· Indian School of Finance & Accounts Principles & Practice of Banking JAIIB PAPER 1 0 JAIIB...

Indian School of Finance & Accounts Principles & Practice of Banking

JAIIB PAPER 1 0 www.isfaindia.com

JAIIBPAPER 1

Principles & Practices of Banking

INDEX

CHAPTER PAGE NO.1. Indian financial system 12. Recent developments 73. Banking in India – a detail view 204. Bank & customer-products & relationship 415. Negotiable Instrument Act 686. Lending by banks 747. Priority Sector Lending & Government Sponsored Schemes 868. Agricultural Finance 969. Prudential Norms for Income Recognition & Asset classification 9910. The Micro, Small and Medium Enterprises Development Act, 2006

108

11. Computerisation in banks & core banking 11112. Marketing concepts & marketing of banking products 137 Multiple objective question bank 162

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THIS VERSION OF STUDY MATERIAL IS UPDATED UPTO 31.12.2018



CHAPTER 1INDIAN FINANCIAL SYSTEM

What you should know: Indian Financial System – An Overview Financial Markets & intermediation Products/Instruments in financial Markets\system

Indian Financial system – An overviewFinancial system in any country comprises two important segments namely the surplus sector and the deficit sector. The surplus sector consists of capital suppliers, who provide their savings for capital formation. The major sources of capital come from individual/ household savings in the form of NSS, NSC, IVP, savings bank, fixed deposits with banks and Non Bank Financial Institutions (NBFIs), insurance companies (life and general), provident funds, retained earnings of corporate sector, government budgetary support, and international sources. The deficit sectorcomprises of capital seekers such as sole proprietors, private and public limited companies, SSI units/cottage industries, State level Finance Corporations, Co-operative Banks, agricultural sector, rural industries, artisans, etc. The capital mobilisation in any economy could be achieved through(a) direct method where procurement of capital is channelled through the money markets for short-term needs and capital markets for long-term needs, and (b) indirect method wherein various financial institutions facilitate the procurement and dissemination of the capital through the intermediation and distribution functions.The entire process of mobilizing and channelling the capital can be described as a financial system. It consists of markets of different kinds, institutions associated with such markets, products traded in the market and finally regulating agencies.

ROLE OF FINANCIAL SYSTEMAs discussed earlier, the basic role of financial system is to allow the capital flow from surplus sector to deficit sector. That is from those who have surplus capital to those who need such surplus capital. In addition to this basic role, financial system is expected to ensure frictionless flow of capital at lowest cost. For instance, if you get a rate of interest from your bank at 6%, and the companies that have to borrow capital from the bank has to pay 10%, the cost of converting the savings to capital is 4%. A good financial system should ensure that the cost is not this much high and tries to reduce the same to the lowest possible level. Sometimes, the cost of conversion is high because of regulatory requirements. For instance, in the above case, if the bank is required to keep some amount of your deposits (say 30%) in cash or government securities, which earn an interest rate of 5%, then the bank has to load 1% loss on this part of transaction (borrowing Rs. 30 at 6% and investing the same at 5% due to regulatory requirement) when lending takes place. Regulatory imposed costs increase when the financial system is unstable or risky. The financial system should allow innovation such that capital seekers come out with various new products to attract large savings and also cater various needs of investors. It should not only reduce the volatility of the market but also facilitate suitable products to manage the risk arising out of financial transactions. It should also allow use of advanced technologies to reduce the cost of financial transactions. For instance, today it cost a lot and long time for someone to collect outstation cheque in a typical old bank whereas technologically advanced new banks like ICICI Bank, HDFC Bank, etc., offer such collection at much shorter time. Finally financial system should protect the interest of various players through suitable regulations and more importantly enforcement of regulations.



FINANCIAL MARKETSA Financial Market can be defined as the market in which financial assets are created or transferred for providing liquidity to the holder of financial instrument or product. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Money Market- The money market its a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Constituents of a Financial System

FINANCIAL INTERMEDIATIONHaving designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve



Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter. However, the services offered by them vary from one market to another.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to securities

Investment Bankers Capital Market, Credit MarketCorporate advisory services, Issue of securities

Underwriters Capital Market, Money MarketSubscribe to unsubscribed portion of securities

Registrars, Depositories, Custodians

Capital MarketIssue securities to the investors on behalf of the company and handle share transfer activity

Primary Dealers Satellite Dealers

Money MarketMarket making in government securities

Forex Dealers Forex Market Ensure exchange ink currencies

Products/Instruments in financial Markets\systemMoney Market InstrumentsThe money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money 2. Treasury Bills3. Term Money 4. Certificate of Deposit5. Commercial Papers

1. Call /Notice-Money MarketCall/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

Borrowing & Lending Limits under Call Money Market: As per RBI circular,

Borrowing LendingSchedule commercial bank

Banks are allowed to borrow a maximum of 125% of their capital funds on any day, during a fortnight. However, borrowing outstanding in a reporting fortnight should not exceed 100% of capital funds (i.e., sum of Tier I and Tier II capital) of latest audited balance sheet.

Banks are allowed to lend a maximum of 50% of their capital funds on any day, during a fortnight. However, lending outstanding in a reporting fortnight should not exceed 25% of capital funds (i.e., sum of Tier I and Tier II capital) of latest audited balance sheet.



Cooperative Banks

Outstanding borrowings of State Co-operative Banks/District Central Co-operative Banks/ Urban Co-operative Banks in call/notice money market, on a daily basis should not exceed 2% of their aggregate deposits as at end March of the previous financial year.

No Limit

Trading:The Call/Notice Money transactions can be executed either on NDS -Call, a screen–based, negotiated, quote-driven electronic trading system managed by the Clearing Corporation of India (CCIL), or over the counter (OTC) through bilateral communication.

Note: RBI has clarified on October 29, 2018 that Payment Banks and Small Finance Banks are eligible to participate in the Call/Notice/Term money market (i.e. Call money market) both as borrowers and lenders. The prudential limits and other guidelines on Call money market for Payments Banks and Small Finance Banks will be the same as those applicable to Scheduled Commercial Banks

2. Inter-Bank Term MoneyInter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/- on maturity (i.e on 91st day). The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price (here in this example Rs.98.20).The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger or GILT account in dematerialization form. For calculation discount on T Bill total 365 days will be considered ( as against Gsec wherein 360 days are considered for interest payment by Govt.)91 days T Bill will be auctioned on every Wednesday every week, 182 days and 364 days T Bill will be auctioned on every alternated Wednesday as per Quarterly calendar given by RBI.Treasury Bills are available for a minimum amount of Rs 25,000 and in multiples of Rs 25,000 thereafter.

4. Certificate of DepositsCertificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.



Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakhthereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. CDs may be issued at a discount on face value. The issuing bank/FI is free to determine the discount/coupon rate.

5. Commercial PaperCP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freelynegotiable by endorsement and delivery. A company shall be eligible to issue CP provided –(a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days & maximum will be 1 year. The minimum creditrating shall be P-2 of CRISIL or such equivalent rating by other agencies.CP can be issued either in the form of a promissory note or in a dematerialization form through any of the depositories approved by and registered with SEBI. CP will be issued at a discount to face value as may be determined by the issuer.

Use of LIBRO & MIBOR in debt market:LIBOR:LIBOR is the benchmark interest rate that banks charge each other for overnight, one-month, three-month, six-month and one-year loans. LIBOR is an acronym for London Inter Bank Offered Rate. This rate is published at 11 am by Reuters each day. It's used as the benchmark for bank rates all over the world. It is published in five currencies: the Swiss franc, the euro, the pound sterling, the Japanese yen and the U.S. dollar.The rates are determined by a calculation based on submissions from individual contributor banks. There is also an oversight panel of anywhere from 11-18 contributor banks for each currency calculated. The ICE Benchmark Administration (IBA) took over administration from the British Bankers Association (BBA) on August 1, 2014.How is LIBOR Used?In addition to setting rates for interbank loans, LIBOR is also used to guide banks in setting rates for adjustable-rate loans, including interest-only mortgages and credit card debt. Lenders typically add a point or two to create a profit. LIBOR is also the rate used to base the price for credit default swaps.

MIBOR:Mumbai Interbank Offered Rate: The interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers.MIBOR is the most widely accepted and used benchmark reference rate in India. MIBOR finds its use in the Interest Rate Swaps. Banks, Finance Companies and Financial Institutions have issued MIBOR linked securities / deposits / papers. MIBOR gives an overnight clean reference rate and generally tracks the call market. MIBOR is rates are for overnight, 14-day, 1-month and 3-month.From July 22, 2015, Financial Benchmarks India Private Limited (FBIL) will set the overnight inter-bank interest rate benchmark, a new method based on actual trade, to promote transparency in money market transactions. The current FIMMDA-NSE MIBOR polled overnight benchmark will cease to be published from the effective date.FBIL, set-up in December 2014, was jointly promoted by Fixed Income Money Markets and Derivatives Association (FIMMDA), Foreign Exchange Dealers' Association of India (FEDAI) and Indian Banks' Association (IBA).



"Based on a detailed analysis of overnight call money market data, the Board of FBIL has decided to adopt a benchmark based on trade weighted inter-bank call money transactions on the Clearing Corporation of India Ltd's (CCIL) NDS-Call platform between 9 am and 10 am,". The new benchmark will be known as the FBIL Overnight Mumbai Interbank Outright Rate (FBIL-Overnight Mibor).LIBOR OR MIBOR are considered to be risk free rate over which bank will add for cost of carry, which makes Interest rate for customer on different loan products.

Debt Market Instruments:There are three main segments in the debt markets in India, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities. a. Government Securities: Government Securities are issued by the Government for raising a Public loan or as notified in the official Gazette. They Consist of Government Promissory Notes, Bearer Bonds, Stocks or Bond held in Bond Ledger Account. Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities.Fixed Income Money Market and Derivatives Association of India (FIMMDA) have issued guidelines / clarifications in respect of the methodology to be followed for valuation of Government Securities, bonds and debentures etc. at periodical intervals based on guidelines issued by Reserve Bank of India. b. Bonds: A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market.Zero Coupon Bonds: Generally bonds are issued at its face value and investor will earns interest on it till its redemption, but a zero coupon bond is issued at a discount to its face value, without any periodic interest and is redeemed at the face value at maturity ( just like T Bills).C. Participation certificates: These are Inter-bank instruments to be deal only by Scheduled Commercial Banks. This instrument is a money market instrument with a tenure not exceeding 90 days. The interests on such participation certificate are determined by two contracting banks.

Capital Market InstrumentsThe capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc.

Hybrid InstrumentsHybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.

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CHAPTER 2RECENT DEVELOPMENTS IN INDIAN FINANCIAL SYSTEM

What you should know: Role and Functions of Capital Markets Reforms/changes in capital market SEBI - Its importance & Role Measures taken for investors protection Developments in Primary & Secondary markets of capital market Developments in Government securities market Concept of Mutual fund and its various types of schemes New type of Investors like FII & QIB’s

I. Role and Functions of Capital Markets: Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market instruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Significance, Role or Functions of Capital Market:-Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.Let us get acquainted with the important functions and role of the capital market.

Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.

Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.

Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.

Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.



Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.

Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they arecontinuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.

Reforms/changes in capital marketCorporate Securities Market: With the objectives of improving market efficiency, enhancing transparency, preventing unfair trade practices and bringing the Indian market up to international standards, a package of reforms consisting of measures to liberalise, regulate and develop the securities market was introduced. Major part of the liberalisation process was the repeal of the Capital Issues (Control) Act, 1947 in May 1992. With this, Government’s control over issue of capital, pricing of the issues, fixing of premia and rates of interest on debentures etc. ceased and the market was allowed to allocate resources to competing uses.

SEBI - Its importance & RoleSEBI Act, 1992: It created a regulator (SEBI), empowered it adequately and assigned it with the responsibility for (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for readressal of investor grievances. The courts have upheld the powers of SEBI to impose monetary penalties and to levy fees from market intermediaries. Enactment of SEBI Act is the first attempt towards integrated regulation of the securities market. SEBI was given full authority and jurisdiction over the securities market under the Act, and was given concurrent/delegated powers for various provisions under the Companies Act and the SC(R)A. Many provisions in the Companies Act having a bearing on securities market are administered by SEBI. The Depositories Act, 1996 is also administered by SEBI. A high level committee on capital markets has been set up to ensure co-ordination among the regulatory agencies in capital markets.

Measures taken for investors protectionI. Disclosure and Investor Protection (DIP) Guidelines: In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) guidelines. The guidelines contain a substantial body of requirements for issuers/intermediaries, the broad intention being to ensure that all concerned observe high standards of integrity and fair dealing, comply with all the requirements with due skill, diligence and care, and disclose the truth, whole truth and nothing but truth. The guidelines aim to secure fuller disclosure of relevant information about the issuer and the nature of the securities to be issued so that investors can take informed decisions. For example, issuers are required to disclose any material ‘risk factors’ and give justification for pricing in their prospectus. The guidelines cast a responsibility on the lead managers to issue a due diligence certificate, stating that they have examined the prospectus, they find it in order and that it brings out all the facts and



does not contain anything wrong or misleading. Issuers are now required to comply with the guidelines and then access the market. The companies can access the market only if they fulfill minimum eligibility norms such as track record of distributable profits and net worth. In case they do not do so, they can access the market only through book building with minimum offer of 50% to qualified institutional buyers. The norms for continued disclosure by listed companies also improved availability of information. The information technology helped in easy dissemination of information about listed companies and market intermediaries. Equity research and analysis and credit rating improved the quality of information about issues.

II. Investor Education and Protection Fund:The SEBI Act established SEBI with the primary objective of protecting the interests of investors in securities and empowers it to achieve this objective. SEBI specifies the matters to be disclosed and the standards of disclosure required for the protection of investors in respect of issues and issues directions to all intermediaries and other persons associated with the securities market in the interest of investors or of orderly development of the securities market. The Central Government established a fund called Investor Education and Protection Fund (IEPF) in October 2001 for the promotion of awareness amongst investors and protection of the interest of investors. The Government issued the following guidelines for the purpose of financial assistance from IEPF: (a) Any organisation/entity/person with a viable project proposal on investors’ education and protection would be eligible for assistance from the fund. (b) The entity should be registered under the Societies Registration Act or formed as Trusts or incorporated Companies; should be in existence for a minimum period of 2 years prior to its date of application for registration for assistance; should have a minimum of 20 members and a proven record of 2 years; and should have rules, regulations and or by-laws for its governance and management. (c) No profit making entity shall be eligible for financial assistance from the fund. (d) Notwithstanding the above, the Committee on IEPF can give a project to any organisation. (e) The limit for each entity for assistance would be subject to 5% of the budget of IEPF during that financial year and not exceeding 50% of the amount to be spent on the proposed programme/activity.

DEA, DCA, SEBI and exchanges have set up investor grievance cells for redressal of investor grievance. The exchanges maintain investor protection funds to take care of investor claims, which may arise out of non-settlement of obligations by a trading member for trades executed on the exchange. DCA has also set up an investor education and protection fund for the promotion of investors’ awareness and protection of interest of investors. All these agencies and investor associations are organising investor education and awareness programmes.

III. Counter party risk management Measures:Market integrity is the essence of any financial market. To pre-empt market failures and protect investors, the regulator/exchanges have developed a comprehensive risk management system, which is constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover, indemnity insurance, on-line position monitoring and automatic disablement, etc. They also administer an efficient market surveillance system to curb excessive volatility, detect and prevent price manipulations. Exchanges have set up trade/settlement guarantee funds for meeting shortages arising out of non-fulfillment/partial fulfillment of funds obligations by the members in a settlement. As a part of the risk management system, the index based market wide circuit breakers have also been put in place. The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party necessitated some innovation in this area. To effectively address this issue, NSE introduced the concept of a novation, and set up the first clearing corporation, viz. National Securities Clearing Corporation Ltd. (NSCCL), which commenced operations in April 1996. The NSCCL assures the counterparty risk of each member and guarantees financial settlement. Counterparty risk is guaranteed through a fine tuned risk management system and an innovative method of on-line position monitoring and automatic disablement. NSCCL established a Settlement Guarantee Fund (SGF). The SGF provides a cushion for any residual risk and operates like a self-insurance mechanism wherein the members contribute to the fund. In the event of failure of a trading member to meet his obligations, the fund



is utilized to the extent required for successful completion of the settlement. This has eliminated counter-party risk of trading on the Exchange. The market has now full confidence that settlements will take place in time and will be completed irrespective of default by isolated trading members. In fact such confidence is driving volumes on exchanges. Traditionally, brokerage firms in India have been proprietary or partnership concerns with unlimited liabilities. This restricted the amount of capital that such firms can raise. The growing volume of transactions made it imperative for such firms to be well capitalised and professional. The necessary legal changes were effected to open up the membership of stock exchanges to corporates with limited liability, so that brokerage firms may be able to raise capital and retain earnings. In order to boost the process of corporatisation, capital gains tax payable on the difference between the cost of the individual’s initial acquisition of membership and the market value of that membership on the date of transfer to the corporate entity was waived. In response, many brokerage firms reorganised themselves into corporate entities.

Developments in Primary & Secondary markets of capital market:I. Secondary Market developments:1. Introduction of Screen Based Trading:The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully-automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market participants to see the full market on real-time, making the market transparent. It allows a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. This diverted liquidity from other exchanges and in the very first year of its operation, NSE became the leading stock exchange in the country, impacting the fortunes of other exchanges and forcing them to adopt SBTS also. As a result, manual trading disappeared from India. Technology was used to carry the trading platform to the premises of brokers. NSE carried the trading platform further to the PCs in the residences of investors through the Internet and to hand-held devices through WAP for convenience of mobile investors. This made a huge difference in terms of equal access to investors in a geographically vast country like India.

2. Trading Cycle:In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on net obligations for the day. This trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. Often this cycle was not adhered to. Many things could happen between entering into a trade and its performance providing incentives for either of the parties to go back on its promise. This had on several occasions led to defaults and risks in settlement. In order to reduce large open positions, the trading cycle was reduced to T+2 since April 2003. For example, a trade executed on Monday is mandatorily settled by Wednesday (considering two working days from the trade day).

3. Depositories Act: ( D-mat)The earlier settlement system on Indian stock exchanges gave rise to settlement risk due to the time that elapsed before trades are settled. Trades were settled by physical movement of paper. This had two aspects. First, the settlement of trade in stock exchanges by delivery of shares by the seller and payment by the purchaser. The stock exchange aggregated trades over a period of time



to carry out net settlement through the physical delivery of securities. The process of physically moving the securities from the seller to the ultimate buyer through the seller’s broker and buyer’s broker took time with the risk of delay somewhere along the chain. The second aspect related to transfer of shares in favour of the purchaser by the company. The system of transfer of ownership was grossly inefficient as every transfer involved physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer took much longer, and a significant proportion of transactions ended up as bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant, and in addition the issuer had the right to refuse the transfer of a security. All this added to costs, and delays in settlement, restricted liquidity and made investor grievance redressal time consuming and at times intractable.

To obviate these problems, the Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions; (b) dematerialising the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form.

In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. In order to promote dematerialisation, the regulator mandated trading and settlement in demat form in an ever-increasing number of securities in a phased manner. The stamp duty on transfer of demat securities was waived. Two depositories, namely, NSDL and CDSL, came up to provide instantaneous electronic transfer of securities. All actively traded scrips are held, traded and settled in demat form. Demat settlement accounts for over 99% of turnover settled by delivery. This has almost eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it is mandatory for all IPOs to be compulsorily traded in dematerialised form. The admission to a depository for dematerialisation of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs.10 crore or more to do the same only in dematerialised form.

4. Derivatives Trading:To assist market participants to manage risks better through hedging, speculation and arbitrage, SC(R)A was amended in 1995 to lift the ban on options in securities. However, trading in derivatives did not take off, as there was no suitable legal and regulatory framework to govern these trades. Besides, it needed a lot of preparatory work- the underlying cash markets strengthened with the assistance of the automation of trading and of the settlement system; the exchanges developed adequate infrastructure and the information systems required to implement trading discipline in derivative instruments. The SC(R)A was amended further in December 1999 to expand the definition of securities to include derivatives so that the whole regulatory framework governing trading of securities could apply to trading of derivatives also. A three-decade old ban on forward trading, which had lost its relevance and was hindering introduction of derivatives trading, was withdrawn. Derivative trading took off in June 2000 on two exchanges. At NSE, Index futures and options are available on Indices-S&P CNX Nifty, CNX IT Index, Bank Nifty Index, CNX Nifty Junior, CNX 100, Nifty Midcap 50. Single stock futures and options are available on more than 200 stocks. The Mini derivative Futures & Options contract was introduced for trading on S&P CNX Nifty on January 1, 2008 while the long term option contracts on S&P CNX Nifty were introduced for trading on March 3, 2008.

5. Demutualisation:Historically, brokers owned, controlled and managed stock exchanges. In case of disputes, the self often got precedence over regulations leading inevitably to conflict of interest. The regulators, therefore, focused on reducing dominance of members in the management of stock exchanges and advised them to reconstitute their governing councils to provide for at least 50% non-broker



representation. This did not materially alter the situation. In face of extreme volatility in the securities market, Government proposed in March 2001 to corporatise the stock exchanges by which ownership, management and trading membership would be segregated from one another. Government offered a variety of tax incentives to facilitate corporatisation and demutualization of stock exchanges. NSE, however, adopted a pure demutualised governance structure where ownership, management and trading are with three different sets of people. This completely eliminated any conflict of interest and helped NSE to aggressively pursue policies and practices within a public interest (market efficiency and investor interest) framework. Currently, there are 19 demutualised stock exchanges.

6. Securities Lending and Borrowing: SEBI issued a SLB scheme on December 20, 2007. The salient features of the scheme are as under:• To begin with, the SLB would be operated through Clearing Corporation/Clearing House of stock exchanges having nation-wide terminals who will be registered as Approved Intermediaries (AIs) under the SLS, 1997. • The SLB would take place on an automated, screen based, ordermatching platform which will be provided by the AIs. This platform would be independent of the other trading platforms. • To begin with, the securities traded in derivatives segment would be eligible for lending & borrowing under the scheme. • All categories of investors including retail, institutional etc. will be permitted to borrow and lend securities. The borrowers and lenders would access the platform for lending/borrowing set up by the AIs through the clearing members (CMs) who are authorized by the AIs in this regard. • The tenure of lending/borrowing would be fixed as standardised contracts. To start with, contracts with tenure of 7 trading days may be introduced.• The settlement cycle for SLB transactions would be on T+1 basis. The settlement of lending andborrowing transactions would be independent of normal market settlement. • The settlement of the lending and borrowing transactions should be done on a gross basis at the level of the clients i.e. no netting of transactions at any level will be permitted. NSCCL, as an Approved Intermediary (AI) launched the Securities Lending & Borrowing Scheme from April 21, 2008. Lending & Borrowing is carried on an automated screen based platform where the order matching is done on basis of price time priority. The borrowing has a fixed tenure of seven days with the first leg settlement on T+1 day and reverse leg settlement on T+8 day.

7. Direct Market Access: During April 2008, Securities & Exchange Board of India (SEBI) allowed the direct market access (DMA) facility to the institutional investors. DMA allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. DMA facility give clients direct control over orders, help in faster execution of orders, reduce the risk of errors from manual order entry and lend greater transparency and liquidity. DMA also leads to lower impact cost for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools/algorithms for trading.

II. Primary Market developments:Initial Public Offers (IPOs)/Rights/ Follow-on Public Offers (FPOs) by Book Building Process:Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.Book Building is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.



IPO grading : A company can’t make an IPO for shares unless as on the date of filing of DRHP or RHP with ROC, the issuer has obtained grading for the IPO from at least one credit rating agency registered with SEBI. This means IPO grading is mandatory for making an IPO.

The Process: The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the

investors. The syndicate members input the orders into an 'electronic book'. This process is called

'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of

the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be

issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final

price per share. Allocation of securities is made to the successful bidders. The rest get refund orders.

→ What is the main difference between offer of shares through book building and offer of shares through normal public issue? The price at which securities will be allotted is not known in case of offer of shares through book building while in the case of offer of shares through normal public issue, the price is known in advance to investor. In case of book building, the demand can be known everyday as the book is built. But in case of a normal public issue, the demand is known only at the close of the issue. → What is the advantage of taking the book-building route? This process will help to discover the demand and the price of the shares. Also, the costs of public issue are much reduced and the time taken for completion of the entire process is much less than the in the normal public issue.

Guidelines for Book Building:Rules governing Book building are covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000.In case of an issuer company makes an issue of 100% of the net offer to public through 100% book building process-i) Not less than 35 % of the net offer to the public shall be available for allocation to retail individual investors. ii) Not less than 15 % of the net offer to the public shall be available for allocation to non institutional investors i.e. investors other than retail individual investors and Qualified Institutional Buyers. iii) Not more than 50% of the net offer to the public shall be available for allocation to Qualified Institutional Buyers. Provided that, 50 % of net to public should be mandatorily allotted to the Qualified Institutional Buyers, in case the issuer company is making a public issue. Further, in respect of issues made under Rule 19(2)(b) of Securities Contract (Regulation) Rules 1957, there should be 60% mandatory allocation to Qualified Institutional Buyers, and the percentage allocation to retail individual investors and non institutional investors should be 30 % and 10% respectively. Other requirements for book building include: bids remain open for at least 3 days, only electronic bidding is permitted; bids are submitted through syndicate members; bids can be revised; bidding demand is displayed at the end of every day; allotments are made not later than 15 days from the closure of the issue failing which interest at the rate of 15% shall be paid to investors. The 100% book building has made the primary issuance process comparatively faster and cost effective



ASBA for Investors:ASBA means “Applications Supported by Blocked Amount”. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.ASBA is a supplementary process of applying in Initial Public Offers (IPO) and Follow-On Public Offers (FPO) made through Book Building route and co-exists with the current process of using cheque as a mode of payment and submitting applications.ASBA is stipulated by SEBI, only certain designated banks Self-Certified Syndicate Banks (SCSB) can offer this facility to the applicants. This allows the investors money to remain with the bank till the shares are allotted after the IPO. Only then does the money transfer out of the investors account to the company. This eliminates the need for refunds on shares not being allotted.The applicant can submit the ASBA application to the SCSB with whom he/she is maintaining the account to be blocked (to the extent of the application money) for the purpose. The application can be submitted either by filling up the form or online, by using the Internet banking facility.

ADR / GDR:-ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Let’s understand these better.Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc.These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly.But many good companies get listed on these stock exchanges indirectly – using ADRs and GDRs.This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company.These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders.

Indian Depository Receipts (IDR’s): An Indian investors who are looking for investing their funds in foreign equity ( foreign companies) can look for these IDR. Just like ADR or GDR, which are the instruments used by Indian companies abroad, IDR’s are meant for foreign companies looking to raise capital in India.Indian Depository Receipts means any instrument in the form of a depository receipts created by Domestic Depository in India against the underlying equity shares of issuing company which is located outside India. The Indian IDR holder would thus indirectly own the equity shares of overseas issuer company. IDRs are to be listed in Indian stock exchange for trading and are denominated in Indian currency. An IDR issuing company cannot raise funds in India by issuing IDRs unless has obtained permission from SEBI.

Registration of Stock Broker:



For working with stock exchanges, stock brokers registration with SEBI is mandatory. A stock broker applies in the prescribed format for grant of a certificate through the stock exchange or stock exchanges, as the case may be, of which he is admitted as a member . The stock exchange forwards the application form to SEBI as early as possible as but not later than thirty days from the date of its receipt. SEBI takes into account for considering the grant of a certificate all matters relating to buying, selling, or dealing in securities and in particular the following, namely, whether the stock broker(a) is eligible to be admitted as a member of a stock exchange, (b) has the necessary infrastructure like adequate office space, equipment and man power to effectively discharge his activities,(c) has any past experience in the business of buying, selling or dealing in securities,(d) is subjected to disciplinary proceedings under the rules, regulations and bye-laws of a stock exchange with respect to his business as a stockbroker involving either himself or any of his partners, directors or employees, and(e) is a fit and proper person. SEBI on being satisfied that the stock-broker is eligible, grants a certificate to the stock-broker and sends intimation to that effect to the stock exchange or stock exchanges, as the case may be. Where an application for grant of a certificate does not fulfill the requirements, SEBI may reject the application after giving a reasonable opportunity of being heard.

Sub - Broker Registration:A “Sub-broker” means any person not being a member of a Stock Exchange who acts on behalf of a Member as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such Member.All the sub-brokers are required to obtain a Certificate of Registration from SEBI without which they are not permitted to deal in securities. SEBI has directed that no broker shall deal with a person who is acting as a sub-broker unless he is registered with SEBI and it shall be the responsibility of the member-broker to ensure that his clients are not acting in the capacity of a sub-broker unless they are registered with SEBI as a sub-broker.

Share Transfer Agents:These share transfer agents maintains the records of holders of securities/shares issued by body corporate and deals with all the matters connected with the transfer and redemption securities/shares. These are required to be appointed by body corporate. The corporate can have a department or division performing activities as Share transfer agents if at any time the total number of holders of its securities issued exceed one lakh. These are very important intermediaries in the primary market. They are having very important role in the secondary markets. They render very useful services in mobilising new capital and facilitating proper records of the details of the investors, so that the basis of allotment could be decided and allotment ensured as per SEBI regulations.

Developments in Government securities marketGovernment Securities Market:The government securities market has witnessed significant transformation in the 1990s. With giving up of the responsibility of allocating resources from securities market, government stopped expropriating seignior age and started borrowing at near-market rates. Government securities are now sold at market related coupon rates through a system of auctions instead of earlier practice of issue of securities at very low rates just to reduce the cost of borrowing of the government. Major reforms initiated in the primary market for government securities include auction system (uniform price and multiple price method) for primary issuance of T-bills and central government dated securities, a system of primary dealers and non-competitive bids to widen investor base and promote retail participation, issuance of securities across maturities to develop a yield curve from short to long end and provide benchmarks for rest of the debt market, innovative instruments like, zero coupon bonds, floating rate bonds, bonds with embedded derivatives, availability of full range ( 91-day, 182 day and 364-day) of T-bills, etc. The reforms in the secondary market include Delivery versus Payment system for settling scripless SGL transactions to reduce settlement risks,



SGL Account II with RBI to enable financial intermediaries to open custody (Constituent SGL) accounts and facilitate retail transactions in scripless mode, enforcement of a trade-for-trade regime, settlement period of T+1 for all transactions undertaken directly between SGL participants and for transactions routed through NSE brokers, routing transactions through brokers of NSE, OTCEI and BSE, repos in all government securities with settlement through SGL, liquidity support to PDs to enable them to support primary market and undertake market making, special fund facility for security settlement, etc. Other measures include abolition of TDS on government securities and stamp duty on transfer of demat debt securities.

Market Infrastructure: As part of the ongoing efforts to build debt market infrastructure, two new systems, the Negotiated Dealing System (NDS) and the Clearing Corporation of India Limited (CCIL) commenced operations on February 15, 2002. NDS, interalia, facilitates screen based negotiated dealing for secondary market transactions in government securities and money market instruments, online reporting of transactions in the instruments available on the NDS and dissemination of trade information to the market. Government Securities (including T-bills), call money, notice/term money, repos in eligible securities, Commercial Papers and Certificate of Deposits are available for negotiated dealing through NDS among the members. The CCIL facilitates settlement of transactions in government securities (both outright and repo) on Delivery versus Payment (DVP-II) basis which provides for settlement of securities on gross basis and settlement of funds on net basis simultaneously. It acts as a central counterparty for clearing and settlement of government securities transactions done on NDS. Further, there was adoption of modified Delivery-versus-Payment mode of settlement (DvP III in March 2004). The settlement system for transaction in government securities was standardized to T+1 cycle on May 11, 2005. To provide banks and other institutions with a more advanced and more efficient trading platform, an anonymous order matching trading platform (NDS-OM) was introduced in August 2005. Short sale was permitted in G-secs in 2006 to provide an opportunity to market participants to manage their interest rate risk more effectively and to improve liquidity in the market. ‘When issued’ (WI) trading in Central Government Securities was introduced in 2006. As a result of the gradual reform process undertaken over the years, the Indian G-Sec market has become increasingly broad-based and characterized by an efficient auction process, an active secondary market, electronic trading and settlement technology that ensures safe settlement with Straight through Processing (STP).

Concept of Mutual fund and its various types of schemes:Role and Functions of Mutual Funds:-‘Put your money in trust, not trust in money’ entices the small investors, who generally lack expertise to invest on their own in the securities market and prefer some kind of collective investment vehicles, which can pool their marginal resources, invest in securities and distribute the returns there from among them on co-operative principles. The investors benefit in terms of reduced risk, and higher returns arising from professional expertise of fund managers employed by such investment vehicle. This was the original appeal of mutual funds (MFs) which offer a path to stock market far simpler and safer than the traditional call-a-broker-and-buy-securities route. This caught the fancy of small investors leading to proliferation of MFs. In developed financial markets, MFs have overtaken bank deposits and total assets of insurance funds. In the USA, the number of MFs far exceeds the number of listed securities. MFs, thus, operate as CIV that pools resources by issuing units to investors and collectively invests those resources in a diversified portfolio comprising of stocks, bonds or money market instruments in accordance with objectives disclosed in the offer document issued for the purpose of pooling resources. The profits or losses are shared by investors in proportion to their investments. The process gathered momentum in view of regulatory protection, fiscal concession and change in preference of investors. The first ever MF in India, the Unit Trust of India (UTI) was set up in 1964. This was followed by entry of MFs promoted by public sector banks and insurance companies in 1987. The industry was opened up to private sector in 1993 providing Indian investors a broader choice.

Management of Mutual Fund:



A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders.Securities and Exchange Board of India (SEBI) has given the regulatory responsibility of Capital markets and Mutual Funds by Government. SEBI formed Mutual Funds regulations in 1993 which were later replaced by new regulations in 1996.Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

MF Types According to Maturity Period:MFs can be broadly classified as open-ended fund or closed-ended funds. An open-ended fund gives the investors an option to redeem and buy units at any time from the fund. These schemes do not have a fixed maturity period. They can conveniently buy and sell units at NAV related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. A close-ended fund or scheme on the other hand has a stipulated maturity period e.g. 5-7 years. In closed-ended funds, the investors have to wait till given maturity date to redeem their units to the fund. However, to provide liquidity, it is mandatory for closed-ended funds to get themselves listed on a stock exchange within six months from the closure of the subscription. The units of a close ended scheme may be converted to open ended scheme, if the offer document of such scheme discloses the option and the period of such conversion or the unit-holders are provided with an option to redeem their units in full.

MF Types According to Investment Objective:MFs/schemes can also be classified on the basis of the nature of their portfolios and investment objective, i.e. whether they invest in equities or fixed income securities or some combination of both. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth/Equity Oriented Schemes provide capital appreciation over the medium to long- term. These schemes normally invest a major part of their corpus in equities and are good for investors having a long-term outlook seeking appreciation over a period of time.

Income/Debt Oriented Schemes provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes.

Balanced Funds provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth.

Money Market or Liquid Funds provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Funds invest exclusively in government securities which have no default risk.

Index Funds try to mirror a market index, like Nifty or Sensex, as closely as possible by investing in all the stocks that comprise that index in proportions equal to the weightage of those stocks in



the index. Thus, index funds are designed to replicate the performance of a well-established stock market index or a particular segment of the stock market.

Exchange Traded Funds (ETFs) may be described as baskets of securities that are traded, like individual stocks, on an exchange. They are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. For e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries.

Gold Exchange Traded Fund A gold exchange traded fund unit is like a mutual fund unit whose underlying asset is Gold and is held in demat form. It is typically an Exchange traded Mutual Fund unit which is listed and traded on a stock exchange. Every gold ETF unit is representative of a definite quantum of pure gold and the traded price of the gold unit moves in tandem with the price of the actual gold metal.

New Fund Offer (NFO) Period:In case of open ended and close ended schemes (except ELSS schemes), the NFO should be open for 15 days. The NFO period in case of ELSS schemes shall continue to be governed by guidelines issued by Government of India. The maximum period for which initial offering of Mutual Fund scheme eligible under RGESS shall be open for subscription shall be thirty days.The mutual fund should allot units/refund of money and dispatch statements of accounts within five business days from the closure of the NFO and all the schemes (except ELSS, RGESS) shall be available for ongoing repurchase/sale/trading within five business days of allotment”. However, for Mutual Fund scheme eligible under RGESS, the period within which Mutual Fund/AMC should allocate the units, refund money and issue statements of accounts, shall be fifteen days from the closure of the initial subscription.

Product Labeling in Mutual Funds:All the mutual funds shall ‘Label’ their schemes on the parameters as mentioned under:a. Nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term).b. A brief about the investment objective (in a single line sentence)followed by kind of product in which investor is investing (Equity/Debt).c. Level of risk in mutual fund schemes shall be increased to five as under: Low, Moderately Low, Moderate, Moderately High & High.The depiction of risk using colour codes would be replaced by pictorial meter named "Riskometer". Mutual Funds may 'product label' their schemes on the basis of the best practice guidelines issuedby Association of Mutual Funds in India (AMFI) in this regard. AMFI has given the following Label colour:1. Blue - Low risk - All debt-oriented schemes. 2. Yellow - Moderate risk - All diversified/blended schemes.3. Brown - Higher risk - All equity-oriented schemes.

Disclosure of Performance: A MF is required to compute net asset value (NAV) of each scheme by dividing net assets of the scheme by the number units outstanding on the valuation date. The performance of a scheme is reflected in its NAV which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of MFs are required to be published in newspapers. The NAVs are also available on the web sites of MFs. All MFs are also required to put their NAVs and sale/repurchase prices on the web site of Association of Mutual Funds in India AMFI by 8 p.m. everyday, so that the investors and the newspapers can access NAVs of all MFs at one place. The price at which units may be sold or repurchased by a MF is made available to investors. The repurchase price can not be lower than 93% of the NAV and sale price can not be higher than 107% of NAV. The repurchase price of a closed ended scheme shall, however, not be less than 95% of NAV. The difference between repurchase and sale price shall not exceed 7% of the sale price.



All MFs are required to disclose the performance of the benchmark indices in case of equity oriented schemes, debt oriented scheme and balanced fund scheme while disclosing the yields of the schemes in the format of half-yearly results. The MFs may select any of the indices available, e.g. BSE (Sensitive) index, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX 500, depending on the investment objective and portfolio of the scheme for equity schemes. In case of debt / balanced schemes, the benchmarks have been developed by research and rating agencies recommended by AMFI.

New type of Investors like FII & QIB’s:Foreign Institutional Investor [FII] : An investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.As per the current guidelines of the RBI,FII can invest upto 24% in a company but if they want further investment the need special approval from the company's board and in any case cannot go beyond the foreign investment cap for the sector, set by the government. Even for sectors like insurance, where the government is considering raising the foreign investment cap to 49% against 26% in present, there is ambiguity about whether FII investment should be subsumed in it. FII can invest in all the securities traded in the primary and secondary market, including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. These would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government may even like to add further categories of securities later from time to time.

Participatory Notes:What are participatory notes or PNs? Participatory notes are instruments used by foreign funds which are not registered to trade in domestic Indian Capital Markets. PNs are derivative instruments issued against an underlying security permitting holders to get a share in the income from the security.How does it work? Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional Investors (FII) operating in India. The FII uses its proprietary account to buy stocks.Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments.Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery.

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CHAPTER 3BANKING IN INDIA – A DETAIL VIEW

What you should know: Role of Banking in economy –Commercial banking Banking regulator – RBI Banking concepts of Retail, Wholesale, Global banking & bancassurance Concept of Factoring & forfating Risk Management in Bank Capital Framework of banks – Basel I, II, III MERGERS & ACQUISITONS in banking industry CIBIL & Fair practice code for lenders

I. Role of BankingBanks have played a critical role in the economic development of some developed countries such as Japan and Germany and most of the emerging economies including India. Banks today are important not just from the point of view of economic growth, but also financial stability. In emerging economies, banks are special for three important reasons. First, they take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs. Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks.Forms of banking have changed over the years and evolved with the needs of the economy. The transformation of the banking system has been brought about by deregulation, technological innovation and globalization. While banks have been expanding into areas which were traditionally out of bounds for them, non-bank intermediaries have begun to perform many of the functions of banks. Banks thus compete not only among themselves, but also with nonbank financial intermediaries, and over the years, this competition has only grown in intensity. Globally, this has forced the banks to introduce innovative products, seek newer sources of income and diversify into non-traditional activities.

Functions of Commercial BanksThe main functions of a commercial bank can be segregated into three main areas:(i) Payment System (ii) Financial Intermediation (iii) Financial Services.Banks are at the core of the payments system in an economy. A payment refers to the means by which financial transactions are settled. A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role.(ii) Financial IntermediationThe second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits represent the banks' liabilities, while loans disbursed, and investments made by banks are their assets. Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest. On the other hand, bank loans and investments made by banks play an important function in channelling funds into profitable as well as socially productive uses.(iii) Financial ServicesIn addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank's profitability.

II. Banking Regulator



The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.1.Scheduled Banks in IndiaScheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country. Our focus in this module will be only on the scheduled commercial banks. A pictorial representation of the structure of SCBs in India is given in figure 2.1.

Figure 2.1: Scheduled Banking Structure in India

Role of Reserve Bank of India vis-à-vis Commercial BanksThe Reserve Bank of India (RBI) is the central bank of the country. It was established on April 1, 1935 under the Reserve Bank of India Act, 1934, which provides the statutory basis for its functioning. When the RBI was established, it took over the functions of currency issue from the Government of India and the power of credit control from the then Imperial Bank of India.As the central bank of the country, the RBI performs a wide range of functions; particularly, it:• Acts as the currency authority • Controls money supply and credit• Manages foreign exchange • Serves as a banker to the government• Builds up and strengthens the country's financial infrastructure• Acts as the banker of banks • Supervises banksAs regards the commercial banks, the RBI's role mainly relates to the last two points stated above.

RBI as Bankers' BankAs the bankers' bank, RBI holds a part of the cash reserves of banks,; lends the banks funds for short periods, and provides them with centralised clearing and cheap and quick remittance facilities.Banks are supposed to meet their shortfalls of cash from sources other than RBI and approach RBI only as a matter of last resort, because RBI as the central bank is supposed to function as only the 'lender of last resort'.To ensure liquidity and solvency of individual commercial banks and of the banking system as a whole, the RBI has stipulated that banks maintain a Cash Reserve Ratio (CRR). The CRR refers to the share of liquid cash that banks have to maintain with RBI of their net demand and time liabilities (NDTL).CRR is one of the key instruments of controlling money supply. By increasing CRR, the RBI can reduce the funds available with the banks for lending and thereby tighten liquidity in the system; conversely reducing the CRR increases the funds available with the banks and thereby raises liquidity in the financial system.

RBI as supervisorTo ensure a sound banking system in the country, the RBI exercises powers of supervision, regulation and control over commercial banks. The bank's regulatory functions relating to banks

Scheduled Banks in India

Scheduled Commercial Bank Scheduled Co-op. Bank

Public Sector Bank Private Sector Bank Foreign Bank Regional Rural Bank

Nationalised Bank SBI & its Associates



cover their establishment (i.e. licensing), branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. RBI controls the commercial banks through periodic inspection of banks and follow-up action and by calling for returns and other information from them, besides holding periodic meetings with the top management of the banks. While RBI is directly involved with commercial banks in carrying out these two roles, the commercial banks help RBI indirectly to carry out some of its other roles as well. For example, commercial banks are required by law to invest a prescribed minimum percentage of their respective net demand and time liabilities (NDTL) in prescribed securities, which are mostly government securities.This helps the RBI to perform its role as the banker to the Government, under which the RBI conducts the Government's market borrowing program.

RBI structure:RBI Act was last amended on 27.06.2016. According to it the following is the structure of RBI:1. The capital of the Bank shall be Rs.5 crores.

2. The Central Board shall consist of the : a. A Governor and [not more than four] Deputy Governors to be appointed by the Central Government;b. Four Directors to be nominated by the Central Government, one from each of the four Local Boardsc. Ten Directors to be nominated by the Central Government; and d. Two Government officials to be nominated by the Central Government]

3. The Governor and a Deputy Governor shall hold office for such term not exceeding five years as the Central Government may fix when appointing them, and shall be eligible for re-appointment

4. Monetary Control by RBI : Monetary policy is RBI’s primary responsibility, wherein the RBI is required to control the inflation. As per amended act of RBI, the Central Government shall, in consultation with the RBI, determine the inflation target in terms of the Consumer Price Index(CPI), once in every five years. The Central Government shall, upon such determination, notify the inflation target in the Official Gazette.The Central Government will constitute a Committee to be called the Monetary Policy Committee of the RBI.The Monetary Policy Committee shall consist of the following Members, namely:—(a) The Governor of the Bank—Chairperson, ex officio; (b) Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio; (c) One officer of the Bank to be nominated by the Central Board—Member, ex officio; and (d) Three persons to be appointed by the Central Government—Members. Further in this category, no person shall be appointed as a Member, if i) completed the age of seventy years on the date of appointment as Member; ii) is a Member of any Board or Committee of the Bank; iii) is an employee of the Bank; iv) is a public servant as defined under section 21 of the Indian Penal Code; (v) is a Member of Parliament or any State Legislature. Under this clause the Members is appointed shall hold office for a period of four years and shall not be eligible for re-appointment.

The RBI shall organise at least four meetings of the Monetary Policy Committee in a year.

The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target. The decision of the Monetary Policy Committee shall be binding on the Bank.

The tools that RBI uses at its disposal are five. They are:a. Repo and reverse repo rate: Repo is a transaction wherein securities are sold by RBI and simultaneously repurchased (hence, the term repo) at a fixed price. This fixed price is determined in context to an interest rate which is called the repo rate. The transaction is relevant for banks when they need funds from RBI—so, RBI repurchases the securities—which is akin to lending money to the bank at the decided rate. The higher the repo rate, the more costly funds are for



banks and hence, higher will be the rate that banks pass on to customers. If the rate is high, it signals that access to money is expensive for banks; lesser credit will flow in the system and that helps bring down liquidity and lowers inflation. The reverse is the reverse repo rate which is used by banks to park excess money with RBI.b. Cash reserve ratio (CRR): This is the percentage of a bank’s time and demand liabilities that needs to be kept as cash with RBI. RBI can vary the percentage up to a limit. A high percentage means banks have less to lend and hence, curbs liquidity and a low CRR does the opposite. RBI can use the CRR to tighten or ease liquidity by increasing or decreasing it as the situation demands. c. Open market operationsThis refers to buying and selling of government securities by RBI to regulate the short-term money supply. If RBI wants to induce liquidity or more funds in the system, it will buy government securities and inject funds into the system, and if it wants to curb the amount of money out there it will sell these to the banks thereby reducing the amount of cash that banks have.d. Statutory Liquidity RatioBanks are required to invest a percentage of their time and demand liabilities in government approved securities, this is referred to as the SLR. e. Bank rateThis is the re-discounting rate that RBI extends to banks against securities such as bills of exchange, commercial papers and any other approved securities. In recent years it has been the repo rate rather than the bank rate which acts as a guideline for banks fixing their interest rates.

Banking concepts of Retail, Wholesale, Global banking & BancassuranceRETAIL BANKING: What is retail banking?Retail banking is, however, quite broad in nature - it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on the assets side, are the more important of the products offered by banks. Related ancillary services include credit cards, or depository services. Today’s retail banking sector is characterized by three basic characteristics: • multiple products (deposits, credit cards, insurance, investments and securities); • multiple channels of distribution (call centre, branch, Internet and kiosk); and • multiple customer groups (consumer, small business, and corporate). It is reported that Indian retail market has the potential to be second only to the USA. National Readership Survey puts Indian households with monthly of over Rs. 5000 at 4.5 million. According to the survey, the category of households with annual income of Rs. 2 lakhs and above is growing at the rate of 30 per cent per annum. No wonder, banks with vision and insight are trying to woo this market through a series of innovative additions to their products, services, technology and marketing methods. Fixed and unfixed Deposits, (cluster deposits which can be broken into smaller units to help meet depositors’ overdraft without breaking up entirely), centralised database for ‘any branch banking’ (whereby the customer can access his account in any of the branches irrespective of where the account is maintained), room services (whereby the customers are visited at their residences offices to enable them to open their accounts), automatic teller machines, telebanking network, extended banking time, courier pickup for cheques and documents, etc are some of the privileges extended to the customers by the banks in are eagerness to cultivate the retail market. In short, in the bold new world of retail banking the customer is crowned as king.

Approach of Retail BankingBanks, today, offer a range of retail asset products, including home loans, automobile loans, personal loans (for marriage, medical expenses etc), credit cards, consumer loans (such as TV sets, personal computers etc) and, loans against time deposits and loans against shares. Banks also may fund dealers who sell automobiles, two wheelers, consumer durables and commercial vehicles. The share of retail credit in total loans and advances was 21.3% at end March 2009.



Customers for retail loans are typically middle and high-income, salaried or self-employedindividuals, and, in some cases, proprietorship and partnership firms. Except for personal loans and credit through credit cards, banks stipulate that (a) a certain percentage of the cost of the asset (such as a home or a TV set) sought to be financed by the loan, to be borne by the borrower and (b) that the loans are secured by the asset financed.Many banks have implemented a credit-scoring program, which is an automated credit approval system that assigns a credit score to each applicant based on certain attributes like income, educational background and age. The credit score then forms the basis of loan evaluation. External agencies such as field investigation agencies and credit processing agencies may be used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. Before disbursements are made, the credit officer checks a centralized delinquent database and reviews the borrower's profile. In making credit decisions, banks draw upon reports from agencies such as the Credit Information Bureau (India) Limited (CIBIL).Some private sector banks use direct marketing associates as well as their own branch network and employees for marketing retail credit products. However, credit approval authority lies only with the bank's credit officers.

Wholesale BankingWholesale banking typically involves a small number of very large customers such as big corporations and governments, whereas retail banking consists of a large number of small customers who consume personal banking and small business services. Wholesale banking is largely inter-bank; banks use the inter-bank markets to borrow from or lend to other banks/ large customers, to participate in large bond issues and to engage in syndicated lending. Retail banking is largely intra-bank; the bank itself makes many small loans.Most of the Indian public sector banks practice retail banking; they are slowly practising the concept of wholesale banking. On the other hand, most of the well established foreign banks in India and the recent private sector banks practice wholesale banking alongside retail banking. As a result of this difference, the composition of income for a public sector bank is different. While a major portion of the income for large public sector banks is from lending operations, in the case of any private sector bank in India, the amount of non-operating income (other than interest income) is substantially higher. The composition of other income is commission on bills/ guarantees/ letters of credit, counselling fees, syndication fees, credit report fees, loan processing fees, correspondent bank charges etc.

Universal Banking: Universal banking means 'one-stop shop' and is a combination of commercial banking and investment banking. It seeks to provide the entire gamut of financial products under one roof.Universal Banking covers formal banking of receipt of deposits, advances, merchant banking, underwriting, investing and trading in all types of securities, advisory services on mergers and acquisitions by the corporate sector and so on. The wide range of services offered also includes mutual funds, insurance, share broking, commodity broking, investment type of products like sale of gold/bullion, bonds etc.The main advantage of universal banking lies in the ability of banks to cross sell their products to clients using lager database of bank thereby earn both fee based and non fee based income. The customers of bank will also have an advantage that they should not have to visit different experts to deal with different financial needs.

Cash Management Services and RemittancesMany banks have branches rendering cash management services (CMS) to corporate clients, for managing their receivables and payments across the country. Under cash management services, banks offer their corporate clients custom-made collection, payment and remittance services allowing them to reduce the time period between collections and remittances, thereby streamlining their cash flows. Cash management products include physical cheque-based clearing, electronic clearing services, central pooling of country-wide collections, dividend and interest remittance



services and Internet-based payment products. Such services provide customers with enhanced liquidity and better cash management.

Types of off balance sheet items:1. Bank Guarantees: There are two types of guarantees generally issued by bank: a. Financial guarantees: Financial guarantees are direct credit substitutes wherein a bank irrevocably undertakes to guarantee the repayment of a contractual financial obligation. b. Performance guarantees are essentially transaction-related contingencies that involve an irrevocable undertaking to pay a third party in the event the counterparty fails to fulfill or perform a contractual non- financial obligation.

2. Letter of Credit: Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document. The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as: "An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :

1. Is to make a payment to or to the order third party (the beneficiary) or is to accept bills of exchange (drafts) drawn by the beneficiary.

2. Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).

3. Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.

