorse in a suit by a holder in due course.
Deny signature or capacity of prior party. An endorser cannot, in a suit by a holder in due course, deny the signature or capacity of any prior party.
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Payee A negotiable instrument can be made payable in the following ways:
Payable to bearer. This signifies an instrument is payable to the person who bears it or on which the last endorsement is in blank. This can be converted into an endorsement in full from “in blank”. Then the holder will not be able to negotiate by mere delivery but would need to indorse before delivery.
Payable to order. This is when it is payable to: o The order of a specified person o A specified person or his order
CHEQUES
Cheques are used to withdraw monies from current and savings accounts. A cheque is defined as a “bill of exchange drawn on a specified banker and not expressed otherwise than
on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” A cheque in the electronic form means a cheque “which contains the exact mirror image of a paper cheque
and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometric signature) and asymmetric crypto signature”.
A truncated cheque means a cheque “which is truncated during the course of a clearing cycle either by the clearing house or by the bank whether paying or receiving payment immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing”.
Cheques are used to withdraw monies from current and savings accounts. Cheque Details
ABC BANK Date…………..
PAY______________________________________OR BEARER
RUPEES ___________________________ Rs. .................
____________________________________________________
A\c No. 51003465 ABC BANK LTD. Carmichael Road, Sankaran Nair Mumbai 400026, Maharashtra
334678 400700456 10
Characteristics
A cheque is an unconditional order on a specified banker where the drawer has his account. A cheque is payable only on demand A cheque is drawn for a certain sum of money. Cheques are revocable by countermanding payment. Cheques are determined by the death or insolvency of the drawer. All cheques are bills of exchange but all bills of exchange are not cheques.
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Forms Bearer cheque – Either expressed to be so payable or on which the last endorsement is in blank. Order cheque – Either expressed to be so payable or expressed to be payable to a particular person without
indicating an intention that it is not transferable. Crossed cheque – A cheque that can be collected only through a banker.
BANK DRAFT
A bank draft is an order drawn by an office of a bank upon another office of the same bank instructing the other office to pay a specified sum to a specified person or his order.
Drafts can be issued either against cash or by debiting a client’s (the entity requesting the draft) account Features of a draft
It is issued by a bank on one of its branches. It cannot be payable to bearer. The relationship between the purchaser of the draft and the banker is that of creditor and debtor. The purchaser of a draft can by returning the draft has it cancelled before it has been delivered to the payee. The purchaser cannot have the draft cancelled after it has been delivered to the payee. A bank cannot ordinarily refuse to pay the amount unless there is some doubt on the identity of the person
presenting it. Who may cross a cheque?
Drawer – the drawer may cross the cheque generally or specially. Holder – Where the drawer has not crossed the cheque, the holder may cross it generally or specially. Banker – Where a cheque is crossed specially, the collecting banker may cross it again to another banker as its
agent for collection. This is called double special crossing. Types of crossing
General Special
General Crossing
Two traverse lines across the face of the cheque with or without the words “& co” or the words “non negotiable.” Where a cheque is crossed generally, the banker on whom it is drawn should pay it through a banker Cheques that are crossed generally and payable to “order” should be collected only on proper endorsement by
the payee. Special crossing
Within the two traverse lines the drawer writes specific instructions such as to which bank it should be paid to. The intent of a special crossing is to pay it if it is presented though a specific banker such as at XYZ Bank. Some cheques are crossed “account payee”. This is a restrictive crossing that the cheque should be paid to the
account of a specific person. It is also a warning to the collecting banker to ensure that the cheque is to be deposited in the account of a specific depositor. The paying banker needs to only ensure that it bears no other endorsement than that of the payee..
Cheques marked Not Negotiable
The principle of “nemo dat quod non habet” (nobody can pass on a title better than what he himself has) will be applicable.
The title of the transferee would be vitiated by the defect in the title of the transferor. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in
good faith.
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Cheques marked Account payee
This is an instruction to the collecting banker that he should collect the amount of the cheque for the benefit of the payee’s account only and no body else.
This crossing does not restrict transferability but in practice these are not transferred as the collecting banker had to credit the payee’s account.
The Reserve Bank has also stated that these should not be credited to any one else’s account. The RBI has also stated that “account payee” cheques of third parties should not be collected
Cheques that are double crossed.
These are to be collected by the banker specified. It cannot be crossed again as the purpose of the first is frustrated by the second crossing. This is only permitted if the bank to which it is crossed does not have a branch at the paying banker’s place.
Cheque crossing
Holder of a cheque can cross it or add to existing crossing. Banker to whom it is crossed can cross it. Cheque crossings can be opened by the drawer by cancelling the crossing with his full signature The Negotiable Instruments Act specifically states what amounts to a crossing. A cheque with the words “not
negotiable” without the two traverse lines is not a crossed cheque. The traverse lines are essential for a crossing.
If a cheque bears a single line it is not a crossed cheque. It is presumed that the banker on whom it is drawn has made payment to a banker who acts for the true owner
of the cheque, though in fact the amount of the cheque may not reach the true owner. In short the banker is protected.
Liability on wrong payment of a crossed cheque. If a crossed cheque is wrongly paid, the banker is liable to the true owner for any loss he has sustained. Protection on uncrossed cheques If the banker pays an uncrossed cheque in due course, he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the endorsement on the cheque. Protection in respect of crossed cheques When a banker pays a cheque drawn by his customer, he can debit the drawer’s account even though the amount of the cheque does not reach the owner. Liability of drawee of cheque
Drawee is under a duty to pay the cheque provided he has in his hands sufficient funds of the drawer. If the banker refuses payment without sufficient cause he must compensate the drawer (not the holder) for any
loss. The banker should pay the cheque only when he is required to. The compensation payable will be based on the damage caused to the drawer. A bank on whom a cheque is drawn is liable to make payment on the cheque only during banking hours. If payment is after banking hours the amount cannot be debited to the client’s account till the bank opens.
When payment is to be refused:
The cheque is undated. The cheque is stale. A cheque is stale if it has not been presented for payment for six months The instrument is inchoate or not free from reasonable doubt.
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The cheque is postdated and presented for payment before the date. The customer’s funds are not “properly applicable” to the payment of the cheque by the customer. The customer’s account is overdrawn. The customer has died or been declared insolvent or a lunatic. The cheque contains material alterations or irregular signature. Notice of closure of account has been served on the bank. The customer has countermanded payment. Ambiguity in the material part of the cheque. Difference between the amount of the cheque in words and in figures. Irregular endorsements. The cheque is mutilated. Signature of the drawer has been forged. If it differs or the signature is false, payment must be refused. The banker is liable on the payment of forged cheques even if the client was negligent. The Mumbai High Court in a decision in 2005 held that banks must pay the value of cheques they have sent if
they were lost in transit/ sent for collection Dishonor of cheque
If on presentation the banker does not pay, the cheque is said to be dishonored. On dishonor, the cheques negotiability is lost. Dishonor can be rightful or wrongful. If wrongful, the drawee can bring an action against the bank. Dishonor of a cheque due to lack of funds is an offence and action can be taken against the drawer. Holders of cheques must present these at the bank upon which it is drawn. If payment is refused by the bank,
the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed.
If the holder does not present the cheque in time, the position of the bank may become precarious and the bank may not honor the cheque. In this case the drawer is not responsible if the bank refuses payment on presentment. In short the cheque must be presented before the relation between the drawer and the banker has been altered to the prejudice of the drawer.