3. Market related off-balance sheet items would include: a) interest rate contracts – including single currency interest rate swaps, basis swaps, forward rate agreements, and interest rate futures; b) foreign exchange contracts, including contracts involving gold, – includes cross currency swaps (including cross currency interest rate swaps), forward foreign exchange contracts, currency futures, currency options;

Small Banks:i) Eligible promoters: Resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks. Promoter/promoter groups should be ‘fit andproper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

ii) Scope of activities : The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. There will not be any restriction in the area of operations of small finance banks.

iii) Capital requirement: The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.



iv) Promoter's contribution: The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

v) Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

vi) Prudential norms : The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions. The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

Payment Bank:i) The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

ii) Eligible promoters : Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.

A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank. However, scheduled commercial bank can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949.

Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or running their businesses for at least a period of five years in order to be eligible to promote payments banks.

iii) Scope of activities : Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer.Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.Payments and remittance services through various channels. BC of another bank, subject to the Reserve Bank guidelines on BCs. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.

iv) Deployment of funds : The payments bank cannot undertake lending activities. Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its "demand deposit balances" in Statutory Liquidity Ratio(SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

v) Capital requirement : The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.



The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

vi) Promoter's contribution: The promoter's minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.

vii) Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

viii) Other conditions : The operations of the bank should be fully networked and technology driven from the beginning, conforming to generally accepted standards and norms.The bank should have a high powered Customer Grievances Cell to handle customer complaints.

Banking Outlet/Part-time Banking Outlet:1. A ‘Banking Outlet’ for a Domestic Scheduled Commercial Bank (DSCB), a Small Finance Bank (SFB) and a Payment Bank (PB) is a fixed point service delivery unit, manned by either bank’s staff or its Business Correspondent where services of acceptance of deposits, encashment of cheques/ cash withdrawal or lending of money are provided for a minimum of 4 hours per day for at least five days a week. It carries uniform signage with name of the bank and authorisationf rom it, contact details of the controlling authorities and complaint escalation mechanism. The bankshould have a regular off-site and on-site monitoring of the ‘Banking Outlet’ to ensure propersupervision, ‘uninterrupted service’ except temporary interruptions due to telecom connectivity, etc. and timely addressing of customer grievances. The working hours/days need to be displayedprominently. 2 A banking outlet which does not provide delivery of service for a minimum of 4 hours per dayand for at least 5 days a week will be considered a ‘Part-time Banking Outlet’. 3. Domestic scheduled commercial banks (other than RRBs) are permitted to open, unless otherwise specifically restricted, Banking Outlets in Tier 1 to Tier 6 centres without having the need to take permission from Reserve Bank of India in each case. The policy covers the opening of ‘Banking Outlets’ in all Tiers as defined on the basis of population as per Census 2011. 4. At least 25 percent of the total number of ‘Banking Outlets’ opened during a financial year should be opened in unbanked rural centres.

Role and Functions of Insurance:Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance can be classified into three categories from business point of view1. Life insurance; 2. General Insurance; and 3. Social Insurance.

Life Insurance: Life Insurance pays the policy holder or beneficiaries a certain sum of money in case of death of policyholder. Since the insurance coverage is more than a year, policyholder has to pay the premium either every month, every three months or annually. Risks involved: are: premature death, source of income during retirement or in case of illness.Life insurance offers various polices according to the requirement of the persons - Term Assurance, Whole Life, Endowment Assurance, Family Income Policy, Life Annuity Joint Life Assurance, Pension Plans, Unit Linked Plans, Policy for maintenance of handicapped dependent,Endowment Policies with Health Insurance benefits.

General Insurance: The general insurance includes property insurance, liability insurance and other form of insurance. Property insurance includes fire and marine insurance. Property of the individual and business involves various risks like fire, theft etc. This need insurance Liability insurance includes motor, theft, fidelity and machine insurance



Type of General Insurance policies available are - Health Insurance, MediClaim Policy, Personal Accident Policy, Group Insurance Policy, Automobile Insurance, Worker’s Compensation Insurance, Liability Insurance, Aviation Insurance, Business Insurance, Fire Insurance Policy, Travel Insurance Policy.

3. Social Insurance: Social insurance provide protection to the weaker sections of the society who are unable to pay the premium. It includes pension plans, disability benefits, unemployment benefits, sickness insurance and industrial insurance.

AABY: Aam Aadmi Bima Yojana is a Social Security insurance Scheme. Under this scheme the head of the family or one earning member in the family of such a household is covered. The members should be aged between 18 years completed and 59 years nearer birthday. The member should normally be the head of the family or one earning member of the below poverty line family (BPL) or marginally above the poverty line under identified vocational group/rural landless household. The premium to be charged initially under the scheme will be Rs.200/- per annum per member for a cover of Rs.30,000/-, out of which 50% will be subsidized from the Social Security Fund . In case of Rural Landless Household (RLH) remaining 50 % premium shall be borne by the State Government/ Union Territory and in case of other occupational group the remaining 50% premium shall be borne by the Nodal Agency and/or Member and/or State Government/ Union Territory.Upon death of a member, during the period of insurance cover the Sum Assured of Rs.30,000/-under assurance, then in force, shall become payable to the nominee. Further, On death, due to accident Rs. 75,000/-, Permanent Total Disability, due to accident Rs. 75,000.

Regulatory Requirment:In the year 2000, the IRDA (Insurance Regulatory & Development Authority) was constituted as an autonomous body to regulate and develop the business of insurance & reinsurance in India by Insurance Regulatory & Development Authority Act, 1999. The authority has been entrusted with the requisite regulations in the areas of registration of insurers, their conduct of business, solvency margins, conduct of reinsurance business, licensing and code of conduct of intermediaries etc.

BancassuranceEntry of Banks into Insurance Business: Banks are permitted to set up insurance joint ventures on risk participation basis and also to undertake insurance business as agents of insurance companies on fee basis, without any risk participation by banks and their subsidiaries. This is as per notification of Government of India specifying “Insurance” as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act,1949.With the objective of increasing insurance penetration using the entire network of bank branches, the Finance Minister in the budget speech 2013-14 announced that banks will be permitted to act as insurance brokers. Accordingly, banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either departmentally or through a subsidiary subject to the conditions.However, it may be noted that if a bank or its group entities, including subsidiaries, undertake insurance distribution through either broking or corporate agency mode, the bank/other group entities would not be permitted to undertake insurance distribution activities, i.e, only one entity in the group can undertake insurance distribution by either one of the two modes mentioned :

i) Banks setting up a subsidiary/JV for undertaking insurance business with risk participation:Banks are not allowed to undertake insurance business with risk participation departmentally and may do so only through a subsidiary/JV set up for the purpose. Banks which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India to set up a subsidiary/joint venture company for undertaking insurance business with risk participation:a) The net worth of the bank should not be less than Rs.1000 crore;b) The CRAR of the bank should not be less than 10 per cent;c) The level of net non-performing assets should be not more than 3 percent.



d) The bank should have made a net profit for the last three continuous years;e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

ii) Banks undertaking insurance broking/corporate agency through a subsidiary/JVBanks require prior approval of RBI for setting up a subsidiary/JV. Accordingly, banks desirous of setting up a subsidiary for undertaking insurance broking/corporate agency and which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India for approval to set up such subsidiary/JV:a) The net worth of the bank should not be less than Rs.500 crore after investing in the equity of such company;b) The CRAR of the bank should not be less than 10 per cent;c) The level of net non-performing assets should be not more than 3 per cent.d) The bank should have made a net profit for the last three continuous years;e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

Micro Insurance:Insurance Regulatory and Development Authority of India (IRDAI) has created a special category of insurance policies called micro-insurance policies to promote insurance coverage among economically vulnerable sections of society. The IRDA Micro-insurance Regulations, 2005 defines and enables micro-insurance. A micro-insurance policy is a general or life insurance policy with a sum assured of Rs 50,000 or less.A general micro-insurance product is any Health insurance contract, any contract covering belongings such as Hut, Livestock, Tools or instruments or any personal accident contract. They can be on an individual or group basis.A life micro-insurance product is a term insurance contract with or without return of premium, any endowment insurance contract or a health insurance contract. They can be with or without an accident benefit rider and Either on an individual or group basis. There is flexibility in the regulations for insurers to offer composite covers or package products that include life and general insurance covers together.Intermediaries:Micro- insurance business is done through the following intermediaries:Non-Government Organisations, Self-Help Groups, Micro-Finance Institutions.

Concept of Factoring & forfatingFactoring : Factoring means an arrangement between a factor (means a company having business of factoring) and his client which includes at least two of the following services to be provided by the factor: • Finance • Maintenance of debt • Collection of debts • Protection against credit risk”

Factoring is essentially a management (financial) service designed to help firms better manage their receivables; it is, in fact, a way of offloading a firm’s receivables and credit management on to some one else - in this case, the factoring agency or the factor. Factoring involves an outright sale of the receivables of a firm by another firm specialising in the management of trade credit, called the factor. Under a typical factoring arrangement a factor collects the accounts on the due dates, effects payments to its client firm on these days (irrespective of whether or not it has received payment or not) and also assumes the credit risks associated with the collection of the accounts.The legal status of a factor is that of an assignee. However, the following types of Factoring may be arranged:1. Recourse and Non-recourse Factoring : Under a recourse factoring arrangement, the factor has recourse to the client (firm) if the debt purchased/receivable factored turns out to be irrecoverable. In other words, the factor does not assume credit risks associated with the receivables. The factor does not have the right to recourse in the case of non-recourse factoring. The loss arising out of irrecoverable receivables is borne by him, as a compensation for which he charges a higher commission.



2. Advance and Maturity factoring : The factor paid a pre specified portion, ranging between three-fourths to nine tenths, of the factored receivables in advance, the balance being paid upon collection/on the guaranteed payment date. The client has to pay interest (discount) on the advance/repayment between the date of such payment and the date of actual collection from the customers/or the guaranteed payment date, determined on the basis of the prevailing short-term rate, the financial standing of the client and the volume of the turnover.3. Full factoring: This is the most comprehensive form of factoring combining the features of all the factoring services specially those of non-recourse and advance factoring. It is also known as old line factoring.4. Disclosed and undisclosed Factoring: In disclosed factoring, the name of the factor is disclosed in the invoice by the supplier-manufacturer of the goods asking the buyer to make payment to the factor. Further, a customer who by mistake remits the payments to the firm is not discharged from his obligations to the factor until and unless the firm remits the proceeds to the factor.When name of the factor is not disclosed in the invoice, is called as undisclosed factoring although the factor maintains the sales ledger of the supplier-manufacturer. For rendering these services, the factor charges a fee which is usually expressed as a percentage of the total value of the receivables factored. Factoring involves two types of costs: (a) factoring commission; and (b) interest on funds advances.

Forfaiting: The forfaiting owes its origin to a French term ‘a forfait’ which means to forfeit (or surrender) ones’ rights on something to some one else. Forfaiting is a form of financing of receivables pertaining to international trade. It denotes the purchase of trade bills/promissorynotes by a bank/financial institution without recourse to the seller.Forfaiting is a mechanism of financing exports:a. by discounting export receivables b. evidenced by bills of exchanges or promissory notes c. without recourse to the seller (viz; exporter) d. carrying medium to long-term maturities e. on a fixed rate basis upto 100% of the contract value. In other words, it is trade finance extended by a forfaiter to an exporter seller for an export/sale transaction involving deferred payment terms over a long period at a firm rate of discount. Forfaiting is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms. Recourse to forfaiting usually takes place where the credit is for long date maturities and there is no prohibition for extending the facility where the credits are maturing in periods less than one year.

RISK MANAGEMENT IN BANKSThe success and failure of a banking institution heavily depends on the strength of the risk management system in the current environment. Banks in the process of financial intermediation are confronted with various kinds of financial and non-financial risks viz., credit, interest rate, foreign exchange rate, liquidity, equity price, commodity price, legal, regulatory, reputational, operational, etc. These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories.

Objectives of Risk Management:The very basic objective of risk management system is to put in place and operate a systematic process to give a reasonable degree of assurance to the top management that the ultimate corporate goals that are vigorously pursued by it would be achieved in the most efficient manner. In this way, all the risks that come in the way of the institution achieving the goals it has set for itself would be managed properly by the risk management system. In the absence of such a system, no institution can exist in the long-run without fulfilling the objectives for which it was set up. Thus, top management of banks should attach considerable importance to improve the ability to identify, measure, monitor and control the overall level of risks undertaken.The broad parameters of risk management function should encompass: i) organisational structure; ii) comprehensive risk measurement approach;



iii) risk management policies approved by the Board which should be consistent with the broader business strategies, capital strength, management expertise and overall willingness to assume risk;iv) guidelines and other parameters used to govern risk taking including detailed structure of prudential limits;v) strong MIS for reporting, monitoring and controlling risks; vi) well laid out procedures, effective control and comprehensive risk reporting framework; vii) separate risk management framework independent of operational Departments and with clear delineation of levels of responsibility for management of risk; and viii) periodical review and evaluation.

Risk Management Structure:The Board should set risk limits by assessing the bank’s risk and risk bearing capacity. At organisational level, overall risk management should be assigned to an independent Risk Management Committee or Executive Committee of the top Executives that reports directly to the Board of Directors. The purpose of this top level committee is to empower one group with full responsibility of evaluating overall risks faced by the bank and determining the level of risks which will be in the best interest of the bank. At the same time, the Committee should hold the line management more accountable for the risks under their control, and the performance of the bank in that area. The functions of Risk Management Committee should essentially be to identify, monitor and measure the risk profile of the bank. The Committee should also develop policies and procedures, verify the models that are used for pricing complex products, review the risk models as development takes place in the markets and also identify new risks. The risk policies should clearly spell out the quantitative prudential limits on various segments of banks’ operations.

Asset Liability Management information systems:The Asset - Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives. The ALM desk consisting of operating staff should be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits.The ALCO is a decision making unit responsible for balance sheet planning from risk return perspective including the strategic management of interest rate and liquidity risks. Each bank will have to decide on the role of its ALCO, its responsibility as also the decisions to be taken by it. The business and risk management strategy of the bank should ensure that the bank operates within the limits / parameters set by the Board. The business issues that an ALCO would consider, inter alia, will include product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities, etc. In addition to monitoring the risk levels of the bank, the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings. The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy on this view. In respect of the funding policy, for instance, its responsibility would be to decide on source and mix of liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of interest rate movements and decide on a funding mix between fixed vs floating rate funds, wholesale vs retail deposits, money market vs capital market funding, domestic vs foreign currency funding, etc. Individual banks will have to decide the frequency for holding their ALCO meetings.

Composition of ALCO The size (number of members) of ALCO would depend on the size of each institution, business mix and organisational complexity. To ensure commitment of the Top Management, the CEO/CMD or ED should head the Committee. The Chiefs of Investment, Credit, Funds Management / Treasury (forex and domestic), International Banking and Economic Research can be members of the Committee. In addition the Head of the Information Technology



Division should also be an invitee for building up of MIS and related computerisation. Some banks may even have sub-committees.Internationally, a committee approach to risk management is being adopted. While the Asset -Liability Management Committee (ALCO) deal with different types of market risk, the Credit Policy Committee (CPC) oversees the credit /counterparty risk and country risk. Thus, market and credit risks are managed in a parallel two-track approach in banks. Banks could also set-up a single Committee for integrated management of credit and market risks.

CATEGORIES OF RISKBanking risks can be broadly categorized as under:a) Credit Risk b) Interest Rate Risk c) Market Riskd) Liquidity Risk e) Operational Risk

a) Credit Risk: Credit risk is the oldest risk among the various types of risks in the financial system, especially in banks and financial institutions due to the process of intermediation. Managing credit risk has formed the core of the expertise of these institutions. While the risk is well known, growth in the markets, disintermediation, and introduction of a number of innovative products and practices has changed the way. Credit risk is measured and managed in today’s environment. Studies carried out on bank failures in the U.S. show that credit risk alone has accounted for 71% of large bank failures in the period from 1980 to 2004 as well as recent in 2008. Simon Hills of the British Bankers Association defines credit risk “is the risk to a bank’s earnings or capital base arising from a borrower’s failure to meet the terms of any contractual or other agreement it has with the bank. Credit risk arises from all activities where success depends on counterparty, issuer or borrower performance”. Credit risk enters the books of a bank the moment the funds are lent, deployed, invested or committed in any form to counterparty whether the transaction is on or off the balance sheet.

b) Interest Rate Risk: Interest Rate Risk (IRR) arises as a result of change in interest rates on rate earning assets and rate paying liabilities of a bank. The scope of IRR management is to cover the measurement, control and management of IRR in the banking book. With the deregulation of interest rates, the volatility of the interest rates has risen considerably. This has transformed the business of banking forever in our country from a mere volume driven business to a business of carefully planning and choosing assets and liabilities to be entered into to achieve targets of profitability.There are two basic approaches to IRR. They are: a) Earnings Approach, and a) Economic Value Approach.

c) Market Risk: Traditionally, credit risk management was the primary challenge for banks. With progressive deregulation, market risk arising from adverse changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more important. Even a small change in market variables causes substantial changes in income and economic value of banks.Market risk takes the form of: a) Liquidity Risk, b) Interest Rate Risk, c) Foreign Exchange Rate (Forex) Risk, d) Commodity Price Risk, and e) Equity Price Risk

d) Liquidity Risk: Liquidity risk is defined as the possibility that the bank would not be able to meet the commitments in the form of cash outflows with the available cash inflows. This risk arises as a result of inadequacy of cash available and near cash item including drawing rights to meet current and potential liabilities. Liquidity risk is categorized into two types; a) Trading LiquidityRisk; and b) Funding Liquidity Risk.Trading liquidity risk arises as a result of illiquidity of securities in the trading portfolio of the bank. Funding liquidity risk arises as a result of the cash flow mismatch and is an outcome of difference in balance sheet strategies pursued by different institutions in the same industry. It is perfectly possible for a few banks to have excess funding liquidity while other banks may suffer shortage ofliquidity.



e) Operational Risk: Operational risk is emerging as one of the important risks financial institutions worldwide are concerned with. Unlike other categories of risks, such as credit and market risks, the definition and scope of operational risk is not fully clear. A number of diverse professions such as internal control and audit, statistical quality control and quality assurance, facilities management and contingency planning, etc., have approached the subject of operational risk thereby bringing in different perspectives to the concept. While studies carried out on bank failures in the U.S. show that operational risk has accounted for an insignificant proportion of large bank failures so far, it is widely acknowledged that most of the new, unknown risks are under the category of operational risk. According to the Basel Committee, Operational risk is defined as “the risk of loss resulting from inadequate or failed processes, people and systems or external events. This definition includes legal risk, but excludes strategic and reputation risk” (The New Basel Capital Accord, Consultative Document released in April 2003). There can be different classifications depending on the purpose.

CAPITAL FRAMEWORK OF BANKS FUNCTIONING IN INDIA- AN OVERVIEW:BASEL ACCORD:In response to these and other disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices at the end of 1974. Later renamed the Basel Committee on Banking Supervision, the Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters. Its aim was and is to enhance financial stability by improving supervisory knowhow and the quality of banking supervision worldwide. The Committee seeks to achieve its aims by setting minimum standards for the regulation and supervision of banks; by sharing supervisory issues, approaches and techniques to promote common understanding and to improve cross-border cooperation; and by exchanging information on developments in the banking sector and financial markets to help identify current or emerging risks for the global financial system. Also, to engage with the challenges presented by diversified financial conglomerates, the Committee also works with other standard-setting bodies.In October 1996, the Committee released a report on The supervision of cross-border banking,drawn up by a joint working group that included supervisors from non-G10 jurisdictions and offshore centres. The document presented proposals for overcoming the impediments to effective consolidated supervision of the cross-border operations of international banks. Subsequently endorsed by supervisors from 140 countries, the report helped to forge relationships between supervisors in home and host countries.

Basel I:A capital measurement system commonly referred to as the Basel Capital Accord (1988 Accord) was approved by the G10 Governors and released to banks in July 1988. The 1988 Accord called for a minimum capital ratio of capital to risk-weighted assets of 8% to be implemented by the end of 1992. Ultimately, this framework was introduced not only in member countries but also in virtually all other countries with active international banks. The approved formula for calculation of capital adequacy was:

8% = ___________________ Tier I + Tier II__________________________ Risk weighted Asset for credit risk + Risk weighted Asset for Market riskBasel II Provisions:In India, various groups of banks are at present subject to different minimum capital requirements as prescribed in the statutes under which they have been set-up and operate. The foreign banks operating in India should have foreign funds deployed in Indian business equivalent to 3.5% of their deposits as at the end of each year. Further there are prescriptions regarding maintenance of statutory reserves.As per the new formula, every bank should maintain a minimum capital adequacy ratio based on capital funds and risk assets. As per the prudential norms, all Indian scheduled commercial banks (excluding regional rural banks) as well as foreign banks operating in India are required to maintain capital adequacy ratio (or capital to Risk Weighted Assets Ratio) which is specified by RBI from time to time.



At present capital adequacy ratio is 9%.*The capital adequacy ratio is worked out as below :

DEFINITION OF CAPITAL FUNDSThe Basle Committee has defined capital in two tiers - Tier-I and Tier-II. While Tier- I capital, otherwise known as core capital, provides the most permanent and readily available support to a bank against unexpected losses, Tier-II capital contains elements that are less permanent in nature or less readily available. Norms have been established by the RBI identifying Tier-I and Tier-II capital for Indian banks and foreign banks.

TIER-I AND TIER-II CAPITAL FOR INDIAN BANKSTier I capital (also known are core capital) provides the most permanent and readily available support to a bank against unexpected losses.

Tier I capital comprises: The aggregate of paid-up capital, statutory reserves; and other disclosed free reserves including share premium and capital reserves arising out of surplus on sale of assets As reduced by :a. intangible assetsb. current and brought forward losses.c. The DTA (Deferred tax asset) computed as under should be deducted from Tier I capital:

i) DTA associated with accumulated losses; and

ii) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital.

Tier II capital comprises elements that are less permanent in nature or are less readily available than those comprising Tier I capital. The elements comprising Tier II capital are as follows :(a) Undisclosed reserves and cumulative perpetual preference assets(b) Revaluation reserves - These reserves are taken at a discount of 55% (effective from 1st April, 1994) while determining their value for inclusion in Tier-II capital. (c) General provisions and loss reserves - General provisions and loss reserves (including general provision on standard assets) may be taken only up to a maximum of 1.25 per cent of weighted risk assets.(d) Hybrid Debt Capital instruments(e) Subordinated Debt - These often carry a fixed maturity and as they approach maturity, they should be subjected to progressive discount for inclusion in Tier-II capital. Instrument with an initial maturity of less than five years or with a remaining maturity of one year should not be included as part of Tier-II capital. Subordinated debt instrument will be limited to 50% of Tier-I capital.

Ratio of Tier II capital to Tier I capitalThe quantum of Tier II capital is limited to a maximum of 100% of Tier I Capital. This seeks to ensure that the capital funds of a bank predominantly comprise of core capital rather than items of a less permanent nature. It may be clarified that the Tier II capital of a bank can exceed its Tier I capital; however, in such a case, the excess will be ignored for the purpose of computing the capital adequacy ratio.

BASEL III Provisions:The provisions of Basel III include:a) The Basel III capital regulation has been implemented from April 1, 2013 in India in phases.b) To ensure smooth transition to Basel III, appropriate transitional arrangements have been provided for meeting the minimum Basel III capital ratios, full regulatory adjustments to the components of capital etc. Consequently, Basel III capital regulations would be fully implemented as on March 31, 2019.



c) Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and Countercyclical capital buffer etc.). d) Banks are required to disclose the capital ratios computed under Basel III capital adequacy framework from the quarter ending 30.06.2013.

Composition of Regulatory Capital:Under Basel III, Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.).The total regulatory capital fund will consist of the sum of the following categories:-(i) Tier 1 Capital (going-concern capital*): comprises of:(a) Common Equity Tier 1 capital (b) Additional Tier 1 capital(ii) Tier 2 Capital (gone-concern capital*)(*From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation of the bank).

Elements of Capital funds – Indian Banks(i) Common Equity Tier 1 capital a) Common shares (All common shares should ideally be the voting shares as detailed in RBI M. Cir.) b) Stock surplus (share premium if taken for issue of (a) above) c) Statutory reserves d) Capital reserves representing surplus arising out of sale proceeds of assets e) Other disclosed free reserves, if any f) Balance in Profit & Loss Account at the end of previous year g) Revaluation reserves at a discount of 55% h) foreign currency translation reserve, subject to discount of 25%i) Profit for current year calculated on quarterly basis as per the formula given in RBI Cir. (Less: Regulatory adjustments/ deductions)(ii) Additional Tier 1 capital a) Perpetual Non-cumulative Preference shares (PNCPS) b) Stock surplus (share premium if taken for issue of (a) above) c) Debt capital instrumentsd) Any other type of instruments as notified by RBI from time to time.(Less: Regulatory adjustments/ deductions)

(iii) Tier 2 Capital a) General Provisions and Loss Reserves b) Debt capital instruments issued by banks c) Preference share capital instruments (PCPS/RNCPS/RCPS) d) Stock surpluses (share premium if taken for issue of (c) above)e) Any other type of instruments generally notified by RBI for inclusion under Tier 2 capital (Less: Regulatory adjustments/deductions)

Transitional ArrangementsAs per Basel III terms, in order to ensure smooth migration without any near stress, appropriate transitional arrangements for capital ratios have been made which commenced as on 01.04.2013. Capital ratios and deductions from Common Equity will be fully phased-in and implemented as on 31.03.2018 and accordingly the phase-in arrangements for Schedule Commercial Bank operating in India are drawn as under:-

Transitional Arrangements (Excl. Local area bank and RRBs)Minimum Capital Ratio

01.4.13 31.3.14 31.3.15 31.3.16 31.3.17 31.3.18 31.03.2019



Common Equity Tier I

4.50% 5.00% 5.50% 5.50% 5.50% 5.50% 5.50%

Additional Tier I 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%Minimum Tier I 6.00% 6.50% 7.00% 7.00% 7.00% 7.00% 7.00%Tier II 3.00% 2.50% 2.00% 2.00% 2.00% 2.00% 2.00%Minimum TotalCapital

9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%

Capital conservation buffer*

- - - 0.625% 1.25% 1.875% 2.50%

Minimum TotalCapital + CCB

9.00% 9.00% 9.00% 9.625% 10.25% 10.875%

11.50%

*Common Equity Tier 1 Capital Ratio

Common Equity Tier 1Capital Credit Risk RWA* + Market Risk RWA + Operational Risk RWA

Tier 1 Capital Ratio

Eligible Tier 1CapitalCapital Credit Risk RWA* + Market Risk RWA + Operational Risk RWA

Total Capital (CRAR#)

Eligible CapitalCapital Credit Risk RWA* + Market Risk RWA + Operational Risk RWA

* RWA = Risk weighted Assets; # Capital to Risk Weighted Asset Ratio

MERGERS & ACQUISITONS:The Indian Banking Sector :- The history of Indian banking can be divided into three main phases : Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set up Phase II (1969- 1991) - Nationalisation, regularisation and growth Phase III (1991 onwards) - Liberalisation and its aftermath With the reforms in Phase III the Indian banking sector, as it stands today, is mature in supply, product range and reach, with banks having clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-cards, decreasing NPAs due to Securitisation, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g. amendments to the Banking Regulation Act). Certain trends like growing competition, product innovation and branding, focus on strengthening risk management systems, emphasis on technology have emerged in the recent past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks, with the need for additional capital requirement and costly database creation and maintenance processes. Larger banks would have a relative advantage with the incorporation of the norms.

Motives Behind ConsolidationBased on the cases, we can narrow down the motives behind M&As to the following : Growth - Organic growth takes time and dynamic firms prefer acquisitions to grow quickly in size and geographical reach. Synergy - The merged entity, in most cases, has better ability in terms of both revenue enhancement and cost reduction. Managerial efficiency - Acquirer can better manage the resources of the target whose value, in turn, rises after the acquisition. Strategic motives - Two banks with complementary business interests can strengthen their positions in the market through merger. Market entry - Cash rich firms use the acquisition route to buyout an established player in a new market and then build upon the existing platform. Tax shields and financial safeguards - Tax concessions act as a catalyst for a strong bank toacquire distressed banks that have accumulated losses and unclaimed depreciation benefits in their books.



Regulatory intervention - To protect depositors, and prevent the de-stabilisation of the financial services sector, the RBI steps in to force the merger of a distressed bank.

Withdrawal of Legal Tender Character of existing Rs. 500/- and Rs. 1000/- Bank Notes w.e.f 8.11.2016 (Demonitisation):In terms of Gazette Notification No 2652 dated November 08, 2016 issued by Government of India, Rs. 500 and Rs.1000 denominations of Bank Notes of the existing series issued by Reserve Bank of India (Specified Bank Notes) shall cease to be legal tender with effect from November 09, 2016, to the extent specified in the Notification. A new series of Bank Notes called Mahatma Gandhi (New) Series having different size and design, highlighting the cultural heritage and scientific achievements of the country, will be issued. Bank branches will be the primary agencies through which the members of public and other entities will be exchanging the Specified Bank Notes for Bank Notes in other valid denominations or depositing the Specified Bank Notes for crediting to their accounts, upto and including the December 30, 2016.

CIBIL & Fair practice code for lenders:Credit Information Bureau Ltd. The establishment of Credit Information Bureau (India) Limited (CIBIL), India's first Credit Information Bureau, is an effort made by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors' portfolio quality.CIBIL was promoted by State Bank of India (SBI- 40% shareholding), Housing Development Finance Corporation (HDFC- 40% shareholding), Dun & Bradstreet Information Services India Private Limited (D&B-- 10% shareholding) and TransUnion International Inc. (TransUnion- 10% shareholding) to provide comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members. D&B and TransUnion, are also the technology partners and are well-known in the credit information businesses worldwide. In 2006, RBI made a guideline for shareholding pattern of CIBIL and will lay down that no single entity should own more than 10% of sharecapital of CIBIL. Later on SBI & HDFC sold out there shares to other banks and brought down there holdings to 10%.The demand for credit has risen exponentially, there has been a parallel increase in competition, and credit delinquencies. In such an environment, risk assessment is of critical importance. Not only, in deciding on what business to book and the speed at which a credit grantor does so, but also in determining the appropriate pricing.Comprehensive credit information, which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record, has become the need of the hour.CIBIL’s aim is to fulfill the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members. Banks, Financial Institutions, Non Banking Financial Companies, Housing Finance Companies and Credit Card Companies use CIBIL’s services. Data sharing is based on the Principle of Reciprocity, which means that only Members who have submitted all their credit data, may access Credit Information Reports from CIBIL. The relationship between CIBIL and its Members is that of close interdependence.CIBIL houses only credit information i.e. information on loans and credit cards. It does not have any details of customers' savings accounts or fixed deposit accounts. Members share this credit information of their customers with CIBIL month on month so that CIBIL's database is updated. This information is then used by credit underwriters to make effective credit decisions.

Fair Practices Code for Lenders:-The following is the guidelines by RBI : (DBOD. Leg. No.BC. 104 /09.07.007/2002-03, May 5, 2003)On the basis of the recommendations of the Working Group on Lenders’ Liability Laws constituted by the Government of India, we have examined, in consultation with Government, select banks and financial institutions, the feasibility of introducing the Fair Practices Code for Lenders. The guidelines have since been finalised and banks/ all India Financial Institutions are advised to adopt



the following broad guidelines and frame the Fair Practices Code duly approved by their Board of Directors.

2. Guidelines(i) Applications for loans and their processing(a) Loan application forms in respect of priority sector advances up to Rs.2.00 lakhs should be comprehensive. It should include information about the fees/charges, if any, payable for processing, the amount of such fees refundable in the case of non acceptance of application, pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower. (b) Banks and financial institutions should devise a system of giving acknowledgement for receipt of all loan applications. Time frame within which loan applications up to Rs.2 lakhs will be disposed of should also be indicated in acknowledgement of such applications.(c) Banks / financial institutions should verify the loan applications within a reasonable period of time. If additional details / documents are required, they should intimate the borrowers immediately.(d) In the case of small borrowers seeking loans up to Rs. 2 lakhs the lenders should convey in writing, the main reason/reasons which, in the opinion of the bank after due consideration, have led to rejection of the loan applications within stipulated time.(ii) Loan appraisal and terms/conditionsLenders should ensure that there is proper assessment of credit application by borrowers. They should not use margin and security stipulation as a substitute for due diligence on credit worthiness of the borrower.The lender should convey to the borrower the credit limit along with the terms and conditions thereof and keep the borrower's acceptance of these terms and conditions given with his full knowledge on record. Terms and conditions and other caveats governing credit facilities given by banks/ financial institutions arrived at after negotiation by lending institution and the borrower should be reduced in writing and duly certified by the authorised official. A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower.As far as possible, the loan agreement should clearly stipulate credit facilities that are solely at the discretion of lenders. These may include approval or disallowance of facilities, such as, drawings beyond the sanctioned limits, honouring cheques issued for the purpose other than specifically agreed to in the credit sanction, and disallowing drawing on a borrowal account on its classification as a non-performing asset or on account of non-compliance with the terms of sanction. It may also be specifically stated that the lender does not have an obligation to meet further requirements of the borrowers on account of growth in business etc. without proper review of credit limits.In the case of lending under consortium arrangement, the participating lenders should evolve procedures to complete appraisal of proposals in the time bound manner to the extent feasible, and communicate their decisions on financing or otherwise within a reasonable time. (iii) Disbursement of loans including changes in terms and conditionsLenders should ensure timely disbursement of loans sanctioned in conformity with the terms and conditions governing such sanction. Lenders should give notice of any change in the terms and conditions including interest rates, service charges etc. Lenders should also ensure that changes in interest rates and charges are effected only prospectively. (iv) Post disbursement supervisionPost disbursement supervision by lenders, particularly in respect of loans upto Rs.2 lakhs, should be constructive with a view to taking care of any" lender-related" genuine difficulty that the borrower may face.Before taking a decision to recall / accelerate payment or performance under the agreement or seeking additional securities, lenders should give notice to borrowers, as specified in the loan agreement or a reasonable period, if no such condition exits in the loan agreement.Lenders should release all securities on receiving payment of loan or realisation of loan subject to any legitimate right or lien for any other claim lenders may have against borrowers. If such right of set off is to be exercised, borrowers shall be given notice about the same with full particulars about



the remaining claims and the documents under which lenders are entitled to retain the securities till the relevant claim is settled/paid. (v) GeneralLenders should restrain from interference in the affairs of the borrowers except for what is provided in the terms and conditions of the loan sanction documents (unless new information, not earlier disclosed by the borrower, has come to the notice of the lender).Lenders must not discriminate on grounds of sex, caste and religion in the matter of lending. However, this does not preclude lenders from participating in credit-linked schemes framed for weaker sections of the society.In the matter of recovery of loans, the lenders should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc.In case of receipt of request for transfer of borrowal account, either from the borrower or from a bank/financial institution, which proposes to take- over the account, the consent or otherwise i.e, objection of the lender, if any, should be conveyed within 21 days from the date of receipt of request. 3. Fair Practices Code based on the guidelines outlined in the paragraph 2 above should be put in place in respect of all lending prospectively, but not later than 01 August 2003. Banks and financial institutions will have the freedom of drafting the Fair Practices Code, enhancing the scope of the guidelines but in no way sacrificing the spirit underlying the above guidelines. For this purpose, the Boards of banks and financial institutions should lay down a clear policy.4. The Board of Directors should also lay down the appropriate grievance redressal mechanism within the organization to resolve disputes arising in this regard. Such a mechanism should ensure that all disputes arising out of the decisions of lending institutions' functionaries are heard and disposed of at least at the next higher level. The Board of Directors should also provide for periodical review of the compliance of the Fair Practices Code and the functioning of the grievances redressal mechanism at various levels of controlling offices. A consolidated report of such reviews may be submitted to the Board at regular intervals, as may be prescribed by it.

Banking Codes and Standard Boards: • The expectations of customers of banks are generally confined to prompt delivery of services relating to their deposit accounts, assistance in handling the ancillary services, transparency in dealings and a helpful attitude to solve their difficulties. Towards this end, and as a part of the regulatory process, RBI has been taking various steps over the years to ensure that services rendered by the banks to customers and common persons meet their genuine requirements. However, while the customer expectations have kept rising, the services to common person have not improved to expected levels. Therefore, RBI in 2003 constituted a Committee on Procedures and Performance Audit in Public Services (CPPAPS) under Chairmanship of Shri S.S. Tarapore, former Deputy Governor of the Reserve Bank. The CPPAPS examined the areas of interaction of customers and common person with the banks and the quality of service rendered. The Committee in its various reports covered all facets of banking services like Government business, foreign exchange business, exchange of currency, etc. to customers of commercial banks. The Committee recommended that a Banking Codes and Standards Board of India (BCSBI) should be set up in India as an organization to evaluate and oversee observance of a code of conduct by banks so that there is healthy and virtuous pressure on the banks to provide good customer service on par with best practices. To fill in the institutional gap and to calibrate the banks against codes and standards based on best practices, Dr. Y.V. Reddy, Governor, Reserve Bank in his Monetary Policy Statement on September 2005, announced the RBI intention to set up a Banking Codes and Standards Board of India as an independent organization. This Board is expected to function as a watchdog of the banking industry. The Governing Council of the Board consists of seven members drawn from different disciplines such as banking, accountancy, consumer forum, service industry, etc. The Board is intended to be a lean organization with minimum overheads.

Functions of BCSBI• The initiative to establish the Board is driven by the banks themselves as this would lead to the empowerment of their customers for a higher level of satisfaction with regard to the services



offered, through a significant and enduring improvement in customer services. Internationally, such codes are developed by associations of bankers as self-regulatory exercises. The IBA and the BCSBI have drawn up the voluntary codes in general terms and the codes will be followed by detailed Guidance Notes on each of the code. • The adherence to the codes by banks will be monitored by BCSBI. The central task of the Board would, therefore, be to ensure that the subscriber banks file detailed compliance reports to the Board on observance of voluntary codes and that they are followed rigorously.

Operational Aspects of Consumer Protection Regulation Act 1986:To protect the interests of the consumers, the Consumer Protection Act was enacted. The Act extends to the whole of India except the State of Jammu and Kashmir. The Act covers all goods and services, except goods for resale or for commercial purpose and services rendered free of charge and a contract of personal service.The complaint may be made by the complainant which includes a consumer or any voluntary consumer association registered under the Companies Act,1956 or any other law or the Central or State Government or one or more consumers, having the same interest and in case of death of a consumer his/ her legal heirs or representative.The consumers complaints are dealt by District Forum, State and National Commission. District forum and State Commission are established by the State Governments, and the National Commission established by Central Government. District Forum has powers to deal with cases up to Rs. 20 lakhs. The State Commission deals with complaints exceeding value of Rs. 20 lakh and below Rs. One crore and appeals against the orders of any District forum within the State. The cases exceeding Rs. One crore would be handled by the Central Commission. They also deal with appeals against the order of any State Commission.

Banking Ombudsman:The Banking Ombudsman Scheme, 2006 enables resolution of complaints of bank customers relating to certain services rendered by banks The Scheme has come into force from January 1, 2006.The Banking Ombudsman is person appointed by the Reserve Bank of India to redress customer complaints against certain deficiency in banking services.The Banking Ombudsman is a quasi judicial authority. It has power to summon both the parties -bank and its customer, to facilitate resolution of complaint through mediation. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Cooperative Banks are covered under the Scheme.Some of the deficiency in banking services including internet banking, covered under the Banking Ombudsman Scheme are:deficiency in customer service like non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;delayed or non- payment of inward remittance, delay in issuance of drafts, non-adherence to prescribed working hours; refusal to open deposit accounts without any valid reason for refusal; levying of charges without adequate prior notice to the customer; forced closure of deposit accounts without due notice or without sufficient reason; refusal to close or delay in closing the accounts; etc., non-adherence to the fair practices code as adopted by the bank or non-adherence to the provisions o fthe Code of Banks Commitments to Customers issued by Banking Codes and Standards Board of India and as adopted by the bank ;non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; and any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.One can file a complaint before the Banking Ombudsman if the reply is not received from the bank within a period of one month after the bank concerned has received ones representation, or the bank rejects the complaint, or if the complainant is not satisfied with the reply given by the bank.

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CHAPTER 4BANK & CUSTOMER-PRODUCTS & RELATIONSHIP

What you should know: Bank deposits & its types Different types of customer like individual, partnership, HUF etc. Customers operational issues like mandate & power of attorney RBI master circular relating to operational issues of Joint accounts Right of Lien Right to Setoff Garnishee order & its impact on deposit accounts Know your customer norms

I. Bank Deposits & its typesOne of the most important functions of any commercial bank is to accept deposits from the public, basically for the purpose of lending. Deposits from the public are the principal sources of funds for banks.Types of Deposit AccountsThe bank deposits can also be classified into (i) demand deposits and (b) time deposits.(i) Demand deposits are defined as deposits payable on demand through cheque or otherwise. Demand deposits serve as a medium of exchange, for their ownership can be transferred from one person to another through cheques and clearing arrangements provided by banks. They have no fixed term to maturity.(ii) Time deposits are defined as those deposits which are not payable on demand and on which cheques cannot be drawn. They have a fixed term to maturity. A certificate of deposit (CD), for example, is a time deposit.Demand and time deposits are two broad categories of deposits. Note that these are only categories of deposits; there are no deposit accounts available in the banks by the names 'demand deposits' or 'time deposits'. Different deposit accounts offered by a bank, depending on their characteristics, fall into one of these two categories. There are several deposit accounts offered by banks in India; but they can be classified into three main categories:• Current account• Savings bank account• Term deposit accountCurrent account deposits fall entirely under the demand-deposit category and term deposit account falls entirely under time deposit. Savings bank accounts have both demand-deposit and time-deposit components. In other words, some parts of savings deposits are considered demand deposits and the rest as time deposits. We provide below the broad terms and conditions governing the conduct of current, savings and term-deposit accounts.Common Guidelines of Opening and Operating Deposit AccountsTo open and operate a bank account, the following guidelines need to be followed.Due Diligence Process: A bank before opening any deposit account has to carry out due diligence as required under "Know Your Customer" (KYC) guidelines issued by RBI and or such other norms or procedures adopted by the bank.The 'due diligence' process, while opening a deposit account, involves the bank having adequate knowledge of the person's identity, occupation, sources of income, and location. Obtaining an introduction of the prospective depositor from a person acceptable to the bank, obtaining recent photographs of people opening/ operating the account are part of the due diligence process. For customers providing proof of identification and address, there is no need for personal introduction to the bank for opening of a new savings bank account. To promote financial inclusion in rural areas / tribal areas, KYC norms have been relaxed for below the poverty line (BPL) families.

Minimum Balance: For deposit products like a savings bank account or a current account, banks normally stipulate certain minimum balances to be maintained as part of terms and conditions governing operation of such accounts. But for people below the poverty line, banks encourage the



opening of 'No-frills Accounts', typically a special savings bank account where no minimum balance requirement is required. For a savings bank account, the bank may also place restrictions on number of transactions, cash withdrawals, etc., during a given period.Transparency: Failure to maintain minimum balance in the accounts, where applicable, will attract levy of charges as specified by the bank from time to time. Similarly, the bank may specify charges for issue of cheques books, additional statement of accounts, duplicate passbook, folio charges, etc. All such details regarding terms and conditions for operation of the accounts and schedule of charges for various services provided should be communicated to the prospective depositor while opening the account for the sake of transparency.Eligibility: A savings bank account can be opened by eligible person(s) and certain organizations/agencies, as advised by the RBI from time to time. But current accounts can be opened by individuals, partnership firms, private and public limited companies, Hindu Undivided Families (HUFs), specified associates, society trusts, etc. Eligibility criteria for a savings account and a current account are largely similar, but there are important differences too. While both the accounts can be opened by individuals, the savings account cannot be opened by a firm. Term Deposit Accounts can be opened by all categories of account holders.

What is ‘Bulk deposit’? Can be give different interest rate to bulk depositor for same maturity?The expression “bulk deposit” would be used for single Rupee term deposits of Rs.1 crore and above.Yes, RBI has given permission to offer differential rates of interest for the deposits of the same maturity will be applicable to bulk deposits of Rs.1 crore and above.

II. Bank & Customer RelationshipTransaction Relationship Banker/customerOpening a Deposit account with bank Debtor /CreditorLoan from Bank to customer Creditor/DebtorCollateral securities are held by banks Bailee/Bailorsafe deposit locker accounts Lessor/LesseeBank buys or sells securities on behalf of his customer

Agent/Principal

Note: In case of a cheque sent for collection from another banker, the banker acts as a trustee till the cheques is realized and credited to his customers account and thereafter he will be the debtor for the same account.

III. Different Types of CustomersA banking institution solicits deposits of money from the members of the public. An account

in a bank for this purpose may be opened by any person who (i) is legally capable of entering into a valid contract, (ii) applies to the banker in the proper manner, i.e., he follows the procedure laid down by the banker and accepts the terms and conditions stipulated by the latter. The banker, however, possesses the right to reject an application for opening an account, if he is not satisfied with the identity of the applicant, i.e., if the latter is deemed to be an undesirable person. Some persons like the minors, lunatics and drunkards are not competent to enter into valid contracts. Some persons who act on behalf of others have limitations on their power to contract, e.g., the agents, trustees, executors etc., Institutions like schools, colleges, clubs, societies, and corporate bodies are the impersonal customers of a banker. The authority power and functions of the persons managing these institutions are embodied in their respective constitutions. The banker should, therefore, take special care and precautions to ensure that the accounts of these institutes are being conducted in accordance with the provisions of their respective charters. The present chapter discusses the legal position of the special cases of a bank’s customers and the necessary precautions that a prudent banker should take while dealing with them.

Minor : A person under the age of 18 years is a minor, if a guardian of his person or property of both has been appointed by a Court or if the superintendence of his property has been assumed



by a Court of Wards before the minor assumed the age of 18 years, he remains minor till he completes the age of 21 years (Section 3 of the Indian Majority Act, 1875). A minor has certain disabilities and enjoys certain protections under the law which a banker must take into consideration when dealing with a minor.

Under the Indian Contracts Act, all contracts by minors are void ab-initio excepting contracts for necessaries of life such as food, clothing and accommodation or for his benefit. The law imposes an obligation on a minor to pay a reasonable sum for goods and services supplied to him at his request, if the goods are appropriate to his need at the time, having regard to his means and social standing. His estate becomes liable for contracts in respect of his necessaries and other benefits. In case of all other contracts a minor may repudiate his promise or contracts. As minor have limited contractual powers, a banker should take the following precautions in dealing with them:

Opening the Account: Banks prefer to open a saving bank account and a fixed deposit account of a minor, and would not open his/her current account. There is no risk in dealing with a minor so long as his account is kept in credit and is not permitted to be overdrawn because any dealing in the form of a loan of money to the minor would be void. The baker obtains a good discharge in paying cheques and can effectively debit them to the minor’s account.

A bank account in the name of a minor may be opened in one of the following ways:a) in the name of the minor himself/herself with the consent of his/her natural guardian;b) in the joint names of the minor and his/her guardian; orc) in the name of the minor under the natural guardianship of his/her father, and if he is dead, under the natural guardianship of mother, and if both are dead, under the guardianship of a person appointed by a competent court.

Banks can allow minors’ accounts (fixed and savings deposit accounts) with mothers as guardians to be opened subject to safeguards in allowing operations in such accounts by ensuring that the minors’ accounts opened with guardian are not allowed to be overdrawn and that these always remain in credit.Further, a banker will treat a joint account in the name to a minor and his guardian as any other joint account except that he must bear in mind the non-liability of the minor for any overdraft. In cases (b) and (c), only the guardian of the minor operates on the account during the period of minority.

RBI clarification for Minor account by SCB & Primary (Urban) Co-operative Banks dated May 6, 2014: With a view to promote the objective of financial inclusion and also to bring uniformity among banks in opening and operating minors’ accounts, banks are advised as under: a. A savings /fixed / recurring bank deposit account can be opened by a minor of any age through his/her natural or legally appointed guardian. b. Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently, if they so desire. Banks may, however, keeping in view their risk management systems, fix limits in terms of age and amount up to which minors may be allowed to operate the deposit accounts independently. They can also decide, in their own discretion, as to what minimum documents are required for opening of accounts by minors.c. On attaining majority, the erstwhile minor should confirm the balance in his/her account and if the account is operated by the natural guardian / legal guardian, fresh operating instructions and specimen signature of erstwhile minor should be obtained and kept on record for all operational purposes.Banks are free to offer additional banking facilities like internet banking, ATM/ debit card, cheque book facility etc., subject to the safeguards that minor accounts are not allowed to be overdrawn and that these always remain in credit.

Minor as a Party to a Negotiable Instrument: Under Section 26 of the Negotiable Instruments Act, 1881, a minor may draw, endorse, deliver and negotiate negotiable instruments so as to bind all parties except himself, such bills or cheques will be valid instruments and other parties will be liable in their respective capacities. For the banker, this means that the minor by law having no



capacity to contract, cannot be sued on any cheque that he may draw and that if he exchanged a cheque for a minor he cannot recover the proceeds if the cheque is afterwards returned to him dishonoured. However, by making payment to a minor of his own cheque or of third party cheque, if it is otherwise a payment in due course, the banker gets a valid discharge. A minor cannot be sued in respect of a bill accepted by him during his minority.

Is borrowing by minors not valid?Borrowing by minors is not valid. However, financial assistances can be provided to legal / natural guardian (if empowered under the court orders) of a minor. The point to be carefully noted here is that the lenders would need to prove that such borrowing by the legal / natural guardian was for the benefit of the minor. Thus lending to a natural guardian / legal guardian of a minor should be considered carefully.

Accounts for Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities: RBI has been advised by the National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities (the Trust) that a question had been raised as to whether the banks and the banking sector could accept the guardianship certificates in regard to persons with disabilities issued by the Local Level Committees set up under the National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999. The Trust has mentioned that the above Act was specifically passed by the Parliament in order to provide for appointment of legal guardians for persons with disability that is covered under the said Act. The above Act provides for appointment of legal guardians for persons with disability by the Local Level Committees set up under the Act. The Trust has opined that a legal guardian so appointed can open and operate the bank account as long as he remains the legal guardian. It may also be noted that the provisions of Mental Health Act, 1987 also allows appointment of Guardian by District Courts. Banks are therefore advised to rely upon the Guardianship Certificate issued either by the District Court under Mental Health Act or by the Local Level Committees under the above Act for the purposes of opening / operating bank accounts.

Pradhan Mantri Jan-Dhan Yojana (PMJDY):PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. Account can be opened in any bank branch or Business Correspondent (Bank Mitr) outlet. Accounts opened under PMJDY are being opened with Zero balance. However, if the account-holder wishes to get cheque book, he/she will have to fulfill minimum balance criteria. Document required to open an account under Pradhan Mantri Jan-Dhan YojanaAn account can be opened by presenting an officially valid document. 1. the passport, 2. the driving licence, 3. the Permanent Account Number (PAN) Card,4. the Voter’s Identity Card issued by Election Commission of India,5. job card issued by NREGA duly signed by an officer of the State Government,6. the letter issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number, or any other document as notified by the Central Government in consultation with the Regulator:Provided that where simplified measures are applied for verifying the identity of the clients the following documents shall be deemed to be officially valid documents:—a. identity card with applicant's Photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and b. Public Financial Institutions;letter issued by a Gazetted officer, with a duly attested photograph of the person.

Reserve Bank of India (RBI), vide its Press Release dated 26.08.2014, has further clarified that those persons who do not have any of the ‘officially valid documents’ can open “Small Accounts” with banks.

Special Benefits under PMJDY Scheme



1. Interest on deposit.2. Accidental insurance cover of Rs. 1 lac3. No minimum balance required. 4. The scheme provide life cover of Rs. 30,000/- payable on death of the beneficiary, subject to fulfillment of the eligibility condition.5. Easy Transfer of money across India6. Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts.7. After satisfactory operation of the account for 6 months, an overdraft facility will be permitted,Overdraft facility upto Rs.5000/- is available in only one account per household, preferably lady of the household.8. Access to Pension, insurance products.The Claim under Personal Accidental Insurance under PMJDY shall be payable if the Rupay Card holder have performed minimum one successful financial or non-financial customer induced transaction at any Bank Branch, Bank Mitra, ATM, POS, E-COM etc. Channel both Intra and Inter-bank i.e. on-us (Bank Customer/rupay card holder transacting at same Bank channels) and off-us (Bank Customer/Rupay card holder transacting at other Bank Channels) within 90 days prior to date of accident including accident date will be included as eligible transactions under the Rupay Insurance Program 2016-2017.

Joint AccountWhen two or more persons open an account jointly, it is called a joint account. Such accounts may be opened by any two persons for the sake of convenience of operation of account and also for withdrawal of money after the death of any one of them. The banker should take the following precautions in opening and dealing with a joint account:a) All persons should sign the application for opening the account.b) The banker should ascertain the style under which the account is to be opened.c) The nature of account must also be ascertainedd) He must ascertain the mode of operation of the account. In this connection he must note that the authority given to any one of the joint account holders to operate the account does not extend to withdrawals of articles deposited for safe custody, does not make one party liable for overdrafts taken by another, and does not cover dealings in bills and securities. Therefore, he must get clear instructions regarding these matters.e) In the absence of specific instructions the cheques must be signed by all the joint account holders. In order to secure his position the banker must obtain a clear mandate from the persons desiring to open a joint account. This mandate must be signed by all the persons which must contain the following particulars.

Accounts MandateA. Drawings

The mandate must state the name of persons who are authorized to draw cheques on the joint account. In the absence of such clear instructions he must honour only the cheques which are signed by all. The ordinary rule regarding joint debts is that payment by a debtor to open of the several joint creditors, is a good discharge against all, provided hat the debtor was unaware of any lack of authority on the part of the creditor in question. This, however, does not apply to debts due from bankers. A banker, as a debtor of his joint customers, does not get a good discharge unless he pays the debts with the consent of all.

However, the authority given to anyone terminates on the death, insolvency or insanity of any one of the joint account holders. In addition to this cheque drawn by any one on the authority given by others may be countermanded by any one of them.

B. SurvivorshipThe mandate should also deal with the question of survivorship. This is not however

necessary since under the law of devolution application to joint owners on the death of any one of them the survivors are entitled to the balance standing to the credit of the account. Therefore the executors of the deceased cannot claim a share in the balance. But in order to avoid future disputes the application to open the joint account contains the clause “In the event of death,



insolvency or withdrawal of any of us, the survivor or survivors of us shall have full control or any moneys then and thereafter standing to our credit in our account with you”.

C. Power to overdrawThe mandate must also contain the names of persons who are authorized to overdraw on

the joint account. In such a case in addition to the joint liability, several liability also must be included. This, however, does not arise in India, since Under the Indian law, liability by more than one person is joint and several. If shares in the joint names are pledged as the security for loans, transfers must be effected by all of them.

D. Other MattersThe mandate must state whether power is given to any of them to withdraw securities and

other items deposited for safe custody.Death of one of the Joint-Account Holders: If the account is in credit the rule of survivors, applies. But the banker should obtain a fresh mandate, from the remaining survivors, this is because death cancels the mandate.In case of debit account, the banker should close the account prevent the operation of rule in Clayton’s case to determine the liability of the deceased’s estate.With regards to safe custody articles as the law is not certain, it is safe for the banker to part with them on the receipt executed by survivor and the representatives of the deceased party.Insolvency of one of the Joint-Account Holders: The operation of the account must be stopped immediately after the receipts of notice of insolvency. If the balance is in credit, the amount can be released on the joint authority of the solvent party (or parties) and the official receiver. In the case of debit balance also the account must be stooped to determine the liability of the insolvent’s estate. In the case of safe custody items, they must be delivered only after obtaining the receipt from the solvent party and the official receiver.Rule of Survivorship in the Case of Husband and Wife: All the rules applicable to joint accounts also hold good in cases where the account is opened in the joint names of the husband and wife. However, as regards the doctrine of survivorship, there is a lot of controversy. In view of these, the following rules can be lain down which are applicable only to this type of joint account.If the account is opened by the husband for his convenience, the balance in the absence of any written mandate to that effect, cannot be claimed by the widow, but it is to be transferred to the estate of the deceased husband. This was laid down in Marshall v. Crutwell (1875).If, however, the account is opened with the intention of making a provision for the wife, the balance can be claimed by the widow who is entitled to get the same and the amount cannot be claimed by the creditors. Foley v, Foley (1911).

Hindu Undivided Family (HUF):The term 'Hindu Undivided Family' has defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. This means that a membership into a HUF does not come from a contract but from status under Hindu law. A HUF cannot be formed by a group of people who do not constitute a family; lineal descendents with a common ancestor is a must. There are two schools of thoughts for HUF: Dayabhaga and Mitakshara.

a. Under the Dayabhaga system,the father is the sole owner and the exclusive possessor of the joint family property. No member can enforce the partition of the HUF so long as the father lives.

b. But the Mitakshara law stipulates that the property vests in the HUF itself and not in any individual member of the family and therefore can be partitioned within the lifetime of the father.

c. The Dayabhaga law is prevalent in West Bengal and Assam.d. Hindus in the rest of the country are governed by the Mitakshara law.

A HUF consists of:



Karta: The karta has to be the oldest male in the family. If he passes away, his wife cannot become the karta. His eldest son will take his place. If he chooses not to, he can give up his right and the next son in line can take his place.

Coparceners: All the male members. A Hindu coparcenary includes the sons, grandsons and great-grandsons of the holder of the joint family property. By virtue of their birth, they acquire an interest in the property.

Members : The female members are simply called members

DAUGHTER CAN ACT AS COPARCENER: On 9th September 2005, the Hindu Succession Act, 1956 was amended to provide that a daughter too could be a coparcener i.e. joint heir, like her brother to the joint family's assets and she too could enforce the partition of the family property to claim her individual share. She continues to be the coparcener in her father's HUF even after she gets married and forms another HUF with her husband.

Can there be an all-female HUF?Yes, there can be. Where a couple has only a daughter and the husband passes away, the mother-daughter duo can continue the HUF and mother can act as Karta for HUF.

Can a female be the Karta?The answer is yes in the light of the amendment in the Hindu succession Act in 2005. An unmarried daughter, in the unfortunate event of her father passing away, will become the Karta of the HUF if she has no brother.

Can it be partitioned? Yes, the HUF can be partitioned. This is actually a division of property where the share of each member is determined. Any coparcener can enforce the partition of the HUF and then the share will be divided

between:~ All coparceners~ A son in the womb of his mother at the time of partition~ Mother (gets an equal share if there is a partition between the sons and her husband has passed away)~ Wife (gets a share equal to that of a son at the time of partition between father and sons)

Banking of HUF:HUF can open any type of account with bank just like that of individual. Karta will be the person who will operate the account. HUF can also avail the loan facility from bank. While dealing withthe account of a joint Hindu family and granting it to a loan, the banker is naturally faced with a difficult task of ascertaining the right of the coparceners in the joint family. The following legal precautions should be taken by the banker in this regard:1. The family business and its assets are managed by the male member as the Karta. According to the law, the Karta has an implied authority to take a loan, execute necessary documents and pledge the securities on behalf of the family for the purpose of the business of the family. However, to be on the safe side, the loan documents should be executed by all the adult male members of the family or with their consent by the head of the family in his capacity as its Karta or manager.2. The power of the Karta to borrow money on the security of the family property is subject to one limitation, i.e., the loan is taken for the purpose necessary for or beneficial to the family. He can tale a loan and pledge the property of the family for the purpose of meeting the needs of the usual business of the family and not for any speculative business or for standing a new business. Other coparceners will not be liable for a loan contracted for a purpose other than that in the interest of the family business. In case of a dispute on this point, the burden of proof that the bank was satisfied, before granting a loan, that the loan was sought for the benefit of the family business lies on the banker himself. He



should, therefore, be very careful in ascertaining the purpose of the loan sanctioned on the security of joint family assets.3. The coparceners'' liability in case of loans granted to a joint Hindu family is limited to the extent of their interest in the joint property. But if the adult coparceners themselves contract along with the Karta or ratify the contract entered into by the Karta they become personally liable for the loan.4. If there is a minor coparcener in a joint family, his guardian must sign the documents on his behalf. When the minor coparcener attains majority he should also sign the documents to give his assent to the undertaking given by major coparceners.

Partnership FirmA partnership is not regarded as an entity separate from the partners. The Indian Partnership Act. 1932, defines partnership as the “relation between parsons who have agreed to share the profits of he business, carried on by all or any of them acting for all”. A partnership firm is thus established by an agreements amongst the parents. This agreement may be oral or written. The object of constituting a partnership firm must be to (i) carry on a business which may be conducted by all the partners or by any of them on behalf of the rest, and (ii) to share the profits of such business amongst themselves. The partnership deed contains the details of the agreement reached between the partners. The Indian Partnership Act. 1932, lays down the general provisions which govern a partnership business. A banker should take the following precautions while opening an account in the name of a partnership firm.

1. Number of partners:The banker should very carefully examine the Partnership Deed, which is the charter of the firm, to acquaint himself with the constitution and business of the firms. The banker should see that the number of partners does not exceed the statutory limit. Section 464 of Companies Act 2013, puts a restriction on the number of partners that can be admitted to a partnership as may be prescribed by notification by Government for the purpose of carrying on any other business for the acquisition of gain or profit, shall be an illegal association unless it is registered under the Companies Act., 2013 carrying on such business, currently the prescribed limit is 50 (Previously it was 20 partners in Companies Act,1956), however government may prescribe the limit to max of 100 partners, whenever deemed fit. If the number of partners exceeds these limits, the partnership becomes an illegal association of persons, which cannot enter into any contract, and sue or be sued. The minimum number of partners in a firm must be two, excluding a minor partner, who is not competent to enter into a contract. A minor may be admitted into the partnership with the consent of all other partners but he shall not be liable for the losses or debts of the firm. The banker should note the date when the minor partner attain majority so that a fresh partnership letter signed by him and other partners is obtained by the banker.

2. Title of firm’s Account:A form’s account should always be opened in the name of the name of the firm and not in

the name of the individual partner/partners.

3. The Partnership Letter or Mandate:The banker should take letter signed by all partners stating:(i) the names and addresses of the partners.(ii) the nature of the business undertaken by the firm, and(iii) the name/names of the partner/partners who will operate the account on behalf of the

firm and will have the authority to draw and accept bills etc., and to sell and mortgage the property of the firm.

The banker should honour the cheques signed by all the partners or by those partners who are authorized to operate the account.

4. Revocation of authority to operate the account:The authority given in favour of a particular partner/ partners to operate the firm’s account

may be withdrawn by any of them by giving a notice to the banker. In such circumstance, the



banker should stop payment of cheques signed by all the partners. A partner can also stop the payment of a cheque issued by any other partner on the firm’s account.

The power to revoke the authority to operate the account is vested in any partner who is a sleeping partner or is not authorized to operate the account.

5. A partner authorized to operate the firm’s account cannot delegate his authority to another person without the consent in writing of all other partners. If such consent is given by all of them, the authorized partner may execute a Power of Attorney in favour of such other person.

6. When a new partner is admitted to the firm, the banker need not stop the operations in account provided the account should obtain a new mandate signed by all the partners, including the new partner. But when the partnership account shows a debit balance, the banker should stop the operations in old account and open a new account. A new mandate should also be obtained. The banker may take an agreement signed by the new partner undertaking the liability in respect of the outstanding debts of the firm, balance on the partnership account. The can give the banker a valid discharge for it. In case the partnership account shows a debit balance, the account should be stopped to fix the liability of the deceased, and any cheques presented thereafter should be returned with the remark partner deceased. The rule applies even when the cheques are signed by the deceased partner.

7. In the event of insolvency of a partner, the solvent partners have a right to operate the partnership account in connection with the winding-up of the business. However, if the partnership firm is indebted to the bank, the account should be stopped and a new account should be opened in order to avoid the application of the Rule in Clayton’s case. The banker should not honour cheques drawn by the insolvent partner. Cheque drawn by him before adjudging him an insolvent may be honoured by the banker. However it is always advisable to obtain the confirmation of other partners.

8.In the caser of retirement of a partner, the retiring partner will continue to be liable to the banker till the latter is served with a notice of the retirement of the former. On receiving such a notice the banker should take a new mandate from the continuing member. If the partnership account shows a debit balance, the account should be stopped in order to avoid the application of the Rule in Clayton’s case.

Joint Sock CompaniesA joint stock company is a separate legal entity quite distinct from its shareholders, having perpetual succession and a common seal. So even if only one shareholder holds all the shares, the company is distinct form such shareholder.

The account opening formalities and the precautions needed in operating the Accounts of Public Limited companies whose liability is limited by shares are discussed below:Steps to be taken in Opening an Account

1) The Banker should ensure that the company is incorporated by looking into the certificate of incorporation granted by the register of Joint Stock Companies.

2) The banker should obtain copies of Memorandum and Articles of Association and inspect them carefully before he established the relation with the company. The banker should also get it duly certified by the Secretary that the copies are upto-date, since both the clauses in the Memorandum and the Articles can be altered from time to time. Where the Banker gets any doubt he can inspect these documents in the office of the Register of Joint Stock Companies. He must not the borrowing powers, powers to give guarantees and other securities and the restriction if any on director’s powers to borrow.

3). The banker should obtain a certified copy of the resolution of the Board appointing him as a banker of the company and usually such resolution embodies explicit instructions as to who shall draw cheque, draw, accept and endorse bills and deal with securities and safe custodies. The bankers should also obtain the specimen signatures of the officers who are authorized by the resolution to operate the account. Such a copy should be signed by the Chairman of the meeting and the Secretary of the Company.



When a company is a partner in a partnership firm, is the company personally liable for the firm’s debt ? Is the company required to file particulars of charge when the partnership firm creates charge on the assets of the partnership firm in which a company is a partner?Answer: Where a company is a partner in a partnership firm, the company, like any other partner, is personally liable for the firm’s debt. A company can enter into a contract of partnership if it is empowered by its Memorandum of Association. It may be noted that whenever the assets of the partnership firm are charged as security, then the registration of charge with Registrar of Companies (ROC) is not required even if a company is a partner. The authorised persons from the company need to sign the documents on behalf of the company as a partner. The memorandum and articles of association of a company should be checked to verify if the company can become a partner of a partnership firm and certified true copy of requisite resolutions should be procured in relation to execution of documents, securing of properties of etc. by the company as a partner. The company as a partner needs to initial / sign only once on the documents. In case common seal is being affixed on the document then please check and procure certified true copy of resolutions authorizing company to affix common seal as per the provisions of its articles of association.

TrustThe document by means of which a trust is usually formed is called the “Trust Deed”. The law relating to trusts is contained in the Indian Trust Act. 1882.

There is a wide variety of trusts in operation in this country today. They may be categorized into i) private trusts, and ii) corporate trusts. The distinction is not clear cut as, for example, some trusts such as charitable trusts are hybrid in the sense that they fall into either category. Private trusts fall into two broad categories-those which arise under a will and those which are made inter vivos (i.e, those made by deed in donor’s lifetime).Before opening an account in the name of a trust, the banker should examine carefully the Trust Deed and ascertain such matters as the power of the trustee to delegate their powers to any one or more of them, their power to borrow money and the manner of operating on the account in case of death or insolvency of a trustee. It may be noted here that unless the Trust Deed given authority to the trustees to delegate their powers, they cannot do so. Consequently, in the absence of an express provision in the Trust Deed to the contrary, the banker should honour only such cheques as are signed by all the Trustees.Even when an account is opened not describing it as a trust account, if the banker comes to know that it is trust account, he should not allow the customer to draw out money for a purpose obviously inconsistent with the customer’s duty as a trustee. However, his does not mean that the banker should act as a detective.The banker should not credit to the trustee’s private account cheques drawn in favour of the trust. Again the banker is not entitled to use his right of set-off between the trustee’s private and the trust account. But if he has no notice of the character of the accounts, he may exercise his right of set-off. Further, the banker should not grant an advance on a trustee’s private account against trust securities.

Clubs, Societies and Charitable InstitutionsClubs, societies, charitable and religious, institutions, libraries, schools, colleges, etc., not engaged in trading activities, maintain their accounts with the banks. The bank should observe the following precautions in dealing with them:

i) The Society must be incorporate: The Societies Registration Act. 1960, provides for the registration of societies for the promotion of literature, science, fine arts or for charitable purposes. Such institutions may also be incorporate under the Companies Act, 1956, or the Co-operative Societies Acts. A society gets the legal recognition as an entity separate from its members only after its incorporation under any of these Acts. Thereafter, it is empowered to enter into valid contracts and to sue or be sued. The banker should, therefore, ensure that the applicant society is a properly incorporated body. The unregistered society cannot be sued in law.



ii) Rules an by-laws of the Society: A registered society is governed by the provisions of the Act under which it ha been registered. It may have its own Constitution, Charter or Memorandum of Association and rules and by-laws, etc., to carry on its activities. A copy of the same should be furnished by the society to the banker to acquaint the latter with the powers and functions of the persons managing its affairs. The banker should ensure that these rules are observed by the persons responsible for managing the society.

iii) Resolution of the Managing Committee: For opening bank account, the Managing Committee of the society must pass a resolution.

a) Appointment the bank concerned as a banker of the society;b) Mentioning the name/names of the person or persons, who are authorized to operate

the account; and c) giving any other direction for the operation of the said account.

iv) A copy of the resolution must be obtained by the bank for its own record.v) Death or Registration: In case the person authorized to operate the account on behalf of

a society dies or resigns, the banker should stop the operation of the society’s account till the society nominates another person to operate its account.

SHG-Bank Linkage:Self Help Groups (SHGs) are a homogenous group of 10-20 individuals who come together for saving and internally helping each other in times of need. From one family, only one person can become a member of an SHG.The SHGs (self help group) registered or unregistered which are engaged in promoting savings habits among their members would be eligible to open savings bank accounts with banks. These SHGs need not necessarily have already availed of credit facilities from banks before opening savings bank accounts. KYC verification of all the members of SHG need not be done while opening the savings bank account of the SHG as KYC verification of all the office bearers would suffice.The SHG has to pass a resolution in the group meeting, signed by all members, indicating their decision to open SB A/c with the bank. This resolution should be filed with the bank.The SHG should authorize at least 3 members, any 2 of whom, to jointly operate upon their account. The resolution along with the filled in application form duly introduced by the promoter may be filed with the bank branch.Copy of the rules and regulations of the SHG is not a must. A savings bank account passbook may be issued to the SHG. This should be in the name of the SHG and not in the name of any individual(s).

RBI Master Circular :Maintenance of Deposit Accounts : Annexure to circular RBI/2006-07/114UBD.BPD(PCB) MC.No: 11 /13.01.000/2006-07 August 23, 2006Joint Accounts ‘Either or Survivor’, Latter or Survivor’ ‘Former or Survivor’ etc.In the recent past, several letters have appeared in the press highlighting the difficulties experienced by the joint holders of Savings Bank or Term Deposit accounts, especially in regard to payment before maturity or in the settlement of claims when one of the account holders dies. There appears to be some confusion and misunderstanding about the procedure to be followed in respect of such accounts and the legal implications of the expressions ‘Either or Survivor’, ‘Latter of Survivor’, ‘Former or Survivor’ etc.

2. Joint AccountsIn the case of joint accounts (Current, Savings or Deposits) in the names of two or more persons, the terms relating to which do not provide for payment of the amount due under the account to the Survivor(s) in the event of death of one of them, for the banks to obtain a valid discharge payment should be made jointly to Survivor(s) and the legal heirs of the deceased joint account holder. In such a case, in view of the difficulty in ascertaining with certainty as to who the legal heirs of the deceased are, it is the practice of the banks to insist on the production of legal representation (to the estate of the deceased) before settling the claim. As obtaining a grant of legal representation would entail delay and expenses, banks should encourage the opening of joint accounts on terms



such as, payable to (a) Either or Survivor, (b) Former/Latter or Survivor, (c) Anyone or Survivors, or Survivor, etc. This point has been emphasised in the Recommendation NO. 6 of the Working Group on Customer Service in banks.

3. Benefits of SurvivorshipIf the benefit of survivorship is provided, the survivor can give a valid discharge to the bank. Even though payment to the survivor will confer a valid discharge to the bank, the survivor will, however, hold the money only as trustee for the legal heirs (who may include the survivor as well) unless he is the sole beneficial owner of the balance in the account or the sole legal heir of the deceased. Thus, the survivor’s right unless he is the sole owner of the balance in the account/sole legal heir of the deceased, is only in the nature of a mere right to collect the money from the bank. If the legal heirs of the deceased lay a claim to the amount in the bank, they should be advised that in terms of the contract applicable to the account, the survivor is the person entitled to payment by the bank and that, unless the bank is restrained by an order of a competent court, the bank would be within its rights to make the payment to the survivors) named in the account. The position, briefly, is that a payment to survivor can be made if there are no orders from a competent court restraining the bank from making such payments.

4. Joint Savings Bank Account – Either or Survivor/Any one or Survivors or SurvivorAs stated in para 3 above, the survivor can give a valid discharge to the bank. If the legal heirs claim the amount, the bank can inform them that unless they obtain and have served on the bank an order of competent court restraining the bank from effecting payment to the survivor, the bank will be within its rights to do so.

5.Joint Term Deposit Account – Premature/Payment or Loan on death of one of the account holders5.1 Account in the style of ‘Either or Survivor or ‘Anyone or Survivors or Survivor’In a joint term deposit account which has been opened in the style of either or survivor/any one or survivors or survivor, the bank often receives a request, on the death of one of the joint account holders, from the surviving depositors) to allow premature encashment or the grant of a loan against the term deposit receipt. It would be in order to accede to the request of the surviving depositors) for premature payment if (i) there is an option included in the contract of deposit to repay before maturity and (ii) "either/any one or survivorship" mandate has been obtained from original depositors. Requests for loans from surviving depositor(s) could also be considered in special cases, though in the case of such loans, the bank may face a possible risk if the legal representatives of the deceased depositor lay an effective claim to the deposit before it is paid on maturity. In such an event, the bank will have to look to the borrower(s) for repayment. This position for premature payment or grant of loan is applicable also in respect of a joint account (in the style of either or survivor/any one or survivors or survivor), where all the account holders are alive.As a measure of operational prudence, a clause to the effect that loan/premature payment can be permitted to either/any one of the depositors any time during the deposit period can, however, be included in the term deposit contract, i.e. the account opening or application form itself, in the manner indicated in this circular.5.2 Joint Term Deposit – Former or Survivor/Latter or Survivor etc.In the case of these term deposits, the intention of the owner depositor (former/latter) is to facilitate repayment of the term deposit to the survivor only in the event of his death. He (the owner depositor) is in a position to retain with him at all times, the right to dispose of the monies until his death or maturity of the deposit receipt, whichever is earlier. There should, therefore, be no objection to the bank permitting premature payment of such deposits or granting advances against them at the request of the former/latter without insisting on the production of a consent letter from the other party/parties to the term deposit receipt. Here also it is preferable to make this position explicit to the joint depositors, by incorporating suitable clause in the term deposit account opening or application form.

Settlement of claims in respect of missing persons:



The system which should be followed by banks in case a claim is received from a nominee / legal heirs for settlement of claim in respect of missing persons is as under: a. The settlement of claims in respect of missing persons would be governed by the provisions of Section 107 / 108 of the Indian Evidence Act, 1872. Section 107 deals with presumption of continuance and Section 108 deals with presumption of death. As per the provisions of Section 108 of the Indian Evidence Act, presumption of death can be raised only after a lapse of seven years from the date of his/her being reported missing. As such, the nominee / legal heirs have to raise an express presumption of death of the subscriber under Section 107/108 of the Indian Evidence Act before a competent court. If the court presumes that he/she is dead, then the claim in respect of a missing person can be settled on the basis of the same. b. Obtaining court order regarding presumption of death could prove to be costly and time consuming for a common person. Hence the RBI has suggested that banks may follow a simplified procedure for settlement of such claims up to a threshold limit to be fixed by individual having regard to the risk involved. Once the bank fix up the threshold limit, the claim within that limit should be settled on production of any documentation (i) FIR for reporting missing of a person. (ii) Non-traceable report issued by police authorities. (iii) Letter of indemnity.

The Banking Companies (Nomination) Rules, 1985: Some of the important provisions related to Nomination:1. In terms of Banking Companies (Nomination) Rules 1985, nomination facility is available to Savings Bank Account holders or for current account of Sole Proprietary firms . Nomination can be made in favour of one individual only. In case of a joint account of individuals, nomination should be made by all depositors jointly.2. Where the nominee is a minor, the depositor or, as the case may be, all the depositors together, may, while making the nomination, appoint other individual not being a minor, to receive the amount of the deposit on behalf of the nominee in the event of the death of the depositor, or, as the case may be, all the depositors during the minority of the nominee.3. In the case of a deposit made in the name of a minor, the nomination shall be made by a person lawfully entitled to act on behalf of the minor.4. Nomination cannot be made in accounts where deposits are held in a representative capacity e.g. trust accounts etc. and in accounts of partnership firms, H.U.F., companies, associations, clubs etc.

Nomination Safe deposit lockers:-(i) In case of a sole hirer of a safe deposit locker, nomination can be made in favour of only one individual.(ii) Where the safe deposit locker is hired from the bank by two or more individuals, nomination can be made in favour of one or more persons.(iii) Where the safe deposit locker is hired in the name of a minor, the nomination shall be made by a person lawfully entitled to act on behalf of the minor.(iv) A minor can be appointed as a nominee for delivering contents of a hired locker. Section 45 ZE of the Banking Regulation Act, 1949 does not preclude a minor from being a nominee, for obtaining delivery of the contents of a locker. However, the bank in such cases, when the contents of a locker are sought to be removed on behalf of the minor nominee, hand over the articles to a person who, in law is competent to receive the articles on behalf of the minor.

Ancillary services:Remittances: When a customer wants to remit some amount to another person where cheques are not accepted banks issue demand drafts or pay order. Remittances is a service provided by banks through which customer can remit funds without carrying physical cash. Banks earn commission on this. Major remittances modes in Banks are demand draft, pay order or bankers cheque, M.T, T.T. Etc. Some of the important aspects are:Remittance (DD/MT/TT, etc.) of Rs. 50000/- and above should be by debit to customers account or against cheques only. DDs of Rs. 20,000/- and above are to be issued with Account Payee crossing only. A DD is uniformly valid for a period of three months and procedure for revalidation



after three months should be simplified.Duplicate Draft in lieu of lost for amount up to and including Rs. 5000/- can be issued against suitable indemnity without waiting drawing advice within a fortnight from the date of receipt of the request. Delay beyond the period, penal provision to be invoked.Banks may ensure that both drop box facility and the facility for acknowledgement of cheques are made available at collection centres (branches) and no branch should refuse to give acknowledge of cheques if tendered at the counters. Banks should display on the drop box itself that Customers can also tender the cheques at the counter and obtain acknowledgement on the pay-in-slips.For loss of cheque in transit or in clearing process or at the paying banks branch, the banks are required to reimburse the accountholder related expenses for obtaining duplicate instruments and also interest for reasonable delays occurred in obtaining the same. The onus rests with the collecting banker and not the account holder.

Safe Deposit Lockers:Locker cabinets are to be kept in fire proof strong-rooms; fire-proof lockers are also available. This is another ancillary service given by the bank to its customers. The customer will be allotted a locker where he can keep his valuable things safely. . The locker will be under dual control, one key with the banker and the other will be with the customer. The banker’s key is called the master key and it will be same for the entire lockers .The individual customer will be given separate key for each locker. Safe deposit vault will be of different sizes and as per the size rent will be collected by the bank from the customer. Bank collects the rent in advance atleast for one year. The relationship between the banker and the customer is that of lesser and lessee.Banks may carry out customer due diligence for both new and existing customers at least to the levels prescribed for customers classified as medium risk. If the customer is classified in a higher risk category, customer due diligence as per KYC norms applicable to such higher risk category should be carried out.Where the lockers have remained non-operated for more than three years for medium risk category or one year for a higher risk category, banks should immediately contact the locker-hirer and advise him to either operate the locker or surrender it. This exercise should be carried out even if the locker hirer is paying the rent regularly.Nomination facility is available to locker hirer which would provide for nomination and release of contents of safety lockers/safe custody article to the nominee and protection against notice of claim of other persons (Sec. 45ZC to 45 ZF of B.R. Act 1949)Nomination facility can be made available in respect of deposits held in the name of individuals (single/ Joint accounts) including sole proprietorship concerns and Safe Deposit Locker/Safe Custody. Nomination should be made only in favour of individuals and a nominee cannot be an Association, Trust, Society or any other Organization or any office-bearer thereof in his official capacityThere cannot be more than one nominee in respect of a joint deposit account. In the case of a joint deposit account the nominees right arises only after the death of all the depositors

Government Business:Reserve Bank of India carries out the general banking business of the Central and State Governments through its own offices and through the offices of the Agency Banks appointed under Section 45 of the RBI Act, 1934, by mutual agreement. RBI pays agency commission (also called turnover commission) to the Agency Banks for the Government business handled by them.The following transactions undertaken by agency banks are eligible for agency commission :a. Revenue receipts and payments on behalf of the Central/State Governmentsb. Pension payments in respect of Central / State Governmentsc. Special Deposit Scheme (SDS) 1975, Public Provident Fund (PPF) Schemed. Senior Citizen Savings Scheme (SCSS)e. Any other item of work specifically advised by Reserve Bank as eligible for agency commission (viz. Relief Bonds/ Savings Bonds etc. transactions)

EBT: Electronic Benefit Transfer (EBT) is for servicing low value accounts and extending banking infrastructure to underserved low income areas has been implemented. The Central and State



Governments have institutionalized several welfare schemes like social security pensions, Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS), National Old Age Pension (NOAPS) insurance scheme etc. for the benefit of the poor. To ensure EBT for routing MGNREGA wages and social security benefits including proposed cash transfers in respect of subsidies on Kerosene, LPG and Fertilisers, banks were requested to ensure opening of Aadhaar Enabled Bank Accounts (AEBA) of all the beneficiaries including those residing in villages with less than 2000 population. EBT is implemented in country cluster wise. The Reserve Bank, as part of its Financial Inclusion initiative encouraged governments to disburse social security payments through the banking channel leveraging Electronic Benefit Transfers for financial intermediation. EBT is one of the products offered under Financial Inclusion, which facilitates payments to reach the intended beneficiaries through bank accounts. This relieves State Government functionaries of cost and time involved in administering the high volume small value payments. The payment of commission by the State Governments for EBT transactions makes the model economically viable and also helps banks to extend their penetration to remote villages. It also provides banks with a business opportunity of linking credit products to the payments. A Committee (Chairman Dr. R.B. Burman) was set up by Reserve Bank to design an appropriate framework for EBT implementation by Central and State Governments. The Committee had recommended the "One District - One Bank model" to be used for implementation of the EBT Scheme.

Obligation of Bank to maintain Secrecy of Account:The account of the customer in the books of the bank records all of his financial transactions with the latter and the gives the true state of his financial position. If any of these facts is made known to others, the customers reputation may suffer and he may incur losses also. The banker is, therefore, under an obligation to take utmost care in keeping secrecy about the accounts of his customers. By keeping secrecy is meant that the account books of the bank will not be given/open to the public or Government officials and the banker will take all necessary precautions to ensure that the state of affairs of a customers account is not made known to others by any means. The banker is thus under an obligation not to disclosed deliberately or intentionally any information regarding his customers accounts to a third party and also to take all necessary precautions and care to ensure that no such information leaks out of the account books.The nationalized banks in India are also required to fulfill this obligation. Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, specially requires them to observe, except as otherwise required by law, the practices and usages customary amongst bankers and in particular not to divulge any information relating to the affairs of the constituents except in circumstances in which they are, in accordance with law or practices and usages or appropriate for them to divulge such information.Thus, the general rule about the secrecy of customer’s accounts may be dispensed with in the following circumstances:I.When the law requires such disclosure to be made; and II.When practices and usages amongst the bankers permit such disclosure.

I. A banker will be justified in disclosing information about his customers account on reasonable and proper occasions only as required by different laws:1. Under the Income- Tax Act, 1961 to Income tax authority as per Sec. 131 of the Act.2. Under the Companies Act, 1956: When the Central Government appoints an Inspector or to investigate the affairs of any joint stock company.3. By order of the Court under the Bankers Books Evidence Act, 1891: When the court orders the banker to disclose information relating to a customers account, the banker is bound to do so.4. Under the Reserve Bank of IndiaAct,1934: The Reserve Bank of India collects credit information from the banking companies and also furnishes consolidated credit information from the banking company.5. Under the Banking Regulation Act, 1949: Under Section 26, every banking company requires to submit a return annually of all such accounts in India which have not been operated upon for 10 years.



6. Disclosure to Police : Under Section 94 (3) of the Criminal Procedure Code, the banker is not exempted from producing the account books before the police. The police officers conducting an investigation may also inspect the banker’s books for the purpose of such investigations (section 5. Bankers Books Evidence Act)7. Under the Foreign Exchange Management Act, 1999, under section 10: Banking companies dealing in foreign exchange business are designated as authorized persons in foreign exchange. Section 36, 37 and 38 of this Act empowers the officer of the Directorate of Enforcement and the Reserve Bank to investigate any contravention under the Act..

II. Disclosure permitted by the Bankers Practices and Usages.1. With Express or Implied Consent of the Customer.2. The banker may disclose the state of his customers account in order to legally protect his own interest. For example, if the banker has to recover the dues from the customer or the guarantor,disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is quite justified.3. Bankers Reference: Banker follows the practice of making necessary enquires about the customers, their sureties or the acceptors of the bills from other bankers. This is an established practice amongst the bankers and is justified on the ground that an implied consent of the customer is presumed to exist. By custom and practice necessary information or opinion about the customer is furnished by the banker confidentially. However, the banker should be very careful inreplying to such enquiries.

III. Duty to the public to disclose : Banker may justifiably disclose any information relating to his customers account when it is his duty to the public to disclose such information. In practice this qualification has remained vague and placed the banks in difficult situations. The Banking Commission, therefore, recommended a statutory provision clarifying the circumstances when banks should disclose in public interest information specific cases cited below:(i)when a bank asked for information by a government official concerning the commission of a crime and the bank has reasonable cause to believe that a crime has been committed and that the information in the banks possession may lead to the apprehension of the culprit,(ii)where the bank considers that the customers is involved in activities prejudicial to the interests of the country.(iii)where the banks books reveal that the customer is contravening the provisions of any law, and (iv)where sizable funds are received from foreign countries by a constituent.

IV. What is lien?A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor.It is a legal claim by one person on the property of another as security for payment of a debt.

Rights of a banker:It is not that the bank has only duties to wards its customers, it too has certain rights vis-à-vis hiscustomers. The rights can broadly be classified as:Right of General Liena) Right of Set-Offb) Right of Appropriationc) Act as per the mandate of customerd) Right to Charge Interest, Commission, Incidental Charges etc.

Lien: A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be



retained till the owner discharges the debt or obligation to the possessor. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien viz.

1.Particular Lien and2.Right of General Lien

1.Particular Lien:A 'particular lien' gives the right to retain possession only of those goods in respect of which thedues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular securityfor a particular debt, then the banker's right gets converted into a particular lien.

2.Right of General Lien:Banker has a right of general lien against his borrower. General lien confers banks right in respect of all dues and not for a particular due. It is a statutory right of the bank and is available even in absence of an agreement but it does not confer the right to pledge. A 'general lien' gives the right to retain possession of any goods in the legal possession of the creditor until the whole of the debt due from the debtor is paid.Section 171 of Indian Contract Act, 1872 confers the right of general lien to banks. As per thesection “ Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in theabsence of a contract to the contrary, retain, as a security for a general balance of account anygoods bailed to them; but no other persons have a right to retain, as a security for such balance,goods bailed to them, unless there is an express contract to the effect.” Bank has a right of lien only when goods, securities are received in the capacity as a creditor. While granting advances banks take documents. These documents confer right to convert general lien as an implied pledge. A banker’s lien is more than a general lien, it is an implied pledge and he has the right to sell the goods in case of default Bank has a 'Right of Sale' of goods under lien. Banker's right of lien is not barred by the Law of Limitation.

Exercising Right of Lien:Bank has the right of lien on goods and securities entrusted to him legally and standing in thename of the borrower.Bank can exercise right of lien on the securities in its possession for the dues of the sameborrower, even after the loan taken against that particular security has been re-paid. Right of lien can be exercised on bills, cheques, promissory notes, share certificates, bonds, debentures etc.Where right of lien cannot be exercised:Bank cannot exercise right of lien on goods received for safe custody, goods held in capacity as atrustee, or as an agent of the customer, SDV, or left in bank by mistake.

Negative lien:Negative lien is to be distinguished from the lien. Here, the banker does not get the right to retain any assets of the borrower. The banker takes a declaration from the borrower that the assets mentioned therein are free from any charge or encumbrance. He/She gives an undertaking that he/she shall not create any charge over the assets mentioned, or dispose them off without the permission of the banker. Neither the borrower can dispose of the assets or create any charge thereon nor is the bank entitled to realise its dues from the said assets of the customer. The bank’s interests are partly safe by securing a negative lien.

V. Right of set-off:The banker has the right to set off the accounts of its customer. It is a statutory right available to a bank, to set off a debt owned to him by a creditor from the credit balances held in other accounts of the borrower. The right of set-off can be exercised only if there is no agreement express or implied to the contrary. This right is applicable in respect of dues that are due, are becoming due i.e. certain and not contingent. It is not applicable on future debts. It is applicable in respect of deposits that are due for payment. The right of set off enables bank to combine all kinds of credit and debit balances of a customer for arriving at a net sum due. The right is also available for deposits kept in other branches of the same bank. The right can be exercised after death,



insolvency, and dissolution of a company, after receipt of a garnishee/attachment order .The right is also available for time barred debts. Deposits held in the name of a guarantor cannot be set off to the debit balance in borrowers account until a demand is made to the guarantor and his liability becomes certain. Banks cannot set off the credit balance of customer's personal account for a joint loan account of the customer with another person unless both the joint accountholders are jointly and severally liable. Banks exercise the Right of set off only after serving a notice on the customer informing him that the bank is going to exercise the right of set-off.

Automatic right of set off:Depending on the situation, sometimes the set off takes place automatically without the permission from the customer. In the following events the set off happens automatically i.e.without the permission from the customer.a) On the death of the customer,b) On customer becoming insolvent.c) On receipt of a Garnishee order on customer’s account by court.d) On receipt of a notice of assignment of credit balance by the customer to the banker.e) On receipt of notice of second charge on the securities already charged to the bank.

Conditions while exercising right of Set - Off:a) The account should be in the sole name of the customer.b) The amount of debts must be certain and measurable.c) There should not be any agreement to the contraryd) Funds should not be held in trust accountse) The right cannot be exercised in respect of future or contingent debts.f) The banker has the right to exercise this right before a garnishee order is received by it.Unless there is an agreement to the contrary, any payment made by a debtor is applied firsttowards interest and thereafter towards principal. If a customer has only one account and hedeposits and withdraws money from it regularly, the order in which the credit entry will set off the debit entry is in the chronological order, this is known as Clayton’s rule.

Rule in Clayton’s case:The rule was laid down in famous Devayanas Vs. Noble. The rule applies to running accounts like CC/ OD with debit balance. The rule states that each withdrawal in a debit account is considered as a new loan and each deposit as a repayment in that chronological order.

The following are some case laws as decided by Indian courts for lien & set off:1. Two partnership firms JJ & JR with the same set off partners had two separate accounts with the Central Bank of India, Amrutsar. JJ has taken overdraft facility. They failed to clear the debit balance. There was a credit balance in JR current account. Bank incharge debited JR for payment of overdraft of JJ. JJ objected and filed a case against bank.The Court held that the bank was entitled to appropriate the monies belonging to a firm for payment of an overdraft of another firm. Because although two separate firms are involved they are not two separate legal entities and cannot be ‘distinguished from the members who compose them. Mutual demands existed between the bank on the one hand and the persons constituting firm on the other. Nor it could be said that these demands did not exist between the parties in the same right. (In the matter of Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. AIR 1960 Punj.1)

2. Mr. KVV has a bank taken Tractor loan from Union bank of India. He kept some FDR with bank not as security but for investment purpose. The auto loan was overdue and hence banker charged a lien over the FDR. Mr. KVV objected and matter went till Supreme Court.The court held that the fixed deposit money lodged with the bank is strictly a loan to the bank. The banker in connection with the FD is a debtor. The depositor would accordingly cease to be the owner of the money in fixed deposit. The said money becomes money of the bank, enabling the bank to do as it likes, that however, with the obligation to repay the debt on maturity. It was further held that the bank being a debtor in respect of the money in FD, had no right to pass into service



the doctrine of banker’s lien and the money in Fixed Deposit. (Union Bank of India v/s K.V.Venugopalan). Remember here that these FD’s are not security provided and hence lien is not applicable.

3. State Bank of Patiala as a lead member of the Consortium of Banks, has advanced various credit facilities to Northland Sugar Complex Ltd, a company in liquidation. There was an agreement of pledge of goods and assets and an agreement of hypothecation of goods and assets, wherein a sum of Rs. 360 lacs and Rs. 410 lacs respectively were financed to the company in liquidation on the terms and conditions mentioned therein along with entire interest. The stock-in-trade i.e. sugar and molasses etc. of the company in liquidation was sold under the orders of the Court. Official Liquidator, stated that the applicant bank not submitted the details of the movable assets over which it had charge or which were pledged with the Bank and that the entire sale proceeds are those which have not come out of the sale of movable assets pledged with the Bank and hence the claim of the bank would be satisfied by treating the Bank as unsecured creditor.The court held that, the applicant Bank has general lien over the money realized on account of sale of sugar and molasses etc. which was secured under one agreement. The applicant-bank has a right to appropriate the surplus out of such sale proceeds towards the money due to the bank in the other account i.e interest also. (State Bank Of Patiala vs Northland Sugar Complex Ltd.,2004).

4. MP Iron & Steel company was engaged in the business of rerolling steel and manufacturing steel goods. It was advanced loan through its directors after furnishes security for loan as per Banking Policy of State Bank of India. Since the loan was not repaid, bank starts recovery proceedings. One of the Director Mr. Ashish, has a account in SBI, a lender. He deposited Rs.10.00 lakhs in it. The bank has exercised right of lien and setoff the amount. Mr. Ashish has taken a stand that he is a director of the company and company is a artificial legal person and therefore bank cannot setoff his personal amount deposited. Bank has mentioned that he is guarantor and hence the bank has right to setoff this amount.

VI. Garnishee order:Garnishee order is an order from the court obtained by a judgment-creditor attaching the funds in the hands of a third party due to the judgment debtor. This is subject to the condition that the funds attached must be actually due from the garnishee, i.e., the third party and in our context, the banker. However an existing debt through payable at a further date, may be attached. Thus fixed deposits coming under this category can be subject to attachment. But fixed deposits which can be withdrawn after the customer’s notice cannot be attached. The reason is simple. In such a case there is no existing debt unless and until the notice is given by the customer.

Order Nisi: The Garnishee Order is issued in two parts. First, the Court directs the banker to stop payment out of the account of the judgement- debtor (bank’s customer). Such order, called Order Nisi, also seeks explanation from the banker as to why the funds in the said account should not be utilized for the judgement- creditors claim. The banker is prohibited from paying the amount due to his customer on the date of receipt of the Order Nisi. He should, therefore, immediately inform the customer so that dishonour of any cheque issued by him may be avoided. After the banker files his explanation, if any, the Court may issue the financial order, called Order Absolute where the entire balance in the account or a specified amount is attached or to be handed over to the judgement-creditor, & this order is called as Garnishee order.

Types of orders: There are two types of orders that may be made by a court Garnishee order is only an interim order and operates as an order freezing debt. No funds are payable by the banker to the court until the order is made absolute by the court.Since the Garnishee order attaches only the existing debt., it is possible for the banker to open new account for sums deposited subsequently and allow him to draw cheques.

The following are some of the legal decision affecting garnishee orders:



1. Where there is joint account in the name of husband and wife, such an account cannot be attached in favour of husband’s judgments creditor.2. Funds paid into the customer’s account subsequent to the receipt of the order are not attachable.3. The banker immediately, after the order is received, can exercise his right or set-off. (Tyaballe V. Atmarma)4. Unclosed cheques previously paid into the customer’s account are not attached unless the banker by agreement or usage allowed cheques to the drawn against such accounts. (A.L Underwood Ltd. V. Barclays Bank Ltd.)5. Partnership accounts cannot be attached unless the order is made against all the partners, or in the name of the partnership.6. Garnhishee orders can attaché trust moneys also, provided the amount is to the customer’s credit. The reason is that such a money is a debt owing to the customer and as such attachable.7. Balances to the credit of customer’s account at branches of the bank in a foreign country cannot be attached.

Bank’s procedure on receipt of order1. If the order is served on the bank’s head office, then the branch where the account is held should be notified for which a reasonable time is always allowed.2. The question of attachment does not arise, if the customer’s balance is in debit. Such an order will be withdrawn and therefore, does not warrant by action.3. The garnishee order must state the name of the customer correctly, to enable the baker to identify the judgment-debtor. Otherwise, the bank is not bound to act upon it.4. Customer should be advised of the order and also the banker’s intention to comply with the order.5. When the customer is having a large balance and the attachment is for a limited amount far less than the balance, the banker can transfer the necessary amount (including court costs if any) to a separate account pending payment to the court and the customer can be allowed to operate the balance in the account. But if the order attaches all the debts owing to the customer without limit, then his account must be stopped. Even in such a case, if the amount of the judgment debt and the costs is ascertained, the banker at his discretion can allow the customer an overdraft on a new account against the surplus balance of the garnished account.

Special More Points:-a. In case no amount is mentioned, the entire balance should be attached.b. Extends only to those Accounts which are held in same capacity. But, in case of the order is in the joint name, individual Accounts of all the joint holders can be attached, but not vice versa. c. Accounts of Deceased/ Insolvent persons cannot be attached.d. Such items where bank is not a debtor, cannot be attachede. Cheques/ bills sent for collection are not attachable f. Undrawn portions of a Credit Limit cannot be attachedg. Balance with foreign branches not attachableh. Salary not attachable

Garnishee order by Income Tax Officer ( Attachment order):- Section 226(3) of the Income-tax Act, 1961, empowers the Assessing Officer (AO) or Tax Recovery Officer to direct any person from whom money is due to the tax-payer who is in default, to pay such amount directly to the tax department. For doing so, a notice in writing has to be issued to the person from whom recovery is to be made of the dues of an assessee. The essential criterion for a notice is that, on the date of service of notice, the person served should be under an existing liability to pay an amount to the assessee (P K Trading v. I.T.O. (78 I.T.R. 427)), though the liability may be required to be discharged (i.e. the amount may become payable to the assessee) at a later date.

Some more explanations for Garnishee:I. A bank is not a garnishee with respect to the unutilized portion of the overdraft or cash credit facility sanctioned to its customer and such utilized portion of cash credit or overdraft facility



cannot be said to be an amount due from the bank of its customer. . For example, PNB allows it as customer to overdraw to the extent of Rs. 5,00,000.The customer has actually drawn Rs.3,00,000, the balance Rs.2,00,000 undrawn cannot be attached by a Garnishee Order as this is not a debt due from the banker. It merely indicates the extent to which the customer may be the debtor of the bank.

II. The Garnishee Order attachés the balance standing to the credit of the principal debtor at the time the order is served on the banker. The following points are to be noted in this connection:(a)The Garnishee Order does not apply to: (1) the amounts of cheques, drafts, bills, etc.., sent for collection by the customer, which remain uncleared at the time of the receipt of the order, (2) the sale proceeds of the customers securities, e.g., stocks and shares in the process of sale, which have not been received by the banker. In such cases, the banker acts as the agent for the customer for the collection of the cheques or for the sale of the securities and the amounts in respect of the same are not debts due by the banker to the customer, until they are actually received by the banker and credited to the customers account. But if the amount of such uncleared cheque, etc., is credited to the customers account, the position of the banker changes and the garnishee order is applicable to the amount of such uncleared cheques. Similarly, if one branch of a bank sends its customers cheque for realization to its another branch and the latter collects the same from the paying banker before the receipt of the Garnishee Order by the first branch, the amount so realized shall also be subject to Garnishee Order, even though the required advice about realization of cheque is received after the receipt of the Garnishee Order.(b) The Garnishee Order cannot attach the amounts deposited into the customers account after the Garnishee Order has been served on the banker. A Garnishee Order applies to the current balance at the time the order is served, it has no prospective operation. Bankers usually opena new account on the name of customer for such purpose.(c) The Garnishee Order is not effective in the payments already made by the banker before the order is served upon him. But if a cheque is presented to the banker for payment and its actual payment has not yet been made by the banker and in the meanwhilea Garnishee Order is served upon him, the latter must stop payment of the said cheque, even if it is passed for payment for payment. Similarly, if a customer asks the banker to transfer an amount from his account and the banker has already made necessary entries of such transfer in his books, but before the intimation could be sent to the other account-holder, a Garnishee Order is received by the banker, it shall be applicable to the amount so transferred by mere book entries, because such transfer has no effect without proper communication to the person concerned.(d) In case of cheques presented to the paying banker through the clearing house, the effectiveness of the Garnishee Order depends upon the fact whether time for returning thedishonoured cheques to the collecting banker has expired or not. Every drawee bank is given specified time within whichit has to returnthe unpaid cheques, if any, to the collecting bank. If such time has not expired and in the meanwhile the bank receives a Garnishee Order, it may return the cheque dishonoured. But if the order is received after such time over, the payment is deemed to have been made by the paying banker and the order shall not be applicable to such amount.(e) The Garnishee Order is not applicable to: (i)Money held abroad by the judgement- debtor ; and (ii)Securities held in the safe custody of the banker,(f) The Garnishee Order may be served on the Head Officeof the bank concerned and it will be treated as sufficient notice to all of its branches. However, the Head Office is given reasonable time to intimate all concerned branches. If the branch office makes payment out of the customers account before the receipt of such intimation, the banker willnot be held responsible for such payment.

VII. Know Your Customer (KYC) Directions, 2016 :Banks are required to follow Know Your Customer (KYC) guidelines. These guidelines are meant to weed out and to protect the good ones and the banks. With the growth in organized crime, KYC has assumed great significance for banks. The RBI guidelines on KYC aim at preventing banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. They also enable banks to have better knowledge and understanding



of their customers and their financial dealings. This in turn helps banks to manage their risks better. The RBI expects all banks to have comprehensive KYC policies, which need to be approved by their respective boards.Banks should frame their KYC policies incorporating the following four key elements:a) Customer Acceptance Policy;b) Customer Identification Procedures;c) Monitoring of Transactions; andd) Risk Management.

1. Customer Acceptance PolicyEvery bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The usual elements of this policy should include the following. Without prejudice to the generality of the aspect that Customer Acceptance Policy may contain, REs shall ensure that : (a) No account is opened in anonymous or fictitious/benami name. (b) No account is opened where the RE (Regulated Entity) is unable to apply appropriate CDD(Customer Due Diligence) measures, either due to non-cooperation of the customer or non-reliability of the documents/information furnished by the customer. (c) No transaction or account based relationship is undertaken without following the CDD procedure. (d) The mandatory information to be sought for KYC purpose while opening an account and during the periodic updation, is specified. (e) ‘Optional’/additional information, is obtained with the explicit consent of the customer after the account is opened. (f) CDD Procedure is followed for all the joint account holders, while opening a joint account. (g) Circumstances in which, a customer is permitted to act on behalf of another person/entity, is clearly spelt out. (h) Suitable system is put in place to ensure that the identity of the customer does not match with any person or entity, whose name appears in the sanctions lists circulated by Reserve Bank of India. However the adoption of customer acceptance policy and its implementation should not become too restrictive and should not result in denial of banking services to general public, especially to those who are financially or socially disadvantaged.

Risk Management:For Risk Management, REs shall have a risk based approach which includes the following. (a) Customers shall be categorised as low, medium and high risk category, based on the assessment and risk perception of the RE. (b) Risk categorisation shall be undertaken based on parameters such as customer’s identity, social/financial status, nature of business activity, and information about the clients’ business and their location etc.

2. Customer Identification ProceduresCustomer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. REs shall undertake identification of customers in the following cases: (a) Commencement of an account-based relationship with the customer. (b) Carrying out any international money transfer operations for a person who is not an account holder of the bank. (c) When there is a doubt about the authenticity or adequacy of the customer identification data it has obtained. (d) Selling third party products as agents, selling their own products, payment of dues of credit cards/sale and reloading of prepaid/travel cards and any other product for more than rupees fifty thousand.



(e) Carrying out transactions for a non-account based customer, that is a walk-in customer, where the amount involved is equal to or exceeds rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected. (f) When a RE has reason to believe that a customer (account- based or walk-in) is intentionally structuring a transaction into a series of transactions below the threshold of rupees fifty thousand.