When an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the tenor of the instrument. If the suspicion is that of fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification, provided the truncated cheque so demanded shall be retained by it if payment is made accordingly.
It should be remembered that if a bill is not presented in time the drawer is discharged but the drawer of a cheque (if there is a delay) is discharged only if he has suffered some loss or injury and that too to the extent of such loss or injury and that too, to the extent of the loss only. If the bank is solvent, the drawer will be liable unless it becomes time barred by the statute of limitations.
Presentment may be made to an authorized agent or if dead, legal representatives or if insolvent to assignees Any person liable to pay, and called upon by the holder to pay, is before payment entitled to have it shown and
is on payment entitled to have it delivered to him. If the instrument is lost or cannot be produced, the banker can ask to be indemnified against any further claim
thereon against him. Regarding cheques in an electronic form or a truncated cheque even after the payment, the banker who has
received the payment shall be entitled to retain the truncated cheque. Any person liable to pay, and called upon by the holder to pay, is before payment entitled to have it shown and
is on payment entitled to have it delivered to him.
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CHAPTER IV - CLEARING INTRODUCTION
A merchant or a purchaser when he makes a purchase would draw a cheque in payment of the goods purchased or services availed of.
This would then be given to the vendor who would take it to the banker on whom it was drawn and collect the monies due to him.
As trade developed and individuals began to sell goods in different cities, in other countries and in multiple currencies, it was no longer feasible for individual sellers to go from one bank to another to collect their dues.
It was this that resulted in the birth of clearing and clearing-houses. CLEARING
Clearing can be defined as an arrangement through which a bank exchanges cheques drawn on other banks for those drawn on it.
This exchange is done at the clearing-house. CLEARING-HOUSE
A clearing-house is a place where banks that are members of the clearing-house meet to hand over cheques. The London clearing-house was established between 1750 and 1770 as a place where the clerks of the
bankers of the City of London could assemble daily to exchange with one another the cheques drawn upon and bills payable at their respective houses.
At first the clearing-house was simply a place of meeting. It came to be perceived that the sorting and distribution of cheques could be more expeditiously conducted by
the appointment of two or three common clerks to whom each bankers clerk could give all the instruments he wished to collect and from whom he could receive all those payable at his own house (bank).
The payment of the balance settled the transaction. The settlement was by a payment into or from the account the bank had with the Bank of England. In 1858, the use of the clearing-house was further extended to include the settlement of exchange between the
country bankers of England. Before this the country banker had to send the cheque by post to London and each cheque necessitated a separate payment in London. From 1858, the country banker would send his cheques to his London correspondent who would collect the cheques and then credit the country banker’s account.
At the early stage the clearing-house consisted of one long room. Around the walls and down the centre desks were placed, each allotted to a bank. Clerks moved from one desk to another handing or collecting cheques.
At the time there were three clearings in London – at 10.30 AM, at noon and at 2.30 PM. In 1907 these were divided into town, metropolitan and country clearings.
CLEARING IN INDIA
In India clearing-houses were presided over by the Imperial Bank of India (now the State Bank of India) until 1935.
The Reserve Bank of India when constituted in 1935 took over the clearing-house function. In those cities that the Reserve Bank has a presence, the Reserve Bank manages the clearing-house. In other cities and towns the State Bank of India and its associates manage clearing and in some case a public
sector bank (where the State Bank and its associates do not have a dominant presence). There are presently 1047 clearing-houses in India with 42 clearing-houses having MICR capability. Clearing-houses are autonomous institutions having their own rules regarding the conduct of operations. These rules relate to admission of members and sub members, entrance fees, minimum balance of deposit,
meetings, quorum, representation and other matters.
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TYPES OF CLEARING Outward Clearing. Inward Clearing.
OUTWARD CLEARING
Outward clearing refers to instruments that are deposited by customers that are drawn on other banks that need to be presented at clearing.
This can be further divided to: Local clearing (instruments drawn on banks in that city) Outstation Clearing (instruments drawn on banks outside the city). These may be within the country or on
banks in other countries. Branches normally collect all the local cheques and other instruments deposited by customers and after
ensuring they have all the relevant details send them to their service branch. The service branch then presents these at the clearing-house.
With regard to outstation cheques practices can differ: Some banks send the instruments to branches they have in the locations where the banks on whom the
instruments are drawn for collection. Others hand over the instruments to a large bank that have branches in multiple locations for collection. Cheques are posted to the representative branch or correspondent branch for presentation in the clearing-
house in the outstation centre. On realization, the proceeds are remitted to the original presenting bank for credit to the customer’s account. There is often considerable delay in the payment transaction both for the recipient of the funds as well as the
banks involved. In the interest of the customer, the Reserve Bank has directed that banks should give immediate credit for all
outstation instruments up to Rs. 15,000 to individuals who are maintaining satisfactory accounts. Customers will have to bear service and postal charges. If a client deposits two outstation cheques below Rs. 15,000, he may only draw up to Rs. 15,000. The bank’s exposure is thus limited to Rs. 15,000. In the event of the cheque being returned unpaid, the customer will have to pay interest for the period for which funds were utilized.
INWARD CLEARING
The service branch will collect cheques drawn on the bank and the cheques would then be checked for completeness – signature, whether there is adequate balance, date and the likes.
If there is any inconsistency the cheque is returned. It should be remembered that all paper based instruments have to be presented at the drawer bank either in
person or by another bank in clearing or through collection. Delays are due to the requirement of physical presentation of the paper instrument.
RETURN CLEARING
Return clearing is the aggregate of all unpaid items. This: o is debited to the original presenting bank. o is credited to the drawee bank.
Credit given to payee is reversed. TIME TAKEN FOR CLEARING
If a cheque is to be paid in the same city (local cheque), the cheque will clear on the third working day. In large cities a system called high value clearing facilitates clearing on the same day. Regarding outstation cheques time taken to realize can vary from eight (National Clearing) to fourteen days
(except for those drawn on state capitals. These will normally clear in ten days). . With regard to high value instruments (Rs. 100,000 or more) credit is given to the depositor the same day.
There are however some conditions:
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The instrument should be drawn on a bank in the city’s commercial centre. The area is defined for every city. Both the presenting (collecting bank) and the paying bank must be in the commercial area.
The depositor should deposit the instrument early in the morning usually by 11.00 AM. This can differ from bank to bank.
The cheques are presented at clearing around noon. Banks know whether the instruments have been honored by 4.30PM that evening.
SETTLEMENT
Claims are made by every bank on every other bank. The Credit or debit position of the individual bank is determined. The account the bank maintains with the Reserve Bank of India is then either credited or debited (depending on
whether monies are due to the bank or due from it). OTHER FUNCTIONS OF THE CLEARING-HOUSE Apart from facilitating the exchange of instruments the clearing-house is involved in settlements which may be:
Settlements of claims; Settlement with major banks; Settlement with Central bank.
INTER BRANCH CLEARING
Cheques drawn different branches of the same bank need not be sent to the clearing-house. The service branch acts as the settlement branch for the branches. The instruments are sent to the drawee branches. The inter branch accounts are credited or debited internally. Cheques are, to facilitate clearing, have critical data such as the location, city, amount and type of transaction
printed with a special ink which can recognize characters. This is by the imbedding of metal in the ink. The process is known as Magnetic Ink Character Recognition or MICR.
MICR
MICR was introduced in India in the mid 1980s to facilitate the clearing of cheques. Uptil then all cheques deposited were separated into banks and then machine totaled to determine the amount
due from a bank. This then had to be agreed to the amount actually credited to deposit accounts. There were many errors and considerable time was spent in reconciling figures.