3. “Officially valid document” (OVD):It means the passport, the driving licence, the Permanent Account Number (PAN) Card, the Voter's Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government, letter issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number. Explanation: Customers, at their option, shall submit one of the six OVDs for proof of identity and proof of address . Provided that where ‘simplified measures’ are applied for verifying the identity of the customers the following documents shall be deemed to be OVD: 1. identity card with applicant’s photograph issued by Central/ State Government Departments, Statutory/ Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions; 2. Letter issued by a Gazetted officer, with a duly attested photograph of the person. Provided further that where ‘simplified measures’ are applied for verifying, for he limited purpose of, proof of address the following additional documents are deemed to be OVDs : 1. Utility bill, which is not more than two months old, of any service provider (electricity, telephone, post-paid mobile phone, piped gas, water bill); 2. Property or Municipal Tax receipt; 3. Bank account or Post Office savings bank account statement;

Explanation: Customers, at their option, shall submit one of the six OVDs for proof of identity and proof of address.

E-KYC: The e-KYC service of Unique Identification Authority of India (UIDAI) shall be accepted as a valid process for KYC verification under the PML Rules, as (a) the information containing demographic details and photographs made available from UIDAI as a result of e-KYC process is treated as an ‘Officially Valid Document’, and (b) transfer of KYC data, electronically to the RE from UIDAI, is accepted as valid process for KYC verification. Provided REs/ Business Correspondents (BCs)/ Business Facilitators (BFs) shall obtain authorisation from the individual user authorising UIDAI by way of explicit consent to release his/her identity/address through biometric authentication to the REs.

Some more clarification for OVD:While undertaking customer identification, REs shall ensure that :a. The customers shall not be required to furnish separate proof of address for permanent and current addresses, if these are different. In case the proof of address furnished by the customer is the address where the customer is currently residing, a declaration shall be taken from the customer about her/his local address on which all correspondence will be made by the RE. b. A copy of the marriage certificate issued by the State Government or Gazette notification indicating change in name together with a certified copy of the ‘officially valid document’ in the existing name of the person shall be obtained for proof of address and identity, while establishing an account based relationship or while undertaking periodic updation exercise in cases of persons who change their names on account of marriage or otherwise.c. In case the person who proposes to open an account does not have an OVD as ‘proof of address’, such person shall provide OVD of the relative as provided at sub-section 77 of Section 2 of the Companies Act, 2013, read with Rule 4 of Companies (Specification of definitions details) Rules, 2014, with whom the person is staying, as the ‘proof of address’.



Explanation: A declaration from the relative that the said person is a relative and is staying with him/her shall be obtained.

Simplified norms for Self Help Groups (SHGs):(a) KYC verification of all the members of SHG shall not be required while opening the savings bank account of the SHG (b) KYC verification of all the office bearers shall suffice. (c) No separate KYC verification of the members or office bearers shall be necessary at the time of credit linking of SHGs.

CKYC: Central Know Your Customer or C KYC is a centralized depository of KYC records of customers engaged in various financial market segments. The uniqueness of C KYC is that once a person/investor completes his KYC process with a financial entity like a bank, Mutual Fund, or insurance company, he/she need not enter a KYC norm again.The Government of India authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) to act as and to perform the functions of the Central KYC Records Registry including receiving, storing, safeguarding and retrieving the KYC records in digital form under Section 2 (1) of the Prevention of Money-Laundering Act, 2002.Central KYC Registry is a centralized repository of KYC records of customers in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector with an objective to reduce the burden of producing KYC documents and getting those verified every time when the customer creates a new relationship with a financial entity.The PMLA states as per rule (9) (I) (1):Every reporting entity shall within three days after the commencement of an account-based relationship with a client, file the electronic copy of the client´s KYC records with the Central KYC Records Registry.″The Central KYC Registry requires data as per the common KYC documents to be captured along with the scanned copy of the certified supporting documents (PoI/PoA) and photograph. For Normal Account, any of six officially valid documents (PAN, AADHAAR, Voter ID, Passport, Driving licence, NREGA Job Card) can be submitted for the ID of the customer.For Small Account types, only personal details and photograph duly certified by the customer are required to be submitted. The KYC identifier for Small Account will have a prefix ″S″.A 14 digit unique KYC identifier will be generated for new customer records and notified to the reporting entity.As per RBI circular, in the first phase, Scheduled Commercial Banks (SCBs) may upload the KYC data with CERSAI, in respect of new individual accounts opened on or after July 15, 2016.

Small Accounts: Bank account known as ‘Small Account’ can be open by submitting your recent photograph and putting your signature or thumb impression in the presence of the bank official.'Small account' means a savings account in a banking company where(i) the aggregate of all credits in a financial year does not exceed Rs.1,00,000;(ii) the aggregate of all withdrawals and transfers in a month does not exceed Rs.10,000 and (iii) the balance at any point of time does not Rs.50,000/-.Such accounts remain operational initially for a period of twelve months and thereafter, for a further period of twelve months if the holder of such an account provides evidence to the bank of having applied for any of the officially valid documents within twelve months of the opening of such account.The GOI (Ministry of Finance) also expanded the definition of 'officially valid document’ for opening 'small accounts' to include job card issued by NREGA duly signed by an officer of the State Government or the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number.

5. CDD Measures for Non Individual Accounts:a. Sole Proprietary firms



For opening an account in the name of a sole proprietary firm, a certified copy of an OVD as mentioned at Section 3(a) (vi) of Chapter I, containing details of identity and address of the individual (proprietor) shall be obtained. In addition to the above, any two of the following documents as a proof of business/ activity in the name of the proprietary firm shall also be obtained: (a) Registration certificate (b) Certificate/licence issued by the municipal authorities under Shop and Establishment Act. (c) Sales and income tax returns. (d) CST/VAT certificate. (e) Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities. (f) Licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute. (g) Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/acknowledged by the Income Tax authorities. (h) Utility bills such as electricity, water, and landline telephone bills.In cases where the REs are satisfied that it is not possible to furnish two such documents, REs may, at their discretion, accept only one of those documents as proof of business/activity. Provided REs undertake contact point verification and collect such other information and clarification as would be required to establish the existence of such firm, and shall confirm and satisfy itself that the business activity has been verified from the address of the proprietary concern. b. Legal Entities For opening an account of a company, one certified copy of each of the following documents shall be obtained: (a) Certificate of incorporation. (b) Memorandum and Articles of Association. (c) A resolution from the Board of Directors and power of attorney granted to its managers, officers or employees to transact on its behalf. (d) Officially valid documents in respect of managers, officers or employees holding an attorney to transact on its behalf.

For opening an account of a partnership firm, one certified copy of each of the following documents shall be obtained: (a) Registration certificate. (b) Partnership deed. (c) Officially valid documents in respect of the person holding an attorney to transact on its behalf.

For opening an account of a trust, one certified copy of each of the following documents shall be obtained: (a) Registration certificate. (b) Trust deed. (c) Officially valid documents in respect of the person holding a power of attorney to transact on its behalf.

For opening an account of an unincorporated association or a body of individuals, one certified copy of each of the following documents shall be obtained: (a) resolution of the managing body of such association or body of individuals; (b) power of attorney granted to transact on its behalf; (c) Officially valid documents in respect of the person holding an attorney to transact on its behalf and (d) such information as may be required by the RE to collectively establish the legal existence of such an association or body of individuals.

Explanation: Unregistered trusts/partnership firms shall be included under the term ‘unincorporated association’.

6. Periodic updation of KYC:Different periodicities have been prescribed for updation of KYC records depending on the risk perception of the bank. KYC is required to be done at least once in two years for high risk customers, once in eight years for medium risk customers and once in ten years for low risk customers. This exercise would involve all formalities for KYC normally taken at the time of opening the account.If a customer do not provide yKYC documents at the time of periodic updation, bank has the option to close your account. Before closing the account, the bank may, however, impose ‘partial freezing’ (i.e. initially allowing all credits and disallowing all debits while giving an option to close



the account and take your money back). Later, even credits also would not be allowed. The ‘partial freezing’ however, would be exercised by the bank after giving you due notice.

Partial freezing is imposed in the following ways:a. Banks have to give due notice of three months initially to the customers before exercising the option of ‘partial freezing’.b. After that a reminder for further period of three months will be issued.c. Thereafter, banks shall impose ‘partial freezing’ by allowing all credits and disallowing all debits with the freedom to close the accounts.d. If the accounts are still KYC non-compliant after six months of imposing initial ‘partial freezing’ banks shall disallow all debits and credits from/to the accounts, classifying them inoperative.Meanwhile, the account holders can revive accounts by submitting the KYC documents.

7. Prevention of Money Laundering Act (PMLA), 2002The PMLA, 2002 casts certain obligations on the banking companies in regard to maintenance and reporting of the following types of transactions:a) all cash transactions of the value of more than Rs 10 lakh or its equivalent in foreign currency;b) all series of cash transactions integrally connected to each other which have been valued below Rs 10 Lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds Rs 10 Lakh;c) all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transaction; andd) all suspicious transactions whether or not made in cash.

Records to be maintained as per Rule 3 of Prevention of Money Laundering Act:in terms of PML Amemdment Act 2012 notified on February 15, 2013, banks should maintain for at least five years from the date of transaction between the bank and the client, all necessary records of transactions, both domestic or international, which will permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of persons involved in criminal activity.b) Banks should ensure that records pertaining to the identification of the customer and his address (e.g. copies of documents like passports, identity cards, driving licenses, PAN card, utility bills etc.) obtained while opening the account and during the course of business relationship, are properly preserved for at least five years after the business relationship is ended as required underRule 10 of the Rules. The identification records and transaction data should be made available to the competent authorities upon request.

Incorporation of Name of the Purchaser on the Face of the Demand Draft: As per recent amendment in KYC Guidelines & in order to address the concerns arising out of the anonymity provided by payments through demand drafts and its possible misuse for money laundering, it has been decided that the name of the purchaser be incorporated on the face of the demand draft, pay order, banker’s cheques, etc., by the issuing bank. This change took effect for such instruments issued on or after September 15, 2018.

Financial Intelligence Unit – India (FIU-IND)Financial Intelligence Unit – India (FIU-IND) was set by the Government of India in 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Functions of FIU-IND



The main function of FIU-IND is to receive cash/suspicious transaction reports, analyse them and, as appropriate, disseminate valuable financial information to intelligence/enforcement agencies and regulatory authorities . The functions of FIU-IND are: • Collection of Information: Act as the central reception point for receiving Cash Transaction reports (CTRs) and Suspicious Transaction Reports (STRs) from various reporting entities. • Analysis of Information: Analyze received information in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes. • Sharing of Information: Share information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units. • Act as Central Repository: Establish and maintain national data base on cash transactions and suspicious transactions on the basis of reports received from reporting entities. • Coordination: Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes. • Research and Analysis: Monitor and identify strategic key areas on money laundering trends, typologies and developments.

Organisational Set-up FIU-IND is a multi disciplinary body headed by a Director. Personnel in this Unit are being inducted from different organizations namely Central Board of Direct Taxes (CBDT), Central Board of Excise and Customs (CBEC), Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Legal Affairs and Intelligence agencies.

Authorities at FIU-IND According to Section 48 of the Prevention of Money Laundering Act, 2002 there shall be the following classes of authorities for the purposes of this Act, namely:- (a) Director or Additional Director or Joint Director, (b) Deputy Director, (c) Assistant Director, and (d) such other class of officers as may be appointed for the purposes of this Act.

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CHAPTER 5Negotiable Instrument Act

Introduction:The Negotiable Instruments Act was enacted, in India, in 1881. This law facilitates the commercial world to carry on activities in trade & commerce, providing them an instrument of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, the commercial activities were likely to be adversely affected as it was not practicable for the traders to carry on with it the bulk of the currency in force. This law deals with Promissory Notes, Bills of Exchange and chqeues. These are the three most common types of negotiable instruments. The act applies to the whole of India and to all persons resident in India, whether foreigners or Indians.

Types of Negotiable Instrument:Sec.13 of N.I Act recognizes only three instruments as negotiable instruments a) Promissory notes b) Bills of exchange c) Cheques.Other than the above certain instruments have acquired the status of negotiability by virtue of customs of trade in India and they are Government Promissory notes, banker’s draft & pay orders, hundies, railway receipts, Dividend warrants.

Cheques Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand” and it includes the electronic image of a truncated cheque and a cheque in the electronic form.A cheque is bill of exchange with two more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheques are bill of exchange, but all bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a certain person or to the bearer of the cheque. However, it does not require acceptance as that of Bills of exchange.

Parties to a Cheque 1. Drawer: A person who draws the cheque, i.e., the depositor of money in the bank. 2. Drawee: It is the drawer’s banker on whom the cheque has been drawn. 3. Payee: A person who is entitled to receive the payment of the cheque. 4. The holder, endorser and endorsee (the same as in the case of a bill or note).

Banker’s Obligation to pay: U/s 31 of Negotiable Instruments Act, bank under statutory obligation to honour cheque issued by the customer where (a) there are sufficient funds (b) funds are meant for payment of the cheque and (c) there is proper demand to make the payment.Now let us take one by one :a. there are sufficient funds means, the banker should have sufficient funds of the drawer, i.e. there should be sufficient credit balance in the customers account.

b. funds are meant for payment of the cheque: The funds available in the customers account, should also be properly available to the payment of the cheque. The funds may not be available to pay the cheque if:i. the banker has exercised his right of set off for amounts due from the customer; ii. there is an order passed by a Court, competent authority or other lawful authority restraining the bank from making payment.

c. there is proper demand to make the payment : This means that the cheque must be properly drawn and signed by the drawer.

Different Types of Cheques: There may be different types of Cheques depending on how the drawer has issued the Cheque.



a. Open / Bearer Cheque : When the word “Bearer” on the cheque is not crossed or cancelled, the cheque is called a bearer cheque. Open / Bearer Cheques are payable to person specified in the instrument or any person who posses it and present for payment over the counter.

b. Order Cheque : When the word “Bearer” written on cheque is crossed or cancelled it becomes an order cheque. An order Cheque is payable to a specified person named in the cheque or any other to whom it is endorsed.

c. Crossed Cheque: Cheques are usually crossed as a measure of safety. Cheque can be crossed in different ways:1. General crossing: According to Sec. 123 of NI Act, crossing is made by drawing two parallel transverse lines across the face of the cheque with or without the words like “& Company”, or “not negotiable” in between the transverse lines. The usage of crossing distinguishes the cheque from bill of exchange. The object of general crossing is to direct drawee banker to pay the amount of cheque only to a banker (collecting bank), to prevent the payment of the cheque being made to wrong person.

2. Special crossing: According to Sec. 124 of NI Act, where a cheque bears across its face an entry of the name of the banker either with or without the words like “not negotiable” in between the transverse lines, the cheque is considered to have crossed specially. The effect of this crossing is that, the proceeds of the cheque should be paid only to that banker. Because of this reason, the banks, put the crossing stamp on the cheque received by them for collection.

3. Account Payee crossing: It is a form of restrictive crossing, represented by words “Account Payee” entered on the face of the cheque. This type of crossing has not been provided for in the NI Act. Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited only to the account of the payee. If the collecting bankers allows the proceeds of the cheque so crossed to be credited to pay any other account, they may be held guilty of a negligence in the event of an action for wrongful payment. These words do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee.

4. Cheque marked “ not negotiable”: According to section 130, a person taking a cheque crossed generally or specially bearing in either case the words ’not negotiable’ shall not have or shall not be able to give a better title to the cheque than that title the person from who, he took had. In consequence if the title of the transferor is defective, the title of the transferee would be vitiated by the defect. Cheque crossed ‘not negotiable’ does not affect the transferability of the negotiable instrument in anyway. The cheque still continues to be transferable but only those rights are conveyed to the transferee which transferor has.For example, Mr. X, by means of fraud obtained from Mr. Y a cheque crossed ‘not negotiable’ and got it cashed at a bank other than the drawee bank. Mr.Y sued the bank for conversion. Is the bank liable? Section 130 of NI Act, broadly said that if the holder has a good title, he can still transfer it with a good title, but if the transferor has a defective title, the transferee is affected by such defects, and he cannot claim the fight of a holder in due course by proving that he purchased the instrument in good faith and for value. Here, in this case, as Mr. X, has obtained the cheque by fraud, he had not title to it and could not give to the bank any title to the cheque or the money, and bank would be liable for the amount of the cheque conversion. A similar decision was taken in Great Western Railway co. Vs. London and Country Banking Co(1901).

d. Post Dated Cheque: Cheque bearing the date which is yet to come in future is called Post Dated Cheque. Cheque is honored only on or after the date (upto three months) written on cheque.Note: The RBI vide Notification No. RBI/2011-12/251 DBOD.AML BC.No. 47/14.01.001/2011-12,dated 4.11.2011, directed that the validity of Cheques/Pay order/Banker’s cheques will be 3 months w.e.f 1.4.2012.



e. Stale Cheque: A Cheque turns stale after three months of the date written on cheque. A Stale Cheque can not be honored by the bank.

f. Mutilated Cheque : When cheque gets torn into two or more pieces and presented in bank for payment. Such cheques are called mutilated cheque. Bank requires confirmation by the drawer before honoring such cheques.

Negotiation:When a Promissory note, bill of exchange or cheque is transferred to any person, so as to constitute the person the holder thereof, the instrument is said to be negotiated.Negotiation thus requires two conditions to be fulfilled, namely:1. There must be a transfer of the instrument to another person; and 2. The transfer must be made in such a manner as to constitute the transferee the holder of the instrument. Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a transfer with an intention to pass title.Negotiation may be effected in the following two ways: 1. Negotiation by delivery (Sec. 47): Where a cheque is payable to a bearer, it may be negotiated by delivery thereof. Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated. 2. Negotiation by endorsement and delivery (Sec. 48): A cheque payable to order can be negotiated only be endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

ENDORSEMENT:The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But under the Negotiable Instruments Act it means, the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument is transferred by endorsement is called the ‘endorsee’.Effect of Endorsements: According to Section 50 of N.I. Act, the endorsement of a negotiable instrument followed by delivery transfers the endorsed property therein with the right of further negotiation. Thus the endorsee acquires property or interest in the instrument as its holder. He can also negotiate it further. (His right can, of course, be restricted by the endorser in case of a restrictive endorsement.)Section 50 also permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.a. to endorse the instrument further, or b. to receive its amount for the endorser or for some other specified person.

Essentials of a valid Endorsement:The following are the essentials of valid endorsement :1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it called allonage. It should usually be in ink. That means there is no restriction on number of times it can be endorsed.2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.3. It must be signed by the endorser. Thumb-impression should be attested. Signature may be made on any part of the instrument. . If the endorser signs in block letters, it will not be considered a regular endorsement.4. Spelling: The endorser should spell his name in the same way as his name appears on the cheque or bill as its payee or endorsee. If his name is misspelt or his designation has been given



incorrectly, he should sign the instrument in the same manner as given in the instrument. Thereafter, he may also put his proper signature in the same handwriting, if he likes to do so. For example, if the payees name is wrongly spelt as Vijay Chaudhary instead of Vijay Chavdhary regular endorsement will be as follows: Vijay Chavdhary Merely writing the correct name will not be regular endorsement.5. No addition or omission of initial of the name. An initial name should neither be an added nor omitted from the name of the payee or endorsee as given in the cheque. For example, a cheque is payable to H.C. Kapoor should not be endorsed as H. Kapoor or vice versa. Similarly, a cheque payable to Harish Nath should not be endorsed as H. Nath. 6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to transfer to the endorsee a part only of the amount payable does not operate as a valid endorsement.Types of Endorsement:(a) Blank or general endorsement (Sections 16 and 54). It is an endorsement when the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made. Endorsement in blank specifies no endorsee. It simply consists of the signature of the endorser on the endorsement. A negotiable instrument even though payable to order becomes a bearer instrument if endorsed in blank. Then it is transferable by mere delivery. Example: A cheque is payable to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank by X. In this case the cheque becomes payable to bearer.(b) Special or full endorsement (Section 16) When the endorsement contains not only the signature of the endorser but also the name of the person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when endorsement is made by writing the words “Pay to A or A’s order,” followed by the signature of the endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who can transfer the instrument.(c) Restrictive endorsement (Section 50) The endorsement of an instrument may contain terms making it restrictive. Restrictive endorsement is one which either by express words restricts or prohibits the further negotiation of a bill or which expresses that it is not a complete and unconditional transfer of the instrument but is a mere authority to the endorsee to deal with bill as directed by such endorsement. “Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of restrictive endorsement. The endorsee under a restrictive endorsement acquires all the rights of the endoser except the right of negotiation.

‘Sans recourse’ endorsement: An endorser may be express word exclude his own liability thereon to the endorser or any subsequent holder in case of dishonour of the instrument. Such an endorsement is called an endorsement sans recourse (without recourse). Thus ‘Pay to A or order sans recourse, ‘pay to A or order without recourse to me,’ are instances of this type of endorsement. Here if the instrument is dishonoured, the subsequent holder or the endorsee cannot look to the endorser for payment of the same.An agent signing a negotiable instrument may exclude his personal liability by using words to indicate that he is signing as agent only. The same rule applies to directors of a company signing instruments on behalf of a company. The intention to exclude personal liability must be clear.Example: A is the holder of a negotiable instrument. Excluding personal liability by an endorsement without recourse, he transfers the instrument to B, and B endorses it to C, who endorses it to D. Here, if cheque dishonoured then, D can recover the amount of the cheque from B and C and not from A.

Duties & responsibilities of paying bankers & collecting bankers:As seen above, the banker is required to honor the cheque drawn on it. However, there are certain instances which gives rise to obtain protection by bank under the act.

PAYING BANKER AND PROTECTION :Paying bank is getting certain protection under N.I. Act in section 85



a.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.

b.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.

c. Protection in respect of truncation:- It is the duty of the banker who receives the payment on an electronic image of a truncated bill held with him to verify the genuineness of the cheque to be truncated and any fraud, forgery or tampering on the face of the instrument that can be verified with due diligence and ordinary care.

Paying bank is getting certain protection under N.I. Act in section 10 as payment in due course :Prerequisites for claiming protection:- The payment must be made in due course: i. According to the apparent tenor of the instrument ii. In good faith iii. To any person in possession thereof iv. In circumstances, which do not excite any doubt that he is not entitled to receive payment of the cheque.

Paying bank is getting protection under N.I. Act in section 89: a. Where cheque has been materially altered but does not appear to have been so altered, or b. where a cheque is presented for payment which does not at the time of presentation appear to be crossed or c. to have had a crossing which has been obliterated, Then, payment thereof by a person or banker is liable to pay, and paying such sum according to the apparent tenor thereof, at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reason of the instrument having been altered or the cheque crossed.

Case laws on liability of the paying bankersWhen customer's signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC]In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC]Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC]Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC]Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC]Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC]The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]

COLLECTING BANKER AND PROTECTION :Collection of cheques on behalf of a customer is an indispensable service rendered by a banker to his customer. When a customer of a banker receives a cheque drawn on any other banker send it



to his banker for the purpose of collection from the drawee bank. In the latter case the banker, deputed to collect the amount of the cheque from another banker, is called the collecting banker.While collecting his customers cheques, a banker acts either ;(i) as a holder for value, or (ii) as an agent of the customer.

A collecting banker who collects a cheque for a person other than the true owner is said to be guilty of conversion. Under the Common Law principle of conversion, a collecting banker would be liable to the true owner of the cheque to pay damages or to refund the money had and received, in case of wrongful collection.

Protection to collecting Bankers:-Section 131 Non-liability of banker receiving payment of chequeA banker who has in good faith and without negligence received payment for a customer of acheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. Explanation [1] - A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof [Added by Act 18 of 1922][Explanation II.- It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.](Inserted by Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002)

131A Application of Chapter to drafts –The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque. [Added by Act 33 of 1947]

In other words,Under Section 131 of Negotiable instrument act a collecting bank is protected if following conditions are met.The collecting banker should have acted in good faith.He should have acted without negligenceHe should receive payment for customerThe check should have been crossed generally or specially to the bank.

The Collecting Banker is often sued for conversion of money had and received on the ground that the banker collected the cheque or draft in bad faith and exhibited gross negligence, which disentitles him from seeking protection. Cases where bad faith and negligence are attributed to a banker can be in the following instances:(i) No proper enquires were made at the time of opening the account;(ii) The nature of transactions are such that it would arouse suspicion to a man of ordinary prudence;(iii) The apparent irregularities on the apparent tenor of the cheque or the indorsements were not noticed, which could have been noticed if reasonable care was exercised;(iv) The banker collected the instrument without due enquiry to the account of a person who could ex-facie be not entitled to receive the payment under the cheque.Acceptance of cheques bearing a date as per National Calendar (Saka Samvat) for payment:Government of India has accepted Saka Samvat as National Calendar with effect from March 22, 1957 and all Government statutory orders, notifications, Acts of Parliament, etc. bear both the dates i.e., Saka Samvat as well as Gregorian Calendar. Therefore, a cheque written in Hindi and bearing a date in Hindi is a valid instrument. Banks therefore should accept cheques bearing a date as per National Calendar (Saka Samvat) for payment, if otherwise found in order.

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CHAPTER 6LENDING BY BANKS

What you should know: Importance of loans & borrowings Types of loans/credit facilities Types of working capital finance Non Fund Base Working Capital Loans Interest on Bank finance Export finance & norms relating to export finance Long term loans Priority Sector Lending & its norms Prudential Norms for Income recognition, asset classification and provisioning (NPA

guidelines) Financial Inclusion

Importance of loan & borrowings:-Being India as agro economy, prior to 1960, the agriculturist were dependable for loans and borrowing on moneylenders, shop keepers , jamindars or their relatives and friends. Further, the option for industries, traders were also limited at that time. Private banks present were also acted like moneylenders. However, in ancient India, these money lenders have started banking on ‘benches’ where they lend money and exchange valuables. After the nationalization and reforms of banking in 1960, bank credit have gone up significantly year after year. Now, the situation has changed and banking credit is the first option. The banks established after reforms with object of lending function. Further, you are aware that banking means 'Accepting deposits for the purpose of lending and investment'. This definition of banking stresses the importance of lending function. Hence, the basic objective of bank is pre-supposed to be lending and for that purpose, it is expected to mobiles resources by accepting deposits from the public. The process of creation of credit through deposits is called multiple credit creation by banking system.

Principles of Sound Lending:The business of lending carries certain inherent risk, and banks can afford to take only calculated risks as they deal in other people’s money. Another important fact of bank operations is that need to have ready cash as a bank is under an obligation to return the customer’s money whenever it is demanded. Hence, the nature of bank functions is such that it requires a very prudent and diligent handling of bank funds. It is advisable that the following general principles of sound lending should be followed by a banker at the time of granting advances.• SafetyThe bank while assessing the loan requirement of a borrower has to carefully assess the credentials of the borrower. It has to judge whether the borrower will be able to repay the loan and also service the interest component associated with it. The repayment of loan depends upon the borrower’s capacity to pay and willingness to pay the loan. Since lending funds is a risk, bank has to take some form of security from the borrower to safeguard itself from the risk. The security is in the form of tangible assets and depending upon the credentials of borrower, bank may also insist to keep additional security in the form of cash margin at the bank.

• LiquidityThe banks extend loan to the customers typically against some form of security. These could be in the form of fixed assets like land, building, plant & machinery of goods and commodities, which are easily marketable and liquid in character. The bank will normally lend against these securities since these are easily marketable and the loss associated with it will be minimum.

• Profitability



The banks deploy the funds available with it in the form of advances/loans to the customers. They ensure that the return on the funds deployed will be more than the costs associated with using these funds. It is at the bank’s discretion to decide the rate at which it can grant an advance. The rate will be different for different category of customers, viz. – a customer with high reputation may be charged a lower rate as compared to some other customers. The intention should not be to lend to make higher profits at the cost of safety or liquidity.

• The Purpose of the LoanThe bank has to carefully assess the customer’s requirement of loan before actually deciding to disburse the same. They should ensure that the need is genuine and also the intentions and credentials of the customer are to honestly utilize the facility. The banks ensure safety by granting loans for productive purposes such as meeting working capital needs of a customer. No loan should be extended for speculative and unproductive purposes such as social functions/ceremonies. Term loans are also granted for capital expenditure for establishing business, which are of long duration.

• The Principle of Diversification by BanksThis is one of the most important principles of lending. The banks will tend to minimize the risk associated with lending by spreading the loan facility to different category and industries. It thereby ensures that the impact of slowness/recession does not affect its overall portfolio. It also ensures that the lending is not restricted to only a few big firms but to individuals and small firms alsothereby diversifying in risk.

Types of loans /credit facilities : Banks lend money in various forms and practically for every activity. Loans are given against or in exchange of the ownership (physical or constructive) of various types of tangible items. Some of the securities against which the banks lend are:Commodities [In the form of finished industrial produce or agricultural produce], Debts [Books debts], Financial instruments [Shares, bonds, debentures, commercial papers etc.], Real estate [Realty property], Automobiles [Cars and the like], Consumer durable goods, Documents of title [Bill of lading, Airway bill etc.]

There are two types of loan or credit facilities extended by banks -1. Fund Base2. Non- Fund Base

The fund base loan means where funds made available to borrower and borrower avail the fund at his requirement. The non-fund base loan means where funds deployment is not require at least at the initial stage. In other words, the time period has been granted to make the payment at the guarantee of bankers.

The fund base credit facilities are of following types -1) Working capital finance includes overdrafts, cash credit, bill discounting etc.2) Demand loan3) Term loan

Types of working capital finance:-a) overdraft ( OD): Overdraft can be defined as debit allowed by the bank in current accountholders account and to draw more than the credit balance in the account.The Overdraft are generally granted against the security of government securities, shares & debentures, National Savings Certificates, LIC policies and bank's own deposits etc. The interest is charged on debit balances at the rate applicable at the time of sanction of OD.

b) Cash-credit ( CC ):



A cash-credit is an arrangement to extend short term working capital facility wherein customers allowed to borrow money upto a certain limit. Under the system, bank sanctions a limit called the cash-credit limit to each borrower in which he is allowed to borrow against the security of stipulated tangible assets i.e. stocks, book debts etc. supported by collateral security. The customer need not draw the whole of the credit limit sanctioned at one go, but can withdraw from his cash-credit account as and when he needs the funds and deposit the surplus cash/funds proceeds of sale etc., into the account. For e.g if XYZ Ltd., has sanctioned limit of say Rs.10.00 lakhs, then he can draw the amount according to his business needs.

c) Demand loan :A demand loan can be sanctioned for a period of less than 3 years repayable on demand. The loan amount after the disbursement can be withdrawn at one go. The loan may be allowed to be repaid in lump sum or in suitable installments, as per terms of sanction. In demand loan no further debits is allowed except interest, insurance Premium or any other incidental charges by bank. Further, the borrower can deposit or credit the receivable, as there no restriction on it and it will in turn reduces the liability of the borrower.Generally, demand loan is repayable by demand or in lumsum or monthly /quarterly/half-yearly installments within a period of 3 years as per sanction term of the bank. The interest is calculated on debit products on daily product basis and applied on monthly basis.

d) Bills Purchase/Discounting :There are two schemes in this type financing. One is Acceptance system and other is Bill discounting system. Bill limit is generally provided to the seller, which represent advances against bills of exchange/ sales bill drawn on customer for sale of goods. Bills are either purchased or discounted by banks. In this case of drawer (seller) bills, banker primarily sees the creditworthiness of the drawer of the bills. In case of drawee bills, the bill limit is provided to the purchase of goods to acquire raw materials. Here drawee’s (purchaser) bank provides finance taking into account the drawee credit worthiness.

Acceptance System :- To obtain finance under this type of arrangement a borrower draws bill of exchange on bank. The bank accepts the bill thereby promising to payout the amount of the bill at some specified future date. The bill itself is then worth something as the holder is to receive a sum of money at a future date. This bill can be sold either at once or when the funds are need. It is sold in the money market to, say, discount house.

Bills discounting system:- Under this system, the drawer sends a bill to the buyer or is bank. The latter in turndiscounts the bills and sends the proceeds to seller. In the books of the buyer’s bank the bill will remain as ‘bill discounted’. The bank earmarks suitably the drawing power available against stocks after providing the prescribed margin.Bills may be either clean or documentary. Bills accompanied by title to goods i.e. R/R, MTR, etc. are called documentary bills. Bills without such documents are known as clean bills. Documents under bills are either deliverable against acceptance or against payment.

Non Fund Base Working Capital Loans :-The fund base credit facilites are following types -i) Bank Guaranteesii) Letter of Credit

Regulation of Bank Finance in case of Working Capital:-Concerned about such a distortion in credit allocation, the Reserve Bank of India (RBI) has been trying, particularly from the mid 1960s onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to the priority sectors of the economy. From time to time, the RBI issues guidelines and directives relating to matters like the norms for inventory and receivables, the maximum permissible bank finance, the form of assistance, the information and reporting



system, and the credit monitoring mechanism. The important guidelines and directives have stemmed from the recommendations of various committees such as the Dehejia Committee, the Tandon Committee, the Chore Committee, and the Marathe Committee.However, in recent years, in the wake of financial liberalisation, the RBI has given freedom to the boards of individual banks in all matters relating to working capital financing.From the mid-eighties onwards, special committees were set up by the RBI to prescribe norms for several other industries and revise norms for some industries covered by the Tandon Committee.

Maximum Permissible Bank Finance: The Tandon Committee had suggested three methods for determining the maximum permissible bank finance (MPBF).

Lending Norms The recommendation of the Tandon Committee regarding the “Lending norms” has far - reaching implications. The lending norms have been suggested in view of the realization that the banker’s role as a lender in only to supplement the borrower’s resources and not to meet his entire working capitals needs. In the context of this approach, the committee has suggested three alternative methods for working out the maximum permissible level of bank borrowings. Each successive method reduces the involvement of short-term bank credit to finance the current assets.

First Method: According to this method, the borrower will have to contribute a minimum of 25% of the working capital gap from long-term funds, i.e., owned funds and term borrowings.This will give a current ratio of 1:17:1.The term working capital gap refers to the total of current assets less current liabilities other than bank borrowings. This can be understood with the help of following example:

Example 1:- Rs.Total current assets required by the borrower as per norms 20,000Current Liabilities 5,000Amount of maximum permissible bank borrowings as per the first methodCan be ascertained as follows:Working capital gap ( Rs.20,000 – Rs.5,000) 15,000Less: 25% from long term sources 3,750 Maximum permissible bank finance 11,250

Second method:-Under this method the borrower has to provide the minimum of 25% of the total current assets that will give a current ratio of 1.33 : 1.Example 2:- Rs.Total current assets required by the borrower 20,000Less:- 25% from long term sources 5,000

15,000Current Liabilities 5,000 Maximum permissible bank finance 10,000

Third method:- In this method the borrowers contribution from long term funds will be to the extent of entire core current assets and a minimum of 25% of the balance of current assets. The terms core current assets refers to the absolute minimum level of investment in all the current assets which is required at all the times to carry out minimum level of business activities.

Example 3:- Rs.In the above data if the core assets are of Rs.2,000/- then…Total current assets required by the borrower 20,000Less:- Core current assets 2,000 18,000Less:- 25% to be provided from long term funds 4,500 13,500



Less:- Current Liabilities 5,000 Maximum permissible bank finance 8,500

II. Projected Balance Sheet (PBS) Method In which the corporate is asked to project its balance sheet including the requirements for bank finance. The Bank validates these requirements through time-series and ratio analyses and sanctions the limits, if the level of finance projected by the corporate is found acceptable. Otherwise, the corporate is requested to alter its business plans and funding pattern.

II. Cash Budget MethodThe corporate is required to project its cash receipts and expenditure. Whenever, the expenditure overshoots the incomes, the Bank finance steps in to fill the gap. Many other banks, however, have continued with the method of Maximum Permissible Bank Finance (MPBF)

III. Turnover Method:In this method, projection of annual turnover is required to be made. RBI clarified that Turnover means 'Gross Sales' which will include excise duty also. After that arriving of project turnover, as per RBI guidelines the working capital to be assessed will be at 25% of projected turnover however, RBI stipulates that bank finance will be at minimum of 20 per cent of the projected turnover and rest 5% should come from borrower.

IV How to calculate Drawing Power (DP):The following is the example for calculation of DP: (Rs. in lakhs)

Particulars Amount(A)

Margin(B)

DP Amount(A – B)

Paid stocks (RM-Creditors) 4.00 25% 3.00Semi Finished goods 3.00 25% 2.25Finished goods 5.00 25% 3.75Book debts 8.00 30% 5.60

Total 20.00 14.60Note:- RBI on the question of unpaid stock ( creditors for raw material or FG in case of trading concern) has been clarified that the deduction for unpaid stock to be considered or not while arriving DP is the discretion of bank. But if we don’t deduct that amount then that will be a double financing.

Interest on Bank Finance:Deregulation of Interest Rates on Advances:- Till late 1980s, the interest rate structure on loans and advances extended by commercial banks was largely administered by the RBI and banks did not have any freedom to fix the interest on loan products, irrespective of the nature of advance and the amount lent. Banks were simply advised to follow the interest rate prescription of RBI, primarily to ensure the flow of adequate credit to the desired productive sectors of the economy. However from 1990, RBI has initiated a number of steps to simplify and rationalize the complex interest rate structure as well as to bring in transparency in the loan pricing system. During 1990 to 2003 several reforms were made in this regard. In 2003, BPLR (Banks Prime Lending Rate) was introduced.Extending credit at BPLR implies that the borrower is AAA rated and the associated risk is low. With increasing competition in the banking industry, the BPLR lost its relevance as large chunk of bank lending to the commercial sector happened at sub BMPLR rates i.e. around 7.50% as against average BPLR of 12.5%. RBI report on BPLR reveals that more than two-thirds credit portfolio of the Banks (excluding small loans and export credit) belongs to sub BPLR category and majority of these loans pertains to Corporate Sector / Large Borrowers where as Retail and Small borrowers continued to pay higher interest rates. Lending to Corporate Sector / Large Borrowers at



relatively low interest rates has a direct bearing on Yield on Advances and Net Interest Margin (NIM) of the banks.Interest Rate war among banks has caused unhealthy competition and led to unwarranted low interest offerings to corporate/large borrowers, detrimental to the interest of banks and stake-holders. Contrarily, banks are reluctant to revise BPLR downwards in respect of retail loans despite reduction of key rates by RBI.Base Rate:In the above backdrop, RBI constituted a working group under the Chairmanship of Shri. Deepak Mohanty to examine the related issues of BPLR and suggest a transparent credit pricing mechanism with an objective to ensure effective transmission of the Monetary Policy signals from time to time. The working group suggested Base Rate in the place of existing BPLR, which is arrived, duly taking the following components: - Cost of Deposits / Funds- Negative carry in respect of CRR and SLR- Unallocatable Overhead Costs- Average Return on Net Worth Based on the Working Group recommendations, RBI issued guidelines to all banks to announce Base Rate, duly taking the said criteria and directed the banks to price the loans accordingly w.e.f. 01.07.2010. Under this system, banks cannot lend below Base Rate except for certain categories such as Differential Rate of Interest (DRI) advances, Loans to bank’s own employees, Loans to bank’s depositors against their own deposits, Interest Subvention Schemes viz., Crop loans, Export credit and Restructured loans. The final lending rates include the Base Rate plus variable or product specific operating expenses, credit risk premium and tenor premium.Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committee as per the bank's practice and inform the same to RBI.

Export Finance:-There are two types of export finance :

a. Pre-shipment financeb. Post shipment finance

(a) Pre Shipment Finance is issued by a financial institution when the exporter want the payment of the goods before shipment. The main objectives behind pre-shipment finance or pre-export finance is to enable exporter to:

Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.

Let us take a example: ‘A’ has received an export order worth $2,50,000. He has to dispatched this order within next 60days. Now he will need working capital to complete this export order and hence will approach to bank for pre-shipment finance.

Types of Pre Shipment Finance Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.

Pre-shipment finance is extended in the following forms : Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

Eligibility



Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name.In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment credit can be shared between themQuantum of FinanceThe Quantum of Finance is granted to an exporter against the LC or an expected order. The only guideline principle is the concept of Need Based Finance. Banks determine the percentage of margin, depending on factors such as:

The nature of Order. The nature of the commodity. The capability of exporter to bring in the requisite contribution.

(b) Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds.

Basis of FinancePostshipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.

Types of FinancePostshipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating. In that case it involves advance against undrawn balance, and is usually unsecured in nature.Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financingis not funded in nature.

Quantum of FinanceAs a quantum of finance, postshipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of preshipment stage.Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.

Period of FinancePostshipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.

Types of Post Shipment FinanceThe post shipment finance can be classified as :

1. Export Bills purchased/discounted.2. Export Bills negotiated3. Advance against export bills sent on collection basis.4. Advance against export on consignment basis5. Advance against undrawn balance on exports6. Advance against claims of Duty Drawback.

SHG Lending:



RBI has advised the banks to that they may consider lending to SHGs as part of their mainstream credit operations, both at policy and implementation level. They may include SHG linkage in their corporate strategy/plan, training curriculum of their officers and staff and implement it as a regular business activity and monitor and review it periodically. In order to enable the banks to report their SHG lending without difficulty, it was decided that the banks should report their lending to SHGs for on-lending to members of SHGs under the respective categories, viz. 'Advances to SHGs' irrespective of the purposes for which the members of SHGs have been disbursed loans. Lending to SHGs should be included by the banks as part of their lending to the weaker sections.The following elements are required to be present in SHG lending of the bank:a. Margin and Security Norms: As per operational guidelines issued by NABARD, SHGs may be sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4). However, in case of matured SHGs, loans may be given beyond the limit of four times the savings as per the discretion of the bank.b. Documentation: A simple system requiring minimum procedures and documentation is a precondition for augmenting flow of credit to SHGs. Banks should strive to remove all operational irritants and make arrangements to expeditiously sanction and disburse credit by delegating adequate sanctioning powers to branch managers. The loan application forms, procedures and documents should be made simple. It would help in providing prompt and hassle-free credit. c. Presence of defaulters in SHGs: Defaults by a few members of SHGs and/or their family members to the financing bank should not ordinarily come in the way of financing SHGs per se by banks, provided the SHG is not in default. However, the bank loan may not be utilized by the SHG for financing a defaulter member to the bank.d. Interest rates: The banks would have the discretion to decide on the interest rates applicable to loans given to Self Help Groups/member beneficiaries.d. Service/ Processing charges: No loan related and ad hoc service charges/inspection charges should be levied on priority sector loans up to Rs. 25,000. In the case of eligible priority sector loans to SHGs/ JLGs, this limit will be applicable per member and not to the group as a whole.

Long-term loans: This type of loan is given for a fixed period (exceeding one year and not more than 7 years) to the borrowers for acquiring long-term assets i.e. assets that will benefit the borrower over a long period. The repayment is by way of installments according to agreed terms and conditions. However in the case of infrastructure projects, the repayment period may be for more than 7 years. A term loan is extended to finance the following purposes:- Specific asset; Modernization programme; Expansion programme; Diversification programme;New Project; Rehabilitation project.

Types of collaterals and their characteristics :a. Land & Building :Banks generally accepts Land & Building as collateral security. The basic advantage of acceptance of Land as security is its value generally increases with time. With every fall in the value of money, the value of land goes up and due to its scant availability in developing areas its value is bound to increase. One of its feature is it cannot be shifted anywhere. However, some of its disadvantages are valuation, title of owner, difficult to realize the security, and cost of creation of charge.

b. Bonds, Debentures:Bonds/Debenture is a document issued by a company acknowledging its indebtedness to the bearer or a registered holder. A fixed rate of interest is payable at stated periods on such instruments. These instruments will be having certain period of maturity. The Bonds can have maturity more than a period of 10 years also. However, these bonds generally carries credit rating for the issuers of the instruments, which have significance as related to payment of interest & repayment on maturity.

c. Life insurance Policies:



The surrender value of Life Insurance policies can be accepted as security by bank. The assignment of the policy in favour of the banker requires very little formalities and the banker obtains a perfect title. The longer the period for which the policy has been in force, the greater the surrender value. It is also useful as an additional security because, in the event of the borrowers death, the debt is easily liquidated from the proceeds of the policy. The policy is a tangible security and is in the custody of the bank. The banker only has to ensure that regular payment of premiums is made.

d. Shares & stocks:These may be classified into equity shares, and preference shares (which enjoy preference both with regards the payment of dividend and repayment of capital). Most of the time the value of the security can be ascertained without any difficulty as the same are traded in stock markets. However, the shares & stocks may have to face huge volatility due sudden change in prospects of company as viewed by markets, generally for short term. Further, due to volatile in nature RBI specifies high margin to be kept while accepting shares as security.

e. Documents of Title to Goods:As per the Section 2(4) of the Sale of Goods Act, 1930, a document of title to goods is a document used in the ordinary course of business as a proof of possession or control of goods authorizing or purporting to authorize either, by endorsement or delivery, the possessor of the documents, to transfer or receive the goods thereby represented.Examples of documents of title to goods are bills of lading, dock warrant, warehouse-keepers certificate, railway receipts, delivery orders, etc. Banks are accepting these as security because possession of goods represented by such instruments duly endorsed in its favour are taken out of the order and disposition of the insolvent (as per Provincial Insolvency Act, 1920). The significance of this is that in case the borrower becomes insolvent, the Official Receiver or Official Assignee as the case may be, cannot includesuch goods in the assets of the insolvent.Here, mere pledge of the instruments (documents of title) the goods are pledged and serve as a good security. The person in possession of the document can transfer the goods by endorsement and/or delivery. The transferee thereafter is entitled to take delivery of the goods in his own right. Also, the documents are easily transferable, and the formalities involved are less compared to mortgage or assignment.

f. Book Debts (Debtors):Borrowers can take advances by assigning book debts in favour of the bank. Section 130 of the Transfer of Property Act, permits assignment of actionable claim. However, the assignment must be in writing and signed by the transferor or his duly authorised agent as also notice of the assignment in writing must be given to the debtor. The assignment may be absolute or by way of charge. The legal implications which are advantageous to banks are (i) The assignee can sue in his/ their own name and can give a valid discharge (ii) The debtor can exercise any right of set off against the assignee, which but for such transfer, he could have exercised against assignor (iii) As an actionable claim includes future debts, there can be a valid assignment of future debts as well

g. Fixed Deposit :Fixed Deposits are payable on the expiry of a specified period from the date of deposit such a deposit. Interest, is paid at regular intervals at a specified rate on such deposits. This security is certainly the most valuable, as the money represented by the receipt is already with the bank and there is no problem of valuation or enquiring the title, or the problem of storage and costs associated with storage. Then banker, when accepting deposit receipt as a security, should ensure that all the depositors duly discharge it on the back of the instrument, after affixing the appropriate revenue stamp. In addition to this, the banker should obtain a letter of appropriation which authorizes the banker to appropriate the amount of the deposit on maturity or earlier towards the loan amount. After granting the advance, the banker must note his lien in the fixed deposit register or in CBS.



h. Gold ornaments:Banks are accepting Gold ornaments as security for loan in the form of collateral. Banks are also has product called as Gold Loan. The key features for this security is easy liquidity, storage and easy verification of title. However, the concern is always LTV (Loan to value ratio). In order to standardized the valuation & make it more transparent to the borrower, the gold jewellery accepted as security/collateral will have to be valued at the average closing price of 22 carat gold for the preceding 30 days as quoted by the Indian Bullion and Jewellers Association Ltd. However, the bank should appoint approved jeweler or shroff as an appraiser for valuation of gold ornaments proposed to be pledged. The bank should obtain a declaration from the borrower that the ornaments are his/her own & that has the fullest right to pledge them to the bankThe Gold pledged to the bank should be insured for the appraised value against the risk of burglary. If banks store the pledged jewels in fire-proof strong rooms, insuring them against fire may not be necessary. Banks may take blanket insurance policy covering cash, jewels and other valuables and also covering all types of risks.

i. Supply Bills:A party might have taken a contract for execution, and he is entitled to progressive payments based on work done, for which he has to submit bills in accordance with the terms and conditions of the contract. Similarly, parties who have accepted tenders for supply of goods over a period are entitled to payments on the supply of goods, for which they submit bills in accordance with the terms of the contract. These bills are known as supply bills. Banks are accepting Supply bills as security in case of material supplied to Government and public sector undertakings. These bills do not enjoy the status of negotiable instruments. They are in the nature of debts and are assigned, in favour of the banker for payment, after affixing a revenue stamp for having received the amount. The bank should also obtain a letter from the supplier or contractor, requesting the appropriate department to make the payment directly to the banker. The banker should obtain a power of attorney from the supplier authorizing him to receive the money. The same should be registered with the appropriate Government department.

j. Housing: Bank provides loan for the purpose of purchase or construction of house or flats, repairs and renovation of house, getting mortgaged the property for which the loan has been given. The quantum of loan depends on the monthly repayment capacity of the borrower. The bank can give up these loans upto 40 years of repayment tenure. In case of housing loan LTV (Loan to value) ratio is required to maintain as prescribed by RBI. As per RBI norms, LTV Less than or equal to 90% for loans upto Rs.30 lakhs, for loans above Rs. 30 lakhs to Rs. 75 lakhs LTV will be less than or equal to 80% & for loans above Rs. 75 lakhs it will be less than or equal to 75% is required to be maintained. LTV ratio should be computed as a percentage with total outstanding in the account (viz. “principal + accrued interest + other charges pertaining to the loan” without any netting) in the numerator and the realisable value of the residential property mortgaged to the bank in the denominator.

Documentation & Stampings:Documentation is one of the most important elements of the lending operation of a banker. For realization of the loan amount together with the other dues and repayable amount, the document taken as security, from the borrower, or/and, the guarantor, for repayment of loan amount together with the other dues, is the main basis of the claim of the banker and thus realization of the Bank dues depends to a large extent upon the precision and completeness of the documents obtained from the borrower. Therefore it becomes necessary for bank officers to know what the legal provisions are relevant to the subject of the documentation, in so far as it relate to its proper and valid execution, and its enforcement. It is, therefore, also essential to know the fundamental aspects of documentation.

What are "documents”?As per the definition under Section 3(18) of the General Clauses Act, 1987 " a document shall include any matter written, expressed or described upon any substance by means of letters,



figures or marks or by more than one of those means which is intended to be used or which may be used for the purpose of recording that matter.A document in the present context of commercial transactions is therefore, the substratum of commercial law. The application received from the borrower, and the other written agreements executed by the borrower and/guarantor, in connection with a particular loan transaction, constitute documents.

DocumentationThe process of obtaining proper documents and completion of the necessary formalities connected therewith is called, "Documentation".

Need for "documents"The documents are necessary to be procured for the following reasons:-a. to identify the borrower;b. to identify the security;c. to have a written evidence of the transactions of lending made by the bank;d. to ensure due repayment of the loan by the borrower/or guarantor;e. to entitle the bank to take legal steps for recovery of the loan, in the event of non-payment by the borrower/or guarantor;f. to create a valid and effective security in favour of the bank and to create charge on security;g. because in the absence of a document capable of being legally enforceable the bank would find it hard to prove and establish before a court of law that the amount was lent and the same has not been repaid;

Important Points to be borne in mind in Execution of Documentsa. The document should mention the date, month and year of execution: for determining the period of limitation;b. Document must mention Place of execution: This is for determing the jurisdiction of courts in case of disputes and for purposes of payment of proper stamp duty, according to the law applicable to particular place. c. Details of the Security/Collateral Security must be mentionedd. Stampinge. Registration

Stamp Duty on DocumentsA. Rules relating to stamping of documents

1. Amount of Duty: This must be in accordance with the law prevailing in the State where the document is first executed.

2. Kind of Stamps: Normally these are either general stamp papers or adhesive/ special adhesive stamps. In normal documents like hypothecation or pledge both kinds can be used, but special adhesive stamps are affixed only by the Stamp Office and cancelled by them before execution. A promissory note bears a revenue stamp. For bills of exchange and share transfers there are different kinds of special adhesive stamps. Kinds of stamps differ in different states in accordance with the prevalent rules.

3. Writings on a stamp paper: If general stamp papers are used for a document, each paper should have some substantial part of the document written or typed on it. The action of affixing general stamp papers on printed forms is unlawful. Pasting of stamps with the printed documents is not proper.

4. Time on stamping and execution: A document should be stamped before it is executed. The date of execution should always be subsequent to the date appearing on the stamp.



5. Place of stamping and execution: A document should bear the stamp of that State in which it is first executed. If any executant is in another State, the excess duty, if any, in the other state is to be paid there.

6. Cancellation of Stamps: A stamp must be cancelled in such a way which would ensure that it would not be used again. Special adhesive stamps are cancelled by stamp office. Revenue stamps on Promissory Notes and Other adhesive stamps should be cancelled as stated above.