As volumes grew, it became necessary to mechanize clearing. This was introduced using Magnetic Ink Character Recognition) MICR technology. MICR technology enabled machines to sort cheques into banks and amounts due from each thus ensuring speed and accuracy.
To facilitate Cheque processing all instruments (cheques) have to be of a standard format and size (8 X 3 2/3). These are printed on MICR grade quality paper with a read band of 5/8 in width at the bottom reserved for MICR coding (in E-138 Font).
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ELECTRONIC CLEARING SERVICEELECTRONIC CLEARING SERVICE Electronic Clearing Service is a facility of electronically sending payment instructions. The objective is to provide an alternate method of effecting bulk payment transactions which would obviate the
need for issuing and handling paper instruments thereby facilitating customer service This service is in operation in 15 centers where clearing-houses are managed by the Reserve Bank of India
and 31 centers where they are being managed by the State Bank of India and its associates. The scheme is designed for high volume transactions and to discourage low volume presentations This is further divided into ECS Credit and ECS debit.
ECS Credit
This is a method of payment whereby the institutions having to make a large number of payments can directly deposit the amount electronically into the bank accounts of those they need to make the payment to.
The scheme covers bulk payment transactions like periodic payments of salary, interest, dividends and the likes and obviates the need to prepare a large number of warrants, dispatching them by post and reconciling the payments later. Often each individual payment is of a repetitive nature and of a relatively small amount.
The system works on the basis of one debit transaction triggering a large number of credit entries. These credits or electronic payment instructions which possess details of the beneficiaries account number,
amount and branch bank are communicated to the bank branches through their respective service branches for crediting the accounts of the beneficiaries either through magnetic media duly encrypted or through hard copy.
Electronic clearing has been facilitated by MICR and the fact that several companies issue cheques that are payable at par at many locations (such as dividend cheques).
ECS credit can only be given to customers who have accounts in banks that participate in this form of settlement.
The magnetic tape/ floppy are the basis for the sponsor bank to debit the users account and the destination banks to credit the destination account holder’s accounts.
National clearing cell (NCC) would process the transaction. The minimum number of transactions per user institution is 2500. The maximum value of any single item should
not be more that 100,000 in a day at a centre. It is safe as there is no chance of the payment going astray. A deficiency is that sometimes the customer is not advised of the credit to his account by the recipient bank
even though beneficiaries are to be informed of credits to their account and the nature of the credit. ECS Debit
ECS debit is a scheme which facilitates payment of charges to utility services such as electricity, telephone companies, payment of insurance premium, loan installments etc. by customers.
ECS envisages a large number of debits resulting in a single credit simultaneously. It works on the principle of pre-authorized debit systems under which the account holders’ account is debited on
the appointed date and the amounts are passed onto the utility companies. The scheme thus:
o Facilitates faster collection of bills by companies o Enables better cash flow management o Eliminates the need to go to collection centers/ designated banks by customers.
The individual transaction limit under the scheme is Rs. 50,000 (Rs. 25,000 earlier). The amount may vary from month to month. The benefits include faster collection of bills by companies, better cash flow management and eliminate the
need for customers to go to collection centers/ banks to make payment. Additionally it ensures that a facility is not cut off for non- payment.
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The concern many consumers have in accepting this is giving a blanket permission to debit their account on the assumption that the bill amount is correct. If there is an error then the consumer has to expend considerable effort in getting the excess repaid.
To address this concern, an ECS variant called ECS Utility Bills Payment RAPID (Receipts and Payments Instruments/ Documents) has been introduced in Mumbai for BEST customers.
o RAPID is a post verification scheme. The consumer verifies the bill and the customer has the option to pay the bill in cash or have the bank debit his account.
o In this the utility department prepares the bill in three parts – receipt to the customer, voucher for the collecting bank and the third containing an MICR band is sent to the service branch.
o The first part of the receipt is returned to the customer by the collecting branch duly affixing the paid stamp.
o The collecting bank’s service branches need to have a personal computer attached to a small MICR Reader/ Encoder to enable them to capture the data in the third part of the bill which has the MICR read band. The service branch transmits the data to the National Clearing Cell (NCC).
At the NCC, the accounts of the various collecting banks are debited and the account of the sponsor bank is credited.
The scheme is beneficial to corporate as they get the amounts due to them on the stipulated date and is useful to customers as they are able to verify the accuracy of the billed amounts before effecting payment.
ELECTRONIC FUNDS TRANSFER Electronic banking, also known as electronic fund transfer (EFT), uses computer and electronic technology as a substitute for cheques and other paper transactions. They refer to any transfer of funds that is initiated by electronic means such as an electronic terminal, telephone, computer, ATM or magnetic tape. EFTs are initiated through devices like cards or codes that permit account holders to authorize payments and access their account. REAL TIME GROSS SETTLEMENT
RTGS is an internationally accepted system to minimize the settlement risk. It is the centerpiece of an integrated payment system. The settlement occurs simultaneously for delivery of payments (i.e. in real time) for full value of each payment
(i.e. gross). It was introduced in India in March 2004. By March 2006 10,000 branches of banks will have this facility. The system allows banks to give electronic instructions to transfer funds from their account to that of another
bank. Under this system payment occurs only if there is transfer of settlement balances between accounts at the
Reserve Bank of India. All payments settled under real-time gross settlement are same day funds. The RTGS system is maintained and operated by the RBI. In real time gross settlement system (RTGS), both processing and final settlement of funds transfer instruction
takes place simultaneously and continuously. Transfer of funds is made individually and sequentially on a gross basis. As it is a real time settlement system, final settlement takes place continuously provided that a payee bank has
sufficient covering balance. Advantages of RTGS system:
Individual and sequential settlement in RTGS makes it easier to ensure unconditional, irrevocable finality of settlement.
Due to elimination of time lag in settlement, the risk that debtor might fail is greatly reduced. Progress in information technology has made RTGS feasible, easier and less costly to build and operate.
Transaction types
Interinstitutionnel transactions.
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Customer transactions. Delivery versus Payment transactions. Own Account transfers transactions. Multilateral Net Settlement Batches (MNSB) transactions.
Important information
Under RTGS, the debit is initiated first and there is no instrument like cheque, DD, or Banker’s cheque as in the case high value clearing.
The debit is against the written request of the customer, or RTGS message to that effect. RTGS System works on 362 days in a year. The days it does not are the 3 national holidays, i.e.. 26th January,
15th August and 25th December. In RTGS, the beneficiary’s account number is vitally important, even if the beneficiary’s name is spelt incorrect/
different. In its present form, RTGS is in short swift in Rupee. There are sender / receiver transaction code in 11 characters, of which,
o First 4 characters represent the bank/institution’s name in short. o Fifth character is marked ‘0’ (zero) and is reserved by RBI without allotment. o Last 6 characters in the code are institutions choice for referring to their department / office. These six
characters can be digits / alphabets or both. In the outgoing the sender is able to details of the total messages sent and messages pending for authorization
in the queue. Authorization is possible through digital card signatures, issued by IDRBT, Hyderabad. However, password
based method can be used for initiating the message by the clerical level, by the respective institution. “Logica” software used in RTGS is supplied by RBI. RTGS is used a “selling” product by bankers to attract high net worth individuals / corporate for routing their
high value transactions in trade. S.W.I.F.T.
S.W.I.F.T (SWIFT) is the acronym for the Society for Worldwide Interbank Financial Telecommunications. Its headquarters are in La Hulpe near Brussels, Belgium. It runs a worldwide network by which messages concerning financial transactions are exchanged between
banks and other financial institutions globally. It was established as a cooperative society in 1973 under Belgian Law by 239 banks in 15 countries. It was started to establish a common language for financial transactions and a shared data processing system
through a worldwide network communications network. Its fundamental operating procedure and rules were laid down in 1975 and the first message was sent in 1977. It operates as a non-profit making society. It has members in excess of 7000 in over 200 countries worldwide and handles over 7 million messages every
day. Apart from a hub in Brussels, SWIFT has hubs in New York and in the Netherlands. The society functions round the clock for operational services of its members globally India joined the society in 1991. Initially only 41 banks in India participated. Presently because of its efficiency and the fact that nearly all banks
world-wide are members, most banks in India are also members of SWIFT. In India bank locations are connected to the SWIFT regional processor in Mumbai.
Membership of SWIFT
Any bank / financial institution can become a member of the society by paying the relevant fees, subject to the terms and conditions and the approval of the society.
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On becoming a member, the new member is allotted an address called Bank Identification Code (BIC) of 8 characters.
This address is circulated by the society to its members and only then can the new member can participate in the SWIFT system.
The society updates the BIC Directory at regular intervals. How does SWIFT operate?
SWIFT enables banks and institutions (its members) to send secure and reliable messages, since the entire transmission of messages is system based, with uniformity in language and format and authenticated at every level.
Each member is provided with an interface-terminal with SWIFT Link Network (SLN). The sending banker / institutions transmit the message in the relevant format (formats are pre-designed by
SWIFT) to the SWIFT Hub (also called the FIN center) and the FIN center arranges to transmit to the beneficiary’s bank / institution.
In those countries where banks do not have many branches / offices, they operate through a correspondent bank for all transactions.
Where such correspondent bank’s services are availed, the process of transmitting message will need the details of such correspondent bank.
It is also in the practice that different correspondents’ services are availed in different countries, and different accounts are maintained for different banking purposes.
When messages are transmitted through correspondent bank services, the additional details such as correspondent bank’s name, BIC address, and account numbers are also to be included in the message, in the relevant column of the SWIFT format.
The message transmitted through SWIFT is received within a few seconds by the ultimate beneficiary institution, if the receiver is “logged in” the interface.
In case the receiving participant is not on, the messages are arranged in queue at the FIN center and whenever the receiver “logs in” the interface, the messages are pumped-in from the SWIFT hub to the beneficiary’s interface.
Messages and Fields In the SWIFT messages that are normally exchanged between banks have been divided into categories such
as: o Customer Transfers and Cheques. o Financial Institution Transfers o Financial Trading. o Collections and Cash letters. o Documentary Credits & Guarantees. o Securities. o Precious Metals and Syndications. o Travelers Cheques o Cash Management and Customer Status o Supporting System Messages..
The serial number given against each category is known in SWIFT as the CATEGORY CODE. Under each category, various types of messages are sent / received by banks. For example, under the category Documentary Credit, messages pertaining to Issuance of L/C, Amendments to
L/C, Reimbursement claim, Advice of discrepancy in documents etc., are transmitted by banks. Each of the above messages is considered as a MESSAGE TYPE. SWIFT has defined various message types not only under the category of Documentary credit but also under
other categories. These messages types, normally referred to as MT, have been given a three digit identification number.
– The first digit of the MT indicates the category to which it belongs
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What should a customer do to send a remittance through SWIFT?
If a customer A decided to remit funds to another person B through SWIFT, he would instruct his banker to do so, mentioning the name of B’s bank, SWIFT code (if known to him) of B’s bank and B’s account number.
The sending bank debits the account of A and does the needful. Banks undertake to effect remittances on behalf of their Resident and Non-Resident customers who expect the
funds to be places at the disposal of the beneficiary in the shortest possible time. Advantages of SWIFT
It is operational throughout the year 24 hours a day. Funds transfers are affected by the banks by using conventional instruments like DD, TT, etc., which though
time tested can lead to duplication in payment and also gives scope for perpetration of fraud. Hence the need for a computerized solution was desired which would expedite payment and also eliminate the opportunity for commission of fraud or misappropriation of funds. The SWIFT method is totally system based and the duplication of message is cautioned and has minimized these difficulties
Transmission of messages is immediate and all messages are acknowledged (either accepted or rejected). Information is confidential and is protected against unauthorized disclosure and tampering. SWIFT assumes financial liability for the accuracy and timely delivery of all validated messages from the point
they enter the network to the point they leave the network. In case of trade related activities, the process of transmission of documentary credits / issue of guarantees too
needed to be automated. SWIFT meets this requirement. Remittances and messages are transmitted in seconds to the beneficiary.
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CHAPTER V – ELECTRONIC BANKING
Many financial institutions use ATM or debit cards and Personal Identification Numbers (PINs) for this purpose. Some use other forms of debit cards such as those that require, at the most, the customer’s signature or a scan. Shared payment network arrangements allow participating banks to issue universal cards that can be used on the electronic banking services shared by the different banks. Electronic banking now involves many different types of transactions.
Automated Teller Machines; Internet Banking; Debit Cards; Telephone Banking.
AUTOMATED TELLER MACHINES
Automated Teller Machines or 24-hour Tellers are electronic terminals that allow a person to bank almost any time.
There are two types – interior and exterior. Interior are those in banking premises whereas exterior are in malls/ shopping centers and other locations.
Automated Teller Machines (ATMs) facilitate the withdrawal of money at times when banks are not open (outside banking hours) and are primarily used for performing some of the banking functions such as withdrawal of cash or deposit of cash/cheque etc., by using an ATM card.
Each customer is provided with an ATM card with a unique Personal Identification Number (PIN). Whenever a customer performs a transaction, the person has to key in the PIN which is validated by the ATM, before the machine permits any transaction. The PIN has to be kept secret by the customer, to prevent any misuse or fraudulent transactions in the event of loss of the card.
Stand-alone ATMs made their appearance in India, in the early 1990s. These were mostly installed by foreign banks in their branch premises, as per the then existing policy. Easing of restrictions on the location of ATMs has led to their being installed at convenient places such as airports, central business districts, hospitals etc.
IBA has set up a Shared Payment Network System (SPNS) or SWADHAN network of ATMs of its member banks in Mumbai. The network went live on February 1, 1997. The objective behind the SWADHAN network is to provide 24 hours, 7 days in a week and 365 days in a year, electronic banking service to the customer of a member bank any where in the city of Mumbai. The member banks which participate in the network issue cards to their customers for transacting on SWADHAN network. The customer is free to conduct transactions at the ATMs of any of the member banks located in the neighborhood. The services offered under SPNS are cash withdrawal, balance enquiry, cash/cheque deposit, transfer of funds, request for cheque book, standing instructions and statement of account, and change of PIN. The ATMs of member banks are connected to a Central Switch through MTNL leased lines. The Central Switch which is the heart of the SWADHAN network is located in Dadar and is connected to three zonal hubs. These hubs are located in Chembur, Fort and Andheri. The ATM in a particular area is connected to the nearest zonal hub. The cardholder’s database is kept at the Central Switch. Banks update the balances at the Switch at pre-determined frequencies. On a daily basis the Switch provides settlement reports necessary for arriving at inter-bank settlement. Bank of India, a public sector commercial bank, acts as the settlement bank for all inter-bank transactions in SWADHAN. Every member bank has to maintain a deposit of Rs.25, 000/- with the settlement bank. INTERNET BANKING Internet Banking permits an account holder to access his account by a computer from home or other remote location and issue instructions. The account is accessed by the account holder stating a unique identification customer number and a password. Customers can:
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Ascertain their account balance; Transfer amounts from one account to another; Arrange for the issuance of a cheque; Instruct payments to be made; Request for a cheque book; Request for a statement of their account; Make a fixed deposit.