B. Consequences of not stamping a document according to lawAs to the consequences of not properly stamping, documents are divided into two classes:-Those documents which are not admissible in evidence at all if any of the rules is violated.

1. These are (a) Promissory Notes, (b) Bills of exchange and (c) Instrument chargeable with a duty of _____ (Rupees as per Stamp Act of different states where the documents are executed). Inadmissible in evidence means they cannot be produced and relied upon in any suit for establishing any right there under.

2. All documents other than these stated above are admissible in evidence after payment of penalty which cannot exceed ten times the deficit duty.

Various types of documents:1. Demand promissory note2. Letters of continuity3. Agreement for hypothecation4. Agreement for pledge of goods5. Guarantees : Guarantees are in either of the following forms:a. D.F. Note signed by the guarantor jointly with the borrower. It binds both of them to be jointly and severally liable.b. A separate guarantee agreement.

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CHAPTER 7Priority Sector Lending & Government Sponsored Schemes

Introduction: Availability of cheap and adequate credit is a boon for the Economic Development of a country. By providing credit to farmers, industries, traders and businessmen the economic progress can be achieved. The banking system can influence economic growth by enhancing resources in the direction of national objectives and priorities. The banks play a very crucial role in the process of economic development and so theavailability of banking infrastructure is considered as one of the prerequisites for rapid and balanced development of the country. The banks in India have an important responsibility of chanalizing the funds with most important sectors to fulfill the predetermined objectives. There is a rapid expansion in banking, deposit mobilization and credit development due to which there is change in the scope of banking operations.

Lending To Priority Sectors By Commercial Banks:- The concept of priority sector was evolved in the late sixties in order to focus attention on the need to ensure adequate credit facilities to certain neglected sectors of the economy particularly in the rural areas. The involvement of banks in priority sector lending has grown considerably with special emphasis on opening branches in un-banked areas.With a view to ensure flow of credit to the neglected sectors like agriculture and small scaleindustries, the concept of priority sector lending was evolved and commercial banks were advised to grant at least 40 percent of their ANBC to priority sector comprising of agriculture,small scale industries, small road and transport operators, retail trade, small business, professional and self employed persons, education and 32% for foreign banks.

TARGETS/SUB-TARGETSThe targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below:

Categories under priority sectorAgriculture, Micro, Small and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Others.

The details of eligible activities under the above categories are specified in paragraph III.II. Targets /Sub-targets for Priority sector(i) The targets and sub-targets set under priority sector lending for all scheduled commercial banks operating in India are furnished below:

CategoriesDomestic scheduled commercial banks and Foreign banks with 20 branches and above

Foreign banks with less than 20 branches

Total Priority Sector

40 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii)] or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.Foreign banks with 20 branches and above have to achieve the Total Priority Sector Target within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 as per the action plans submitted by them and approved by RBI.

40 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii)] or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher; to be achieved in a phased manner by 2020 as indicated in sub paragraph (ii) below.

Agriculture 18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent

Not applicable



Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 per cent by March 2016 and 8 per cent by March 2017.Foreign banks with 20 branches and above has also required to achieve achieve the above target.

Micro Enterprises 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher to be achieved in a phased manner i.e. 7 per cent by March 2016 and 7.5 per cent by March 2017.Foreign banks with 20 branches and above has also required to achieve achieve the above target

Not Applicable

Advances to Weaker Sections

10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.Foreign banks with 20 branches and above have to achieve the Weaker Sections Target within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 as per the action plans submitted by them and approved by RBI.

Not Applicable

Computation of Adjusted Net Bank Credit (ANBC)

Bank Credit in India [As prescribed in item No.VI of Form ‘A’ under Section 42 (2) of the RBI Act, 1934].

I

Bills Rediscounted with RBI and other approved Financial Institutions IINet Bank Credit (NBC)* III (I-II)Bonds/debentures in Non-SLR categories under HTM category+ other investments eligible to be treated as priority sector +Outstanding Deposits under RIDF and other eligible funds with NABARD, NHB and SIDBI on account of priority sector shortfall + outstanding PSLCs

IV

Eligible amount for exemptions on issuance of long-term bonds for infrastructure and affordable housing as per circular DBOD.BP.BC.No.25/08.12.014/2014-15 dated July 15, 2014.

V

Eligible advances extended in India against the incremental FCNR (B)/NRE deposits, qualifying for exemption from CRR/SLR requirements.

VI

ANBC III+IV-V-VI

PENALTIES FOR NON-ACHIEVEMENT OF PRIORITY SECTOR LENDING TARGET / SUB-TARGETS1. Domestic scheduled commercial banks – Contribution by banks to Rural Infrastructure Development Fund (RIDF) or Funds with other Financial Institutions, as specified by the Reserve Bank:1.1 Domestic scheduled commercial banks and foreign banks with branches 20 and above having shortfall in lending to priority sector lending target (40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher) and / or agriculture lending target (18 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher) and / or weaker sections lending target (10 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposures, whichever is higher) shall be allocated amounts for contribution to the



Rural Infrastructure Development Fund (RIDF) established with NABARD or Funds with NHB/SIDBI/other Financial Institutions, as specified by the Reserve Bank. III. Description of the eligible categories under priority sector

1. AgricultureThe present distinction between direct and indirect agriculture is dispensed with. Instead, the lending to agriculture sector has been re-defined to include (i) Farm Credit (which will include short-term crop loans and medium/long-term credit to farmers) (ii) Agriculture Infrastructure and (iii) Ancillary Activities. A list of eligible activities under the three sub-categories is indicated below:

1.1 Farm credit

A. Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. This will include:(i) Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities.(ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.)(iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.(iv) Loans to farmers up to Rs.50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.(v) Loans to distressed farmers indebted to non-institutional lenders.(vi) Loans to farmers under the Kisan Credit Card Scheme.(vii) Loans to small and marginal farmers for purchase of land for agricultural purposes.B. Loans to corporate farmers, farmers' producer organizations/companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of Rs.2 crore per borrower. This will include:(i) Crop loans to farmers which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities.(ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and developmental loans for allied activities.)(iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.(iv) Loans up to Rs.50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.

1.2. Agriculture infrastructure

i) Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of their location.ii) Soil conservation and watershed development.iii) Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermi composting.For the above loans, an aggregate sanctioned limit of Rs.100 crore per borrower from the banking system, will apply.

1.3.Ancillary activities

(i) Loans up to Rs.5 crore to co-operative societies of farmers for disposing of the produce of members.(ii) Loans for setting up of Agriclinics and Agribusiness Centres.



(iii) Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs.100 crore per borrower from the banking system.(iv) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture.(v) Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified in paragraph IX of this circular(vi) Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sector shortfall.

For the purpose of computation of 7 percent/ 8 percent target, Small and Marginal Farmers will include the following:-Farmers with landholding of up to 1 hectare are considered as Marginal Farmers. Farmers with a landholding of more than 1 hectare and upto 2 hectares are considered as Small Farmers.Landless agricultural labourers, tenant farmers, oral lessees and share-croppers.Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual Small and Marginal farmers directly engaged in Agriculture and Allied Activities, provided banks maintain disaggregated data of such loans.Loans to farmers' producer companies of individual farmers, and co-operatives of farmers directly engaged in Agriculture and Allied Activities, where the membership of Small and Marginal Farmers is not less than 75 per cent by number and whose land-holding share is also not less than 75 per cent of the total land-holding.

2. Micro, Small and Medium Enterprises (MSMEs)Bank loans to Micro, Small and Medium Enterprises, for both manufacturing and service sectors are eligible to be classified under the priority sector as per the following norms:2.2. Manufacturing EnterprisesThe Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The Manufacturing Enterprises are defined in terms of investment in plant and machinery.2.3. Service EnterprisesRBI has removed the cap for providing loans to Micro and Small Enterprises and Medium Enterprises engaged in providing or rendering of services, means all loans to MSME of services sector will classify as Priority sector.2.4. Khadi and Village Industries Sector (KVI)All loans to units in the KVI sector will be eligible for classification under the sub-target of 7 percent /7.5 percent prescribed for Micro Enterprises under priority sector.2.5. Other Finance to MSMEs(i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.(ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries.(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions specified in paragraph IX of this circular.(iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to the non-farm entrepreneurial credit needs of individuals).(v) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.2.6. Considering that the MSMED Act, 2006 does not provide for any sub-categorization within the definition of micro enterprises and that the sub-target for lending to micro enterprises has been fixed, the current sub-categorization within the definition of micro enterprises in the existing guidelines is dispensed with.2.7. To ensure that MSMEs do not remain small and medium units merely to remain eligible for priority sector status, the MSME units will continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned.



2.8. From 11.8.2016, factoring transactions on ‘with recourse’ basis with MSME shall be eligible for priority sector classification by banks, which are carrying out the business of factoring departmentally. The factoring transactions taking place through Trade Receivables Discounting System (TReDS) shall also be eligible for classification under priority sector upon operationalization of the platform.

3. Export CreditThe Export Credit extended as per the details below would be classified as priority sector.

Domestic banks Foreign banks with 20 branches and above

Foreign banks with less than 20 branches

Incremental export credit over corresponding date of the preceding year, up to 2 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit of Rs.25 crore per borrower to units having turnover of up to Rs.100 crore.

Incremental export credit over corresponding date of the preceding year, up to 2 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, effective from April 1, 2017 (As per their approved plans, foreign banks with 20 branches and above are allowed to count certain percentage of export credit limit as priority sector till March 2016).

Export credit will be allowed up to 32 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Export credit includes pre-shipment and post shipment export credit (excluding off-balance sheet items) as defined in Master Circular on Rupee / Foreign Currency Export Credit and Customer Service to Exporters issued by our Department of Banking Regulation.

4. EducationLoans to individuals for educational purposes including vocational courses upto Rs. 10 lakh irrespective of the sanctioned amount will be considered as eligible for priority sector.

5. Housing(i) Loans to individuals up to Rs. 35 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs. 25 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs. 45 lakh and Rs. 30 lakh respectively. The housing loans to banks’ own employees will be excluded. (ii) Loans for repairs to damaged dwelling units of families up to Rs. 5 lakh in metropolitan centres and up to Rs. 2 lakh in other centres.(iii) Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of Rs. 10 lakh per dwelling unit.(iv) The loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses for economically weaker sections and low income groups, the total cost of which does not exceed Rs. 10 lakh per dwelling unit. For the purpose of identifying the economically weaker sections and low income groups, the family income limit of Rs. 3 lakh per annum for Economically Weaker Sections (EWS) & Rs. 6 lakh per annum for Low Income Groups (LIG) irrespective of the location, is prescribed.(v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of Rs. 10 lakh per borrower.The eligibility under priority sector loans to HFCs is restricted to five percent of the individual bank’s total priority sector lending, on an ongoing basis. The maturity of bank loans should be co-terminus with average maturity of loans extended by HFCs. Banks should maintain necessary borrower-wise details of the underlying portfolio.(vi) Outstanding deposits with NHB on account of priority sector shortfall.



6. Social infrastructureBank loans up to a limit of Rs. 5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres.

7. Renewable EnergyBank loans up to a limit of Rs. 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual households, the loan limit will be Rs. 10 lakh per borrower.

8. Others8.1. Loans not exceeding Rs. 50,000/- per borrower provided directly by banks to individuals and their SHG/JLG, provided the individual borrower’s household annual income in rural areas does not exceed Rs. 100,000/- and for non-rural areas it does not exceed Rs. 1,60,000/-.8.2. Loans to distressed persons [other than farmers already included under III (1.1) A (v)] not exceeding Rs. 100,000/- per borrower to prepay their debt to non-institutional lenders.8.3. Overdrafts extended by banks upto Rs. 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts provided the borrowers household annual income does not exceedRs. 100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas.8.4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the beneficiaries of these organisations.

IV. Weaker SectionsPriority sector loans to the following borrowers will be considered under Weaker Sections category:-No. Category1. Small and Marginal Farmers2. Artisans, village and cottage industries where individual credit limits do not exceed

Rs. 1 lakh3. Beneficiaries under Government Sponsored Schemes such as National Rural

Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)

4. Scheduled Castes and Scheduled Tribes5. Beneficiaries of Differential Rate of Interest (DRI) scheme6. Self Help Groups7. Distressed farmers indebted to non-institutional lenders8. Distressed persons other than farmers, with loan amount not exceeding Rs. 1 lakh

per borrower to prepay their debt to non-institutional lenders9. Individual women beneficiaries up to Rs. 1 lakh per borrower10. Persons with disabilities11. Overdrafts upto Rs. 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY)

accounts, provided the borrowers’ household annual income does not exceedRs. 100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas

12. Minority communities as may be notified by Government of India from time to time

GOVERNEMENT SPONSORED SCHEMES- IN NUTSHELL

PRIME MINISTWR’S EMPLOYMENT GENERATION PROGRAME (PMEGP)

(RBI cir. 10.10.2008)The Government of India, have merged Rural Employment Generation Programme ( REGP) with Prime Minister Rozgar Yojana (PMRY)

SCHEME FOR REHABILITATION OF MANUAL SCAVENGERS

(SRMS)



and introduced a new scheme called Prime Minister Employment Generation Programme (PMEGP) w.e.f.01.04.2008 (As such PMRY scheme is closed).

ELIGIBILITY NORMS

Borrowers : Individuals SGH’s (of BPL) charitable trusts, Institution under Societies Registration Act, Production coop societies.Existing unit and those who have borrowed under some subsidy scheme, not eligibleAge: Individual above 18 years Income celling: There is no income cellingMinimum qualification 8th pass only for manufacturing projects costing above Rs10 lac and service / business projects above Rs5 lac.Family : beneficiary & spouse. Only one person from family eligibleTraining 2-3 weeks EDP essential before release of loan. It is waived for those who have already undergone such training.Identification of beneficiary by Dist level task force headed by DC/DM and represented by KVIC/DIC/BANKS.

Scavenger – The person who ispartially or wholly engaged in the obnoxious and inhuman occupation of manually removing night soil and filth. Eligible borrowers:a. Scavengers or their dependents who have not been provided any assistance for rehabilitation by Central/State govt. sponsored by STATE chennelising agencies.b. No income criteria applicable.c. Age 18 years & aboved. They are not employed.e. No minimum education criteria.e. SHG’s can be involved but norms applicable to SHG’s are not applicable as it is tome bound scheme.

IMPLEMENTINGAGENCIES

Administration by Ministry of MSE. Implementation by KVIC at National Level. At State level by KVIC-board, DIC and banks. Scheme to be implemented through PSBSs, RRBs, SIDBI and coop banks & Private banks approved by State leveltask force.

Apex corporations of Ministry of Social Justice & Empowerment (mainly National Safai Karmachari Finance & Development Corporation and State Channeling Agencies).

QUANTAM OF LOAN & COST OF PROJECTS

Projects cost manufacturing sector: up to Rs 25lac. Business and service sector Rs 10lac.Projects cost include capital expenditure and one cycle of working capital projects without capital expenditure, not eligible Projects costing more than Rs5 lac but not requiring working capital to be cleared by Regional Offices of the bankCost of land not part of projects costAmount of loan : Composite loans can be sanctioned to the extent of 90% of project cost including subsidy ( 95% in case of special category borrow that include SC/ST, woman, OBC, physically handicapped, Ex-servicemen, minority, north east region, hill and border areas etc).Section of borrower on the basic of score card prepared by SBI/RBI.

Both term loan for project cost upto Ts.5 lac and micro-financing by SHG/NGOs upto Rs.25,000,available.

TAGET The targets for margin money (subsidy) will be allocated by KVIC and in the State by SLBC, 50% should be for rural areas projects.

Maximum Project cost – Rs.5 lacBank Loan = Project cost less capital subsidy.



SUBSIDY Subsidy –general borrowers 15% in urban and 25% in rural areas. For special category (as above) 25% & 35%.

Annual target to be fixed by SLBC for each bank in the state.

Loan application disposal – Fortnight for loan upto Rs.25,000 and above that 8 – 9 weeks.

Deendayal Antyodaya Yojana - National Rural Livelihoods Mission: The Ministry of Rural Development, Government of India has launched National Rural Livelihood Mission (NRLM) by restructuring Swarnajayanti Gram Swarozgar Yojana (SGSY) replacing the existing SGSY scheme, effective from April 1, 2013. NRLM was renamed as DAY-NRLM (Deendayal Antyodaya Yojana - National Rural Livelihoods Mission) w.e.f. March 29, 2016 and is the flagship program of Govt. of India for promoting poverty reduction through building strong institutions of the poor, particularly women, and enabling these institutions to access a range of financial services and livelihoods services.

Features:NRLM focuses on building, nurturing and strengthening the institutions of the poor women, including the SHGs and their Federations at village and higher levels.Funding Pattern: NRLM is a Centrally Sponsored Scheme and the financing of the programme would be shared between the Centre and the States in the ratio of 75:25 (90:10 in case of North Eastern States including Sikkim; completely from the Centre in case of UTs). The Central allocation earmarked for the States would broadly be distributed in relation to the incidence of poverty in the States.Capital Subsidy has been discontinued under NRLM.Revolving Fund (RF): NRLM would provide a Revolving Fund (RF) support to SHGs in existence for a minimum period of 3/6 months and follow the norms of good SHGs, i.e they follow ‘Panchasutra’ – regular meetings, regular savings, regular internal lending, regular recoveries and maintenance of proper books of accounts. Only such SHGs that have not received any RF earlier will be provided with RF, as corpus, with a minimum of Rs. 10,000 and up to a maximum of Rs.15,000 per SHG.

Introduction of Interest subvention: NRLM has a provision for interest subvention, to cover the difference between the Lending Rate of the banks and 7%, on all credit from the banks/ financial

MARGIN 10%for general candidates and 5%of the project cost for special categories (as above)

No margin from the borrower, state agencies to distribute funds within 3 months.

INTEREST As per head office /RBI Upto Rs.25,000 : 5% (for women 4%)Above Rs.25,000 : 6%.Subsidy available for difference amount from National Safai karmachri finance & Devel. Corporation.

COLLATERAL SECURITY

Collateral security exemption will be up to Rs 5 lace

Hypothecation of assets.

REPAYMENT 3 to 7 years with moratorium as prescribed. For composite loan, repayment to be fixed for term loan component only.

Loan upto Rs.25000 – 3 years Loan above Rs.25000 – 5 yearsMoratorium period : 6 months.

MISC Defaulters of nationalized bank /financial institution/coop bank not eligible.Village industry is where is where fixed capital investment per head of artisan/worker does not exceed Rs 1lac (in hilly areas rs 1.50 lac). Review of proposals and recovery of loans on a quarterly basic by Task force.

Loan application disposal – Fortnight for loan upto Rs.25,000 and above that 8 – 9 weeks.



institutions availed by women SHGs, for a maximum of Rs 3,00,000 per SHG. This will be available across the country in two ways: In 250 identified districts, banks will lend to all the women SHGs @7% upto an aggregated loan amount of Rs 3,00,000/- . The SHGs will also get additional interest subvention of 3% on prompt payment, reducing the effective rate of interest to 4%. In the remaining districts also, NRLM compliant women SHGs will be registered with SRLMs. These SHGs are eligible for interest subvention to the extent of difference between the lending rates and 7% for the loan upto Rs. 3 lakhs, subjected to the norms prescribed by the respective SRLMs. This part of the scheme will be operationalized by SRLMs.

Loan amount: Type of facility:SHGs can avail either Term loan or a CCL loan or both based on the need. In case of need, additional loan can be sanctioned even though the previous loan is outstanding.

Cash Credit Limit (CCL): In case of CCL, banks are advised to sanction minimum loan of Rs. 5 lakhs to each eligible SHGs for a period of 5 years with a yearly drawing power (DP). The drawing power may be enhanced annually based on the repayment performance of the SHG. The drawing power may be calculated as follows:• DP for First Year: 6 times of the existing corpus or minimum of Rs. 1 lakh whichever is higher. • DP for Second Year: 8 times of the corpus at the time review/ enhancement or minimum of Rs. 2 lakh, whichever is higher • DP for Third Year: Minimum of Rs. 3 lakhs based on the Micro credit plan prepared by SHG and appraised by the Federations /Support agency and the previous credit History. • DP for Fourth Year onwards: Minimum of Rs. 5 lakhs based on the Micro credit plan prepared by SHG and appraised by the Federations /Support agency and the previous credit History.

Term Loan should be as follows:First dose: 6 times of the existing corpus or minimum of Rs. 1 lakh whichever is higher. Second dose: 8 times of the existing corpus or minimum of Rs. 2 lakh, whichever is higher.Third dose: Minimum of Rs.3 lakhs based on the Micro credit plan prepared by the SHGs and appraised by the Federations /Support agency and the previous credit History.Fourth Dose: Minimum of Rs. 5 lakhs based on the Micro credit plan prepared by the SHGs and appraised by the Federations /Support agency and the previous credit History The loans may be used by members for meeting social needs, high cost debt swapping, construction or repair of house, construction of toilets and taking up sustainable livelihoods by the individual members within the SHGs or to finance any viable common activity started by the SHGs. (Corpus is inclusive of revolving funds, if any, received by that SHG, its own savings and funds from other sources in case of promotion by other institutes/NGOs.)

Repayment:Prompt repayment of the loans is necessary to ensure the success of the programme. Banks shall take all possible measures, i.e. personal contact, organization of joint recovery camps with District Mission Management Units (DPMUs) / DRDAs to ensure the recovery of loans. Keeping in view, the importance of loan recovery, banks should prepare a list of defaulting SHGs under DAY-NRLM every month and furnish the list in the BLBC, DLCC meetings. This would ensure that DAY-NRLM staff at the district/ block level will assist the bankers in initiating the repayment.

Security and Margin:No collateral and no margin will be charged upto Rs. 10.00 lakhs limit to the SHGs. No lien should be marked against savings bank account of SHGs and no deposits should be insisted while sanctioning loans. Priority Lending – Microfinance institution: Bank credit to MFIs for onlending will be eligible for categorization as priority sector advance if aggregate amount of loan, extended for income generating activity, is not less than 75% of the total loans given by MFIs. This 75% is now changed to 70%.



Deendayal Antyodaya Yojana – National Urban Livelihoods Mission (DAY-NULM)The Ministry of Housing & Urban Affairs, Government of India has given the operational guidelines of Self-Employment Programme (SEP) under DAY-NULM.The Self Employment Program (SEP) of NULM focuses on providing financial assistance through provision of interest subsidy on loans to support establishment of Individual & Group Enterprises and Self-Help Groups (SHGs) of urban poor. The erstwhile provision of capital subsidy for USEP (Urban Self Employment Program) and UWSP (Urban Women Self-Help Program) under SJSRY has been replaced by interest subsidy for loans to Individual enterprise (SEP-I), Group enterprise (SEP-G) and Self Help Groups (SEP-SHGs).The SEP provides financial assistance to individuals/groups including street venders/hawkers of urban poor for setting up gainful self-employment ventures/ micro-enterprises, suited to their skills, training, aptitude and local conditions. The programme also supports Self Help Groups (SHGs) of urban poor to access easy credit from bank and avail interest subsidy on SHG loans. The SEP will also focus on technology, marketing and other support services to the above beneficiaries engaged in micro enterprises for their livelihoods and will also facilitate issuance of credit cards for working capital requirement of the entrepreneurs. The percentage of women beneficiaries under SEP shall not be less than 30 percent. SCs and STs must be benefited at least to the extent of the proportion of their strength in the city/town population of poor. A special provision of 3 percent reservation should be made for the differently-abled under this program. The Community Organizers (COs) and professionals from Urban Local Body (ULB) will identify the prospective beneficiaries from among the urban poor.The financial assistance available to urban poor in setting up individual and group enterprises will be in the form of Interest subsidy on the bank loans. Interest subsidy, over and above 7% rate of interest will be available on a bank loan for setting up of individual or group enterprises. The difference between 7% p.a. and the rate of interest charged by the bank will be provided to banks under DAY-NULM. Interest subsidy will be given only in case of timely repayment of loan. Suitable certification from banks will be obtained in this regard. An additional 3 percent interest subvention will be provided to all Women Self Help Groups (WSHGs) who repay their loan in time. The Interest subsidy will be subject to timely repayment of the loan (as per the loan repayment schedule) and suitable certification obtained from banks by the ULB. The additional 3% interest subvention amount will be reimbursed to the eligible WSHGs. The banks should credit the amount of 3% interest subvention to the eligible WHSGs accounts and thereafter seek the reimbursement.

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CHAPTER 8Agricultural Finance

Introduction:Agricultural finance means financing and providing liquidity services to farm borrowers. Agricultural production in this country depends upon millions of small farmers. Their intensity, effort andefficiency have helped in raising yields per acre. Finance in agriculture act as a key to farmers. But farmers money is always inadequate and they needs outside finance or credit. Because of inadequate financial resources and absence of timely credit facilities at reasonable rates, many of the farmers, are unable to go in for improved seeds and manures or to introduce better methods or techniques. Agriculture plays a crucial role in the development of the Indian economy. It accounts for about 19 per cent of GDP and about two thirds of the population is dependent on this sector. Agricultural finance is a subset of rural finance dedicated to financing agricultural related activities such as input supply, production, distribution, wholesale, processing and marketing.

Types of based on period:Short-Term: Loans repayable upto 18 months are termed as short-term loans. The short-term loans are generally advanced for meeting annual recurring purchases such as, seed, feed, fertilizers, hired labour expenses, pesticides, and hired machinery charges which are termed as seasonal loans/crop loans/production loans. Loan sanctioned through Kisan credit card scheme, loan against gold ornaments for agricultural purpose are some of the examples.

Medium to Long Term Loans: The period of credit under this category is more than 18 months. The loans will be given as direct finance for minor irrigation, farm/land development, farm mechanization, plantation, horticulture, diary farming, sheep/goat farming, piggery & rabbit farming, poultry farming, fisheries, sericulture, bee keeping, mushroom cultivation. Indirect finance includes distribution of fertilizers, petsticides, pump set, spraying operations etc.

Different products of financing:Agricultural loans are available for a multitude of farming purposes. Farmers may apply for loans to buy inputs for the cultivation of food grain crops as well as for horticulture, aquaculture, animal husbandry, floriculture and sericulture businesses. There are also special loans to finance the purchase of agricultural machinery such as tractors, harvesters and trucks. Construction of biogas plants and irrigation systems as well as the purchase of agricultural land may also be financed through special types of agricultural finance.

Kisan Credit Card (KCC) scheme: Was introduced in 1998 for issue of Kisan Credit Cards to farmers on the basis of their holdings for uniform adoption by the banks so that farmers may use them to readily purchase agriculture inputs such as seeds, fertilizers, pesticides etc. and draw cash for their production needs. The scheme facilitate issue of Electronic Kisan Credit Cards. The Kisan Credit Card Scheme is to be implemented by Commercial Banks, RRBs, Small Finance Banks and Cooperatives.

Eligibility:i. Farmers - individual/joint borrowers who are owner cultivators; ii. Tenant farmers, oral lessees & share croppers; iii. Self Help Groups (SHGs) or Joint Liability Groups (JLGs) of farmers including tenant farmers, share croppers etc.

The Kisan Credit Card scheme aims at providing adequate and timely credit support from the banking system under a single window with flexible and simplified procedure to the farmers for their cultivation and other needs as indicated below: a. To meet the short term credit requirements for cultivation of crops; b. Post-harvest expenses; c. Produce marketing loan; d. Consumption requirements of farmer household; e. Working capital for maintenance of farm assets and activities allied to agriculture;



f. Investment credit requirement for agriculture and allied activities. Note: The aggregate of components ‘a’ to ‘e’ above will form the short term credit limit portion and the aggregate of components under ‘f’ will form the long term credit limit portion.

This Kisan Credit Card is valid for 5 years subject to annual review. As incentive for good performance, credit limits may be enhanced to take care of increase in costs, change in cropping pattern, etc. Each drawl should be repaid within a maximum period of 12 months. Conversion or rescheduling of loans is allowed in case of damage to crops due to natural calamities. Security, rate of interest and other details are fixed according to RBI norms & margin will be as per bank norms.

Security: Security will be applicable as per RBI guidelines prescribed from time to time. Currently, i. Hypothecation of crops: For KCC limit upto ₹ 1.00 lakh banks are to waive margin/security requirements.ii. With tie-up for recovery: Banks may consider sanctioning loans on hypothecation of crops up to card limit of ₹ 3.00 lakh without insisting on collateral security.iii. Collateral security: Collateral security may be obtained at the discretion of Bank for loan limits above ₹ 1.00 lakh in case of non-tie-up and above ₹ 3.00 lakh in case of tie-up advances.iv. In states where banks have the facility of on-line creation of charge on the land records, the same shall be ensured.

Agricultural Term Loans: The banks provides medium to long term loans for the following activities of agriculture.

Land Development - Financial assistance for Land reclamation, Soil conservation measures and on farm development works like Land leveling, terracing, contouring, bunding, fencing etc.

Minor Irrigation - Term Loans are extended for construction of wells, for deepening/renovating the existing wells and for boring in the existing dug wells to augment water supply.

Farm Mechanization - Financing for purchase of machinery/implements like Tractors, Power Tillers, seed drill, seed-cum-fertilizer drill, planters, power sprayers, seed cleaners, weed removers, power threshers, chaff cutters, cane crushers, harvester combines etc.

Plantation / Horticulture Crops - Term loans for cultivation of Coconut, Coffee, Tea and Rubber plantations, Floriculture, Vegetable and Fruit cultivation etc.

Loan for Allied Activities - Credit facilities extended for activities related to dairy, poultry, Fisheries, duckery, rearing of goat and sheep, pig, rabbit, etc.

Risk Mitigation in agriculture:Agriculture in India is exposed to risk from rainfall variability, market price fluctuations, credit uncertainty and adoption of new technology. The diversities in the sources of risks require a variety of instruments for protecting the farmers. Some of the risk mitigation measures are:

Farmers Support System:

I. National Agricultural Insurance Scheme (NAIS) :The scheme is sponsored by both Central & State Government. The objectives of the NAIS are a. To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases.b. To encourage the farmers to adopt progressive farming practices, high value inputs and higher technology in Agriculture. c. To help stabilise farm incomes, particularly in disaster years.



FARMERS TO BE COVERED: All farmers including sharecroppers, tenant farmers growing the notified crops in the notified areas are eligible for coverage. The Scheme covers following groups of farmers: On a compulsory basis: All farmers growing notified crops and availing Seasonal Agricultural Operations (SAO) loans from Financial Institutions i.e. Loanee Farmers. On a voluntary basis: All other farmers growing notified crops (i.e., Non-Loanee farmers) who opt for the Scheme.

SUM INSURED / LIMIT OF COVERAGE: The Sum Insured (SI) may extend to the value of the threshold yield of the insured crop at the option of the insured farmers. However, a farmer may also insure his crop beyond value of threshold yield level upto 150% of average yield of notified area on payment of premium at commercial rates. In case of Loanee farmers the Sum Insured would be at least equal to the amount of crop loan advanced. Further, in case of Loanee farmers, the Insurance Charges shall be an additionality to the Scale of Finance for the purpose of obtaining loan.

II. Minimum Support Price:MSP is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall in price during bumper production years. The minimum support prices are a guarantee price for their produce from the Government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.

III. Interest Subvention scheme for Short Term Crop Loans during the year 2017-18:Government of India has given a Interest Subvention scheme for Short Term Crop Loans during the year 2017-18 for short term crop loans upto Rs.3.00 lakhs. The following are the features of it:i. Short-term crop loans upto Rs. 3 lakh will be at an interest rate of 7% p.a. (i.e after subvention, that means original rate of interest will be 9%) during the year 2017-18, so as to offer interest subvention of 2% per annum to lending institutions viz. Public Sector Banks (PSBs), Private Sector Commercial Banks (in respect of loans given by their rural and semi-urban branches only) on use of their own resources. This interest subvention of 2% will be calculated on the crop loan amount from the date of its disbursement/ drawal up to the date of actual repayment of the crop loan by the farmer or up to the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one year.ii. Over & above 2%, provide an additional interest subvention of 3% per annum to such of those farmers repaying in time i.e. from the date of disbursement of the crop loan upto the actual date of repayment by farmers or upto the due date fixed by the banks for repayment of crop loan, whichever is earlier, subject to a maximum period of one year from the date of disbursement. This also implies that the farmers paying promptly as above would get short term crop loans @ 4% per annum during the year 2017-18. iii. In order to discourage distress sale and to encourage them to store their produce in warehouses, the benefit of interest subvention will be available to small and marginal farmers having Kisan Credit Card for a further period of upto six months post the harvest of the crop at the same rate as available to crop loan against negotiable warehouse receipts issued on the produce stored in warehouses accredited with Warehousing Development Regulatory Authority (WDRA).iv. To provide relief to farmers affected by natural calamities, an interest subvention of 2 percent per annum will be made available to banks for the first year on the restructured loan amount. Such restructured loans will attract normal rate of interest from the second year onwards.

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CHAPTER 9Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances1.INTRODUCTION1.1.In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts.1.2. The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained nonperforming and the availability of security and the realisable value thereof.

2. NPA:- MEANING2.1 Non performing Assets2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.2.1.2 A non performing asset (NPA) is a loan or an advance where;i.interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,ii.the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC),iii.the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.2.1.3 Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

2.2 ‘Out of Order’ statusAn account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. 2.3 ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

3. INCOME RECOGNITION3.1 Income Recognition Policy 3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Internationally income from nonperforming assets (NPA) is not recognised on accrual basis but



is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. 3.1.2 However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. 3.1.3 Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.3.1.4 If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.

3.2 Reversal of income 3.2.1 If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire interest accrued and credited to income account in the past periods, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.3.2.2 In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. 3.2.3 Leased AssetsThe finance charge component of finance income [as defined in ‘AS 19 Leases’ issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to income account before the asset became nonperforming, and remaining unrealised, should be reversed or provided for in the current accounting period.3.3 Appropriation of recovery in NPAs 3.3.1 Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. 3.3.2 In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.3.4 Interest Application There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts.

3.5 Computation of NPA levelsBanks should deduct the following items from the Gross Advances and Gross NPAs to arrive at the Net advances and Net NPAs respectively:i) Balance in Interest Suspense Account ii) DICGC/ECGC claims received and held, pending adjustmentiii) Part payment received and kept in suspense accountiv) Total provisions held (excluding amount of technical write off and provision on standard assets)For the purpose, the amount of gross advances should exclude the amount of Technical Write off but would include all outstanding loans and advances; including the advances for which refinance has been availed but excluding the amount of rediscounted bills. The level of gross and net NPAs will be arrived at in percentage terms by dividing the amount of gross and net NPAs by gross and net advances, computed as above, respectively.

4. ASSET CLASSIFICATION 4.1 Categories of NPAs Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues:I. Substandard Assets



II. Doubtful Assetsiii. Loss Assets

4.1.1 Substandard AssetsWith effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

4.1.2. Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

4.1.3 Loss AssetsA loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

4.2 Guidelines for classification of assets4.2.1 Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realisation of dues.4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.4.2.3 Availability of security / net worth of borrower/ guarantorThe availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided in Para 4. 2.9, as income recognition is based on record of recovery.

4.2.4 Accounts with temporary deficienciesThe classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular.



A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. ii) Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non--availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

4.2.5 Upgradation of loan accounts classified as NPAsIf arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as ‘standard’ accounts.

4.2.6 Accounts regularised near about the balance sheet dateThe asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status.

4.2.7 Asset Classification to be borrower-wise and not facility-wisei) It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.

ii) If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning.iii) The bills discounted under LC favouring a borrower may not be classified as a Non-performing advance (NPA), when any other facility granted to the borrower is classified as NPA. However, in case documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA.

iv) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the overdues arising from forward contracts and plain vanilla swaps and options become NPAs, all other funded facilities granted to the client shall also be classified as non-performing asset following the principle of borrower-wise classification as per the existing asset classification norms. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC norms. The classification



of all other assets of such clients will, however, continue to be governed by the extant IRAC norms.

v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft facility from the bank, the receivables mentioned at item (iv) above may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit / overdraft facility account. The principle of borrower-wise asset classification would be applicable here also, as per extant norms.

vi) In cases where the contract provides for settlement of the current mark-to-market value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as a non-performing asset after an overdue period of 90 days.

vii) As the overdue receivables mentioned above would represent unrealised income already booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken to 'Profit and Loss a/c' should be reversed and held in a 'Suspense a/c' in the same manner as is done in the case of overdue advances.

4.2.8 Advances under consortium arrangementsAsset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.

4.2.9 Accounts where there is erosion in the value of security/frauds committed by borrowersIn respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate:i. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.ii. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.

4.2.10 Advances against Term Deposits, NSCs, KVP/IVP, etcAdvances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

4.2.11 Loans with moratorium for payment of interesti. In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected.



ii. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates.

5. PROVISIONING NORMS (As amended by RBI till date)5.1 General5.1.1 The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. 5.1.2 In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:

5.2 Loss assetsLoss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

5.3 Doubtful assetsi. 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.

ii. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance hasremained in ‘doubtful’ category

Provision requirement (%)

Up to one year 25One to three years 40More than three years 100

iii. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.

Note: Valuation of Security for provisioning purposesWith a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation.Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.

5.4 Substandard assets(i) A general provision of 15% on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.



(ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.Note:- However, “unsecured exposures” in respect of Infrastructure loan accounts classified as sub-standard, in case of which certain safeguards such as escrow accounts are available as indicated in RBI circular DBOD.No.BP.BC.96/08.12.014/2009-10 dated April 23, 2010, will attract an additional provision of 5 per cent only i.e. a total of 20 per cent as against the existing 15 per cent

(iii) In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks' balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards :a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.b) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in ';Notes to Accounts';. This would differentiate such loans from other entirely unsecured loans.

Restructured Accounts:- (Revised on 1st June,2013)Category of Advances Rate

(%) Restructured accounts classified as standard advances (In respect of new restructured standard accounts (flow) with effect from June 1, 2013)- with effect from March 31, 2014 (spread over the four quarters of 2013-14)- with effect from March 31, 2015 (spread over the four quarters of 2014-15)- with effect from March 31, 2016 (spread over the four quarters of 2015-16)

3.504.255.00

5.5 Standard assets(i) As a countercyclical measure, the provisioning requirements for all types of standard assets stands amended as below, w.e.f November 5, 2009. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:(a) direct advances to agricultural and SME sectors at 0.25 per cent; (b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;(c) advances to Commercial Real Estate – Residential Housing Sector(CRE - RH) at 0.75 per cent(d) all other loans and advances at 0.40 per cent provisioning. (It is clarified that the Medium Enterprises will attract 0.40% standard asset.)(ii) The revised norms would be effective prospectively but the provisions held at present should not be reversed. However, in future, if by applying the revised provisioning norms, any provisions are required over and above the level of provisions currently held for the standard category assets, these should be duly provided for.(iii) While the provisions on individual portfolios are required to be calculated at the rates applicable to them, the excess or shortfall in the provisioning, vis-a-vis the position as on any previous date, should be determined on an aggregate basis. If the provisions on an aggregate basis required to be held w.e.f November 5, 2009 are less than the provisions already held, the



provisions rendered surplus should not be reversed to P&L and should continue to be maintained at the existing level. In case of shortfall determined on aggregate basis, the balance should be provided for by debit to P&L.(iv) The provisions on standard assets should not be reckoned for arriving at net NPAs.(v) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

Resolution of Stressed Assets: Early identification and reporting of stress Assets:Lenders shall identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) as per the following categories:

SMA Sub-categoriesBasis for classification – Principal or

interest payment or any other amount wholly or partly overdue between

SMA-0 1-30 days

SMA-1 31-60 days

SMA-2 61-90 daysLenders shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of Rs. 50 million and above with them. The CRILC-Main Report will now be required to be submitted on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of Rs. 50 million and above), on a weekly basis, at the close of business on every Friday, or the preceding working day if Friday happens to be a holiday. The first such weekly report shall be submitted for the week ending February 23, 2018.

NOTE:- Additional Provisions for NPAs at higher than prescribed ratesThe regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs.

Financial Inclusion:India witnessed a sustained period of strong economic growth since the onset of economicreforms in the early 1990s. The banking sector has grown tremendously over the last two decades. With approximately 40% of the Indian population having a bank account, large sections of the population have been excluded from financial services and are therefore unable to participate fully in the economic growth. Further, the potential of the financial system has not been harnessed fully due to the extent of financial exclusion prevailing today. Financial inclusion, in recent years, has emerged as a major policy initiative. The Reserve Bank of India has significantly scaled up its efforts aimed at increasing the level of penetration of bank financing in the economy.

The government has set up two funds — the Financial Inclusion Fund to meet the costs of developmental and promotional interventions toward financial inclusion, and the Financial Inclusion Technology Fund to meet the costs of technology adoption. The regulation on branch licensing has been relaxed to promote financial inclusion. Domestic commercial banks are also required to prepare their own financial inclusion plans (FIPs) and implement them over the coming years, adhering to their laid-out performance assessment norms. The RBI has progressively liberalized the branch authorization policy, providing in-built incentives for branch expansion in the unbanked areas.



There have been considerable efforts toward financial inclusion through State Level Bankers Committee (SLBC) convener banks and lead banks. The regulator advised lead banks to constitute a sub-committee of District Consultative Committees to draw a roadmap to provide banking services through a banking outlet in every village with a population of more than 2,000 people. The BC model was comprehensively reviewed. In November 2009, banks were permitted to engage the following additional entities as BCs (a) individual kirana/ medical/fair price shop owners, (b) individual public call office operators, (c) agents of small saving schemes of the Government of India/insurance companies, (d) individuals who owned petrol pumps, (e) retired teachers, (f) authorized functionaries of well-run SHGs linked to banks. Further, with a view to ensuring the viability of the BC model, banks (not BCs) were permitted to collect reasonable service charges from the customer, in a transparent manner. In April 2010, the BC ambit was further widened by permitting banks to engage any individual as BC, subject to their comfort level and their carrying out due diligence, as also instituting additional safeguards considered appropriate to minimize agency risks. Scheduled commercial banks (SCBs), especially public sector banks, have stepped up efforts toward financial inclusion. However, there is a need to ensure that financial inclusion does not end up being only a number target. It should qualitatively be such that it makes a difference to the lives of those who are financially included by the process. Banks have been permitted by the RBI to engage the services of approved intermediaries to be engaged as business facilitators and business correspondents with the objective of ensuring greater financial inclusion and increasing the outreach of the bank branches. In the process of outsourcing vital banking services, the bank is exposed to both operational and reputational risks. This requires efficient and effective monitoring of the activities of the business correspondents by the concerned branches to safeguard the interests of the bank's customers.

Product/service designa. No frill saving account with overdraft facility b. Recurring deposit c. Kisan credit card d. General credit carde. Life and health insurance

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CHAPTER 10The Micro, Small and Medium Enterprises Development Act, 2006

What you should know? Defination for manufacturing, service enterprise Special provisions relating to due to MSME sector enterprises

The Micro, Small and Medium Enterprises Development Act, 2006 came into being on 16th June, 2006. Though the Act empowered Government to notify different dates for enforcement of different provisions of the Act, the whole of the Act came into force in one go on 2nd October, 2006. By virtue of section 32 of this Act, ‘The Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993’ stands repealed w.e.f 2nd October 2006. The Act aims to facilitate promotion, development and enhancement of the competitiveness of micro, small and mediumenterprises through skill development, technological upgradation, and preference in procurement by Government, government aided institutions and public sector enterprises. The Act also seeks to provide protection to such enterprises by making provisions for timely release of payments due to these organisations.Micro Small and Medium enterprises are defined as below:

(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery.

(b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

Manufacturing Sector Investment in plant & machinery Micro Enterprises Does not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees

Medium Enterprises More than five crore rupees but does not exceed ten crore rupees

Service Sector Investment in equipments Micro Enterprises Does not exceed ten lakh rupees:

Small Enterprises More than ten lakh rupees but does not exceed two crore rupees

Medium Enterprises More than two crore rupees but does not exceed five core rupees

Special Provisions for payment:- Provisions affecting almost every enterprise/organisation are contained in Chapter V – of the Act which consists of sections 15 to 25 under the heading ‘Delayed payments To Micro And Small Enterprises’. Section 15 stipulates that buyer must make payment to the supplier for the goods supplied or services rendered (i) on or before the date agreed upon or (ii) on or before 16th day of delivery of goods or rendering of service. Section 15 further stipulates that ‘in no case the period’ of payment ‘agreed upon’ ‘in writing shall exceed 45 days’. Section 16 of the Act provides for payment of ‘compound interest with monthly rests’ fromthe date of default in payment as per section 15 ‘at three times’ of the bank rate notified by theReserve Bank’.

Major Policy Package for MSME by Ministry of MSME, Government of India:A. Collateral Free Borrowings:



The Ministry and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) with a view to facilitate flow of credit to the MSE sector without the need for collaterals/ third party guarantees. The main objective of the scheme is that the lender should give importance to project viability and secure the credit facility purely on the primary security of the assets financed. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of an MSE unit, which availed collateral- free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 85 per cent of the outstanding amount in default. The CGTMSE would provide cover for credit facility up to Rs. 100 lakh which have been extended by lending institutions without any collateral security and /or third party guarantees. A guarantee and annual service fee is charged by the CGTMSE to avail of the guarantee cover. Presently the guarantee fee and annual service charges are to be borne by the borrower.

B. Support available for technology upgradation:Ministry implements a scheme called Credit Linked Capital Subsidy Scheme (CLCSS) for technology upgradation of Micro and Small enterprises in the country. Under the scheme, 15 per cent capital subsidy, limited to maximum of Rs 15 lakh (12 per cent prior to 29.09.2005 limited to maximum of Rs 4.8 lakh) is provided to the eligible MSEs for upgrading their technology with the well-established and improved technology as approved under the scheme. 48 products/sub-sectors have been approved under the CLCSS till date. If you are an MSE manufacturing a product and want to upgrade the technology of manufacturing the product with the well established and improved technology as approved under the Scheme, then you may have to approach to the nodal agencies/eligible financial institution for sanction of term loan for purchase of eligible machinery.

C. Support to promote energy conservation in the manufacturing process for SMEs:The Ministry implements the “Technology and Quality Upgradation Support to Micro, Small and Medium Enterprises (TEQUP)” which focuses on two important aspects, namely, enhancing competitiveness of MSME sector through Energy Efficiency and Product Quality Certification. The basic objective of this scheme is to encourage MSMEs in adopting energy efficient technologies and to improve product quality of manufacturing in MSMEs. It is a well known fact that energy consumption is a significant component in the cost structure of almost any manufacturing/ production activity. Adopting energy efficient technologies curtails the cost of energy there by reducing production cost and increasing competitiveness. Under this scheme, a capital subsidy of 25% of the project cost subject to a maximum of Rs. 10.00 lakh shall be provided to the registered MSME units. While 25% of the project cost will be provided as subsidy by the Government of India, the balance amount is to be funded through loan from SIDBI/banks/financial institutions. The minimum contribution as required by the funding agency will have to be made by the MSME unit.

D. Performance & Credit Rating Scheme:The Ministry is implementing the Performance & Credit Rating Scheme, the main objective of the which is to provide a trusted third party opinion on the capabilities and creditworthiness of the MSEs so as to create awareness amongst them about the strengths and weakness of their existing operations. This is to provide them an opportunity to improve and enhance their organizational strengths and credit worthiness, so that they can access credit at cheaper rates and on easy terms. NSIC was appointed as nodal agency to implement the scheme on behalf of the Government. Rating under the scheme is being carried out through empanelled rating agencies i.e. Credit Rating Information Services of India Limited (CRISIL), Credit Analysis & Research Limited (CARE), Onicra Credit Rating Agency of India Ltd. (ONICRA), Small and Medium Enterprises Rating Agency of India Ltd. (SMERA), ICRA limited and Brickwork India Ratings. Under this Scheme, rating fee payable by the micro and small enterprises is subsidized for the first year only and that is subject to maximum of 75% of the fee or Rs. 40000/-, whichever is less.

MUDRA Loans:



MUDRA, which stands for Micro Units Development & Refinance Agency Ltd, is a financial institution beingset up by Government of India for development and refinancing micro units enterprises. It was announced by the Hon’ble Finance Minister while presenting the Union Budget for FY 2016. The purpose of MUDRA is to provide funding to the non-corporate small business sector through various Last Mile Financial Institutions like Banks, NBFCs and MFIs.MUDRA would be responsible for refinancing all Last Mile Financiers such as Non-Banking Finance Companies, Societies, Trusts, Section 8 Companies [formerly Section 25], Co-operative Societies, Small Banks, Scheduled Commercial Banks and Regional Rural Banks which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities. MUDRA would also partner with State/Regional level financial intermediaries to provide finance to Last Mile Financier of small/micro business enterprises.Under the aegis of Pradhan Mantri MUDRA Yojana (PMMY), MUDRA has already created its initial products / schemes. The interventions have been named ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur and also to provide a reference point for the next phase of graduation / growth to look forward to. The financial limit for these schemes are :-

a. Shishu : covering loans upto 50,000/-b. Kishor : covering loans above 50,000/- and upto 5 lakhc. Tarun : covering loans above 5 lakh to 10 lakh

Target clients of MUDRA/ kind of borrowers are eligible for assistance from MUDRA: Non–Corporate Small Business Segment (NCSB) comprising of millions of proprietorship / partnership firms running as small manufacturing units, service sector units, shopkeepers, fruits / vegetable vendors, truck operators, food-service units, repair shops, machine operators, small industries, artisans, food processors and others, in rural and urban areas.

ELIGIBILITY:Any individual including women, proprietary concern, partnership firm, private limited company or any other entity are eligible applicant under PMMY loans.

Rate of Interest (ROI) : As prescribed by the Bank from time to time linked to MCLR.

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CHAPTER 11COMPUTERISATION IN BANKS & CORE BANKING

What you should know: Technology and Transformation in Indian banking Essentials of Bank Computerisation Data Communication Network and EFT Systems Payment Systems and Electronic Banking Concept of Data mining & data warehousing Role of Technology Upgradation and its Impact on Banks Security Considerations

Technology and Transformation in Indian banking Technology has brought about a complete paradigm shift in the functioning of banks and delivery of banking services. Gone are the days when every banking transaction required a visit to the bank branch. Today, most of the transactions can be done from the comforts of one’s home and customers need not visit the bank branch for anything. Technology is no longer an enabler, but a business driver. The growth of the internet, mobiles and communication technology has added a different dimension to banking. The information technology (IT) available today is being leveraged in customer acquisitions, driving automation and process efficiency, delivering ease and efficiency to customers.

Essentials of Bank ComputerisationWorking of computer:-The basic function performed by a computer is the execution of a program. Program is a sequence of instructions, which operates on data to perform certain tasks. In modern digital computers data is represented in binary form by using two symbols 0 and 1 which are called binary digits or bits. Computers use eight bits to represent a character internally. This allows up to 28=256 different items to be represented uniquely. This collection of eight bits is called a byte. Thus, one byte is used to represent one character internally. One of the most common codes to represent characters in Computers is ASCII (American Standard Code of Information Interchange). Most computers use two bytes or four bytes to represent numbers (positive and negative) internally. Another term that is commonly used in computer is a Word. A word may be defined as a unit of information that a computer can process or transfer at a time. A word must be equal to the number of bits transferred between the central processing unit and the main memory in a single step or it may be defined as the basic unit of storage of integer data in a computer. Normally, a word may be equal to 8, 16, 32, or 64 bits. The terms like 32 bit computer, 64 bit computers etc. basically points to the word size of the computer. The arithmetic Logic Unit (ALU) and the Control Unit (CU) together are termed as the Central Processing Unit (CPU). The CPU is the most important component of a computer's hardware. The ALU performs the arithmetic operations such as addition, subtraction, multiplication and division, and the logical operations such as: "Is A = B? (Where A and B are both numeric or alphanumeric data), "Is a given character equal to M (for male) of F (for female)?” The control unit interprets instructions and produce the respective control signals.

Sharing of Data by designing suitable network:-The entire computer network can be classified into two board categories (However, elaborate categorisation exists ). They are: (a) LAN (Local Area Network) (b) WAN (Wide Area Network)

a. LANAs number of systems grows within an organisation, a need is felt for sharing expensive resource and exchanging data and information between systems. This need of information exchange and resource sharing within an organisation has resulted in development of Local Area Network or LAN. A LAN is a data communication network, which connects many computers or workstations



(computers terminal, printer etc.) and permits exchange of data and information among them, within a localised area, typically confined to a building, or a cluster of buildings. The distance between two communication points connected on the same LAN channels, is usually upto 02-05 kms. LANs are not rigidly defined but tend to share most of all of the following characteristics: (a) All the connected devices in the network share the transmission media. (b) Each device connected in the network can either operate standalone or in the network. (c) Area covered is small. (d) Data transfer rates are high, usually 1Mbps-100 Mbps. (Million of bits per second) (e) Each device connected in the network can communicate with any other device in network. (f) Cost of setting up the network is usually low.

LAN Topology A network topology refers to the physical layout of the network in which all the devices are connected. This includes all the hardware that makes up the network. The points of connection to the network by the stations are called Nodes or link stations. There are several types of topographical design and strategies used to implement LAN. The majority of these are based on three types of topologies: (a) Star (b) Bus (c) Ring Each topology has its advantages and disadvantages.Star TopologyA star topology is shown in Figure 1. In this topology, a number of stations are connected directly to a central station or controller. Communications on the connecting links between the stations and the central station of a star topography can be bi-directional and are point-to-point. A station on this type of network passes an information frame to the central controller, which then forwards the information to the destination station. The central controller manages and controls all communications between stations on the network.

Failure of a station on a star network is easy to detect and can be removed from the network. However, failure of the central controller will disable communication throughout the whole network.

Bus Topology A bus topology is shown in Figure 2. All stations are connected to a single communication line. This single communication line is referred to as a bus. Information frames originating at a station are propagated away from the station in both directions on the bus. - Each station on the bus interrogates the information frame destination address field for its own address. If the destination field does not match the station's address, the station discards the information frame back on to the bus. If the destination address matches the station address, it accepts the information frame and processes the frame. An extension to the bus topology is tree topology and is depicted in Figure 2. Tree topology extends the branches of the bus topology allowing more stations to access

the bus.



Figure:- Bus Topology

Figure:- Tree Topology

Ring TopologyA ring topology is shown in figure 3. Local area networks that have each station attached to an adjacent station using point-to-point links form a physical ring. Each station attached and active to the ring regenerates the information frame, then re-transmits the information frame on the ring. The ring itself is logically circular and the information travels in one direction. Failure of a station in a ring topology disrupts the ring because the information frame is not regenerated. Additions or deletions of stations to the ring can be disruptive, if the changes are not managed properly.

b.WIDE AREA NETWORK(WAN):As the name suggests, WAN spread across countries and continents, satellites being one of the transmission media. A Wide Area Network or WAN, is a network that links separate geographical locations. A WAN can be a public system such as the Public Switched Telephone Network (the PSTN) or one of the various packet switched services provided by the public telecommunication authorities. WANs can also use most other types of circuit including satellite networks, ISDN, Value Added Networks (VANs/VADs). The network can be a private system made up from a network of circuits leased from the local Telephone Company or set up using public systems as virtual private networks. A Virtual Private Network is one which operates in the same way as a private network but which uses public switched services for the transmission of information. The main distinguishing feature between a WAN and LAN is that, the LAN is under the complete control of the owner, whereas the WAN needs the involvement of another authority like the Telephone Company. LANs are also able to handle very high data transfer rates at low cost because of the limited area covered. LANs have a lower error rate than WANS.

Protocols:-The protocols in human communication are rules about appearance, speaking, listening and understanding. These rules, also called protocols of conversation, represent different layers of



communication. They work together to help people communicate successfully. The need for protocols also applies to computing systems. Network engineers have written rules for communication that must be strictly followed for successful host-to-host communication. These rules apply to different layers of sophistication such as which physical connections to use, how hosts listen, how to interrupt, how to terminate communications, which language to use and many others. These rules, or protocols, that work together to ensure successful communication are grouped into what is known as a protocol suite or family.

Data Communication Network and CBS SystemsInternet:-The history of the Internet began with the development of electronic computers in the 1950s. This began with point-to-point communication between mainframe computers and terminals, expanded to point-to-point connections between computers and then early research into packet switching.

The World Wide Web ("www" or simply the "Web") is a global information medium which users can read and write via computers connected to the Internet. The term is often mistakenly used as a synonym for the Internet itself, but the Web is a service that operates over the Internet, just as e-mail also does. The history of the Internet dates back significantly further than that of the World Wide Web.

By Christmas 1990, Berners-Lee had built all the tools necessary for a working Web: the Hyper Text Transfer Protocol (HTTP) the Hyper Text Markup Language (HTML), the first Web browser (named World Wide Web, which was also a Web editor), the first HTTP server software (later known as CERN httpd), the first web server (http://info.cern.ch), and the first Web pages that described the project itself.

Internet Services:There are various Communication Services available that offer exchange of information with individuals or groups. The following table gives a brief introduction to these services.Email: Used to send electronic message over the internet.

Usenet: It allows sending message/information on varied subjects on to an electronic bulletin board for anyone to refer to.

Gopher :Used to search, retrieve, and display documents on remote sites.

File Transfer Protocol (FTP) : Enable the users to transfer files one system to another system.

Internet Relay Chat (IRC) :Allows the people from all over the world to communicate in real time.

World Wide Web (WWW): WWW is also known as W3. It offers a way to access documents spread over the several servers over the internet. These documents may contain texts, graphics, audio, video, hyperlinks. The hyperlinks allow the users to navigate between the documents.

Internet in India:The National Informatics Centre was established in March 1975. The inception of The Computer Maintenance Company (CMC) followed in October 1976. During 1977-1980 the country's Information Technology companies Tata Infotech, Patni Computer Systems and Wipro had become visible.During 1986-1987, the Indian government embarked upon the creation of three wide-area computer networking schemes: INDONET (intended to serve the IBM mainframes in India), NICNET (the network for India's National Informatics Centre), and the academic research oriented Education and Research Network (ERNET).

DATA COMMUNICATION NETWORK:



Data communications refers to the transmission of digital data between two or more computers. And a computer network or data network is a telecommunications network that allows computers to exchange data. The physical connection between networked computing devices is established using either cable media or wireless media. A data communication system may collect data from remote locations through data transmission circuits, and then outputs processed results to remotelocations.

Components of Data communication Network:I. Transmission Devices and Interface Equipment:1. Modems: Modems are necessary because computers and transmission media speak completely different languages. Computers are digital (0s and 1s) and most transmission media are analog (UTP or radio waves). For digital computers to communicate over analog media, they need translation device.The modem actually performs two distinct tasks, modulation and demodulation. During modulation, the modem translated digital information into an analog waveform. Next, the data travels along the medium to the destination device. There, the analog wave is demodulated into digital 0s and 1s.2. Router: a networking device that forwards data packets between computer networks. Routers perform the "traffic directing" functions on the Internet. A data packet is typically forwarded from one router to another through the networks that constitute the internetwork until it reaches its destination node. It works on OSI layer 3.3. Switch: a device that connects devices together on a computer network, by using packet switching to receive, process and forward data to the destination device. Unlike less advanced network hubs, a network switch forwards data only to one or multiple devices that need to receive it, rather than broadcasting the same data out of each of its ports. It works on OSI layer 2.

II Transmission Medium:For communications between computers, the data has to travel through some medium during transmission. The prevalent technologies for data communications media are terrestrial,microwave, and satellites.a. Terrestrial cables: Three of the most commonly used wiring techniques are the twisted pair, coaxial cables and the fiber optics.i. Twisted pair: It consists of 2 separately insulated conductor wires wound about each other. Generally, several such pairs are bundled together in a protective sheath. They are the most widely used Transmission Media. These are useful for connecting terminals to computers upto a distance of 150 meters.ii. Coaxial cable: It has an outer plastic covering containing 2 parallel conductors each having a separate insulated protection cover. Coaxial cable transmits information in two modes: Baseband mode(dedicated cable bandwidth) and Broadband mode(cable bandwidth is split into separate ranges). Cable TVs and analog television networks widely use Coaxial cables.iii. Optical fiber: It uses the concept of reflection of light through a core made up of glass or plastic. The core is surrounded by a less dense glass or plastic covering called the cladding. It is used for transmission of large volumes of data.

b. Microwave systems:It is a line of sight transmission i.e. the sending and receiving antennas need to be properly aligned with each other. The distance covered by the signal is directly proportional to the height of the antenna. Frequency Range: 1GHz – 300GHz. These are majorly used for mobile phone communication and television distribution.

c. Communication Satellite: A communication satellite is, in effect, a microwave relay station. It is used to link two or more ground-based microwave transmitter/receivers, known as earth stations, or ground stations. The satellite receives transmissions on one frequency band (uplink), amplifies or repeats the signal, and transmits it on another frequency (downlink). A single orbiting satellite will operate on a number of frequency bands, called transponder channels, or simply transponders.



Example is VSAT:Short for very small aperture terminal, an earthbound station used in satellite communications of data, voice and video signals, excluding broadcast television. A VSAT consists of two parts, a transceiver that is placed outdoors in direct line of sight to the satellite and a device that is placed indoors to interface the transceiver with the end user's communications device, such as a PC. The transceiver receives or sends a signal to a satellite transponder in the sky. The satellite sends and receives signals from a ground station computer that acts as a hub for the system. Each end user is interconnected with the hub station via the satellite, forming a star topology. The hub controls the entire operation of the network. For one end user to communicate with another, each transmission has to first go to the hub station that then retransmits it via the satellite to the other end user's VSAT.

III. Transmission Processors:The communication processors support data transmission and reception between the terminals and computers. These are broadly categorized as : Message Switches, Multiplexers, Front end processors.

Modes of Transmission:The methods of data transmission for communications purposes are classified as follows:Simplex : A simplex transmission is a connection in which the data flows in only one direction, from the transmitter to the receiver. This type of connection is useful if the data does not need to flow in both directions (for example, from your computer to the printer, from the mouse to your computer, etc.).Half-duplex : A half-duplex connection, sometimes called an alternating connection or semi-duplex, is a connection in which the data flows in one direction or the other, but not both at the same time. With this type of connection, each end of the connection transmits in turn. This type of connection makes it possible to have bidirectional communications using the full capacity of the line.Full-duplex: A full-duplex connection is a connection in which the data flows in both directions simultaneously. Each end of the line can, thus, transmit and receive at the same time, which means that the bandwidth is divided in two for each direction of data transmission if the same transmission medium is used for both directions of transmission

NETWORKS IN INDIA

NICNET:-NICNET was designed and implemented by NIC using state-of-the-satellite-based computer-communication technology. Keeping in view the wide geographic spread of the country, ranging from islands in Indian ocean to the highest Himalayan ranges, in design of NICNET, which is one of the largest VSAT networks of its kind in the world, ensures extremely cost effective and reliable implementation.NICNET has now become an integral part of a large number of Government and Corporate sector organisations, providing information exchange services. NICNET services include File Transfer, Electronic Mail, Remote Database Access, Data broadcast and EDI. In times of natural calamities like cyclones, NICNET has served as the basic message communication facility in the calamity-affected areas.A large number of users including banks, financial institutions, exporters, ports and custom houses are targeted for provision of EDI services on NICNET. NICNET provides gateway to International Networks for Electronic Mail, Database Access and EDI services.

INDONET: It was set up by CMC Ltd in 1980 and was among the first countrywide network in India. It was build around X.25 protocol which allows flexibility in heterogeneous hardware connectivity. It can be accessed via dial-up/dedicated VHF radio links.

RBINet:



RBI commissioned the BANKNET in 1991 for betterment of intra-bank and interbank communications. This network is a packet switched X.25 with nodes at all metros and a switching center at Nagpur. RBI net, a communication software for free format messaging and file transfer on the exiting BANKNET infrastructure. Each RBI Net user interacts with the local server connected to X.25 switch. The UNIX servers in turn communicate with each other using TCP/IP over the X.25 protocol.

INFINET - Network by RBI for banksIn order to upgrade the country's payment and settlement systems, the Reserve Bank of India took the initiative of providing a communication backbone in the form of a satellite network based on VSAT technology to the Banking and Financial Sector. This would need allocation of bandwidth to various users and appropriate configuration of ports for dealing with different types of applications viz., bursty, transaction oriented, streams by employing appropriate Access Mechanism.Three access modes viz., the aloha mode, the transaction reservation mode and the stream mode, would be in place in the VSAT based INFINET.

Payment Systems and Electronic BankingWhile cash transactions still account for a sizeable volume of payment transactions in the country, the non-cash modes of payment are gaining wider increase in volumes. Until the early 1990s, payment transactions in India and their settlement process were predominantly paper-based to include cheques, drafts, Payment Orders, ‘At Par’ Cheques (Interest / dividend warrants, refund orders, gift cheques etc which were payable at any city without application of a discount factor). The statutory basis for these instruments was provided by the Negotiable Instruments Act, 1881 (NI Act). Therefore, the payments process has been facilitated by evolving appropriate institutional arrangements. The dominant feature of the Indian Banking system is its large geographic spread and branch-centered banking. The vast network of branches implies that the logistics of collection and delivery of paper payment instruments becomes formidable. And this significant aspect of our Banking structure has always been taken into consideration while evolving other payment systems features and products.The milestones in the evolution of payment systems in India are detailed below: → The CLEARING SYSTEM in India provides a convenient and well established institutional mechanism to take care of the problem of physical delivery of instruments as well as funds transfer between different banks. → Computerisation of clearing operations was the first major step towards modernisation of the payments system. → The next important milestone was mechanization of the clearing operations with the introduction of Magnetic Ink Character Recognition (MICR) based cheque processing technology(in 1986) using High Speed Reader Sorter Systems (HSRS). → The Computerised Cheque Clearing Process has been further consolidated through the introduction of magnetic media based input settlement as an Electronic Banking intermediate step towards complete automation of cheque clearing through MICR processing especially to facilitate the high-value and inter-bank clearing.→ Greyscale Imaging Technology has been introduced (in 2000) as a value added service to the members of the Clearing Houses in some cities which will serve as a forerunner for the introduction of electronic presentment and cheque truncation.→ The Electronic Clearing Service (ECS) was introduced (in 1994) whereby a series of electronic payment instructions are generated to replace paper instruments to meet the requirement of a cost-effective system which would serve as an alternate method of effecting bulk, low value, recurring payment transactions, thereby obviating the need to issue and handle paperinstruments.→ Another development that took place in the payments system scenario was the introduction of the Electronic Funds Transfer Scheme (in 1998) which is a retail funds transfer system and enables an account holder of a bank to transfer funds to another person having an account with any of the participating banks, without any physical movement of instruments from one center to another.



→Centralised Funds Management System (CFMS) – was introduced (in 2002) to facilitate better funds management by account holders with RBI by providing on-line consolidated information about their transactions / balances across accounts maintained with Deposit Accounts Departments in different offices.→ Negotiated Dealing System / Securities Settlement System - NDS/SSS was developed (in 2002) as a system to provide an electronic platform for trading and reporting of transactions in government securities market and to facilitate settlement of these transactions through the delivery versus payment mechanism.→ Clearing of Forex transactions – was instituted (in 2002) as a system to provide net settlement arrangement for forex transactions between members / entities in the foreign exchange market in the country. The process of settling only net obligations reduced the liquidity requirements of foreign currency, sought to reduce transaction costs (SWIFT related) and also take care ofsettlement related risks since the mechanism was facilitated by guaranteed settlement through central counter party arrangement of the Clearing Corporation of India.

Automated Clearing System:An automated clearing house (ACH) is an electronic funds-transfer system that facilitates financial transaction in the United States & in some European countries. This system uses distributed data processing techniques with central system acting as the main database server. Following are some of ACS in these countries:

1. The Clearing House Interbank Payments System (CHIPS) is a United States private clearing house for large-value transactions. The Clearing House began operating CHIPS in 1970 to simplify and expedite interbank payments in New York City. CHIPS participants include U.S. commercialbanks and foreign banks with offices in the United States. A CHIPS participant sends a payment message to CHIPS in a structured format. Upon receipt of a payment message, CHIPS will perform system syntax checks rejecting any payment message that does not pass the checks. Once these syntax checks have been completed, CHIPS will move the payment message to a queue where a computer algorithm determines whether to release the payment message. The payment message will be released if the algorithm determines that it can be released and settled within the parameters set by the CHIPS Rules.

2. The Clearing House Automated Payment System or CHAPS is a British payment system , which offers same-day sterling fund transfers. CHAPS was originally established in London by the Bankers Clearing House in February 1984, transferring to the CHAPS and Town Clearing Company Limited in December 1985. This company also operated the 'town clearing', where cheques cleared the same day between the 'town' bank branches in central London. Town clearing had been the forerunner of the CHAPS system, and was finally closed in 1995. With the closure of the town clearing, the operating company was renamed to CHAPS Clearing Company Limited (informally 'CHAPS Co'). Responsibility for the CHAPS system transferred from it to the Bank of England in November 2017.

3. The Clearing House Automated Transfer System, or CHATS, is a real-time gross settlement (RTGS) system for the transfer of funds in Hong Kong. It is operated by Hong Kong Interbank Clearing Limited, a private company jointly owned by the Hong Kong Monetary Authority (HKMA) and the Hong Kong Association of Banks. CHATS, like other RTGS systems, settles payment transactions on a "real time" and "gross" basis—payments are not subjected to any waiting period and each transaction is settled in a one-to-one manner such that it is not bunched with other transactions. It is a single-tier system where participants settle with one central clearing house. Payments are final, irrevocable, and settled immediately if there is sufficient funds in the participant's settlement account with the clearing house.

Two Level Funds Transfer System:During the past few years, Fedwire, Bankwire & POS have established themselves as major system for EFT and settlement facilities.



a. Fedwire: The Federal Reserve Banks provide the Fedwire Funds Service, a real-time gross settlement system that enables participants to initiate funds transfer that are immediate, final, and irrevocable once processed. The Fedwire Funds Service is a credit transfer service. Participants originate funds transfers by instructing a Federal Reserve Bank to debit funds from its own account and credit funds to the account of another participant. Participants may originate funds transfers online, by initiating a secure electronic message, or off line, via telephone procedures. The Fedwire is an X.25 protocol based packet switched network and has a large number of alternative routes for transmission of messages. Fedwire makes use of CHIPS also.b. POS: A POS system, or point of sale, is a combination of hardware and software built to centralize business operations. Owing to the advanced functions and capabilities of many of these systems, POS can also refer to point of service. An electronic point of sale system can also be known as a sales register, cash register, or simply a till. These terms are essentially interchangeable.POS terminals and systems are used to process card payments, or a virtual sales point such as a computer or mobile electronic device.

SWIFT TRANSACTIONS:-SWIFT stands for ‘Society for Worldwide Interbank Financial Telecommunication’. A SWIFT money transfer begins when a person gives a bank permission to send a specific amount of money from his account to an account abroad. The person provides her bank with the SWIFT code and account number for the other bank. Electronic instructions are then sent to the other bank detailing the amount that should be posted and the account involved.The SWIFT network sends messages using a technology known as packet switching. Packet switching involves splitting up data into small sections, each of which contain their destination address, i.e a swift code. A SWIFT code is a universal way of identifying banks throughout the world. The SWIFT code is an 8 or 11 alphanumeric characters code that uniquely identifies financial institution. The first four characters of a SWIFT code are letters and refer to the bank specifically. The next two characters are the country code, and the last two characters are the location code. If a SWIFT code is eleven characters, this means that the bank has added a three-digit code to denote a specific branch of a bank. It is the standard format of Bank Identifier Codes (BIC) which is approved by the International Standard Organization (ISO) and represents a particular bank or bank branch. The purpose of these codes includes the transferring of money between banks especially for international wire transfers and also used for exchanging of other messages between banks.Types of business areas handled through SWIFT messages:-1. Customer Payments and Cheques 2. Financial Institution Transfers 3. Treasury Markets 4. Collection and Cash Letters 5. Securities Markets 6. Treasury Markets - Metals and Syndications 7. Documentary Credits and Guarantees 8. Travellers Cheques 9. Cash Management and Customer Status

National Electronic Funds Transfer SystemYet another product innovation by the RBI was the National Electronic Funds Transfer System, which was introduced in November 2005 as a more secure, nation-wide retail electronic payment system to facilitate funds transfer by the bank customers, between the networked bank branches in the country. It is a deferred net settlement system and is an improvement over other modes in terms of security and processing efficiency. It provides Eleven settlement cycles a day and enables funds transfer to the beneficiaries account on T+0 basis.

Who can receive funds through the NEFT system?Ans: Individuals, firms or corporates maintaining accounts with a bank branch can receive funds through the NEFT system. It is, therefore, necessary for the beneficiary to have an account with the NEFT enabled destination bank branch in the country. The NEFT system also facilitates one-waycross-border transfer of funds from India to Nepal. This is known as the Indo-Nepal Remittance Facility Scheme. A remitter can transfer funds from any of the NEFT-enabled branches in to Nepal, irrespective of whether the beneficiary in Nepal maintains an account with a bank branch in Nepal or not. The beneficiary would receive funds in Nepalese Rupees.



Is there any limit on the amount that could be transferred using NEFT?No. There is no limit – either minimum or maximum – on the amount of funds that could be transferred using NEFT. However, maximum amount per transaction is limited to Rs.50,000/- for cash-based remittances and remittances to Nepal.

Whether the system is centre specific or has any geographical restriction?No. There is no restriction of centres or of any geographical area within the country. The NEFT system takes advantage of the core banking system in banks. Accordingly, the settlement of funds between originating and receiving banks takes places centrally at Mumbai, whereas the branches participating in NEFT can be located anywhere across the length and breadth of the country.

What are the operating hours of NEFT?NEFT from July 10, 2017, operates at half-hour intervals- there are 23 settlement batches during the day (at 8.30 am, 9.30 am, 10.30 am ……… 5.30 pm and 6.30 pm). The starting batch at 8.00 am and closing batch at 7.00 pm.

How does the NEFT system operate?Step-1 : An individual / firm / corporate intending to originate transfer of funds through NEFT has to fill an application form providing details of the beneficiary (like name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number) and the amount to be remitted. The application form will be available at the originating bank branch. The remitter authorizes his/her bank branch to debit his account and remit the specified amount to the beneficiary. Customers enjoying net banking facility offered by their bankers can also initiate the funds transfer request online. Some banks offer the NEFT facility even through the ATMs. Walk-in customers will, however, have to give their contact details (complete address and telephone number, etc.) to the branch. This will help the branch to refund the money to the customer in case credit could not be afforded to the beneficiary’s bank account or the transaction is rejected / returned for any reason.

Step-2 : The originating bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre).

Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch.

Step-4 : The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the destination banks(credit). Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre).

Step-5 : The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.

Step-6: 6. For efficient customer service, the participant banks in NEFT system were advised (vide, circular DPSS CO EPPD No. 168/04.03.01/2009-2010 dated February 5, 2010) to send a positive confirmation to the remittance originator (customer) confirming the successful credit of funds to the beneficiary’s account. Accordingly, beneficiary / destination banks shall ensure strict adherence in sending the N10 messages to the originating banks, which in turn shall ensure sending the positive confirmation to the remitting customer advising status of credit to the beneficiary account.

→Real Time Gross Settlement (RTGS) System –RTGS was introduced (in 2004) to facilitate predominantly the settlement of inter-bank payments on a real-time and gross basis so as to reduce the incidence of risks in the payment systems.



The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time.'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.

How RTGS is different from National Electronics Funds Transfer System (NEFT)?NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.

Minimum / maximum amount stipulation for RTGS transactionsThe RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is Rs. 2 lakh. There is no upper ceiling for RTGS transactions.

Time taken for effecting funds transfer from one account to another under RTGS?Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within two hours of receiving the funds transfer message.

Would the remitting customer receive an acknowledgement of money credited to the beneficiary's account?The remitting bank receives a message from the Reserve Bank that money has been credited to the receiving bank. Based on this the remitting bank can advise the remitting customer that money has been delivered to the receiving bank.

Would the remitting customer get back the money if it is not credited to the beneficiary's account? When?Yes.It is expected that the receiving bank will credit the account of the beneficiary instantly. If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account is reversed.

Till what time RTGS service window is available?The RTGS service window for customer's transactions is available from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 13.30 hours on Saturdays for settlement at the RBI end. However, the timings that the banks follow may vary depending on the customer timings of the bank branches.

What about Processing Charges / Service Charges for RTGS transactions?With a view to rationalize the service charges levied by banks for offering funds transfer through RTGS system, a broad framework has been mandated as under: a) Inward transactions – Free, no charge to be levied.b) Outward transactions –Rs. 2 lakh to Rs. 5 lakh - not exceeding Rs. 30 per transaction.Above Rs. 5 lakh - not exceeding Rs. 55 per transaction.

Implementation of Positive Confirmation: Presently, the National Electronic Funds Transfer (NEFT) system provides for sending a positive confirmation to the remitter of the funds regarding completion of the funds transfer, thus giving an assurance to the remitter that the funds have been



successfully credited to the beneficiary account. It has now been decided that banks will provide the same facility to the remitter of funds under the RTGS system as well.As per RBI circular of 15th November,2018, initially, the positive confirmation feature in RTGS would be available for member banks wherein both remitter and beneficiary banks access RTGS through thick client interface / SFMS member interface. Member banks are expected to communicate the same to their customers. In this connection, a new message format (camt.059) is being introduced to communicate an acknowledgement to the remitting bank containing the date and time of credit to beneficiary account. This message would flow from the beneficiary bank to the remitter bank through the SFMS. After receiving the positive confirmation from the beneficiary bank, the remitter bank shall initiate an SMS and / or generate an e-mail to the remitter. All banks are required to put in place systems to ensure straight-through-processing (STP) based confirmation processing. The beneficiary bank shall ensure that such confirmation message is sent as soon as the amount is credited to the beneficiary account in CBS while the confirmation message from the remitting bank shall be necessarily sent on a real time basis and in any case not beyond one hour after receipt of credit message from the beneficiary bank.

National Electronic Clearing Service (NECS)The National ECS is a product being developed by the RBI to enable centralised processing of the ECS transactions, in contrast to the existing ECS system that has decentralized operations at 70 locations, spread all over the country. Under the National ECS, the processing of all the ECS transactions would be centralised at the National Clearing Cell at Nariman Point, Mumbai and sponsor banks would need to only upload the relative files to a web server, with online data validation facility. Destination banks would receive their inward clearing data/file at a central location, through the web server. The National ECS would leverage the Core Banking platform of the commercial banks, to enable around 50,000 core banking enabled branches of the various banks, to avail of this service. The system would facilitate end-to-end seamless posting of the NECS transactions in a straight-through processing (STP) environment. This would help the users and member banks to send, receive and process the data files at one centralised place, thereby improving the efficiency of the payment system.

Types of Electronic Payments:-With the growing complexities in the e-commerce transactions, different electronic payment systems have appeared in the last few years. At least dozens of electronic payment systems proposed or already in practice are found (Murthy, 2002).The grouping can be made on the basis of what information is being transferred online. There aresix types of electronic payment systems: (1) PC-Banking (2) Credit Cards (3) Electronic Cheques (i-cheques) (4) Micro payment (5) Smart Cards and (6) E-Cash. Thus, electronic payment system can beOnline Credit Card Payment System, Electronic Cheque System, Electronic Cash System andSmart Card based Electronic Payment System

1. Internet BankingThe total number of registered users for Internet banking in India is over two million. But this figure needs to be adjusted for dormant users and multiple accounts (a user having accounts with more than one bank). India has a little less than a million active Internet banking users. Thus indicating that, the concept of Internet banking is surely catching on. India lags behind other countries in Internet banking. In the US, the number of commercial banks with transactional websites is 1,275 or 12 percent of the total number of banks. Of these, seven could be called ‘virtual banks.’ From the Asian market experience, it is clear that Internet banking is here to stay and will be a major channel to acquire and service customers. Markets like Korea and Singapore have nearly 10 percent of their population banking over the Internet.Indian banks have an insignificant Internet banking record. ICICI Bank kicked off online banking way back in 1996 and a host of other banks soon followed suit. But even for the Internet as a whole, 1996 to 1998 marked the adoption phase, while usage increased only in 1999 due to lower ISP online charges, increased PC penetration and a tech-friendly atmosphere. Concept of Internet banking is more like an add-on service which the customers should gradually adopt. In line with



this strategy, initially the Net banking facility was provided in order to meet the information requirements of the customers and gradually it ventured into fund transfers and third party transfers.

2. Automatic Teller MachineThe introduction of ATM’s has given the customers the facility of round the clock banking. The ATM’s are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks are closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password. ATM’s are currently becoming popular in India that enables the customer to withdraw their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or deposit funds, check account balances, transfer funds and check statement information. The advantages of ATM’s are many. It increases existing business and generates new business.

Advantages of ATM’s:To the Customers :ATM’s provide 24 hrs. 7 days and 365 days a year service. Service is quick and efficient. Privacy in transaction. Wider flexibility in place and time of withdrawals.The transaction is completely secure – you need to key in Personal Identification Number (Unique number for every customer).

To Banks :Alternative to extend banking hours. Crowding at bank counters considerably reduced.Alternative to new branches and to reduce operating expenses. Relieves bank employees to focus on more analytical and innovative work. Increased market penetration.

By the end of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the form of “SWADHAN”, a system of shared payments networks, introduced by the Indian Bank Association (IBA).

White label-ATM:Traditionally, Automated Teller Machines (ATMs) have respective bank’s logo. So just by looking, this is SBI’s ATM, this is BOB’s ATM and so on. But White label ATM doesn’t have such Bank logo, hence called White label ATMs. RBI has given license / permission to non-bank entities to open such ATMs. Any non-bank entity with a minimum net worth of Rs.100 crore, can apply for white label ATMs. (not just NBFC, any non-bank entity can apply.)The authorized non-bank entity (henceforth referred to as WLA Operator) would have the freedom to choose the location of the WLA. However, it will adhere to annual targets and the ratio of WLA between Tier I &II and Tier III-VI centres that may be stipulated by the Reserve Bank of India. Being non-bank owned ATMs, the guidelines on five free transactions in a month for using other bank ATMs would not be applicable for transactions effected on the WLAs. The charges for the transactions should be displayed on the screen before the customer initiates the transaction.WLA Operator shall declare one “Sponsor Bank” , who will serve as the Settlement Bank for the settlement of all the service transactions at the WLAs. The Sponsor Bank should be a member of one of the ATM networks authorized by the RBI and also be a member of the RTGS.

3. Mobile BankingMobile Banking (also known as M-Banking or SMS Banking) is a term used for performing balance checks, account transactions, payments, etc., via a mobile device such as a mobile phone. It was Internet Banking, which ushered in a new era in banking convenience by bringing the entire operations to the computer, and now mobile banking promises to take it to the next level.Operative Guidelines for banks:1 Only banks which are licensed and supervised in India and have a physical presence in India will be permitted to offer mobile banking services.



2 The services shall be restricted only to customers of banks and holders of debit/credit cards issued as per the extant Reserve Bank of India guidelines.3 Only Indian Rupee based domestic services shall be provided. Use of mobile banking services for cross border transfers is strictly prohibited.4 Banks may also use the services of Business Correspondent appointed in compliance with RBI guidelines, for extending this facility to their customers.5.The guidelines issued by Reserve Bank on “Know Your Customer (KYC)”, “Anti Money Laundering (AML)” and Combating the Financing of Terrorism (CFT) from time to time would be applicable to mobile based banking services also.6 Only banks who have implemented core banking solutions would be permitted to provide mobile banking services.7 Banks shall file Suspected Transaction Report (STR) to Financial Intelligence Unit – India (FID-IND) for mobile banking transactions as in the case of normal banking transactions.

Technology and Security StandardsInformation Security is most critical to the business of mobile banking services and its underlying operations. Therefore, technology used for mobile banking must be secure and should ensure confidentiality, integrity, authenticity and non-repudiability.

AuthenticationBanks providing mobile banking services shall comply with the following security principles and practices for the authentication of mobile banking transactions:a) All mobile banking shall be permitted only by validation through a two factor authentication. b) One of the factors of authentication shall be mPIN or any higher standard.c) Where mPIN is used, end to end encryption of the mPIN shall be ensured, i.e mPIN shall not be in clear text anywhere in the network.d) The mPIN shall be stored in a secure environment.

4. Proper level of encryption and security shall be implemented at all stages of the transaction processing. The endeavor shall be to ensure end-to-end encryption of the mobile banking transaction. Adequate safe guards would also be put in place to guard against the use of mobile banking in money laundering, frauds etc. The following guidelines with respect to network and system security shall be adhered to:a) Implement application level encryption over network and transport layer encryption whereverpossible.b) Establish proper firewalls, intruder detection systems (IDS), data file and system integrity checking, surveillance and incident response procedures and containment procedures.c) Conduct periodic risk management analysis, security vulnerability assessment of the application and network etc at least once in a year.d) Maintain proper and full documentation of security practices, guidelines, methods and procedures used in mobile banking and payment systems and keep them up to date based on the periodic risk management, analysis and vulnerability assessment carried out.e) Implement appropriate physical security measures to protect the system gateways, network equipments, servers, host computers, and other hardware/software used from unauthorizedaccess and tampering. The Data Centre of the Bank and Service Providers should have proper wired and wireless data network protection mechanisms.

5. The dependence of banks on mobile banking service providers may place knowledge of bank systems and customers in a public domain. Mobile banking system may also make the banks dependent on small firms ( i.e mobile banking service providers) with high employee turnover. It is therefore imperative that sensitive customer data, and security and integrity of transactions are protected. It is necessary that the mobile banking servers at the bank’s end or at the mobile banking service provider’s end, if any, should be certified by an, accredited external agency. In addition, banks should conduct regular information security audits on the mobile banking systems to ensure complete security.



6. For channels which do not contain the phone number as identity, a separate login ID and password shall be provided to ensure proper authentication. Internet banking login IDs and Passwords shall not be allowed to be used for mobile banking.

Wireless Application Protocol (WAP): WAP is the emerging connectivity method that gives your customers secure wireless access to a wider array of information from the mobile banking server.WAP is a protocol designed for micro browsers. The WAP standard is based on Internet standards (HTML, XML and TCP/IP). It consists of a WML language specification, a WMLScript specification, and a Wireless Telephony Application Interface (WTAI) specification.

IMPS:IMPS - Immediate Payment Service is an interbank electronic instant mobile money transfer service through mobile phones in India.Currently majority of interbank mobile fund transfer transactions are channelised through NEFT mechanism. Under NEFT, the transactions are processed and settled in batches, hence are not real time. Also, the transactions can be done only during the working hours of the RTGS system.In the above context, NPCI has carried out a pilot on mobile payment system initially with 4 member banks viz State Bank of India, Bank of India, Union Bank of India and ICICI Bank in August 2010. Yes Bank, Axis Bank and HDFC Bank have joined this pilot project. Immediate Payment Service (IMPS) public launch happened on 22nd November 2010 and this service is now available to through out India.IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones. IMPS facilitate customers to use mobile instruments as a channel for accessing their bank accounts and put high interbank fund transfers in a secured manner with immediate confirmation features. This facility is provided by National Payments Corporation of India (NPCI) through its existing NFS switch.

Input options (beneficiary details) for initiating IMPS funds transfer :I. Using Mobile number and MMIDa. IMPS allows funds transfer using a beneficiary mobile number and MMID (Mobile Money Identifier)b. MMID is a seven digit number, first four digits of which are called NBIN (allocated to member by NPCI) and last three digits are provided by the memberc. A combination of mobile number and MMID is linked to a unique account number.

II. Using Account number and IFSCIMPS allows funds transfer using beneficiary account number and IFSC.

III.Using AADHAAR numberIMPS allows funds transfer using the Aadhaar number.

IMPS: ProductsP2P- Persons to PersonP2A (IFSC/Account number)P2M (Push)P2M (Pull)

4. TelebankingTelebanking refers to banking on phone services. A customer can access information about his/her account through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective in nature.Telebanking offers the following services to its customers:To get a particular work done through the bank, the users may leave his instructions in the form of message with bank.Facility to stop payment on request. One can easily know about the cheque status.Information on the current interest rates.



Information with regard to foreign exchange rates.Request for a DD or pay order.Demat Account related services.And other similar services.

5. Multi City Cheque“Multi City Cheque” or MCC is a facility wherein the customer can issue cheques drawn at the base branch and payable at any branch at remote centre. These cheques will be treated as local cheques at the remote branch. There will be no collection charges and the credit will be given on the same day, as applicable to local cheques. Even if the cheque is dropped at any other bank other than the base bank, there will not be any collection charges. For example, if Mr. A is paid a Multi city cheque by Mr. B at SBI branch in Delhi, Mr. A can drop the same at any bank in Mumbai where he holds an account, and there will not be any collection charges.

6. Credit CardThe credit card can be defined as a small plastic card that allows its holder to buy goods and services on credit and to pay at fixed intervals through card issuing agency. The credit card releases the customers form botheration of carrying cash and ensures safety.

7. Debit CardDebit cards will offer direct withdrawal of funds from a customer’s bank account. The spending limit is determined by the user’s bank depending upon available balance in the account of the user. It is a special plastic card connected with electromagnetic identification that one can use to pay for things purchased directly from its bank account. Under the system, cardholder’s accounts are immediately debited against purchase or service to the computer network. Hence, under debit card the card holder must have adequate balance in his account. The system is intended to replace cheque system of payment. These can be maintained only for customers maintaining satisfactory accounts and for a minimum period of 6 months.

8. NPC:Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in 2005, released a vision document incorporating a proposal to set up an umbrella institution for all the RETAIL PAYMENT SYSTEMS in the country. The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. The other objective was to facilitate an affordable payment mechanism to benefit the common man across the country and help financial inclusion.IBA's untiring efforts during the last few years helped turning this vision a reality. National Payments Corporation of India (NPCI) was incorporated in December 2008 and the Certificate of Commencement of Business was issued in April 2009. It has been incorporated as a Section 25 company under Companies Act and is aimed to operate for the benefit of all the member banks and their customers. The authorized capital has been pegged at Rs 300 crore and paid up capital is Rs 100 crore so that the company can create infrastructure of large dimension and operate on high volume resulting payment services at fraction of the present cost structure.Presently, there are ten core promoter banks ( State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC).National Payments Corporation of India (NPCI) has implemented “National Automated Clearing House (NACH)” for Banks, Financial Institutions, Corporates and Government a web based solution to facilitate interbank, high volume, electronic transactions which are repetitive and periodic in nature. NACH System can be used for making bulk transactions towards distribution of subsidies, dividends, interest, salary, pension etc. and also for bulk transactions towards collection of payments pertaining to telephone, electricity, water, loans, investments in mutual funds, insurance premium etc.

9. Rupay



RuPay is an Indian domestic card scheme conceived and launched by the National Payments Corporation of India (NPCI). It was created to fulfill the Reserve Bank of India’s desire to have a domestic, open loop, and multilateral system of payments in India. RuPay facilitates electronic payment at all Indian banks and financial institutions, and competes with MasterCard and Visa in India. NPCI maintains ties with Discover Financial to enable the card scheme to gain international acceptance uPay cards are accepted at all automated teller machines (ATMs) across India under National Financial Switch, and under the NPCI's agreement with DFS, RuPay cards are accepted on the international Discover network.

10. Implementation of Bharat Bill Payment System (BBPS) – Guidelines:Reserve Bank of India has set up a Committee under the chairmanship of Shri G. Padmanabhan, Executive Director, RBI was set up to study the feasibility of implementation of an electronic GIRO (General Interbank Recurring order) payment system in the country.The objective was also of defining a framework that enables the creation of pan India touch points for bill payments by customers in the country, irrespective of the geographical location of the billers.Based on the recommendations & public comments received on the draft guidelines for implementation of the Bharat Bill Payment System (BBPS) the final guidelines are being issued. The National Payments Corporation of India (NPCI) will function as the authorized Bharat Bill Payment Central Unit (BBPCU) to set the standards for BBPS processes which need to be adhered to by all operating units under the system.The objective of the BBPS is to implement an integrated bill payment system in the country that offers interoperable and accessible bill payment services to customers through a network of agents, enabling multiple payment modes, and providing instant confirmation of payment. Hence, it has been decided that the existing players (both banks & non-banks) catering to the requirements of bill payments as well as aggregation of payment services will be a part of BBPS.

11. UPI: Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience. Each Bank provides its own UPI App for Android, Windows and iOS mobile platform(s).Funds Transfer limit: 1 lakh / transaction or as per bank risk management polices.Money can be sent or requested with following methodsVirtual Payment Address (VPA): Send or request money from/to bank account mapped using VPA.Mobile number: Send or request money from/to bank account mapped using mobile number.Account number&IFSC: Send money to bank account.Aadhaar:Send money to bank account mapped using Aadhaar number.QR code:Send money by QR code which has enclosed VPA, Account number and IFSC or Mobile number.UPI permits real time Push & Pull transactions. Payment Service Providers (PSP’s) will be entities which are allowed to acquire customers and provide payment (credit/debit) services to individuals or entities. Payment Service Providers are the entities that provide for the Front-end/App for the customer. It should be a regulated entity by RBI under Banking Regulations Act 1949 and should be authorized by RBI for providing mobile banking service. All financial transactions follow mandatory two factor authentication process. The first factor is validated by the PSP & the second factor is validated by the Issuer Bank. - For non-biometric based authentication, the second factor will be a four digit or six digit numeric PIN. - For biometric based authentication, IRIS/Fingerprint is the second factor which will be validated by UIDAI (Trusted Third Party) on behalf of Issuer Bank. The Bio-metrics which are locally stored shall not be supported under this mechanism.

Transacting Parties: There are maximum upto four parties consisting of two PSPs which will be acting as Interface Providers for the customers/merchants and two banks acting as Remitter &



Beneficiary Bank. The role of the two PSPs shall be to facilitate the transaction and customer debits and credits happen in the bank accounts. In case of Person to Person transactions, there may be four parties (two PSPs and two Account Providers/Banks).

12. Cheque TruncationCheque Truncation is a method of payment processing whereunder movement of the paper instrument is truncated by substituting with electronic transmission of the cheque details or data. The Shere Committee had examined the legal issues pertaining to cheque truncation and had indicated that the definition of presentment in the Negotiable Instruments Act may have to be amended for adoption of cheque truncation system in India. Under the Negotiable Instruments Act, 1881, cheques would have to be presented for payment to drawee / drawer bank. Without such presentment, no cause of action arises against the drawer. In default of presentment of a cheque to the drawee for payment, other parties to the cheque are not liable to the holder. It is by banking practice and under the Uniform Rules and Regulations for Clearing Houses that banks have agreed for presentment at any place other than the branch, such as the clearing house. Besides, the implications of the definition of payment in due course under the Negotiable Instruments Act, 1881 may make it difficult for banks to introduce cheque truncation system simply by agreement among themselves. The right of the paying bank to require physical presentation and possession of the cheque are designed to provide the bank with an opportunity to examine the signature and other authentication of the cheque. This is meant essentially to protect the interest of the drawer. Therefore, in UK, the cheque truncation system started with customer consent agreements and was eventually introduced after a fair degree of familiarisation with imaging technology by the banks. Thus, introduction of cheque truncation system may require adoption of a fairly standardised imaging technology and appropriate amendments to the Negotiable Instruments Act, 1881.The latest amendments to the definition of cheque in NI Act by inclusion of the “electronic image of a truncated cheque” and a “cheque in the electronic form” have opened up avenues for introducing new methods of processing paper-based payment instruments. Enactment of the Information Technology Act, 2000, and further amendments to it making it applicable to N.I. Act, has brought about legal status to usage of electronics-based payment systems in Indian banking. The securityfeatures to be adopted by any electronic payment system has also been standardized by providing legal recognition to PKI-based security through the IT Act, 2000.

CTS 2010:Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch.Entire process flow in CTS:-In CTS, the presenting bank (or its branch) captures the data (on the MICR band) and the images of a cheque using their Capture System (comprising of a scanner, core banking or other application) which is internal to them, and have to meet the specifications and standards prescribed for data and images.To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been implemented in CTS. As part of the requirement, the collecting bank (presenting bank) sends the data and captured images duly signed and encrypted to the central processing location (Clearing House) for onward transmission to the paying bank (destination or drawee bank). For the purpose of participation the presenting and drawee banks are provided with an interface / gateway called the Clearing House Interface (CHI) that enables them to connect and transmit data and images in a secure and safe manner to the Clearing House (CH).The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing. The drawee banks through their CHIs receive the images and data from the Clearing House for payment processing. The drawee CHIs also generate the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed. The entire essence of CTS



technology lies in the use of images of cheques (instead of the physical cheques) for payment processing.

Image specifications in CTS :Imaging of cheques can be based on various technology options. The cheque images can be Black & White, Gray Scale or Coloured. These have their associated advantages and disadvantages. Black & White images are light in terms of image-size, but do not reveal all the subtle features that are there in the cheques. Coloured images are ideal but increase storage and network bandwidth requirements. Gray Scale images are mid-way. CTS in India uses a combination of Gray Scale and Black & White images. There are three images of each cheques that need to be taken - front Gray Scale, front Black & White and back Black & White.

Image and data security transmitted over the network :The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to the payee bank are ensured using the Public Key Infrastructure (PKI). CTS is compliant to the requirements of the IT Act, 2000. It has been made mandatory for the presenting bank to sign the images and data from the point of origin itself. PKI is used throughout the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank. The PKI standards used are in accordance with the appropriate Indian acts and notifications of Controller of Certifying Authority (CCA)

Some features of Standardised cheques under CTS:Watermark (At Manufacturing Stage) : All cheques shall carry a standardised watermark, with the words “CTS-INDIA” which can be seen when held against any light source. This would make it difficult for any fraudster to photocopy or print an instrument since this paper would be available only to security printers handling cheque printing. The watermark should be oval in shape and diameter could be 2.6 to 3.0 cms. Each cheque must hold atleast one full watermark.

VOID pantograph (At Printing Stage): Pantograph with hidden / embedded “COPY” or “VOID” feature shall be included in the cheques. This feature should not be visible on the scanned image at the resolution specified in CTS but should be clearly visible in photocopies and scanned colour images as resolution used in such cases would be above the prescribed CTS standards. This would act as a deterrent against colour photocopy or scanned colour images of a cheque.

Bank’s logo printed with invisible ink (ultra-violet ink) (At Printing Stage) : Bank’s logo shall be printed in ultra-violet (UV) ink. The logo will be captured by / visible in UV-enabled scanners / lamps. It will establish genuineness of a cheque.

Clutter free background : Background of cheques shall be kept as clutter free as possible for improving quality and clarity of images.

Prohibiting alterations / corrections on cheques : No changes / corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This would help banks to identify and control fraudulent alterations.

What are the modes in which banks can participate in CTS ?There are two modes in which banks may participate in CTS –Direct membership: Banks may participate as direct member provided they have a settlement account with the settlement bank and have put in place necessary infrastructure for participating in CTS.Indirect / Sub-membership: Banks may become sub-members / indirect members of the direct members by using the infrastructure and / or settlement services of the direct members. The settlement for such indirect / sub-member could be done either directly (if such banks have



settlement accounts with the settlement bank) or through the direct member through whom they are participating.

What is an IRD? Under CTS, after the capture of the image, the physical cheque would be warehoused with the presenting bank. In case the beneficiary or any other connected persons require the instrument, the payee bank could issue a copy of the image, under its authentication, which is called Image Replacement document. It is a legally recognized replacement of the original cheque for re-presentment. The provisions of NI act (Section 81(3) of the NI Act as amended) also permit the usage of such IRD.To meet legal requirements, the presenting banks which truncate the cheques need to preserve the physical instruments for a period of 10 years.

Core Banking Solutions (CBS):-Centralised Banking Solutions is the process which is completed in a centralized environment i.e. under which the information relating to the customer’s account (i.e. financial dealings, profession, income, family members etc.) is stored in the Central Server of the bank (that is available to all the networked branches) instead of the branch server. Depending upon the size and needs of a bank, it could be for the all the operations or for limited operations. This task is carried through advanced software by making use of the services provided by specialized agencies. Due to its benefits, a no. of banks in India in recent years have taken steps to implement the Core Banking Solutions with a view to build relationship with the customer based on the information captured and offering to the customer, the customised financial products according to their need.

Advantages for Customer:Transaction of business from any branch, Lower incidence of errors. Hence accuracy in transactions. Better funds management due to immediate availability of funds.

For Banks:Standardisation of process within the bank. Better customer service leading to retention of customer and increased customer traffic. Availability of accurate data & Better use of available infrastructure. Following are some of the Core Banking services provided by Indian public and private sector banks.

Concept of Data mining & data warehousing:Traditionally, enterprise data has been kept in information silos that are physically separate from other data repositories and serve specialized functions. Enterprise-wide reporting was difficult at best, requiring multiple data extracts and reformulation. All this data manipulation extracted a high cost in terms of accuracy and timeliness. Fortunately, the technology sector has anted up newdata warehousing and mining tools to provide assistance.

Data warehousing:- Data warehouses offer organizations the ability to gather and store enterprise information in a single conceptual enterprise repository (means the database). Basic data modeling techniques are applied to create relationship associations between individual data elements or data element groups. These associations, or “models,” often take the form of entity relationship diagrams (ERDs). More advanced techniques include the star schema and snowflake data model concepts. Regardless of the technique chosen, the goal is to build a metadata model that conceptually represents the information usage and relationships within the organization.

Data mining:-Enter the concept of data mining. During the mid- to late 1990s, commercial vendors began exploring the feasibility of applying traditional statistical and artificial intelligence analysis techniques to large databases for the purpose of discovering hidden data attributes, trends, and patterns. This exploration evolved into formal data-mining toolsets based on a wide collection of statistical analysis techniques.For a commercial business, the discovery of previously unknown statistical patterns or trends can provide valuable insight into the function and environment of their organization. Data-mining



techniques allow businesses to make predictions of future events, whereas OLAP only gives an analysis of past facts. Data-mining techniques can generally be grouped into one of three categories: clustering, classifying, and predictive.

Role of Technology Upgradation and its Impact on Banks:IT as a ”Value” Creator. Value can be attributed in terms of tangible and intangible benefits. Tangible benefits are evaluated based on the comparison between return on investment (ROI) calculation versus the total cost of ownership (TCO). Tangible benefits sometimes outweigh intangible benefits that the project generates. Intangible benefits can be accrued in terms of customer convenience, brand creation, increased operational efficiency, compliance, improved skills sets of the employees and better decision making to generate a unified view of customers.

IT as Strategic Enabler to Reduce Costs or Increase Revenues:Several banks use IT to automate their key business and operations and help reduce operational costs. Revenues are largely increased with the introduction of more channels such as ATMs, internet banking or mobile banking to bring more customers or to retain existing customers by offering convenience to banks on a 24x7 basis. Banks have also placed a strong emphasis on IT to improve customer service, security, efficiency and competitiveness of the business. Some of the initiatives to reduce costs or increase revenues that the banks have implemented include consolidation of data centers and servers, virtualization, network bandwidth management tool, installation of solid state hard disks or implementation of advanced data replication tools. The proactive monitoring of the infrastructure and applications has also helped banks reduce costs and improve customer service. Infrastructure monitoring helps to reduce the potential downtime and cost of servicing. The implementation of dashboards for various applications helps the senior management to monitor the status of applications on a real-time basis.

IT for Internal Effectiveness IT is an important lever in improving internal organization effectiveness and not just delivering customer benefits. In fact, a misalignment will result in deficiency in delivering customer benefits. These two factors play a vital role, namely knowledge management and internal process effectiveness, to reduce TAT in service delivery. Most of the banks have implemented online training systems and knowledge management methodologies. Building human capital and capabilities is of utmost importance in the service sector to maintain a competitive edge. One of the large private sector banks has also implemented an ”mLearning” solution, which provides audio nuggets on topics such as credit awareness, current economics and operations risk management. Workflow automation and BPR efforts to improve internal process efficiency are helping banks toward more effective utilization of IT resources. The various areas of implementation include:

a. Data collection package for the various Bancassurance products of the bank b. Centralized web-based inspection information system made available for inspection centers and the Head Office Claiming reimbursement of FIT (Funds in transit) ATM cash through RACS (Reconciliation accounting and cash settlement) c. Review and renewal of structured loan products d. Automated solution to move accounts under subvention products to non-subvention products on the specified date (subvention end date) e. Input data entry screen provided to the branches to enter data related to the ATM access lock functioning, ATM door functioning, UPS functioning, ATM security-related issues and ATM ventilation availability to enable both CO/HO for effective monitoring f. Online tax accounting system (OLTAS), electronic accounting system in excise and service tax (EASIEST) implemented in all designated branches g. Integrated treasury software for domestic and forex treasury operations implemented h. HRM software to automate HR-related activities implemented; centralized processing of salary, pension, deposit processing, clearing operations for both inward and outward clearing i. Automated performance appraisal systems



Security Considerations:Generally the terms privacy, integrity and confidentiality are loosely construed to be synonymous with security. These however have different connotations with respect to data or information. They also address different areas of information systems. To better understand the measures and to ensure protection in each area, let us see their definitions.