TELEPHONE BANKING
Telephone banking is a facility offered to customers whereby they can, by dialing a number, issue instructions or seek information.
The customer when he makes a call is answered by an operator in a call centre. This person has access to the customer’s account. To ensure that it is indeed an authorized person who is seeking information, the customer would be required to state an identifying number (personal identification number), date of birth, billing address or any other unique information. On being satisfied that it is indeed the customer, the transaction required is carried out. These may include:
o Transfers to a fixed deposit; o Balance enquiry; o Request for a cheque book; o Request for a statement; o Payment of a bill.
There is one concern. In many instances the information required is in the public domain and therefore it is possible for a person not properly authorized to access sensitive information.
CARDS There are several cards issued to customers to facilitate banking activities. These cards are in plastic and usually about 8.5 cm by 5.5 cm in size. The name of the holder is embossed as is the number of the card. It also has an expiry date. Charge Card
In these cards transactions are accumulated over a period of time (generally a month) and then the total is debited to the account. The card- holder is given 25 to 50 days to pay. These are called charge cards as the transactions are accumulated and not debited to the account immediately. The amount on a charge card is payable in full and no credit is given.
American Express and Diners Cards are the major charge cards in circulation. These are also called T & E cards.
Credit Card
Credit cards are similar to charge cards. At the end of a month details of all amounts purchased are sent to the card- holder who is required to pay a minimum amount (if he does not wish to pay the entire amount). He is then given credit for the balance not paid and charged interest on the balance (varies between 2 – 3% per month).
The major credit card issuers are MasterCard and Visa and most banks offer either MasterCard or Visa linked cards. This is for acceptability at vendor establishments.
Debit Card
Debit cards are dissimilar to charge and credit cards as the holder receives no credit. As soon as a transaction is undertaken, the customer’s account is debited with the amount of the purchase. If the customer does not have sufficient balance the transaction is rejected.
These are issued by banks and are linked to the account of the holder. The great benefit is that individuals cannot buy more than they have funds for.
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Debit cards are similar to ATM cards and have a unique number. Bank customers may use this to withdraw money from ATMs by punching in their personal identification
number or they may pay for goods and services When paying for goods/ services the vendor swiped the card through a point of sale terminal. The customer’s
account is checked and if there is adequate balance, the account is debited and the vendors account is credited.
The great benefit is that the customer will not, by using these, create huge outstanding. The flaw is that customers cannot avail of credit (as they can with a credit card).
Smart Card
A smart card is like any other credit card. It however has an integrated circuit (IC) chip installed in it. The chip contains memory, may contain a processor and communicates through contacts on the surface of the card.
As these are difficult to copy there is a move to make credit cards and other cards smart cards.
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CHAPTER VI - OTHER PAYMENT AVENUES BANK DRAFT
Banks often, at the request of customers, issue bank drafts or demand drafts payable in another city/ location where they have offices. It t is issued by the bank on one of its branches.
A bank draft is an order drawn by an office of a bank upon another office of the same bank instructing the other office to pay a specified sum to a specified person or his order.
Although a bank is not specially mentioned as a negotiable instrument, it has all the characteristics of one and in a case the Allahabad High Court in 1960 held that a bank draft is a bill of exchange as it fulfills all the requisites of one.
Drafts can be drawn either against cash or by debiting a client’s (the entity requesting the draft) account. It must be noted that drafts are always issued for consideration received in advance
Drafts of Rs. 50,000 or more must be issued only against another cheque or by debiting the purchaser’s account.
Banks normally charge a commission for the issuance of a draft. By purchasing a draft an individual does not become a customer. . The relationship between the purchaser of
the draft and the banker is that of creditor and debtor It cannot be payable to bearer. The purchaser of a draft can by returning the draft has it cancelled before it has been delivered to the payee. The purchaser cannot have the draft cancelled after it has been delivered to the payee... A bank cannot ordinarily refuse to pay the amount unless there is some doubt on the identity of the person
presenting the draft. If a draft is lost before it is handed over to the payee and is without any endorsement, the bank can refuse
payment. The bank must inform the drawee branch about the loss. Duplicate drafts can be issued if the bank is satisfied that the draft has been lost/ mutilated and a confirmation
is received from the drawee bank that the draft has not been paid. The purchaser should furnish an indemnity bond before a duplicate draft is issued.
Drafts are sought because of the comfort to receivers as it is considered often as well as money (if not better) since the bank issuing it is bound to honor it. Refusal is tantamount to stating the bank is bankrupt.
TRAVELERS CHEQUE
Traveler’s cheques are issued by banks and financial institutions like American Express to travelers. They are for the convenience of travelers and are considered safer than money since if these are lost the
issuing company will issue duplicates on being intimated of the loss. They are convenient as they are issued in different denominations and in different currencies. Traveler’s cheques up to Rs. 50,000 can be purchased in cash. Above this amount a person can purchase
them only against a cheque/ draft or by debit to his account. Traveler’s cheques are widely accepted – not only at banks but at shops, hotels and other outlets. On purchasing travelers cheque, the purchaser is required to sign the cheque in the presence of the issuer.
Then when encashing it he is required to again sign it in front of the person accepting the cheque. The two signatures are compared before the traveler’s cheque is accepted. In addition, the identity of the person is also required to be proven.
No commission is normally charged when traveler’s cheques are issued. There is no expiry date for traveler’s cheques and they never go stale.
STANDING INSTRUCTIONS
Bank customers have payments they need to make with frightening regularity such as life insurance premium, rent, subscriptions, equated monthly installments on housing loans, hire purchase loans and the like. Banks can
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take this responsibility over from customers and make these payments on their behalf after receiving instructions.
These instructions would be to make a specific payment to a person/ organization on a specific date. The payment may be monthly, quarterly, half yearly or annually. The period (length of time) the payments are to be made would also be specified.
The customer can, at any time, instruct the bank, to stop payment. The bank is not bound to make payment if the customer does not have an adequate balance. The assumption
is that the payment will be made provided the customer keeps the account adequately funded. CASH
Cash is money held in the form of currency notes or in coins or in accounts with other banks that are available on demand or after giving notice.
Banks hold cash in two forms: o Cash with banks and o Cash in hand
The intent is to keep as little cash as possible as cash does not earn any interest while the bank has to pay interest to its depositors on amounts they have deposited in the bank.
Cash with banks Banks keep cash or balances with:
The Reserve Bank of India and Other commercial banks.
Cash with the Reserve Bank of India Commercial Banks keep money with the Reserve Bank for two purposes:
To meet Statutory requirements. Banks are under the Banking Regulation Act required to keep a certain percentage (not exceeding 20%) of their net demand and time liabilities in cash with the Reserve Bank of India. At present the percentage that they are required to keep is 5.00 %. The RBI does not pay any interest on 3% of the 5.00% kept. On the remainder interest is paid at the bank rate. The average daily CRR balance must be 70% of the total CRR requirement on all days of the fortnight. .
To make payments to and receive amounts from other commercial banks. This may be with regard to investment transactions or clearing or other interbank transaction including borrowing from or lending to commercial banks.
Cash with other banks
Accounts are kept with other banks for commercial needs. Banks in India often maintain accounts with banks in other countries for trade transactions.
Accounts may be maintained with other banks in India for convenience especially if the bank does not have a branch in a particular location or alternatively if services of another bank is availed of for cash management or clearing or other services.
Cash in hand
Cash is kept by banks to meet day to day needs The amount kept by a bank will vary from bank to bank and from branch to branch as the demands of
customers will vary. Banks will aim to keep the minimum they� require to meet needs as cash is unproductive and earns no interest. The cash held in a bank branch may be divided into cash:
o In the vault and o With tellers. o Cash in the vault
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NOTES Notes refers to currency notes issued by the Reserve Bank of India. This is legal tender and is in several
denominations. The RBI has issued instructions that notes must not be stapled. This was because earlier banks had the habit
of awkwardly stapling the notes and binding bundles with multiple staples. The result was that it was very difficult to separate the notes and the multiple stapling also resulted in the notes tearing.
Mutilated/ soiled notes If mutilated notes are presented banks should accept them if they are not in more than two pieces and no
essential feature of the note is missing. Both the pieces should be of the same note and the complete number of the note in an undivided area on each piece should be the same.
Unfit notes should not be issued to the public. These should be deposited in currency chests and periodically sent to the Reserve Bank.
Notes which are extremely brittle or badly burnt or inseparably stuck should not be accepted for exchange. Soiled/ mutilated note bearing ‘PAY/ PAID’ or ‘REJECT of any RBI office or a bank should be rejected. No bank should issue such notes.
Notes with slogans and political messages cease to be legal tender. Disfigured notes are not legal tender. Deliberately cut/ mutilated notes should be rejected. If the bank takes a badly mutilated note, it should be communicated to the client that if the Reserve Bank does
not accept the note, his account will be debited Banks should not force customers to note their names on bank notes or list note numbers on the bills submitted
for payment or insist on an undertaking when depositing higher denomination notes.. Coins The RBI has issued instructions that banks must accept coins as it is legal tender. This notice was issued as there were several banks that refused to handle a large amount of coins deposited because of the time it would take to count it.
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CHAPTER VII - RETAIL LOANS Retail loans are those that are given to individuals to meet their needs as opposed to corporate to meet business or commercial imperatives. These may be unsecured or secured. Unsecured loans include:
Personal loans; Some loans to professionals and self employed persons; Some Educational Loans.
Secured Loans include
Some educational loans; Some loans to professionals and self employed persons; Loans against shares and debentures; Vehicle Loans; Housing Loans.
The Reserve Bank has not stipulated (apart from housing, loans against shares, and educational loans on aspects of these loans. The general features of these loans are detailed in the next few chapters. These may, of course vary from bank to bank in some degree and is intended only to give the reader an understanding of how the loans are structured.
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PERSONAL LOANSSONAL LOANS Personal loans are loans advanced to individuals for a need. These could be to meet marriage expenses, hospitalization/ medical costs, costs for a holiday or for some other need. Eligibility
These loans are advances to persons over the age of 18/ 21 who have sufficient disposable income to repay the loan in monthly installments.
Usually these loans are not advanced to individuals who are likely to retire with one to two years. A certain minimum annual income is also expected – the quantum varies from bank to bank.
Quantum of loan
The amount that is advanced is usually based on the nature of the loan, the take home and disposable income of the person seeking the loan.
These loans are between Rs.50, 000 to Rs.200, 000. The amount does vary from bank to bank. Period of the loan
The loan is usually repayable between twelve to twenty four months. Rate of Interest
The rate of interest would vary from bank to bank. Security
These loans are usually unsecured. CONSUMER DURABLE LOANS Consumer durable loans are for the purchase of consumer durables such as washing machines, dish washers, mobile phones, refrigerators, cooking ranges, music systems, televisions and the like. Eligibility
These loans are normally extended to persons over the age of 18 who have sufficient disposable income to repay the loan in monthly installments,
Quantum of Loan
These loans are not large and are usually below Rs. 100,000. They may be for an amount as low in some cases as Rs. 5,000. As the amounts are usually not large, normally 90% of the value (and in cases 100%) is advanced.
Period of the loan
The loan is usually repayable in a period between 12 months to 36 months. Interest
The rate of interest varies from bank to bank. Security
These are usually unsecured though at times certain equipment such as computers may be hypothecated. LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS Loans to professional and self-employed persons include:
Loans for the purpose of purchasing equipment, repairing or renovating existing equipment and/or acquiring and repairing business premises or for purchasing tools and/or for working capital requirements to medical
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practitioners including Dentists, Chartered Accountants, Cost Accountants, Practicing Company Secretary, Lawyers or Solicitors, Engineers, Architects, Surveyors, Construction contractors or Management Consultants or to a person trained in any other art or craft who holds either a degree or diploma from any institutions established, aided, or recognized by Government or to a person who is considered by the bank as technically qualified or skilled in the field in which he is employed.
Advances to accredited Journalists and Cameramen who are freelancers, i.e. not employed by a particular newspaper/magazine for acquisition of equipment by such borrowers for their professional use.
Credits for the purpose of purchasing equipment, acquisition of premises (strictly for business) and tools to practicing company secretaries who are not in the regular employment of any employer.
Financial assistance for running Health Centre by an individual who is not a doctor, but has received some formal training about the use of various instruments of physical exercises.
Advances for setting up beauty parlors where the borrower holds qualification in the particular profession and undertakes the activity as the sole means of living/earning his/her livelihood.
Preference may be given by banks to financing professionals like doctors, etc., who are carrying on their profession in rural or semi-urban areas. The term also includes firms and joint ventures of such professional and self-employed persons. This category will include all advances granted by the bank under special schemes, if any, introduced for the purpose.
Only such professional and self-employed persons whose borrowings (limits) do not exceed Rs. 10 lakhs of which not more than Rs. 2 lakh should be for working capital requirements, should be covered under this category. However, in the case of professionally qualified medical practitioners, setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs. 15 lakhs with a sub-ceiling of Rs. 3 lakhs for working capital requirements. Advances granted for purchase of one motor vehicle to professional and self-employed persons other than qualified medical practitioners will not be included under the priority sector.
Advances granted by banks to professional and self-employed persons for acquiring personal computers for their professional use, may be classified in this category, provided the ceiling of total borrowings of Rs. 10 lakhs of which working capital should not be more than Rs. 2 lakh per borrower, is complied with in each case for the entire credit inclusive of credit provided for purchase of personal computer. However, home computers should not be treated on par with personal computers and excluded from priority sector lending.
Quantum The amount advanced will depend on the amount required, the nature of the expense and the earnings of the
professional. To qualify within this category it should not exceed Rs. 10 lakhs of which working capital finance should not
exceed Rs. 2 lakhs. Period of the loan
The period is usually between 36 months and 60 months. Rate of Interest
The rate will vary from bank to bank. Security
These loans are secured by the asset purchased with these loans. VEHICLE LOANS Vehicle loans are advanced to enable individuals:
Purchase new two-wheeler / motorcar of any make for private use or professional or business use. Purchase second hand / used two-wheeler / motorcar of not more than 5 years old.
Eligibility
Most banks expect the applicant to be at least 21 years of age and not more than 60 years old.
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As a safety criteria to satisfy themselves that the person has the ability to repay other aspects may be looked at such as for how long the person has been employed, other assets and the like.
In addition the net take home pay/ disposable income will be checked to determine whether the applicant can repay the loan.