SECURITY: "Data or information security is the protection of data against accidental or intentional, destruction, disclosure or modification". Computer data security refers to the technological safeguards and managerial procedure, which can be applied to computer hardware, software and data to ensure that organisational assets and individual privacy are protected.

PRIVACY: "Is a concept applied to an individual". It is the right of an individual to decide what information he/she wishes to share with others or is willing to accept from others.

BREACHES OF SECURITY The above warnings paint a fairly bleak picture for PC users. Some of the ways in which data loss or manipulation can occur have been hinted at in these articles. Let us look at the details of the manner in which losses can occur.

Theft of PC and Media: May sound preposterous but it is a distinct possibility. A smart person with a false calling card can take away the PC for repairs and of course never show his face again ! However, electronic media like floppies and CD-ROMs are slightly safe as it is far easier to lock up floppies in a safer place.

Damage due to Breakage: Floppies are easily breakable. It is hard to visualise dropping PCs but it can happen if they are shifted from one place to another. More likely is that something may get dropped on the PC resulting in damage. Damage can also occur due to natural causes such as storms or floods, or due to electrical or other fires.

Environmental Damage: The manufacturer recommends some environmental conditions like temperature and humidity ranges, voltage limits, dust micron limits etc. If the conditions in your office remain outside these limits the PC and media are likely to get damaged.

Inadvertent Corruption/Loss: This can occur due to: a. Usage of inferior media : If sub-standard media is used, as it would be generally cheaper, after using it for some time it may develop faults and data held on it may become unusable. One hears about frequent corruption of data on inferior floppies. b. Erasure of Files : Files may get erased from the media due to incorrect actions by the operator. Corruption may occur due to the PC being subjected to frequent power failures, wrong programming techniques or defective software.

Environmental losses: Excessive dust or humidity can result in corruption of disc surfaces or read/write heads resulting in loss of data.

Malicious damage/Leakage: We now turn to the real problem of computer installations, be they stand alone PCs or large main frames with hundred of terminals. It is not necessary that outsiders would do this; it is equally possible that some unhappy or impish insiders may wreck havoc.

Unauthorised Access: As the saying goes "Curiosity killed that Cat", but it does not stop the human from trying to look at things they should not or need not. Information on personnel, finance, products or assets can be accessed and copied for malafide use.

Modifications Erasures etc.: The person accessing data files may be authorised to read the data only, but he would like to alter, modify or erase the data by writing into that file.



Computer Viruses: This is the latest threat to computer users. These can be introduced deliberately or unknowingly by anyone at anytime and the consequences to the user would be equally disastrous. The problems created by viruses include: a. Destruction of file Allocation Table (FAT) - user loses everything on his media;b. Erasing of specific programs and/or data on discsc. Alter contents of fields in the file; d. Suppress execution of RAM resident programs;e. Destroy parts of programs/data held on disc by creating bad sectors;f. Reduction of free space on disc;g. Formatting of discs or tracks on discs in a different way; h. Overwriting of entire disc directories;i. "Hang" the system at periodic intervals so that keyboards become inoperative; j. Automatic copying of results obtained by other programs into some designated areas.

Protection against virus: A number of measures are available for reducing the risk of being attacked by computer virus:

Build employee awareness of the risk; Do not allow the use of outside programs for company PCs or networks; Do not interface company networks to outside "Bulletin Boards” Make system/server files "Read only"; Try and obtain source code for important software in use and compile it in-house; If source code is difficult to follow, it should ring a warning bell in your head; Check executable code using "debug" or separate utilities to study code structure and

check spaces for viruses.

Password Security In most organisations or computer systems, the only authorisation for data access is giving the correct password; rightly speaking, this is only one step; the whole process would be: Identification: An identification user code only indicates an object with a unique identity assigned to it. Thus it should not become authorisation to access data without further checks, if some measure of security is desired;

Authentication: This process verifies that a person or object is who he, she or it claims to be. This could be achieved by asking some standard questions (from a large selection) and getting answers to them. If the answers match with those held on the systems, the person or object is authenticated. Biometric and other physical authentication processes are also popular in systems where security is a primary concern.

Authorisation: This is the last step in the process. Through this you can ensure that only a given user, terminal or other resource can access data to which permission has been granted to read, write or alter. Thus a matrix can be created to indicate which users have access to which file, records or fields. If the user request passes the matrix he is allowed access, otherwise he is denied access to some parts of the database.

Database Access: Larger systems provide various mechanisms to prevent access to data. User classes can be defined automatically prohibiting access to data by user class. User can be given only "query view" of the data so that he can have only "read" access to a limited amount of data. In some systems, certain terminal numbers can display or access only some parts of database, thus, even a user, with higher access permissions cannot access some data on those terminals.

Phishing : It is deployed to steal user’s personal and confidential information like bank account numbers, net banking passwords, credit card numbers, personal identity details etc. Later the perpetrators may use the information for siphoning money from the victim's account or run up bills on victim's credit cards. In the worst case one could also become the victim of identity theft.Methodologies:



- Phishing attacks use both social engineering and technical subterfuge to steal customers' personal identity data and financial account credentials.- Customer receives a fraudulent e-mail seemingly from a legitimate Internet address.- The email invites the customer to click on a hyperlink provided in the mail.- Click on the hyperlink directs the customer to a fake web site that looks similar to the genuine site.- Usually the email will either promise a reward on compliance or warn of an impending penalty on a non compliance.- Customer is asked to update his personal information, such as passwords and credit card and bank account numbers etc.- Customer provides personal details in good faith. Clicks on 'submit' button.- He gets an error page.

Special Aspects relates to security in banks:Bank IT Infrastructure Physical Environment :Since the growth of financial services in India has been significant in the past few years, most large banks have ensured that their current IT set up is not only capable of handling the current level of customers and their associated volumes, but are also well equipped to ensure a similar level of service for the future growth and services in line with their business goals. The leading banks of the country have ensured state-of-the-art data center facilities for their DC (Data centre) and DRC (Data recovery centre), maintaining a 2/3 security compliance level and ISO 27001 certification. Banks have also ensured zero data loss with the implementation of the near site, considering the RPO (recovery point objective) and RTO (recovery time objective) for critical applications. These data centers have been housed in different seismic zones to ensure data security in Force Majeure situations such as earthquakes, floods and fire. The replication of data between the data centers has been done using redundant network links from different service providers. The security environment of the data center has been ensured at the physical level and operational level by the installation of firewalls, network-based intrusion prevention system (NIPS) and hostbased intrusion prevention system (HIPS) as well as the installation of anti-spam and anti-virus solutions from industry leaders. The installation of devices such as CCTV cameras, finger printer readers and scanners ensures physical security and prevents intrusion. The consistent improvement in IT is another theme that has emerged not only to keep pace with organizational priorities, but also to pro-actively build capacity over the next three to five years.

Backup and Disaster Management Plan in banks:The DR site at banks is vital for recovery in a disaster situation. Banks have set up their DR for all their critical applications and replication of data on a periodic or a real-time basis to ensure quick recovery in an adverse scenario. Banks also conduct the DR mock drill once in a quarter for all critical applications and servers to be well equipped to respond in the face of a real exigency. Banks have also implemented a centralized backup solution for the back-up of critical applications. An everyday backup on the SAN storage and back-up tapes and stored in fire proof cabinets in an offsite location would ensure data survival in case of a disaster. A business continuity plan includes availability of people, processes and technology. There are packages available in the market, which some of the banks have implemented to take care of their business continuity plan that includes automated disaster recovery management solutions.

Gopalakrishna Committee Report on IT: The RBI constituted the Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds, which produced its report in January 2011. The Working Group was headed by Mr. G. Gopalakrishna and is popularly known as the Gopalakrishna Committee Report.The committed delved into various issues arising out of the use of Information Technology in banks and made its recommendations in nine broad areas. These areas are IT governance, Information Security, IS Audit, IT Operations, IT Services Outsourcing, Cyber Fraud, Business



Continuity Planning, Customer AwarenessFraud, Business Continuity Planning, Customer Awareness programmes and Legal issues.

Some of the major recommendations on Governance & security are:On IT Governance:a. Banks need to formulate a Board approved IT strategy/plan document.b. A need was felt to create an exclusive Board level IT Strategy Committee with a minimum of two directors as members, one of whom should be an independent director.c. A need was felt for the position of CIO in banks, to be the key business player and play a part in the executive decision-making function.d. Key focus areas of IT Governance that need to be considered include strategic alignment, value delivery, risk management, resource management and performance management.

On Information Security:a. The major role of the Board/ Top Management should involve approving information security policies, establishing necessary organizational processes/ functions for information security and providing necessary resources.b. Each bank needs to create a separate information security function to focus exclusively on information security management. The organization of the information security function should be commensurate with the nature and size of activities of a bank and extent of IT leverage and e-delivery channels.c. A Board approved Information security policy needs to be in place and reviewed at least annually.d. Digital evidence needs to be considered as similar to any other form of legal proof. It needs to withstand challenges to its integrity, its handling must be carefully tracked and documented, and it must be suitably authenticated by the concerned personnel. A policy needs to be in place in this regard.e. Personnel with elevated system access privileges should be closely supervised. f. The audit trails should satisfy a bank’s business requirements apart from regulatory and legal requirements. It should also be facilitating the conduct of audit, serving as forensic evidence when required and assisting in dispute resolution including for non-repudiation purposes. Audit trails should be secured to ensure the integrity of the information captured and preservation of evidence.g. Data security measures need to be in place. Banks need to define and implement procedures to ensure the integrity and consistency of all critical data stored in electronic form, such as databases, data warehouses and data archives.h. Cryptographic techniques need to be used to control access to critical and sensitive data/information in transit and storage. Banks should only select encryption algorithms which are well established international standards and which have been subjected to rigorous scrutiny by an international community of cryptographers or approved by authoritative professional bodies, reputable security vendors or government agencies. i. Normally, a minimum of 128-bit SSL encryption is expected. Constant advances in computer hardware, cryptanalysis and distributed brute force techniques may induce use of larger key lengths periodically. It is expected that banks will properly evaluate security requirements associated with their internet banking systems and other relevant systems and adopt an encryption solution that is commensurate with the degree of confidentiality and integrity required.

Some Key words in Banking Technology:1. PDA- Personal Digital Assistant 2. ATM-Automated teller Machine 3. PKI- Public key infrastructure 4. PINS-Personal identification number5. EDI -Electronic data interchange (EDI) is the exchange of documents in a structured form between computers via telephone lines 6. EFT- Electronic Funds Transfer 7. Encryption -To encode data for security purposes 8. Firewall -A method for keeping a network secure



9. Proxy Server -Serves as a relay between two networks 10. Ftp-File Transfer Protocol: A protocol used to transfer files over a TCP/IP network (Internet, UNIX, etc.).11. Host -A computer that acts as a source of information or signals. 12. HTML-Hypertext Markup Language. 13. Hypertext -A linkage between related text. 14. IP Address -internet Protocol address the address of a computer attached to a TCP/IP network. 15. ISDN –(Integrated Services Digital Network) An international telecommunications standard for transmitting voice, video and data over digital lines running at 64 Kbps. 16. ISP/Internet Service Provider -An organization that provides access to the Internet.17. XML -(EXtensible Markup Language) 18. Denial of Service Attack (DoS) - a simple form of DoS attack is by sending large volumes of data to a single server thereby making it unstable or even crashing it. 19. Cookie - information which a website places on your hard drive so that it can remember something about you at a later date.20. Hacker - a person who uses a computer to break into other computer systems in order to steal, change or destroy information. To protect yourself from hackers you should install firewall software on your computer and keep it up to date. 21. Malware - an abbreviation of 'malicious software', malware refers to viruses, trojans, spyware, keyloggers, dialers and browser hijackers.22. GPRS stands for General Packet Radio Service .23. ISAC stands for Information System and Analysis.24. IDS stands for: Intrusion Detection System 25. SSL stands for: Secured Socket Layer 26. DES stands for Data Encryption standard.

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CHAPTER 12MARKETING CONCEPTS & MARKETING OF BANKING PRODUCTS

INTRODUCTION: Marketing is everywhere and it affects our day- to-day life in every possible manner. Formally orinformally people and organizations engage in a vast number of activities that could be called as marketing. Good marketing is no accident, but a result of careful planning and execution. It is both an art and science. Let’s discuss various concepts and issues in marketing.

What is marketing?Marketing is a societal process by which individuals and groups obtain what they need and want through creating, offering and freely exchanging products and services of value with others.For a managerial definition, marketing has often been described as the art of selling products. But people are surprised when they hear that the most important part of marketing is not selling! Selling is only the tip of the marketing iceberg. Peter Drucker, a leading management theorist, puts it this way:‘There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing should result in a customer who is ready to buy. All that should be needed then is to make the product or service available.’

The objective of what is marketing is to make you start thinking on your own: While answering the above question have you thought that Marketing is selling orMarketing is advertising orMarketing is promotion

This definition is undoubtedly an improvement on describing marketing as selling as it shows that marketing does encompass other activities besides selling. Schematically, this definition can be reproduced as shown below:

Producer Consumer Product Need ↓ ↓ ↑

Marketing Activities

We can see that Marketing, as per this definition, starts with a product'. This is very common idea among many people, for example, in advertising agencies, as they normally are required to advertise to sell a product, which already exists. Similarly, salesmen are also given `products' and asked to sell them. Therefore, to them marketing often, starts with a product.

Evolution of Modern Marketing:Marketing is as old as civilization itself. From Ancient Greece to our modern days, culture has based its trading and selling upon communication in order to move products faster than the man next to him.Corporations became aware of the need of individuals that would study markets and consumers -it's behavior patters and steps to be ahead of the game. What started out as a resource that determined what an organization would produce, has transformed into a science that coordinates why, when and how much of a good will be manufactured and where it will be sold. Companies went from inward to outward thinking, and our contribution has never been as clear as it is today.



There have been major stages in the history of marketing, which are:

The Trade Era: Production consisted in handmade goods that were limited and generally traded through exploration.

The Production Orientation Era: Enter the industrial age. Since goods were scarce, businesses focused mainly in manufacturing. As long as someone was producing, someone else would want to buy it. This orientation rose to popularity due to shortages in the market, hence creating the foundation of Jean-Baptiste Say's famous remark: "Supply creates its own demand."

The Sales Orientation Era: After the Industrial Revolution, competition grew and focus turned to selling. Marketing, branding and sales became an important pillar as outputs surpassed demand, and companies competed for customers.

The Marketing Orientation Era: From the second half of the 20th century onward, the saturation of markets led companies to bestow upon marketers the opportunity to perform on a more strategic level. Through a profound knowledge on the customer, these professionals were involved in what the company would produce, its distribution channels and pricing strategy. Employees within an organization were also motivated to acquire marketing knowledge, which set the grounds to clients obtaining a general brand experience.

The Relationship Marketing Era: The focus of companies shifts towards building customer loyalty and developing relationships with clients. Author Philip Kotler said that "the cost of attracting a new customer is estimated to be five times the cost of keeping a current customer happy." (Kotler, 1997)

The Social/Marketing Era: Concentrates on social interaction and a real-time connection with clients. Businesses are connected to current and potential customers 24/7 and engagement is a critical success factor.

CONSUMER BEHAVIOUR Behaviour is the interaction with the ambient surrounding environment, inherent in living creatures and mediated by their external and inner activeness. Thus consumer behaviour is actions of consumers in the market place and the underlying motives for those actions. Marketers expect that by understanding what causes consumers to buy particular goods and services, they will be able to determine which products are needed in the market place, which are obsolete and how best to present those goods to the consumer.

The study of consumer behaviour is the study of how individuals make decisions to spend their available resources ( time, money, effort ) on consumption related items.

TYPES OF CONSUMER BEHAVIOUR:There are four types of consumer behaviour. They are; a. Complex Buying Behaviour: Consumers goes through complex buying behaviour when they are highly involved in a purchase and aware of significant differences among brands. Consumers are highly involved when the product is expensive, bought infrequently, risky and self-expensive. Here consumers go through a rational/logical thinking process to collect as much information as possible about the available brands. Behaviour exhibited while purchasing a car is an example of complex buying behaviour.

b. Dissonance Reduction Buying Behaviour: Sometimes consumers are highly involved in purchases but see little difference in the brands. After the purchase they feel that the product does not perform to their expectations. They may thing about alternative brand which has forgone in the brand selection process. As a result, they feel some discomfort. This mental condition is known as Cognitive Dissonance.



c. Variety Seeking Buying Behaviour: Here consumers have a lot more brand options to choose. At the same time there are significant brand differences. Unit price of product is low. Consumer involvement is also low. But consumer show brand switching behaviour. They go on changing from one brand to another. They like experiments for the sake of variety satisfaction. They exhibit variety seeking behaviour in case of products like soap, detergents, toothpaste etc.

d. Habitual Buying Behaviour : In this situation consumers buy their products on regular basis. Brand switching behaviour is quite common here. Variations among brands are significant. Products are usually low priced. Gathering product knowledge is not so important. Consumers show habitual buying behaviour in case of products like salt, matches etc.

Types of consumers:All consumers can be classified into two types -personal and organisational. When you buy a shirt for your own use - you are buying in your capacity as a personal consumer. However, when you are buying a computer for use in office you are making the purchase in your capacity as an organisational consumer. Whenever you buy goods and services for your own or for family use, you are a representative of a personal consumer. All individuals thus fall in the category of personal consumer. All business firms, government agencies and bodies, non-business organisations such as hospitals, temples, trusts are organisational consumers of goods and services purchased for running the organisation. In this unit our focus is on the personal consumer and factors influencing his/her behaviour.

Factors influencing consumer behaviourConsumer behaviour is affected by a host of variables, ranging from personal motivations, needs, attitudes and values, personality characteristics, socio-economic and cultural background, age, sex, professional status to social influences of various kinds exerted by family, friends, colleagues and society as a whole. The combinations of these various factors produce a different impact on each one of us as manifested in our different behaviour as consumers. You may think that the best way of utilising your annual saving is to have a holiday, but your wife thinks it is wisest to invest in a house, while your colleague considers buying shares as the best way of spending savings. Thus you would find that each person has his or her own standards of judgments and distinct behaviour in every aspect of his role as a consumer. But at the same time, underlying the individual differences are similarities which help explain behaviour of specific types or groups of people. It is these similarities which make it possible for us to classify and analyse the behaviour of individual consumers.

I. Determinants of Consumer Behaviour:Consumers don’t make purchase decisions in a vacuum; rather, they respond to a number of external, interpersonal influences and internal, personal factors. Consumer often decide to buy goods and services based on what they believe others expect of them. They may want to project positive images to peers or satisfy the unspoken desires of family



members. Marketers recognize three broad categories of interpersonal influences on consumer behaviour: cultural influences, group influences and family influences.

a. Cultural influences : Culture can be defined as the values, beliefs, preferences and tastes handed down from one generation to the next. Culture is the broadest environmental determinant of consumer behaviour. Therefore, marketers need to understand its role in customer decision making. They must also monitor trends to spot changes in cultural values. Marketing strategies and business practices that work in one country may be offensive or ineffective elsewhere because of cultural variations. Hence cultural differences are particularly important and complex to understand for international marketers. Cultures are not homogeneous entities with universal values. Each culture includes numerous subcultures groups with their own distinct modes of behaviour.

b. Group (Social) influences : Every consumer belongs to a number of social groups. Group membership influences an individual’s purchase decisions and behaviour in both overt and subtle ways. The influences may be informational and/or normative. Every group establishes certain norms of behaviour. Group members are expected to comply with these norms. Difference in group status and roles can also affect buying behaviour. In nearly every reference group, a few members act as opinion leaders. They are the trendsetters who are likely to purchase new products before others in the group and they share their experiences and opinions via word of mouth. Other members’ purchase decisions are affected by the reports of the opinion leaders. Closely related to reference groups is the concept of social class.

c. Family influences :The family group is perhaps the most important determinant of consumer behaviour because of the close, continuing interactions among family members. Like other groups, each family typically has norms of expected behaviour and different roles and status relationships for its members. The traditional family structure consists of a husband and wife.

Consumer behaviour is affected by many internal, personal factors, as well as interpersonal ones. Each individual brings unique needs, motives, perceptions, attitudes, learning and selfconcepts to buying decisions.

Needs and motives : Individual purchase behaviour is driven by the motivation to fill a need. A need is an imbalance between the consumer’s actual and desired states. Someone who recognizes or feels a significant or urgent need then seeks to correct the imbalance. Marketersattempt to arouse this sense of urgency by making a need ‘felt’and then influence consumers’ motivation to satisfy their needs by purchasing specific products. Motives are inner states that direct a person toward the goal of satisfying a felt need. The individual takes action to reduce the state of tension and return to a condition of equilibrium.

Perceptions:Perception is the meaning that a person attributes to incoming stimuli gathered through the five senses - sight, hearing, touch, taste and smell. Certainly a buyer’s behaviour is influenced by his or her perceptions of a good or service.

Attitudes : Perception of incoming stimuli is greatly affected by attitudes. In fact, the decision to purchase a product is strongly based on currently held attitudes about the product brand, store or salesperson. Attitudes are a person’s enduring favourable or unfavourable evaluations, emotional feelings or action tendencies toward some object. Because favourable attitudes likely affect brand preferences, marketers are interested in determining consumer attitudes toward their products.

Learning: In a marketing context, refers to immediate or expected changes in consumer behaviour as a result of experience (that of self or others’). Consumer learning is the process by which individuals acquire the purchase and consumption knowledge and experience that they apply to future related behaviour. Marketers are interested in understanding how consumers learn so that they can influence consumers’ learning and subsequently, their buying behaviour.



Self concept : The consumer’s self concept a person’s multifaceted picture of himself or herself plays an important role in consumer behaviour. The concept of self emerges from an interaction of many of the influences both personal and interpersonal that affect buying behaviour.

PERSONAL FACTORS A consumer's purchase decisions are also affected by his personal characteristics such as age, sex, stage in family life-cycle, education, occupation, income, life-style, his overall personality and overall self-concept. We shall now discuss some of the influences. Demographic factors and life-cycle stage The first factor influencing a buyer's decision is his age. The need for different products and services changes with age. Babies and children have special needs for products such as milk powder, baby foods and toys. Young adults need clothes, recreational and educational facilities, transportation and a host of other age and fashion related consumption needs. There are certain physiological differences between men and women which result in their having different consumption needs. Women need specialised medical facilities for pregnancy and delivery. Their requirement of clothes and cosmetics is different from that of men. Each gender thus has its own need for specific products and services. Consumption behaviour is also influenced by the specific stage of the family life cycle. Table 1 lists nine stages in the family cycle and the predominant buying pattern associated with each. This family life cycle may be applicable in India only in the urban upper middle classes.

Stage Financial Situation Banking NeedsYoung Bachelor Per capita income high, as no

dependants. Few financial burdens.

Credit cards, auto loan, low cost banking services

Half nest(married with young children)

Home buying priority, low liquidity

Mortgage loan, credit card, overdraft, durable loan

Full nest ( older couple,grown up children) services

Income stabilized, good financial position

Home improvement, equity investment, deposit etc

Empty nest(older couple) Reduced income Medicines, social security etc

MARKET SEGMENTATION:Segmentation is a consumer oriented marketing strategy. It is a process of dividing the market onthe basis of interest, need and motive of the consumer. Market segmentation simply means dividing market or grouping of consumers. It refers to grouping of consumers according to such characteristics as income, age, race, education, sex, geographic location etc. Therefore market segmentation is the strategy that subdivides the target market into sub-groups of consumers with distinct and homogenous characteristics with a view to develop and follow a distinct and differentiated marketing programmes for each sub-group in order to enhance satisfaction to consumers and profit to the marketer.According to Philip Kotler, “ Market segmentation is the sub-dividing of a market into homogenous sub-sects of consumers where any sub-sects may conceivably be selected as a market target to be reached, With a distinct marketing mix.”

The logic of Segmentation : The concept of market segmentation has helped marketing decision making since the evolution of marketing. The goal of market segmentation is to partition the total market for a product or service into smaller groups of customer segments based on their characteristics, their potential as customers for the specific product or service in question and their differential reactions to marketing programs. Because segmentation seeks to isolate significant differences among groups of individuals in the market, it can aid marketing decision making in at least four ways:1. Segmentation helps the marketer by identifying groups of customers to whom he could more effectively ‘target’ marketing efforts for the product or service2. Segmentation helps the marketer avoid ‘trial and error’ methods of strategy formulation by providing an understanding of these customers upon which he can tailor the strategy



3. In helping the marketer to address and satisfy customer needs more effectively, segmentation aids in the implementation of the marketing concept4. On going customer analysis and market segmentation provides important data on which longrange planning (for market growth or product development) can be based.Although it is a very useful technique, segmentation is not appropriate in every marketing situation. If, for instance, a marketer has evidence that all customers within a market have similar needs to be fulfilled by the product or service in question (i.e. an undifferentiated market), one ‘mass’ marketing strategy would probably be appropriate for the entire market.

Criteria for SegmentationIf segmentation has to be useful in marketing decision making, then it must possess the following characteristics:1. Segments must be internally homogeneous -- consumers within the segment will be more similar to each other in characteristics and behaviour than they are to consumers in other segments.2. Segments must be identifiable --- individuals can be ‘placed’ within or outside each segment based on a measurable and meaningful factor3. Segments must be accessible --- can be reached by advertising media as well as distribution channels. Only then, the segments can be acted upon.4. Segments must have an effective demand --- the segment consists of a large group of consumers and they have the necessary disposable income and ability to purchase the good or service.

BASES OF MARKET SEGMENTATION:a. DEMOGRAPHIC SEGMENTATION: In Demographic segmentation, the market is segmented on the basis of demographic variables such as age, sex, family size, family life cycle, income, occupation, education etc. Demographic variables or characteristics are the most popular bases for segmenting the market.b. GEOGRAPHIC SEGMENTATION: The marketer divides the market into different geographical units. Generally international companies segment markets geographically. The theory behind this strategy is that people who live in same area have some similar need and wants and that need and wants differ from those of people living in other areas.c. BEHAVIOURAL SEGMENTATION: Behavioural segmentation is based on buyer behaviour i.e. the way people behave during and after purchase. It may covers Customers can be segmented on the basis of attitude, product characteristics like Prestige products, Status products, Anxiety products, e.g., Medicines, soaps etc. Functional products, e.g., Fruits, vegetables etc.. Further, occasion Segmentation, benefit Segmentation etc.d. PSYCHOGRAPHIC SEGMENTATION: It refers to grouping of people into homogeneous segments on the basis of psychological make up namely personality, life style and Social class.

Segmentation variable

Examples of variables measured

Comments

Demographics - Industry

-Company Size-Location

Which industries that buy this product should we focus us?What size companies should we focus on?What geographical areas should we focus on?

Operating variables

-Technology-User/non user status-Customer capabilities

What customer technologies should we focus on?Should we focus on heavy, medium or light users or non users?Should we focus on customers needing many or few services

Purchasing approaches

-Organisation

-Power structure

-Nature of existing

Should we focus on companies with centralized or decentralized purchasing?Should we focus on engineering or finance or marketing –dominated companies?Should we focus on companies with which we already



relationship

-General Purchase policies-Purchasing criteria

have strong relationships or just go after the most desirable companies?Should we go after companies that prefer leasing? Services contracts? Systems purchases? Sealed bidding?Should we focus on companies that are seeking Quality? Service? Price?

Situational Factors

-Urgency

-Specific application-Size of order

Should we focus on companies that need quick delivery or service?Should we focus on certain applications of our product rather than all applications?Should we focus on small or large orders?

Personal Characteristics

-Buyer-seller similarity-Attitudes towards risk-Loyalty

Should we focus on companies whose people and value are similar to ours?Should we focus on risk taking or risk avoiding customers?Should we focus on companies that show high loyalty to their suppliers?

MARKETING MIXThe marketing mix is a good place to start when you are thinking through your plans for a product or service, and it helps you avoid these kinds of mistakes.Understanding the ToolThe marketing mix and the 4 Ps of marketing are often used as synonyms for each other. In fact, they are not necessarily the same thing."Marketing mix" is a general phrase used to describe the different kinds of choices organizations have to make in the whole process of bringing a product or service to market. The 4 Ps is one way – probably the best-known way – of defining the marketing mix, and was first expressed in 1960 by E J McCarthy.

The 4Ps are: Product (or Service) Place Price Promotion

A good way to understand the 4 Ps is by the questions that you need to ask to define youmarketing mix. Here are some questions that will help you understand and define each of the four elements:

Product/Service→What does the customer want from the product/service? What needs does it satisfy?

→What features does it have to meet these needs? Are there any features you've missed out?

Are you including costly features that the customer won't actually use?

→How and where will the customer use it?

→What does it look like? How will customers experience it?

→What size(s), color(s), and so on, should it be?

→What is it to be called?

→How is it branded?

→How is it differentiated versus your competitors?

→What is the most it can cost to provide, and still be sold sufficiently profitably? (See also Price, below).



Place→Where do buyers look for your product or service?

→If they look in a store, what kind? A specialist boutique or in a supermarket, or both? Or online? Or direct, via a catalogue?

→How can you access the right distribution channels?

→Do you need to use a sales force? Or attend trade fairs? Or make online submissions? Or send samples to catalogue companies?

→What do you competitors do, and how can you learn from that and/or differentiate?

Price→What is the value of the product or service to the buyer?

→Are there established price points for products or services in this area?

→Is the customer price sensitive? Will a small decrease in price gain you extra market share? Or will a small increase be indiscernible, and so gain you extra profit margin?

→What discounts should be offered to trade customers, or to other specific segments of your market?

→How will your price compare with your competitors?

Promotion→Where and when can you get across your marketing messages to your target market?

→Will you reach your audience by advertising in the press, or on TV, or radio, or on billboards? By using direct marketing mailshot? Through PR? On the Internet?

→When is the best time to promote? Is there seasonality in the market? Are there any wider environmental issues that suggest or dictate the timing of your market launch, or the timing of subsequent promotions?

→How do your competitors do their promotions? And how does that influence your choice of promotional activity?

The 4Ps model is just one of many marketing mix lists that have been developed over the years. And, whilst the questions we have listed above are key, they are just a subset of the detailed probing that may be required to optimize your marketing mix.Amongst the other marketing mix models have been developed over the years is Boom and Bitner's 7Ps, sometimes called the extended marketing mix, which include the first 4 Ps, plus people, processes and physical layout decisions.Another marketing mix approach is Lauterborn's 4Cs, which presents the elements of the marketing mix from the buyer's, rather than the seller's, perspective. It is made up of Customer needs and wants (the equivalent of product), Cost (price), Convenience (place) and Communication (promotion). In this article, we focus on the 4Ps model as it is the most well-recognized, and contains the core elements of a good marketing mix.

Using the 4Ps Marketing Mix ModelThe marketing mix model can be used to help you decide how to take a new offer to market. It can also be used to test your existing marketing strategy. Whether you are considering a new or existing offer, follow the steps below help you define and improve your marketing mix.1. Start by identifying the product or service that you want to analyze.

2. Now go through and answer the 4Ps questions – as defined in detail above.

3. Try asking "why" and "what if" questions too, to challenge your offer. For example, ask why your target audience needs a particular feature. What if you drop your price by 5%? What if you offer more colors? Why sell through wholesalers rather than direct channels? What if you improve PR rather than rely on TV advertising?4. Once you have a well-defined marketing mix, try "testing" the overall offer from the customer's perspective, by asking customer focused questions:



a. Does it meet their needs? (product)

b. Will they find it where they shop? (place)

c. Will they consider it's priced favorably? (price)

d. And will the marketing communications reach them? (promotion)5. Keep on asking questions and making changes to your mix until you are satisfied that you have optimized your marketing mix, given the information and facts and figures you have available.

6. Review you marketing mix regularly, as some elements will need to change as the product or service, and its market, grow, mature and adapt in an ever-changing competitive environment.

Key Points:The marketing mix helps you define the marketing elements for successfully positioning your market offer.One of the best known models is the Four Ps, which helps you define your marketing options in terms of product, place, price and promotion. Use the model when you are planning a new venture, or evaluating an existing offer, to optimize the impact with your target market.

MARKETING OF SERVICES:-The term service is rather general in concept, and it includes a wide variety of services. There are the business and professional services such as advertising, marketing research, banking, insurance, computer-programming, legal and medical advice. Then there are services which are provided by professionals but consumed for reasons not of business, rather for leisure, recreation, entertainment and fulfilment of other psychological and emotional needs such as education, fine arts, etc.

CHARACTERISTICS OF SERVICES Services have a number of unique characteristics that make them so different from products. Some of the most commonly accepted characteristics are: a) intangibility b) inseparability c) heterogeneity d) perishability e) ownership.

Intangibility When you buy a cake of soap, you can see, feel, touch, smell and use to check its effectiveness in cleaning. But when you pay fees for a term in college, you are paying for the benefit of deriving knowledge and education which is delivered to you by teachers.These intangible features are: a service cannot be touchedb. precise standardisation is not possible c. there is no ownership transfer d. a service cannot be patented e. production and consumption are inseparable f. there are no inventories of the service.

Inseparability In most cases service cannot be separated from the person or firm providing it. Service is provided by a person who possesses a particular skill (singer), by using equipment to handle a tangible product (dry cleaning) or by allowing access to or use of physical infrastructure (hotel, train). A plumber has to be physically present to provide the service, the beautician has to be available to perform the massage. This is in direct contrast to products which can be produced in the factory today, stocked for the next two, three or more months and sold when an order is procured.

Heterogeneity The human element is very much involved in providing and rendering services and this makes standardisation a very difficult task to achieve. The doctor who gave you his complete attention in your last visit may behave a little differently the next time. The new bank clerk who cashes your cheques may not be as efficient as the previous one and you have to spend more time for the same activity. This is despite the fact that rules and procedures have been laid down to reduce the



role of the human element and ensure maximum efficiency. Airlines, restaurants, banks, hotels have a large number of standardised procedures. You have to reserve a room in a hotel and this is a straight forward procedure for which all the steps are clearly defined. Human contact is minimal in the computerised reservation systems, but when you go to the hotel there will be a person at the reception to hand over the key of your room. The way this person interacts with you will be an important factor in your overall assessment of the service provided by the hotel. The rooms, the food, the facilities may be all perfect, but it is the people interacting with you who make all the difference between a favourable and unfavourable perception of the hotel.

Perishability Services cannot be stored and are perishable. A car mechanic who has no cars to repair today, or spare berths on a train, unsold seats in a cinema hall represent service capacity which is lost forever. Apart from the fact that a service not fully utilised represents a total loss, the other dimension of this perishability aspect is that most services may face a fluctuating demand. There is a peak demand time for buses in morning and evening (office hours), certain train routes are always more heavily booked than others. This fluctuating demand pattern aggravates the perishability characteristic of services.

Ownership When you buy a product you become its owner-be it a pencil, book, shirt, refrigerator or car. In the case of service, you may pay for its use but you never own it. By buying a ticket you can see the evening film show in the local cinema theatre; by paying wages you can hire the services of a chauffer who will drive your car; by paying the required charges you can have a marketing research firm survey into the reasons for your products' poor sales performance, etc. In case of service, the payment is not for purchase, but only for the use or access to or for hire of items or facilities.

Marketing Mix for Services:-The service marketing mix is also known as an extended marketing mix and is an integral part of a service blueprint design. The service marketing mix consists of 7 P’s as compared to the 4 P’s of a product marketing mix. Simply said, the service marketing mix assumes the service as a product itself. However it adds 3 more P’s which are required for optimum service delivery.

Here on we start towards the extended service marketing mix.

People – People is one of the elements of service marketing mix. People define a service. If you have an IT company, your software engineers define you. If you have a restaurant, your chef and service staff defines you. If you are into banking, employees in your branch and their behavior towards customers defines you. In case of service marketing, people can make or break an organization. Thus many companies nowadays are involved into specially getting their staff trained in interpersonal skills and customer service with a focus towards customer satisfaction. In fact many companies have to undergo accreditation to show that their staff is better than the rest. Definitely a USP in case of services.

Process – Service process is the way in which a service is delivered to the end customer. Lets take the example of two very good companies – Mcdonalds and Fedex. Both the companies thrive on their quick service and the reason they can do that is their confidence on their processes. On



top of it, the demand of these services is such that they have to deliver optimally without a loss in quality. Thus the process of a service company in delivering its product is of utmost importance. It is also a critical component in the service blueprint, wherein before establishing the service, the company defines exactly what should be the process of the service product reaching the end customer.

Physical Evidence – The last element in the service marketing mix is a very important element. As said before, services are intangible in nature. However, to create a better customer experience tangible elements are also delivered with the service. Take an example of a restaurant which has only chairs and tables and good food, or a restaurant which has ambient lighting, nice music along with good seating arrangement and this also serves good food. Which one will you prefer? The one with the nice ambience. That’s physical evidence. Several times, physical evidence is used as a differentiator in service marketing. Imagine a private hospital and a government hospital. A private hospital will have plush offices and well dressed staff. Same cannot be said for a government hospital. Thus physical evidence acts as a differentiator.This is the service marketing mix (7p) which is also known as the extended marketing mix.

The Servuction Process:A servuction model is often used in service marketing to describe the close involvement of customers in the service production and experience. It is an amalgamation of two words - services and production and also goes by the name pro-sumption, co-production and co-creation. It is important because of the ‘Inseparability’ attribute of a service i.e. the production and consumption of a service cannot be separated from each other. This model breaks the service delivery process that a customer receives into two parts: that which is visible to the customer and that which is not. The invisible part is the process element from the extended marketing mix consisting of systems, backroom procedures and the technology or equipment needed to produce the service. In a restaurant this would involve the ordering of ingredients, the cooking facilities and the procedures involved in preparing the food. The visible part is broken into the inanimate environment (physical evidence) and the service providers or the individuals (people) who interact with the customer during the service experience. The inanimate environment consists of the physical design elements that the customer comes into contact with. This could include aspects such as the lighting, place settings, colourschemes, staff uniforms and the final bill. The model also suggests that customers interact with each other. Their behaviour and characteristics impact on each other’s experience. Therefore the benefits derived by customer A come from the interaction with the physical environment and the people (service providers and other customers). Each of these elements is supported and influenced by the process, much of which may be invisible to the customer.

Brand Image:Brand image is the current view of the customers about a brand. It can be defined as a unique bundle of associations within the minds of target customers. It signifies what the brand presently stands for. It is a set of beliefs held about a specific brand.

Definition of Brand: The American Marketing Association (AMA) defines a brand as a "name, term, sign, symbol or design, or a combination of them intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of other sellers.

Importance of Brand Image :Brand image is a very important parameter when it comes to brand performance. If the brand image is positive, the product would rise which would result in more sales. Negative brand image will lead to opposite results. Every company should try to be realistic while identifying the brand identity of the product. This identity should be practical, objective and smart. If it is too ambitious it may lead to customers not forming the same brand image in their mind. A positive brand image is built when customers are able to recall the brand and its uniqueness in terms of the offered value proposition, relate to the organization’s way of business and its key values. Hence the Brand



Image is important because it is formed completely on its own in customer's mind and cannot be measured quantitatively.

How brands are built?Several factors contribute to the success of Brand like Quality, Positioning, Strong Communication, Time & consistency, Innovation, consistent customer satisfaction, early entry in market.

Role of colours in Logo:Orange: This colour shows dynamism, an organization responsive to market conditions & customer needs.Blue: Trust & depthMaroon: Indicative that organization goes beyond the basics to understand its customers and provide them with products and services with a view to building lasting relationships.Grey: StabilityWhite: High standard of corporate governance, committed to the highest levels of integrity and work ethics.Electric Orange: Dynamism – brighter & sharper.

Planning for Products and ServicesA key concept on which marketers rely is the concept of PLC i.e. Product Life Cycle. It in essence means the stages in product life from its conception to obsolescence as mentioned earlier. From strategic view point it provides important guidelines about product management.

Through observing and monitoring the product life cycle, it becomes easier to decide andimplement the product development strategy. Generally, these are four strategies recommended for growth in business and profitswhich are :1) Market Penetration 2) Market Development 3) Product Development4) Product Diversification

Market PenetrationMarket Penetration strategies involve increasing the sales for an existing Product in an existing market. This, generally, involves an increase in marketing effort. This can be possible through three strategies :i) Increasing current rate of use of a product ii) Attracting competitor's customers .iii) Attracting non-users of a productIncreasing rate of usage is strategy normally used by many marketers in consumers durable industry. Banks can use this strategy to promote increased usage of certain services. Of course, not all services are conducive to this type of strategy. Attracting competitor's customers is thesecond option in market penetration strategy. Making a SWOT analysis of a bank and its competitors with respect to consumers' needs and place, promotion, price of bank's own products enables a bank to attract customers to its products. The third strategy is to attract the non-users. Cross-selling of a product of a bank is an example of such market penetration strategy. Providing trust/advisory services can be another example of such strategy.

Market DevelopmentMarket Development strategies involve the increase in marketing effort for existing products in new markets. The one option can be to attract new customers for existing products and the second -expanding areas (branch expansion policy). Managing bank's product/service mix in increasingly competitive market determines the success or survival of banks in the volatile market situations.

New product developmentThe new products can be developed for a new market or existing market. New product can also be launched in improved market or in the new market, Innovating a product essentially means developing a product resulting in an increase in the product line. This enables diversifying



business risks, continuing life cycle of a product and also ensuring profits. New product development may start with the maturity or decline of an existing product or due to lack of demand or due to obsolescence of a product, Stiff competition compel a bank to think of new ideas for survival or success in a given market, based on changing customer wants and needs the bank’smarket research department generate new Idea. Such Ideas are, subjected to discussions and examination by expert bankers, economists, experienced field staff and marketing experts within a bank to validate the applicability of such ideas to lead to new and salable product.Normally such ideas for new products pass through following stages :

Product Levels:No matter how well costs are driven or held down, no product can be profitable unless it sells. Therefore all products must satisfy customer needs and wants. As all customers are different and seek different benefits from products, businesses would ideally tailor their products to satisfy each customer's wants and needs.Customers will choose a product based on their perceived value of it. Satisfaction is the degree to which the actual use of a product matches the perceived value at the time of the purchase. A customer is satisfied only if the actual value is the same or exceeds the perceived value. Kotler attributed five levels to products:1. Core benefit:The fundamental need or want that consumers satisfy by consuming the product or service. For example, the need to process digital images.2. Generic product:A version of the product containing only those attributes or characteristics absolutely necessary for it to function. For example, the need to process digital images could be satisfied by a generic, low-end, personal computer using free image processing software or a processing laboratory.3.Expected product:The set of attributes or characteristics that buyers normally expect and agree to when they purchase a product. For example, the computer is specified to deliver fast image processing and has a high-resolution, accurate colour screen.4. Augmented product:The inclusion of additional features, benefits, attributes or related services that serve to differentiate the product from its competitors. For example, the computer comes pre-loaded with a high-end image processing software for no extra cost or at a deeply discounted, incremental cost.5. Potential product:This includes all the augmentations and transformations a product might undergo in the future. To ensure future customer loyalty, a business must aim to surprise and delight customers in the future



by continuing to augment products. For example, the customer receives ongoing image processing software upgrades with new and useful features.

Product Categories:Based on different aspects like durability, tangibility, and use, products can be classified in various categories, which determine the appropriate marketing strategy. Durable : Consumer durable goods are items purchased for long-term use. Common household appliances like refrigerators, dishwashers, washers and dryers, ovens, microwaves and televisions fall under the durables category.Services: Services are distinct from other prominent consumer markets in that they are intangible. People pay for services because of the expertise of the provider, a desire to save time or hassle or because they view their time as more valuable than the money paid to the service providers. Examples of common service categories include tanning, lawn care, childcare, home cleaning, auto repair and banking. Nondurable: These goods are products that are consumed or are only useable for a short period of time because they wear out or become useless. An example of nondurable goods are fresh vegetables, cosmetics and cleaning products, food, condiments, fuel etc.

Further, the products can categories into two sets:Consumer goods: These are products bought for consumption by the average consumer. Alternatively called final goods, consumer goods are the end result of production and manufacturing and are what a consumer will see on the store shelf. Clothing, food, and jewelry are all examples of consumer goods.Industrial goods: These are made up of machinery, manufacturing plants and materials, and any other good or component used by other industries or firms.

Product conceptualization in Banking:The product conceptualisation and development has to bear these needs in mind. e.g. Using the PLC approach seen earlier a banker may group these needs into following segments :

Young Customer A family with teenage children A retired coupleWould prefer a bank which provides security, convenience and quick, friendly service at convenient hours.

Would have need for proper saving with safety of funds, reasonable yield and availability of low cost loans for children’s education, convenient location and convenient hours

Would prefer for high safety, higher yield, counseling advice and personalized service at convenient location.

Thus some needs like safety, liquidity, better yield, personalised service and convenient location and timing are the common factors which have to be satisfied by any bank's product.

PRODUCT LIFE CYCLE AND PRODUCT STRATEGIES:As the products volume (sales) and sales revenue follow a typical pattern, the concept of product life cycle has been one of the important concepts in marketing which must be, properly understood.As each product passes through certain typical but definite stages in its life-span, we will look up into the important stages :i) introductionii) growthiii) maturityiv) declineIt must be borne clearly in mind that the growth or decline of a products depends not on product alone but the market in which it is launched.

Introductory Stage phase



This is the stage when a new service or product has just been introduced in the market. This stage in the product's life cycle, is characterised by low sales and most of the times negative profits which may be due to lack of awareness about the product or limited distribution or unfamiliarity with the product. In banking industry, however, it is different from consumer goods industry as the products have been regulated for long and prices were also controlled by statutory agencies. Promotion being the only variable which could be manipulated, advertising and personal service were the options for enabling rapid product growth.

Growth StageAfter a product survives the introductory stage, it passes into the growth stage. At thispoint, competitive strategies by other banks can affect the growth. The promotional strategies tend to change during this stage to keep up the sales. The product/services are fine tuned during this stage. Sales tend to grow and profits increase during this phase. Market acceptance of the product is the key factor at this stage.

Maturity StageHaving continued, at the growth stage, the product reaches a plateau in it growth curve and thus into the maturity stage. The most notable indicator of this phase can be the initial stability and then slowdown in volume of sales/profit.Products in maturity stage can give indications about changes required in product strategies. The competition at times may tend to thin up, the margin to stabilise the product with at maturity phase. It may force to lower the price of the product or additional cost in promotion and distribution of the product.

Decline StageAfter maturity, with increased competition on change in consumer preferences a downward shift/drift in sales or reduction in profit may start. Except in case of new diversified products in banking industry, such sudden decline cases are not many. We will see the application in the foregoing paragraphs with respect to decline, death or obsolescence of bank products. In real life, in banking - being a financial service industry, all products need not follow such a cycle but still the concept of product life cycle has important place in product ill marketing strategy. The bank, knowing to what happens to different products and services at different stages in a give economic scenario in a market can decide and improve its planning. In fact the trial balances, monthly MIS data and quarterly business figures compiled by the planning divisions can indicate the demand and supply position of various products as inter-se composition (vis-a-vis budgeted pattern) and as a percent share of the total market vis-a-vis the potential for each product. A suitable flexible plan with a matching pricing strategy can ensure sustained growth of all the products ensuring growing business and matching profits – of course with growing customer satisfaction.

PCL Elements Introduction Growth Maturity DeclineCHARACTERISTICS1. Sales Low Fast Growth Slow Growth Declining2. Profits Negligible Peak Level Declining Low3. Cash inflow Negative Moderate High Low



4. Competitors Few Growing Many Declining5. Customers Innovative Mass Market Mass Market Laggards

Product Strategies at Maturity:At some point, a product will hit peak sales and its growth rate will start to slow down when new, better and cheaper products enter the market and customers start switching their allegiance. Without intervention, there's a risk that sales will stagnate or decrease due to market saturation. This fate is not inevitable, however. Smart marketing strategies can help to generate sales during the maturity stage of product and sustain market share.

Product Modification:Modifying the product is a tried-and-tested way for companies to boost the sales of mature products. Modifying the product means tweaking it to meet changing customer needs. This can be by improving the product's quality, features, durability, reliability, versatility or safety or by updating the product's name, packaging and style.

Product Elimination:When a product reaches the stage where continued support is no longer justified because performance is falling short of expectations, it is desirable to pull the product out of the marketplace. Poor performance is easy to spot. It may be characterized by any of the following:1. Low profitability.2. Stagnant or declining sales volume or market share that is too costly to rebuild.3. Risk of technological obsolescence.4. Entry into a mature or declining phase of the product life cycle.5. Poor fit with the business unit's strengths or declared mission.

Product Diversification: Product diversification is done in two ways – by adding a product to an existing product line and by creating an additional product line. It is done to ensure that the firm doesn’t rely completely on existing products or product lines.Horizontal Diversification: Here the marketer does it by acquiring or developing new products or offering new services that could appeal to the company´s current customer groups. In this case the company relies on sales and technological relations to the existing product lines. For example a dairy, producing cheese adds a new type of cheese to its products. Concentric Diversification: Means enlarging the production portfolio by adding new products with the aim of fully utilising the potential of the existing technologies and marketing system. The concentric diversification can be a lot more financially efficient as a strategy, since the business may benefit from some synergies in this diversification model. It may enforce some investments related to modernizing or upgrading the existing processes or systems. This type of diversification is often used by small producers of consumer goods, e.g. a bakery starts producing pastries or dough products. Conglomerate diversification: It means moving to new products or services that have no technological or commercial relation with current products, equipment, distribution channels, but which may appeal to new groups of customers. The major motive behind this kind of diversification is the high return on investments in the new industry. Furthermore, the decision to go for this kind of diversification can lead to additional opportunities indirectly related to further developing the main company business - access to new technologies, opportunities for strategic partnerships, etc.

Product Pricing:OBJECTIVES : Before we review the pricing theories in detail, it is essential to know the typical pricing objectives. Important among which are :1) Growth in Sales - A low price can achieve higher growth in sales volume but may affect the profit level adversely.2) Market Share The customer acceptance is reflected by market share of a product and is an indicator of acceptability of price.



3) Competition - To face the competition, prices can be lowered to maintain sales or in the absence of it, prices can be revised but stable prices help in maintaining image or brand name and quality.4) Pre-determined Profit - If a profit level is pre-decided as a policy, the price has to be maintained at a particular level despite other factors as to ensure attaining that objective.5) Corporate objectives to have pay-back in a specific period also can affect the pricing and price level.

PRICING METHODSa) Market based pricing system:- In order to understand consumers based inputs on pricing system, we should also take into account the market related pricing systems, which adopt one or more of the following approaches :i) Perceived value pricingii) Psychological pricingiii) Promotional Pricingiv) Skimming

i) Perceived value pricing: These are based on the belief the consumers have about the value of products and pricing is based on these assumptions. This is supplemented by market research and if price is more than buyer ═ recognized value, it may affect sales whereas if price is less than buyer ═ recognised value, the revenue will suffer.

ii) Psychological Pricing: In many pricing systems, pricing is based on prestige and can b e kept higher to promote the idea of status and quality. Many other times the price will be just below a round figure say Rs.59.20 (to show it is less than Rs.100) or Rs.499.00 (i.e. not Rs.5001- or above). Sometimes instead of giving a 20% discount, the price per unit per-se will be constant (uncharged) but it will advertised that on purchase of 4 units one unit will be free.

iii) Promotional Pricing: This is used for promoting high level of sales or to clear excess stock which although is with a reduced profit margin improves sales and reduces holding cost.

iv) Skimming: This strategy is to ,'skim the cream' i.e. adopting a high price approach. When the product is new and innovative and in a monopolistic or less competitive market, the price will be higher (like in mobile phones) which can be progressively reduced with entry of more producers and skimming the cream sufficiently.

b) Cost based PricingThere are four main cost based pricing methods which are:1) Standard cost pricing2) Cost-plus pricing3) Break-even analysis4) Managerial Pricing

c) Competition Related Pricing Strategies:-Pricing Decisions as applied in Banks Decisions in pricing are generally taken in view of the market opportunities. Pricing decisions are differently handled by different organisation as a policy or as a strategy. The factors such as economic, social, political affect pricing decisions. In small organisations pricing decisions are taken by the top management whereas in big organisations the divisional or product line heads have the authority to decide to fix the price. In some other organizations, committees are set up to fix the price. As we focus our attention to marketing of banking services and further on the pricingaspects, these are two major costs which have to be considered and they are:a) Interest costb) Servicing costIf we analyses the profitability statement of any bank it shows following broad classification :

Interest Cost - 67



Admn. (staff) cost - 27Other (non-int.) cost 6 100

The interest rates for banks in India have been administered for decades by the Reserve Bank of India and the service charges have been advised and administered by the I.B.A. with which although in funds management market forces and demand and supply do play a role, in respect of interest or service charges, the market forces did not affect to any considerable extent. However, after the deregulation of interest rates and service charges, now the banks are required to taken into consideration of all the factors of marketing as well as the cost of funds for any pricing policy.