With regard to professionals & Self Employed Persons such as Doctors, Engineers, Architects, Chartered Accountants, Lawyers, Consultants, Agriculturists, Businessmen etc. their income should be adequate to pay the monthly installments.
Quantum of Loan
While this may vary, usually the loan is up to 80% (in case of both new and old vehicles; but not older than 5 years) of the cost / invoice value of the vehicle including accessories and registration expenses in the case of new vehicles.
Rate of Interest
The rate of interest will vary from bank to bank. Repayment
Entire loan with interest is required to be paid in 36 to 60 equated monthly installments. Security
Hypothecation of vehicles purchased out of bank finance. Hire purchase is to be got noted in the registration book issued by the Regional Transportation Officer.
Insurance
The vehicle purchased must be comprehensively insured to its full value with a clause stating that if it is damaged beyond repair, the insurance money be paid to the bank. .
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Guarantor As an additional security, at times a guarantor acceptable to the Bank is taken as Guarantor.
EDUCATIONAL LOAN The Indian Bank’ Association has suggested a model scheme and the Reserve Bank has suggested that banks adhere to it as much as possible while developing their own scheme. The Reserve Bank suggests that the main emphasis should be to ensure that every meritorious student though poor is provided with an opportunity to pursue education with the financial support from the banking system with affordable terms and conditions and that no deserving student be denied an opportunity to pursue higher education for want of financial support. Eligibility Criteria The courses that are eligible in India and abroad for a loan and those who are eligible are: Studies in India:
School education including plus 2 stages. Graduation courses : BA, B.Com., B.Sc., etc. Post Graduation courses : Masters & Phd. Professional courses: Engineering, Medical, Agriculture, Veterinary, Law, Dental, Management, Computer etc. Computer certificate courses of reputed institutes accredited to Dept. of Electronics or institutes affiliated to
university. Courses like ICWA, CA, CFA etc. Courses conducted by IIM, IIT, IISc, XLRI. NIFT etc. Courses offered in India by reputed foreign universities. Evening courses of approved institutes. Other courses leading to diploma/ degree etc. conducted by colleges/ universities approved by UGC/ Govt./
AICTE/ AIBMS/ ICMR etc. Courses offered by National Institutes and other reputed private institutions. Banks may have the system of
appraising other institution courses depending on future prospects/ recognition by user institutions. Studies abroad:-
Graduation: For job oriented professional/ technical courses offered by reputed universities. Post graduation : MCA, MBA, MS, etc. Courses conducted by CIMA- London, CPA in USA etc.
Student eligibility:
Should be an Indian National. Secured admission to professional/ technical courses through Entrance Test/ Selection process. Secured admission to foreign university/ Institutions. There is no need to have secured a minimum qualifying mark.
Expenses considered for loan :
Fee payable to college/ school/ hostel. Examination/ Library/ Laboratory fee. Purchase of books/ equipments/ instruments/ uniforms. Caution deposit/ building fund/ refundable deposit supported by Institution bills/ receipts. Travel expenses/ passage money for studies abroad. Purchase of computers - essential for completion of the course. Any other expense required to complete the course - like study tours, project work, thesis, etc.
The amount of loan: Need based finance subject to repaying capacity of the parents/ students with margin and the following ceilings.
Studies in India - Maximum Rs.7.50 lakhs.
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Studies abroad - Maximum Rs.15 lakhs. Margin
Loan up to Rs.4 Lakhs - no margin need be insisted upon. Loan above Rs. 4 lakhs, the margin should be 5% for studies in India and 15% for studies abroad. Scholarship/ assistantship to be included in margin. Margin may be brought in on year-to-year basis as and when disbursements are made on a pro-rata basis.
Security
No security needs to be insisted upon for loans up to Rs. 4 lakhs. For loans above Rs. 4 lakhs collateral security of suitable value or co-obligation of parent/ guardians/ third party
along with the assignment of future income of the student for payments of installments should be obtained. Rate of Interest
Loans up to Rs.4 lakhs – interest rate should not exceed prime lending rate (PLR). Loans above Rs.4 lakhs - PLR + 1% The interest to be debited quarterly/ half yearly on simple basis during the Repayment holiday/ Moratorium
period. Penal interest @ 2% is charged for above Rs.4 lakhs for the overdue amount and overdue period.
Repayment
Repayment holiday/moratorium: Course period + 1 year or 6 months after getting job, whichever is earlier. The loan to be repaid in 5-7 years after commencement of repayment. If the student is not able to complete the
course within the scheduled time extension of time for completion of course may be permitted for a maximum period of 2 years. If the student is not able to complete the course for reasons beyond his control, sanctioning authority may at his discretion consider such extensions as may be deemed necessary to complete the course.
The accrued interest during the repayment holiday period to be added to the principal and repayment in Equated Monthly Installments (EMI) fixed.
1-2% interest concession may be provided for loanees if the interest is serviced during the study period when repayment holiday is specified for interest/ repayment under the scheme.
Priority Sector Advance Educational loans up to the limits stipulated will be considered priority sector advances/ LOANS AGAINST SHARES AND DEBENTURES
Advances against security of shares/debentures/bonds may be given to individuals, share and stock- brokers and market makers.
Advances to individuals Banks may grant advances against the security of shares, debentures or bonds to individuals subject to the following conditions:
Loans against shares, debentures and bonds of public sector undertakings (PSUs) may be granted to individuals to meet contingencies and personal needs or for subscribing to rights or new issues of shares/debentures/bonds or for purchase in the secondary market, against the security of shares/debentures/bonds held by the individual.
Loans against the security of shares, debentures and PSU bonds if held in physical form should not exceed the limit of Rs. 10 lakhs per borrower if the shares are in physical form and Rs. 20 lakhs per borrower if the shares are in dematerialized form.
Banks can grant advances to employees for purchasing shares of their own companies under Employee Stock Option Plans to the extent of 90% of the purchase price or Rs. 20 lakhs whichever is lower.
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Banks should maintain a minimum margin of 50 percent of the market value of equity shares/convertible debentures held in physical and dematerialized form. These are minimum margin stipulations and banks may stipulate higher margins for shares whether held in physical form or dematerialized form. The margin requirements for advances against preference shares/non-convertible debentures and bonds may be determined by the banks themselves.
Each bank should formulate with the approval of the Board a Lending Policy for grant of advances to individuals against shares/debentures/bonds keeping in view the general guidelines given by the Reserve Bank. Banks should obtain a declaration from the borrower indicating the extent of loans availed of by him from other banks as input for credit evaluation. It would also be necessary to ensure that such accommodation from different banks is not obtained against shares of a single company or a group of companies. As a prudential measure, each bank may also consider laying down an aggregate limit of such advances.
Advances against Units of mutual funds
While granting advances against Units of mutual funds, banks should follow the guidelines given below. The Units should be listed in the Stock Exchanges or repurchase facility for the Units of mutual fund should be
available at the time of lending. The Units should have completed the minimum lock-in-period stipulated in the relevant scheme. The amount of advances should be linked to the Net Asset Value (NAV) /repurchase price or the market value,
whichever is less and not to the face value. The advance would attract the quantum and margin requirements as applicable to advance against shares and
debentures wherever stipulated. The margin should be calculated on the NAV/repurchase price or market value, whichever is less.
The advances should be purpose-oriented, taking into account the credit requirement of the investor. Advances should not be granted for subscribing to or boosting up the sales of another scheme of the mutual funds or for the purchase of shares/debentures/bonds.
HOUSING FINANCE Housing Finance refers to finance provided to individuals or groups of individuals including co-operative societies. The Reserve Bank has stated that banks are free to evolve their own guidelines with the approval of their Boards on aspects such as security, margin, age of dwelling units, repayment schedule, etc. Types The following types of bank finance are considered direct housing finance:
Bank finance extended to a person who already owns a house in a town/village where he resides, for buying/ constructing a second house in the same or other town/ village for the purpose of self- occupation.
Bank finance extended for the purchase of a house by a borrower who proposes to let it out on a rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
Bank finance extended to a person who proposes to buy an old house where he is presently residing as a tenant.
Bank finance granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves.
Supplementary finance
Banks may consider requests for additional finance within the overall ceiling for carrying out alterations/ additions/repairs to the house/flat already financed by them.
In the case of individuals who might have raised funds for construction/ acquisition of accommodation from other sources and need supplementary finance, banks may extend such finance after obtaining pari passu or
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second mortgage charge over the property mortgaged in favor of other lenders and/or against such other security, as they may deem appropriate.
Indirect housing finance Banks must ensure that their indirect housing finance is channeled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc., primarily for augmenting the supply of serviced land and constructed units. It should also be ensured that the supply of plots/houses is time bound and public agencies do not utilize the bank loans merely for acquisition of land. Similarly, serviced plots should be sold by these agencies to co-operative societies, professional developers and individuals with a stipulation that the houses should be constructed thereon within a reasonable time, not exceeding three years. For this purpose, the banks may take advantage of various guidelines issued by NHB for augmenting the supply of serviced land and constructed units. Housing Loans Housing Loans are advanced for:
The purchase of as house/ flat or the purchase of a plot of land for the construction of a house. The renovation/ repair of an existing house/ flat. Extending an existing house. Short term bridge finance while purchasing another hose/ flat.
Eligibility
Those eligible are all individuals above the age of 18 years with adequate income to repay the loan in equated monthly installments.
Housing loans are not normally extended to individuals who are above 58 years of age as they would retire in a short while.
Quantum
The quantum will vary from bank to bank. Banks would normally stipulate a minimum of Rs. 100,000. The maximum would depend on the bank and could vary from Rs. 10 lakhs to Rs. 2 crores or more.
The loan amount for repairs would normally be less – around Rs. 10 lakhs. The amount advanced will be based on the individual’s gross pay or take home pay or net disposable income –
the criteria differs from one bank to another. Margin
The entire amount is rarely advanced. The loan is usually between 80% and 85% of the cost of the house/ flat is the amount disbursed.
Term of the loan
The term is dependant on the age of the buyer – the intent being that it should be repaid before the person retires.
Most loans are for 15 to 25 years. Loans to self-employed people are sometimes for a shorter duration. Rate of Interest
Interest may be fixed or floating. Security
The property purchased is usually the security and a mortgage is taken on the property. As an additional security guarantees may be taken.
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CHAPTER VIII : THIRD PARTY PRODUCTS BANCASSURANCE Bancassurance in its simplest form is a term which is coined to denote the combination of banking and insurance business within the same organization. It is the sale of life pension and investment products through the branch network of a bank. Bancassurance, is also known as Allfinanz and it describes a package of financial services that can fulfill both banking and insurance needs at the same time. Bancassurance has many forms and varies from country to country depending upon the demography and economic and legislative climate of that country. Banks view this as an avenue of product diversification and a source of additional fee income. There is no risk as in the case of advances as this is non fund based. For Insurance companies it is a tool for increasing their market penetration and premium turnover. The customer sees Bancassurance as a bonanza in terms of reduced price, high quality product and delivery at doorsteps. The most important reason for banks to offer these products as their sale improves their ROI (return on investment) as it is non fund based fee income. (ROA). Banks that effectively cross-sell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios. Sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks have a large customer base, which they can utilize in selling them personal line insurance products. Another important factor is the personal approach that banks have towards customers is helpful in the sale of personal insurance. Also another important factor that banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable customer base. Banks also enjoy significant brand awareness within their geographic regions. This results in a lower per-lead cost when advertising through print, radio and/or television. Banks have excellent marketing and processing capabilities. They utilize this extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). And because they also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks proficiency in using technology has resulted in improvements in transaction processing MUTUAL FUNDS
A Mutual fund in simple terms is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in stocks and/ or bonds.
These investors buy the units of a fund that best suits their needs. The Fund then invests the pool of money (called a corpus) in securities -- this could be shares, debentures,
money market instruments, etc.- depending on the constitution and objective of the scheme. The income earned through the investments, as well as the capital appreciation realized by the investments,
are allocated amongst the investors in proportion to the number of units they own. These gains are distributed to investors either by way of dividends or through an increase in the value of their
units, or through an allocation of additional units - or a combination of the three. Role of Mutual Funds
Mutual Funds are a financial intermediary - they intermediate between the source of the saving and the user of those savings and help to mobilize capital.
Mutual funds also imparts liquidity to the capital markets, since collectively, they trade much more actively than individual investors. The frequent buying and selling of Mutual Funds, based on specific information, provides the price signals that make capital markets more efficient.
Mutual funds help move companies towards higher corporate governance standards, because their large holdings give them voting clout.
Advantages
Mutual Funds provide investment products that cater to the needs of different classes of investors, whereas Banks, for instance, offer only a few standardized products. Mutual Funds occupy the middle ground - between
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large financial institutions, which offer standardized financial products, and the very small private banks that offer extremely customized products and services.
Mutual Funds reduce or largely eliminate the burden, paperwork and hassles small investors experience in managing a diverse portfolio on their own.
Mutual Funds also provide the investment know-how and trading capabilities that small or novice investors cannot be expected to possess.
Mutual Funds give an investor a high degree of liquidity as it can be purchased and sold quickly. Mutual Funds make it easy for small retail investors to invest in instruments that are otherwise not available to
them. For example, small investors may not be offered high quality debentures directly. The issuers choose to place these with large institutions, including Mutual Funds. For the borrower, this kind of a bulk placement lowers the cost of raising funds. When the investor invests in the Mutual Fund he/she, in effect, gets access to investments in these debentures. The same is the case with Government Securities. As of now, this is a wholesale market. However, an investor can invest in Government Securities through a Gilt Fund.
The Government also provides a range of tax benefits to those who invest in Mutual Funds. So Disadvantages
Unlike saving instruments offered by banks, Dividend payouts can vary and sometimes there may be no dividend declared for a particular period.
An investor managing his own portfolio can separately sell those shares that have gone up and buy those whose price has decreased but when he buys or sells a unit in a Mutual fund he ,in effect buys or sells every share/security in his fund’s portfolio whether he is making a profit or a loss by trading at that time. Thus individual discrimination is not available to investors in Mutual funds - it is either all or none trading the funds portfolio.
But again, these disadvantages matter only to investors who are extremely well informed and experienced in the market. Most investors are better off investing through a Mutual Fund.
Different types of Mutual Fund Schemes.
Open-Ended Schemes; Close-Ended Schemes; Equity Schemes; Income Schemes; Balanced Funds; Money Market Funds; Gilt Fund; Bond Funds; Index Funds; Sector Funds.
Apart from Mutual Funds and Insurance, Bank is also selling Gold Coins and PMS (Portfolio Management Services) to generate fee based income. Disclaimer This report has been prepared for general guidance and not specific or as per the curriculum of any university or institution. This is just a reading material for reference. The objective of this report is to spread awareness only. We recommend you to refer to the text books to get the better understanding.