Pricing policy and strategies, however, is equally relevant in banking due to the fact that it affects the demand as well as profitability and after a considerable stress on social banking in Indian context, due to the guidelines regarding capital adequacy by Narasimham Committee, and now after Basel II, profitability has become an important consideration of bank viability.

Product-Mix pricing:The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total product mix. This pricing is difficult because the various products have related demand and costs and face different degrees of competition. 1. Product-line pricing: Since most firms market multiple product lines, an effective pricing strategy must consider the relationships among all of these products instead of viewing each is isolation. In product line pricing, management must decide on the price steps to set between the various products. The price steps should take into account cost differences between the products, customer evaluations of their different features and competitors’ prices. In many industries, marketers use well-established price points for the products in their line. The customer will probably associate low, average and high quality with the price points. The marketers task is to establish perceived quality differences that support the price differences. 2. Optional-product pricing: Many firms use this strategy by offering to sell optional or accessory products along with their main product. These firms have to decide which items to include in the base price and which to offer as options. Often the basic model which is stripped of many comforts and conveniences sought by the customers gets rejected.3. Captive-product pricing: Firms that make products that must be used along with a main product are using this pricing strategy. Producers of the main products often price them low and set high markups of the supplies. For a competitor who does not sell these supplies, he will have to price his product higher in order to make the same overall profit. In case of services, this strategy is called two-part pricing where the price of the service is broken into a fixed fee plus a variable usage rate. The service firm must decide how much to charge for the basic service and how much for the variable usage. The fixed amount should be low enough to induce usage of the service and profit can be made on the variable usage fees. 4. By-product pricing: In producing certain products, there are by-products. If these by products have no value and if getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the manufacturer will seek a market for these by-products and should accept any price that covers more than the cost of storing and delivering them. This practice allows the marketer to reduce the main product’s price to make it more competitive.5. Product-bundle pricing: Using this strategy, marketers combine several of their products and offer the bundle at a reduced price. Price bundling can promote the sales of products consumers might not buy otherwise, but the combined price must be low enough to get them to buy the bundle.

Promotion: Promotion is a term taken from Latin word ‘promovere’. It means ‘move towards’. In marketing,promotion means all those tools that a marketer uses to take his product from the factory to the customer and hence it involves advertising, sales promotion, personal selling, and public relation. It is necessary to flow the information about the product from the producer to the consumer either



along with the product or well in advance of the introduction of the product. This role is played by promotion.In the words of Masson and Ruth,”Promotion consists of those activities that are designed to bring a company’s goods or services to the favorable attention of customers”.

PROMOTION MIX Firms select a mix of promotional tools to effectively communicate with their target customer group. The different elements of this group are: 1. Advertising 2. Personal selling 3. Sales Promotion 4. Public relations and 5. Direct Marketing

FACTORS TO BE CONSIDERED WHILE SELECTING A PROMOTION MIX: 1. Nature of the Product:- The product may be consumer product or industrial product, convenientgoods or specialty goods, simple or technical goods etc. In each case, the promotion mix elementmay vary.2. Overall marketing strategy:- It means, whether the firm wishes to “push” the product or create“pull” for the product. Depending upon the strategy, the elements of promotion mix will vary.3. Buyer readiness stage:- The choice of different elements of promotion mix is depend on the buyer’s readiness and awareness of the brand.4. Product life cycle stages:- Different elements of promotion mix were used in different stages of product life cycle.5. Market size: -In narrow market, direct marketing is more effective. For a market having large number of buyers the promotion tool is mainly advertising.6. Cost of Promotion elements:- The cost of different tools is very important while selecting the Promotion mix.

ADVERTISING:According to Webstar, “Advertising is to give public notice or to announce publicity”. According to Gardner, “Advertising is the means of mass selling that has grown up parallel with and has been made necessary to mass production”.OBJECTIVES OF ADVERTISING The fundamental purpose of advertising is to sell something - a product, a service or an idea. In addition to this general objective, advertising is also used by the modern business enterprises for certain specific objectives which are listed below:1. To introduce a new product by creating interest for it among the prospective customers. 2. To support personal selling programme. Advertising maybe used to open customers' doors for salesman.3. To reach people inaccessible to salesman. 4. To enter a new market or attract a new group of customers. 5. To light competition in the market and to increase the sales as seen in the fierce competition between Coke and Pepsi. 6. To enhance the goodwill of the enterprise by promising better quality products and services. 7. To improve dealer relations. Advertising supports the dealers in selling he product. Dealers are attracted towards a product which is advertised effectively. 8. To warn the public against imitation of an enterprise's products.

CLASSIFICATION OF ADVERTISING:Classification of Advertising on the various basis

Area Coverage Audience Media Function Stagea. Local a. Consumer a. Print a. Direct & a. Pioneering Indirect action b. Regional b. Industrial b. Electronics b. Primary & b. Competitive Selectivec. National c. Trade c. Outdoor c. Product & Institutional



d. International d. Professional d. Other

Integrated Marketing Communications:Integrated Marketing Communications is a simple concept. It ensures that all forms of communications and messages are carefully linked together. Integrated marketing communications (IMC) is a process of managing customer relationships that drive brand value primarily through communication efforts. Such efforts often include cross-functional processes that create and nourish profitable relationships with customers and other stakeholders by strategically controlling or influencing all messages sent to these groups and encouraging data-driven, purposeful dialog with them. IMC includes the coordination and integration of all marketing communication tools, avenues, and sources within a company into a seamless program in order to maximize the impact on end users at a minimal cost. Ideally, IMC is implemented by developing comprehensive databases on customers and prospects, segmenting these current and potential customers into groups with certain common awareness levels, predispositions, and behaviors, and developing messages and media strategies that guide the communication tactics to meet marketing objectives. In doing this, IMC builds and reinforces mutually profitable relationships with customers and other important stakeholders and generates synergy by coordinating all elements in the promotional mix into a program that possesses clarity, consistency, and maximum impact.

Tools of IMC:

UNIQUE SELLING PROPOSITION (USP): It is that central idea around which the advertising campaign is built. The big selling idea is known as USP. It is the heart of advertising campaign. It is an offer that an advertiser makes to his consumers which is unique in relation to the competing offer or offers and promises to deliver a certain distinctive package of satisfaction. Eg. MRF company says about its tyres as, ‘the tyre with muscles’ , “The beauty soap of film stars”(Lux soap).

PRODUCT POSITIONING:It refers to the placement of company product or products in the minds of target consumers relative to the competitive products , as having certain distinctive benefits and want satisfying potential. Positioning represents more a state of mind or image than different ingredients or attributes; such a state of mind is derived from advertising. Advertising is an instrument positioning or repositioning a product or products in the minds of consumers.

PERSONAL SELLING:Personal selling is the art of convincing the prospects to buy the given products and services. Though it is basically a method of communication, it is two way as it involves direct face to face contact between the salesman and the prospect. It is the ability to convert human needs into wants. It is the process of contacting the prospective buyers personally and persuading them to buy the products. Eg. Eureka Forbes products.Social Media Marketing:Social media marketing is a powerful way for businesses of all sizes to reach prospects and customers. Customers are already interacting with brands through social media, and if business is not speaking directly to audience through social platforms like Facebook, Twitter, Instagram, and



Pinterest, then business growth is difficult now a days. Great marketing on social media can bring remarkable success to business, creating devoted brand advocates and even driving leads and sales.Social media marketing, or SMM, is a form of internet marketing that involves creating and sharing content on social media networks in order to achieve your marketing and branding goals. Social media marketing includes activities like posting text and image updates, videos, and other content that drives audience engagement, as well as paid social media advertising.Before beginning of creating social media marketing campaigns, consider business’s goals. Starting a social media marketing campaign without a social strategy in mind is like wandering around a forest without a map— might have fun, but probably get lost.

Here are some questions to ask when defining social media marketing goals:- What the business hoping to achieve through social media marketing?- Who is target audience?- Where would target audience hang out and how would they use social media?- What message do a business want to send to audience with social media marketing?

Social media marketing can help with a number of goals, such as:- Increasing website traffic, Building conversions, Raising brand awareness, Creating a brand identity and positive brand association, Improving communication and interaction with key audiences.The bigger and more engaged your audience is on social media networks, the easier it will be for business to achieve every other marketing goal on list.

DISTRIBUTION OF GOODS & SERVICES:What is a Channel of Distribution ?A channel of distribution may be referred to by other names, and terms vary from industry to industry. But whether channel, trade channel, or some other variant of the term is used, the functions performed remain the same. The term channel of distribution has its origins in the French word for canal, suggesting a path that goods take as they flow from producers to consumers. In this sense, a channel of distribution is defined by the organizations or individuals along the route from producer to consumer. Because the beginning and ending points of the route must be included, both producer and consumer are always members of a channel of distribution. However, there may be intermediate stops along the way. Several marketing institutions have developed to facilitate the flow of the physical product or the transfer of ownership (title) to the product from the producer to the consumer. Organizations that serve as marketing intermediaries (middlemen) specializing in distribution rather than production are external to the producing organization. When these intermediaries join with a manufacturer in a loose coalition aimed at exploiting joint opportunities, a channel of distribution is formed.

Channel of distribution : The complete sequence of marketing organizations involved in bringing a product from the producer to the ultimate consumer or organizational user.A channel of distribution, then, consists of producer, consumer and any intermediary organizations that are aligned to provide a means of transferring ownership (title) or possession of a product from producer to consumer. The channel of distribution can also be seen as a system of interdependent relationships among a set of organizations a system that facilitates the exchange process.



a. The Direct Channel for Consumer Goods and Services: A good example of the direct channel is supplied by the neighbourhood bakery, which converts flour, water, and other raw materials into baked goods and then retails these products, providing any other functions that might be necessary to complete the transaction. The direct channel is also familiar as the distribution method used by many marketers of services and not for-profit groups that solicit donations.

b. The Manufacturer (Producer) Retailer Consumer Channel:The manufacturer retailer consumers channel is commonly employed when the retailer involved is a sizable organization, such as a discount chain like Wal-Mart. This type of retail marketing organization may prefer to deal directly with manufacturers to be able to order specially made merchandise or obtain discounts or other benefits.

c. The Manufacturer Wholesaler Retailer Consumer Channel:The manufacturer wholesaler retailer consumer channel of distribution is the most commonly used structure for consumer goods. This is because most consumer goods are so widely used. It would be virtually impossible for the ITC, for example, to deal individually with every retailer stocking cigarettes, let alone every consumer of cigarettes. Thus, a long channel, with at least two intermediaries, is needed to distribute the product. Wholesalers can also be used in the distribution of services.

d. Channels of Distribution for Business-to-business MarketingBusiness-to-business marketers use channels that are similar to those used by the marketers of consumer products.

CHANNELS OF DISTRIBUTION FOR BANKSThe channels of distribution in financial services perform a number of key functions, as follows:a. Sale and offer of services and products, as well as advising customers.b. Contact and liaison with advertising and public relations agencies to assist in designing more effective advertising/promotional campaigns.c. Gathering of information necessary for planning marketing activities, strategy decisions and product development.

In distributing financial services, firms employ a number of channels. The advantages of direct distribution channels - for example branches, used to be lower operational costs and more efficiency. In comparison, the selling through indirect channels offers convenience to the customers and more 'impartial' advice, as in the case of agencies.



The Branch NetworkBank's major distribution outlets are their branches. The design and development of the branch network will be affected by :a. Characteristics of the products - importance of service quality, inseparability of the product, intangibility of the product.b. Customer needs - convenience, opening hours, availability of ATM, telephone banking, home banking and so on.c. Environmental factors - legislation, development of information technology.d. Competitors - if a branch network is efficient, it will be a competitive advantage, keeping up to date with changes made by competitors.

TYPES OF BRANCHESBranches of different financial institutions deliver different types of service for different types of customer as explained in following section:1) Full service branch: The full service branch has been the conventional delivery system, providing a full range of the products and services offered by the institution to both corporate and retail customers, However, in the developed countries, the services provided by banks have increased immensely as deregulation has led them to extend their range of conventional financial service variants. In India, too with the liberalisation and deregulation in the financial sector, similar position is set to be evident soon.2) Specialty branch: Specialty branches now serve as alternatives to full service operation. Specialty branches focus on either retail or corporate business but not both; for example real estate specialist branches focus on mortgage finance. Thus the time devoted to withdrawal and deposit transactions is reduced. On the domestic scene, we have many SSI branches, industrial finance/corporate banking branches, NIU branches, Hi tech agricultural branches, service branches, commercial and personal branches, recovery branches, leasing branches, housing and finance branches.3) High net worth' branches: These branches are located' in appropriate socio demographic areas and they distribute a range of financial services for up market customers. These services are often based on minimum account balance criteria, and they emphasises personal financial counsellor services rather than conventional bank teller services.4) Corporate branches : These aim at middle-market corporate accounts and do not usually handle retail financial services. The services provided are on-line foreign exchange, letters of credit, asset-based financial specialisation, corporate cash management services and so on.5) Hub and spoke banking : The status of each branch is determined by the area and customers it serves. There is little point for a branch in a small rural village to have a business advisor. It is more beneficial for the bank to ignore this service when the market is very small and to cater for it at a larger branch in the nearest larger town. This system of providing a limited service in the smaller branches, backed up by a nearby, larger core branch, that is' able to carry out all the services 'the bank offers, is called 'hub and spoke' branch banking. The smaller satellite branches provide a limited and mostly highly automated service, dealing mainly with the personal banking. These are linked to a key branch that offers a full range of services and often co-ordinates the activities of its satellites. Normally there can be between four and 15 satellites to one key branch. The hub is responsible for corporate business and has overall jurisdiction for the network as a whole. In India such an organisational arrangement is not common.

Marketing Information System:The term ‘Marketing Information Systems’ refers to a programme for managing and organising information gathered by an organisation from various internal and external sources. MIS assesses the information needs of different managers and develops the required information from supplied data in time regarding competition, prices, advertising expenditures, sales, distribution and market intelligence, etc. Information sources for MIS include a company’s internal records regarding marketing performance in terms of sales, and effectiveness and efficiency of marketing actions, marketing databases, marketing intelligence systems, marketing research, and information supplied by independent information suppliers.



DatabaseA database refers to the collection of comprehensive information about customers and prospects such as demographic and psychographic profiles, products and services they buy, and purchase volumes, etc., arranged in a manner that is available for easy access and retrieval. Databases allow marketers access to an abundance of information, often through a computer system such as sales reports, news articles, company news releases, and economic reports from government and private agencies, etc., that can be useful in making various marketing decisions.

Internal RecordsModern technology is making information required for marketing decisions ever more accessible. It is possible to track customer buying behaviour and better analyse and understand what customers want. The integration of various modern technologies is allowing companies to access valuable information. Ever increasing numbers of market researchers and managers are having access to e-mail, voice mail, teleconferencing, video conferences, and faxes.Internal database is the most basic starting point in developing a strong MIS. Marketers, not just the growing numbers of large retailers in our country, need information about what is demanded more by customers and what is not. Internal record systems help in tracking what is selling, how fast, in which locations, to which customers, etc. Availability of all such information relies on reports available on orders received from sales people, resellers, and customers, copies of sales invoices, prices, costs, inventories, receivables, payables, etc. Getting inputs and designing systems to provide right data to the right people at the right time is critical for marketing decisions.

External SourcesCensus Bureau is one key source of information regarding various demographic variables. Besides Census Bureau of India, other sources include Newspapers, Trade Publications, Technical Journals, Magazines, Directories, Balance Sheets of companies, Syndicated and published research reports. Various third party information suppliers offer a variety of information about customers as per marketer’s requirements, for a price.Major sources may be The Source Directory, Yellow Pages, Internet etc.

The following are the components of MIS:a. Internal reporting system – This includes orders received, inventory records and sales invoicesb. Marketing Intelligence system – It is carried out by the managers themselves in an informal way rather than by professional marketing researchersc. Marketing research system – Normally carried out by professional marketing researchers and takes the form of purposeful studiesd. Marketing models – Various models are used like: Time series sales modes, Brand switching models, Linear programming, Elasticity models Regression and correlation models, ANOVA models, Sensitivity analysis, Discounted cash flow, Spreadsheet 'what if modelsUse of Computers in Marketing Information System:The concept of marketing information systems has been around for many years. Early systems were paper-based systems but, with the emergence of computers with large storage capacities and later microcomputers with similar features, marketing information systems have become more "electronic" in nature. The companies are increasingly using the computers as productivity tool in MIS for customer service, account management, product management, forecasting, sales management, advertising and promotion, distribution, pricing, competitive tracking or marketing research.Generally the computers are used as database storage medium, but now in combination with software the firms are increasingly using as decision making tools including analyzing customer accounts, planning, analyzing and evaluating sales activities, Setting prices and evaluating different pricing strategies, Monitoring and evaluating new product-market opportunities.Outsourcing of selling activity by bank:

DIRECT SELLING AGENT/DIRECT MARKETING AGENT:The world over, banks are increasingly using outsourcing as a means of both reducing cost and accessing specialist expertise, not available internally and achieving strategic aims. 'Outsourcing'



may be defined as a bank's use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the bank itself, now or in the future.Continuing basis' would include agreements for a limited period. Typically outsourced financial services include applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities etc. Outsourcing brings in its wake, several risks. Some key risks in outsourcing may be Strategic Risk, Reputation Risk, Compliance Risk, Operational Risk, Legal Risk, Exit Strategy. Banks which desire to outsource financial services would not require prior approval from RBI whether the service provider is located in India or outside India.Activities that should not be Outsourced: Banks which choose to outsource financial services should however not outsource core management functions including Internal Audit, Compliance function and decision-making functions like determining compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio.

Responsibilities of DSA/ DMA/ Recovery Agents Code of conduct for Direct Sales Agents formulated by the Indian Banks' Association (IBA) could be used in formulating their own codes for Direct Sales Agents / Direct Marketing Agents/ Recovery Agents. Banks should ensure that the Direct Sales Agents / Direct Marketing Agents/ Recovery Agents are properly trained to handle with care and senstivity, their responsibilities particularly aspects like soliciting customers, hours of calling, privacy of customer information and conveying the correct terms and conditions of the products on offer etc.

IBA CODE FOR DMA/DSAModel Code of Conduct for the Direct Selling Agents (DSAs) is a non-statutory code issued by Indian Banks' Association, a voluntary association of Banks in India for adoption and implementation by DSAs while operating as Agents of Banks and Financial Institutions.1.1 ApplicabilityUpon adoption and inclusion as part of agreement between XXXBank and the DSA, this code will apply to all persons involved in marketing and distribution of any loan or other financial product of the XXXBank. The Direct Selling Agent (DSA) and its Tele-Marketing Executives (TMEs) & field sales personnel, namely, Business Development Executives (BDEs) must agree to abide by this code prior to undertaking any direct marketing operation on behalf of the bank. Any TME/BDE found to be violating this code may be blacklisted and such action taken be reported to the bank from time to time by the DSA. Failure to comply with this requirement may result in permanent termination of business of the DSA with XXXBank and may even lead to permanent blacklisting by the industry.A declaration to be obtained from TMEs and BDEs by the DSAs before assigning them their duties is annexed to this Code.

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NEXT QUESTION BANK….



MULTIPLE OBJECTIVE QUESTION BANK

The following multiple choice questions are for practice purpose, we don’t guarantee that these questions will appear in examination. The intention for providing these MCQ’s is concept clearance and practice. Some of the MCQ’s stated here under are taken from question papers of various entrance exams of professional courses, promotional examinations, PG level or even graduation level. WE also request you that these are available only for students of Indian School of Finance & accounts and not available for sharing to non ISFA students. Copying, reproducing or sharing on any media, social networking or any website is considered to be illegal.

MODULE AChapter 1 to 3 of Notes

1. A company which pools money from investors and invests in stocks, bonds, shares is calleda) A bank b) An insurance company c) Bancassurance d) Mutual Fund

2. Bancassurance isa) An insurance scheme to insure bank depositsb) An insurance scheme to insure bank advancesc) A composite financial service offering both bank and insurance productsd) A bank deposit scheme exclusively for employees of insurance companies

3. As per FIMMDA’s guidelines, the Mid-Office is responsible for:a) Dealing activities b) Risk Management c) Reconciliationd) Confirmation of deals

4. Interest is calculated on actual/365 days basis in respect of the following products, except one :a. Call Money b. Notice Money c. Term Money d. GOI dated securities

5. The regulator for Mutual Funds in India is:a) FIMMDA b) AMFI c) RBI d) SEBI6. FIMMDA’s general principles and procedures are applicable to:a) Fixed Income Markets b) Money Markets c) Derivatives Marketsd) All of the above

7. A bank in India, wants to undertake capital market activities, it should:a) Obtain special license from AMFI b) Obtain special license from FIMMDAc) Both a and b d) Register with SEBI

8. FIMMDA stands for: a) Foreign Exchange Markets and Derivative Markets b) Fixed Income Markets Money Markets and Derivatives Markets c) Fixed Income Markets and Derivatives Markets d) None of the above

9. FIMMDA’s guidelines cover the following products, except one:a) Call Money b) Cross Currency Interest Rate swapsc) Commercial Paper d) Certificate of Deposit

10. While discussing investments there is mention of short term government security. What is this type of investment known as ?Debenture b. Mutual Fund c. Treasury Bill d. Share



11. Money market securities areShort Termed b. Low Risk c. Very Liquid d. All of the above

12. Money lent for more than one days but less than 15 days is calleda. Notice Money b. Call Money c. Term Money d. All of the above

13. Capital Market is the Market deal witha. Short term Funds b. Long term Funds c. Gilt-edge Securities d. All of the above

14. Indian Financial system comprises ofa. Scheduled Commercial Banks b. Non Banking financial Institutions c. Urban Co-operative Banks d. All of the above

15. Commercial paper area) unsecured promissory notes b) secured promissory notesc) sold at the premium d) issued for a period of for maximum of 1 year

16. Book Building is managed mainlya) registrar b) lead manager c) registrar and book runnerd) lead manager and book runner

17. The rolling settlement period introduced in the stock exchanges isa) T+5 b) T+7 c) T+2 d) T+15

18. The Nifty hasa) 25 stocks b )30 stocks c) 33 stocks d) 50 stocks

19. Which of the following is a Characteristics of a Capital Market Instrument ?a. Marketability b. Long Maturity c. Liquidity Premium d. All of the above

20 . Clearing and settlement operations of NSE is carried out bya. NSDL b. NSCCL c. SEBI d. CDSL

21. ____________ are not considered capital market securities. a. bonds b. mortgages c. retail CDs d. stocks

22. Merchant bankers are: A. Financial Brokers B. Financial intermediaries C. Credit AppraisersD. Underwriters E. All of the above

23. Merchant bankers’ activity relate to: A. Equity and equity related finance B. Debt and Debt related financeC. Fund Business D. Non-Fund business

24. Advantage of Factoring service to customers A. Responsibility of collecting sales dues B. Absolve of sales ledger administrationC. Absolve from Bad debts D. Quicker payments by clientsE. All of above

25. Limitation of Factoring A. Over trading B. Manipulation in invoices C. Not suitable to SMEsD. Companies with few Debtors E. All of the above

26. Advantages of Factoring as a financial tool / facility A. Flexible finance through up-front payment B. Obtaining off-balance sheet finance C. Payment to suppliers more promptly for higher credit reputationD. All of the above



27. Bancassurance is nothing but A. Assurance by the bank that it will not fail. B.Insurance of entire deposits at banks by insurance company. C. A packaged financial service offering both banking and insurance products to customers to meet both insurance and banking needs

28. Advantage to banks under Bancassurance A. Increased return of fee income from assets B. Protection of personal life of borrowers to save loans from becoming NPA C. Marketing and processing capabilities are available extensively. D. Only (b) and (c) E. Only (a) and (c)

29. Which of the following is not the part of the structure of Financial system in India?a) Industrial Finance b) Agriculture Finance c) Government Financed) Development Finance e) Personal Finance

30. In case of an issue of 100% of the net offer to public through 100% book building process, not less than _____ % of the net offer should be made available to retail investora. 15% b. 35% c. 50% d. None of these

31. For Government secruties market the trading settlement cycle is _____a. T + 2 b. T + 3 c. T + 1 d. T + 4

32. The full form of NDS is a. National Depository system b. Notional Depository system c. National Deposit system d. Negotiated Dealing system

33. CCIL facilitates settlement of transactions in government securities on a. Delivery Vs. Payment basis b. Payment basis c. SGL basis d. None of these

34. ---------------- represent shares companies kept in foreign depository banks.a. convertible bonds b. American Depository Receipts (ADRs) c. asset-backed securitiesd. LEAPS

35. What has been issued to tap the overseas market for funds by corporate?a. IPO of shares b. Public Issue of shares c. IDR d. GDR

36. Fair practices code (FPC) for lenders is drafted bya. Executive committee of central board b. BOD-Ministry of Financec. Reserve Bank Of India d. Indian Banks Association

37. BCSBI meansa. Banking committee for Supervision of Borrowers of India b. Bankers club of state bank of India. c. Banking codes and standard body of Indiad. Banking codes and standard board of India.

38. Capital Adequacy Ratio indicates...................a. Capital as a Percentage of Risk-weighted Assetsb. Capital as a percentage of Deposits & other liabilitiesc. Capital as a percentage of Investments of the Bankd. none of the above

39. Minimum period of a Certificate of Deposit is :a) 15 days b) 30 days c) 10 days d) 7 days

41. Hybrid capital instruments (debt / equity) form part of ______ capital.a) Tier II b) Tier I c) Paid up d) Preference share



42. Clause 49 of the Listing Agreement of SEBI refers to :a. announcing of quarterly results of listed companies b. restriction of FDI in public sector banksc. corporate governance and financial penalties including delisting for companies who do not appoint the required number of independent directors on their boardd. None of these

43. The Demutualisation Ordinance amending the Securities Contracts (Regulation) Act, 1956 deals with :a. operations of foreign mutual funds in Indiab. rules and regulations for issue of different securities in the capital marketc. compulsory corporatisation of stock exchanges to bring about transparency and efficiency in their operationsd. process of converting paper based securities into electronic form

44. Under Section 19(1) of the Banking Regulation Act, 1949, para- banking activities refer to : a. leasing b. hire purchase finance c. factoring d. credit card operations e. all the above f. only a, b & c

45. Under Book Building process, the price of the share to be issued is determined bya. Issuer b. Quotes given by the prospective buyer c. Manager to issue d. None

46. A financial contract derived from the performances of underlying securities and helps in hedging and risk management is known as a. Securitisation b. Derivative c. Forfeiting d. Forward

47. SME Rating Agency of India Ltd (SMERA) is a joint initiative ofa. SIDBI and Dun & Bradstreet Information Services India Pvt Ltdb. CIBIL and several leading banks in the countryc. a & bd. None of the above

48. Short selling meansa. Selling of less number of stocks than the seller holds b. Selling of stocks in a short periodc. Sale of stocks, which the seller does not own at the time of sellingd. None of these

49. Securities Lending and Borrowing (SLB) is the mechanism introduced by SEBIa. For providing settlement of stocks sold short b. For raising loans against stocksc. For settlement of short selling of securities d. None of these

50. An open-ended mutual fund is one that has: a. an option to invest in any kind of security b. units available for sale and repurchase at all times c. an upper limit on its NAV d. a fixed fund size

51. As per SEBI's principles, the AMC and the Board of Trustees of a fund should belong to the same sponsors a. True b. False

52. The entity that SEBI does not regulate is a. share registrars b. mutual funds c. stock exchanges d. non-banking finance companies

Keys:1 2 3 4 5 6 7 8 9 10

d c b d d d d b b c

11 12 13 14 15 16 17 18 19 20

d a d d d d c d d b



21 22 23 24 25 26 27 28 29 30

c b a e e c c e e b

31 32 33 34 35 36 37 38 39 40

c d a b d d d a d a

41 42 43 44 45 46 47 48 49 50

a a c f b b c c c b

51 52

b d

MODULE BChapter 4 to 7 of Notes

1. In deposits accounts the main relationship between bank and customer is: A. creditor – bank, debtor – customer B. debtor – bank, creditor – customer C. agent -principal D. servant – owner E. only a and b

2. When a bank lends money to the corporate person the relationship is: A. borrower and lender B. creditor – debtor C. debtor – creditor D. customer and client

3. Bailor – bailee relationship is applicable in: A. cash deposited with cashier by customer B. safe deposits locker C. demand draft issued by bank D. keeping articles in safe custody with bank E. none of above

4. what relationship is created when the bank collects a cheque in clearing. A. holder for value B. clearing member and principle. C. agent and principle D. collecting bank and holder E.none of above

5. when any FDR is lost by a customer of a bank, what document is executed: A. guarantee bond B. government bond C. promissory bond D. indemnity bond E. none

6. A credit voucher for Rs.44,444 favouring Tarun was wrongly posted to Varun Bose by the bank, the relationship established with Varun Bose is of: A. trustee and beneficiary B. debtor and guarantor C. creditor and indemnifier D. creditor and debtor

7. Mr Nanhe has a bank account and credited Rs. 20 lakh in it, subsequently he has arrested on charges of fraud. The police informed the bank for not allowing withdrawals from his account. Two days later, bank receives a cheque of RS 15000 favoring Nanhe’s creditor. What should the bank do A. not to pay cheque B. return cheque with memo stating A/c holder in jail C. honour the cheque D. get police orders for payment E. get court orders for payment

8. Account holder X draws a cheque for Rs.5,000 favouring Rajesh (a minor aged 13 years) or dearer. Rajesh presents the cheque on counter duly signed on the back. What should the banker do with the Cheque of a minor? A. refuse, since no contractual capacity B. pay the cheque after inquiring with X C. pay to Rajesh without any responsibility of bank



D. ask Rajesh to bring his parents E. Section 26 N.I. Act 1881, does not allow minor to receive payment.

9. Cheque drawn for Rajkumar or order is stolen. The thief made endorsement as Rajkumar on the cheque in his favour. The cheque is presented in clearing and paid by bank. True owner later on sent legal notice to bank. What is the liability of the bank? A. the paying bank will get protection under N.I. Act B. forgery does not give any rights to bank, hence liable C. under section 85, the paying bank is liable D. under section 131, the paying bank is liable.

10. After close of business hours by 1.30 hrs, the account holder himself availed payment. At 4.15 p.m. (after close of 1.45 hrs) income tax attachment order is received by bank. What would be the liability of paying bank? A. payment is made in due course and as payment is debitable next day, bank is protected B. payment is not in due course since paid after reasonable time ( i. e. 1.30 hrs late for today) C. attachment order will be effective after bank’s right of lien over the late payment D. bank should approach the customer to get the order changed to next day.

11. Ritesh issued a cheque at 3:30 p.m. (one hour after close of business hours of the bank) to Shubha approached to the bank and on request paid the money at 4:00 p.m. as late payment; Ritesh arrived to the bank and stopped payment of cheque issued to shubha at 4:30 p.m. on the same day. Who is liable for loss? A. payment after Business Hours is not a payment in due Course hence bank is liable, Section 10 N.I. ActB. Payment even though after business hours but within banking hours is protected under Section 31C. Payment late for today is protected under Section 85D. Refused to accept stop payment instructions since late for today.

12. Section 131 of N.I. Acts gives protection for collection of A. Bills of Exchange B. Promissory Note C. Hundis D. Cheque E. All the above

13. Rajkumar wants a demand draft striking the word ‘Order’ and writing the word ‘Bearer’. Can bank help him ? A. Bearer Draft is unlawful under section 31 of RBI B. Bearer Draft can be issued like a cheque C. Signature of the payee should be attested on the back of draft by the issuing branch D. Attestation of the signature of the payee on a separate slip of paper by bank (without striking out the word ‘Order’ on draft)

14. A draft purchased is reported lost and the purchaser wants to stop the payment of the draft. Can the Bank do it? A. Bank cannot stop payment since it is a promissory note B. Bank can stop payment since covered under negotiable instrument. C. Bank can ask the purchaser to suffer for negligence and bank cannot help D. Bank would issue stop payment instructions only after two weeks from date of issue.

15. Discuss the essential conditions for right of set off to the bank. A. Money transactions B. Both the accounts in the same name and rights C. implied agreement to keep the accounts distinct and separate. D. All of the above E. None of the above

16. Objectives of KYC A. to ensure appropriate customer identification B. to monitor transactions of suspicious nature



C. to ensure that he / she would not deceive the bank. D. if loan given it would not be a NPA E. only (a) & (b)

17. Sources of credit information’s A. information’s on visit to business premises B. On interview with borrower and from documents submitted C. Information’s on visit to business premises D. All of above E. Only (b) & (c)

18. What qualitative information are available from loan proposals? A. Personal history of achievements health and interpersonal relationship with family B. professional skills and qualifications, details of heirs and successors. C. Track record business reputation , behaviour patterns for managerial skill and bearing capacity D. All of above E. Only (c)

19. Quantitative informations available from loan proposal are: A. personal assets and liabilities of the borrower B. details of expenses / and resources for meeting the margin C. only (a) & (b) D. None of above

20. Demand Deposits are those which can be withdrawn: A. On Request B. On Sanction by Manager C. On Demand D. On Persuasion

21. Current accounts Deposits are not entitled to_________ A. Cheque book above 100 to leaves B. Monthly Statements C. Cash Payment D. Interest 22. Advantages of Lease Financing A. Alternative use of funds B. Arrangement for faster and cheaper credit C. Increased capacity to borrow Lessee D. Trading on Tax Shield E. All of above

23. Disadvantage of Leasing A. Deprivation of asset ownership B. Deprivation of asset in case of default C. Attachment on owner going insolvent D. None of the above

24. Disadvantages to Credit Card holders A. Over Spending Debt Trap B. Frauds due to loss or theft of cards C. Forged signatures D. Forged Charge slips 25. Line is a/an _______ of the creditor to retain possession. A. right B. obligation C. instrument D. interest

26. Particular Lien gives the creditor right to retain ______ increase the expenses incurred are not last A. all goods B. ordered goods C. some goods / securities D. specific goods / securities

27. Banker’s Lien is an / a _______ A. bailment of goods B. implied pledge C. agreement D. an stoppage

28. Banker’s Lien is not applicable in case of ____________ A. Safe Custody B. Securities left negligently C. All of above D. none29. Right to combine two accounts by banks is called __________ A. Garnishee B. Lien C. Set-off D. Rating



30. The right of set-off is __________ A. Customer’s right B. Banker’s right C. Bank’s discretion D. Payee’s right

31. Garnishee order is issued by __________ A. Police Officer B. Revenue Officer C. C.I.D. D. Courts of Law

32. Attachment order is issued by __________ A. Income Tax Officer B. Sales Tax Officer C. (a) and (b) combined D. Public Debt Officer

33. Mandate is a ________ agreement. A. Stamped B. Unstamped C. Memorandum D. Letter

34. Power of attorney can be _______. A. Universal B. Limited C. both (i) & (ii) D. Calculated

35. Person to whom a power of attorney is given is called ________ And who gives it is called _______ A. Debtor-Creditor B. Baior-Bailee C. Pawner-Pawnee D. Donor-Donee

36. Payment in due course means A. Payment on due date B. Payment in accordance with apparent tenor C. Payment in accordance with apparent signature and specimen D. Payment due to sufficient funds.

37. Payment of cheques are governed by sections under N.I.Act A. Section 10/31/85/126 B. Section 15/16/17/131 C. Section 131/138/147/142 D. All of (i) to (iv)

38. The liability of drawee of cheque is A. Sufficient funds B. Property applicable for payment C. Required to do so without default D. All of above

39. Duties of paying banker of crossed cheques are A. Crossed cheques B. Collection on behalf of customers C. Payment in good faith and without negligence D. None of above

40. Promissory Notes / Bill of Exchange and Cheque are defined as ___________ A. Trust Receipts B. Judicial documents C. Negotiable instruments D. documents of title to goods

41. Cheque is payable on _______ A. Demand B. Usance C. Fixed future date D. After Sight

42. Crossing is a direction to the _______ bank to pay the cheque to the payee through a bank. A. Drawer B. Payee C. Paying D. Passing E. Collecting

43. The crossing in a crossed cheque can be cancelled by _______ A. Drawer B. Drawee C. Endorser. D. Acceptor E. Bank

44. Acts done honestly is called acts done ______ A. Without negligence B. Rashly C. Mollified D. In good faith E. Honourly

45. Mere signature of the payee on the reserve of the instrument is called ________ endorsement. A. Full B. Partia C. Conditional D. Restrictive E. Blank



46. Sans recourse means _________. A. Without fear B. Without physical touch C. Without liability to me D. Without liability to payee

47. A bank on whom a cheque is drawn by the customer is _______ A. Collecting bank B. Paying bank C. Advising bank D. Issuing bank E. Confirming

48. Section 131 of N.I. Act extends protection to the ________ A. Collecting bank B. Paying bank C. Drawee bank D. Negotiating bank

49. Where a customer, by a letter has advised the bank directing the banker not to honour / pay particular cheque such letter is called ________ A. Letter of credit B. Stop-payment letter C. Mandate D. Garnishee letter E. Official letter

50. Forged Cheque is __________ cheque. A. Valid B. InValid C. Post-dated D. Stale cheque E. Anti-dated

51. Introduction in opening accounts is A. Optional B. Compulsory C. Discretionary D. Waived from year 2003.

52. Minor with self-operation can open account if he / she is above A.6 year B.10 year C.15 year D.17 year

53. Public Ltd. Company should have minimum shareholders, before opening bank account: A.50 B.200 C.10 D.7 E.no limit

54. Government companies are those companies where the government holds at least_________. A.51% B.26% C.100% D. No Requirement.

55. Delegation of power under Trust is _________. A. Possible B. Not possible C. Beneficiary’s permission D. Charity commissioner’s permission

56. Which document stipulates internal rules of company _________ ? A. Memorandum B. Resolution C. Articles D. Declaration E. Companies Act, 1956

57. Minor’s account can be opened in the guardianship of __________. A. Mother and Father B. Mother or Father C. Grandmother D. Elder brother.

58. Two or more minors desire to open bank a/c in your bank, whether they can open A. Either or Survivor B. Jointly C. Only two can join D. Cannot open

59. Who is considered natural guardians for minor’s ________? A. Mother and Father B. Stepmother and Father C. Stepfather and Stepmother D. All of above

60. Who shall be nature guardian in case of married minor girl? A. Father B. Mother C. Father-in-law D. Mother-in-law E. Husband.

61. Sanjay, a minor aged 11 years, desire to open bank’s Saving Account. His mother is illiterate and his father has become sanyasi. He has got both grand parents. Who will be his natural guardian? A. Father B. Mother C. Grandfather D. Guardian appointed by courtE. Sanjay himself can operate.



62. In a limited co. certificate of incorporation was obtained through memorandum which was signed by two persons for all the 7 signatories The signatures were forged. Will the bank accept memo as genuine for opening bank a/c? A. Yes B. No C. Yes because incorporation certificate is valid D. No because forged documents can not be accepted E. Bank will ask its H.O.

63. There should be two persons to open a partnership account in a bank which is correct? A. X aged 25 years Y aged 17 Years B. X aged 25 years Y aged 21 years C. X aged 17 years and Y aged 16 years D. Ku. Shubha aged 30 years and Ku. Rachna aged 16 years ( daughter of Ku. Shubha) E. X aged 71 years Y aged 57 Years but lunatic

64. HUF account is to be opened in a bank where three major person are there Shivkumar-Father , Mrs. Ramawati-Shivkumar’s Mother, Sharat kumar-Son Who can become Karta of HUF? A. Shivkumar B. Sharat Kumar C. Mrs. Ramawati D. Both Shivkumar and RamawatiE. Both Shivkumar and Sharat Kumar

65. One of the directors of a Ltd. Co. expired and cheques signed by him are presented for payments should the bank pay those cheques? A. Cannot pay B. Company on other directors confirmation C. Can pay as a routine D. Payments be stopped by co.

66. X a partner in the firm XYZ Co. wants to open a bank account in the firm’s name. Does it require signatures of A. All partners B. Any one C. Managing partner only D. Sleeping partner not required

67. Garnishee Order attaches:a) Money/Security kept in safe custody. b) Balances available at the time of serving the order to bank.c) The limits enjoyed by Bank. d) None of the above.

68. Mr. Suresh, a Photocopier, requests for a term loan of Rs 10.00 lakh for purchase of 3 photocopying machines costing Rs 12.00 lakh. He will meet loan WC requirements from his own resources. Manager can sanction the loan under Priority Sector: A.10 lakh B.12 lakh C. Cannot sanction D. Regional manager can sanction

69. Mr. Satish runs a travel agency. He dose not know driving. He approaches the bank for loan of Rs 7.00 lakh for purchase and furnishing of the van for travel and tour operator. Bank can A. Refuse the loan B. sanction C. Sanction if driving license is obtained D. refuse since loan is excessive

70. Net Working Capital / margin means A. Money invested by the borrower B. Bank loan C. Subsidy from Government D. All the above

71. The minimum percentage of Priority Sector advances to be maintained by foreign banks in India A.40% B.32% C.15% D. no minimum limit

72. Which of the following scheme is not covered under weaker section A. IRDP B. DRI C. PMRY D. consumption loan

73. Loan for fish rearing is covered under priority sector as advance A. Direct Agriculture B. Indirect agriculture C. Allied to indirect agriculture D. None

74. Indirect agriculture advance means A. Advances granted to agriculture for motor car to visit city B. Advances granted to profit motive institutions which help indirectly to agriculture or farming



community C. Advance granted to commission agents D. Advances granted to Urban Electricity corpn.

75. Cardinal principles of lending are A. Safety and liquidity B. Profitability and diversifications of risks C. Productive purpose and security D. Only (i) and (iii) E. All of (i) to (iii)

76. Customer profitability analysis means A. Exercise done by bank before to lending for a customer B. Exercise before opening a new branch C. Assets the profitability of customers business D. Only (i) and (iii) E. none

77. Banker can reduce risk in lending to a borrower A. by obtaining adequate security B. by ensuring that there will be no problem of liquidity with borrower C. by ensuring that there will be no the account of lack of liquidity and lack of willingness to pay on the part of the borrower

78. In bankers parlance, credit risk in lending refers to A. default of repayment by a borrower B. default of a bankers in maintaining SLR C. default of a banker to release credit to a borrower D. none of above

79. Net working capital means A. Current assets – Current Liabilities B. Owned funds – goodwill C. Use of assets + sources of funds D. None of above

80. Major Current assets are A. Marketable investments and cash/receivable/inventories B. Inventories + cash + receivables C. Share in sister concern + unquoted shares + cash D. All of above

81. What are the sources of working capital A. Trade credits + Unsecured Loans + Deposits B. Bank borrowings + Advance Payments C. Net working capital D. All of above

82. Working Capital needs are estimated by A. Operating Cycle method B. Projected Turnover method C. Cash Budget method D. Any of above

83. Difference between Cash Budget and Cash Flow A. Cash flow deals with cash and non-cash funds B. Cash Budget deals with Cash Transactions only C. Cash flow statement are for quarterly or half yearly while cash budget for short periods D. Cash budget is projection into future while cash flow statement is historical E. All of above

84. Advantages of Cash Budget could be A. Borrower plans in advance cash requirements B. Banker is able to spot to danger signal quickly and corrective measures could be taken C. Banker can plan his resources to meet credit demands D. All of above

85. Is there any exposure ceiling for banks in providing advances / loan to borrowers? A.15% of capital funds for single borrower and 40% in a borrower’s group B.10% of capital funds for single borrower and 20% in a borrower’s group



C.25% of capital funds for single borrower and 50% in a borrower’s group for infrastructural projects. D. No such ceiling

86. Credit decisions are affected by risks like A. Credit risk / Market risk / Operational risk B. Liquidity / interest rate / foreign exchange rate C. Commodity price / equity price risks D. None of above

87. When a Loan will be NPA? A. interest and / or Loan installments overdue for more than 90 days B. A/c is out of order for more than 90 days in case of overdraft / cash credit C. Bill remain overdue for more than 90 days in BP / BD D. All of above E. Only (i) and (iii)

88. Charging of interest at monthly rests would / would not change overdue under NPA. A. Would make overdue of 90 days form monthly interest debiting B. Would make overdue 90 days from previous Quarter ending C. Both of above D. None of above

89. Advances granted to units placed under rehabilitation package approved by BIFR / TLI are treated as A. NPA B. Standard assets C. Additional credit facilities to such unit are to be treated as Non-NPA for two years approved by BIFR / TLI D. Additional credit facilities granted by banks under nursing programmed prepared by banks themselves

90. Working capital gap means A. Total current assets – total current liabilities B. Total current assets – Current Liabilities, other than bank borrowing C. Total assets – total liabilities

91. Maximum permissible Bank Finance (MPBF) is arrived at by A. Deducting net working capital from working capital gap B. Deducting net working capital gap from total assets C. Deducting NWC from Total Current assets D. None of above

92. Negative Lien means A. A declaration by a Co. not to encumber assets of the co. without previous consent of banker B. A Lien letter executed by the Co. authorising the bank to mark lien on it C. A trust letter executed by a Co. D. A declaration that bank cannot provide cash to Co. if demanded

93. Charge created on LIC policy is A. Lien B. Set-off C. Hypothecation D. Pledge E. Assignment

94. A guarantor is liable only when A. The principle debtor has defaulted to pay B. The creditor has exhausted his remedy against the principal debtor C. The guarantor is called upon to pay on default by the principal debtor D. After the expiry of limitation period of guarantee E. None of above

95. ABC & Co. have been sanctioned cash credit limit of Rs 10 lacs against paid stocks (margin 30%) and book debts upto 90 days (margin 50% with a sub-limit of Rs 2 lacs). The company had stocks worth Rs 20 lacs, Sundry creditors for goods Rs 10 lacs and Book debts upto 90 days Rs 15 lacs. How



many amounts can they draw against this security?a) Rs. 9 lacs b) Rs 10 lacs c) Rs 16 lacs d) Rs 10.5 lacs e) None of these

96. When an account is overdrawn and a new partner is being admitted to the firm?a) Stop operation immediately and rule off the accountb) Obtain a letter from the incoming partner confirming the borrowing arrangements and consenting to be liable for the outstanding as on the date of his joining with an acknowledgment of liability of the firmc) Continue the operations to avoid inconvenience, as an addition of the partner would give more credit worthiness to the firm and thus more security.d) a+b

97. Pre-shipment Credit is available in a) Indian Currency only b) Foreign currency c) Non fund based finance d) Both currencies

98. Post-shipment finance can be extended up to ____ of the invoice value of goods. a) 100 % b) 80% c) 75% d) 70%

99. The maximum period usually allowed for realisation of export proceeds is ____ days from the date of shipment, with certain exceptions. a) 120 days b) 90 days c) 180 days d) 60 days

100. ___________________ provides support to both exporters and financing banks through export credit insurance. a) DICGC b) GIC c) ECGC d) EXIM

101. According to the benchmark laid down by the RBI, at least ___% of the net bank credit of the bank should be to the priority sector, ___% to AGL. and ___% to the weaker sections of the society as a part of the priority sector. a) 40; 18; 10 b) 45;18;10 c) 35;18;10 d) 40;15;15

102. Priority Sector Housing Loan Limit Revised to Rs. 25 Lacs from Rs. 28 Lacs provided the cost of purchase/construction is not exceeding ________ a) 40 lakhs b) 25 lakhs c) No such limit d) 35 lakhs

103. Scheme of 1% Interest Subvention on Housing Loan upto Rs. ___Lacs where the cost does not exceed Rs. 25 Lacs w.e.f. 01.04.2011 a) 10 b)15 c) 20 d) 25

104. Under SGSY scheme subsidy can be adjusted to loan account a. immediately after disbursement b. towards the last installments c. within three years d. immediately after disbursement

105. For the year 2016, Micro enterprises are now entitled to have a priority sector advances to the extent of ____% of ANBC.a. 10% b. 7.5% c. 7% d. 18%

106. For the year 2016, Sub target for Small & marginal farmers as per the new guidelines is ______%a. 10% b. 7% c. 7.5% d. 8%

107. Education loan sanctioned for Rs. 15 Lacs on 26th April’2015, how much amount will be taken as Priority sector advance a) 10 b) 15 c) 75% d) 5

Keys: 1 2 3 4 5 6 7 8 9 10

B B D D D D C C A B

11 12 13 14 15 16 17 18 19 20



A D D A D E D D C C

21 22 23 24 25 26 27 28 29 30

D E D D A D B C C C

31 32 33 34 35 36 37 38 39 40

D C B C D B A D C C

41 42 43 44 45 46 47 48 49 50

A C A D E C C A B B

51 52 53 54 55 56 57 58 59 60

B B D A B C B C A E

61 62 63 64 65 66 67 68 69 70

B C B A C A C C B A

71 72 73 74 75 76 77 78 79 80

B C A B E B C A A A

81 82 83 84 85 86 87 88 89 90

D D E D A A D B A B

91 92 93 94 95 96 97 98 99 100

A A E C A D D A C C

101 102 103 104 105 106 107

A D B B C B A

Case laws:1. Ajit has a safe deposit locker facility with the bank. He has not paid the locker rentals despite reminders. Ajit has a clean overdraft at another branch of the bank, which is irregular, and time barred. One day, he comes to the bank to operate the locker. The Branch Manager refuses to allow him to operate and says that Bank has a lien on the contents for the above dues.In the instant case, the Branch Manager can exercise which of the undernoted powers? a The BM can exercise general lien on the contents of the locker for the rentals due. c The BM can exercise either general lien or particular lien on the contents of the locker for recovery of the rental duesb The BM can exercise particular lien on the contents of the locker for the rentals due d The BM can exercise neither general lien nor particular lien on the contents of the locker for recovery of the rental dues

2. Surya and Co. Ltd. opened an account with a bank and applied for a loan for construction of roads. Accordingly, term loan of Rs. 50 lacs and cash credit limit of Rs. 20 lacs were sanctioned to the company. The object clause of the memorandum specifically stated that the company would do thebusiness o manufacturing of mobile telephones Have the credit facilities been sanctioned properly by the bank or not?a) The directors are the representatives of the share holders of the company. Therefore, they have unrestricted powers to raise loans/credit facilities from the banks. In the instant case, the facilities granted by the bank are in orderb) The directors can raise the credit facilities after getting special resolution passed in either Annual General Meeting or Special Meeting. Otherwise, the loans/credit facilities granted not in order.c) The bank, while dealing with a company, is required to strictly follow the clauses contained in the memorandum of association, which is also known as the constitution of the company. Any violation of memorandum of association make the act ultra vires. Therefore, even though the loan cannot be recovered from the company, being ultra vires the company, the same can be recovered from the directors personally.d) Credit facility is for creating infrastructure (roads, railway siding, captive power generating units etc.) requires clearance / approval from Govt. of India. In the instant case, this approval has not been obtained. Therefore, the credit facilities sanctioned to the company are not in order.

3. Mr. Arjun, has kept a number of securities, which are in the name of his minor son Mr. Rohit, in the Safe Custody on 01.01.2012. Mr. Rohit attained majority on 31.03.2013. Now, Rohit approaches the



Bank and claims delivery of the securities without his father’s intervention. He argues that since he is a major now and also rightful owner of the securities, the bank should accede to his claim. Which is the most appropriate action/decision in such a situation? a The securities can be delivered to Mr.Rohit as he is a major now b The securities cannot be delivered to Rohit c The securities can be delivered to Rohit after obtaining an affidavit to the effect that he is a major as the original contract is between his father Mr.Arjun and the Bank. d The securities can be delivered to Rohit and his father only against their joint acknowledgement.

4. Mr.Sujit Verma, aged 12 years, maintains a saving Bank account at your branch. By mistake, the account is overdrawn by Rs. 2000, which was not paid back in spite of repeated requests made by the Bank. He is also having fixed deposit receipt for Rs. 5000 in the Bank. The bank, on maturity of the fixed deposit, after giving a reasonable notice to the minor, exercises the right of set-off and adjusts the overdraft. Discuss the bank's legal position.a) The bank has done unlawful act because the right of set-off cannot be exercised in the minor's accounts due to the fact that any overdraft given to the minor is an invalid act because contract with the minor is void ab initio.b) The bank is right in exercising right of set off because the minor had used the money for his benefit The fixed deposit is also kept with the bank for the benefit of the minor.c) The bank's action cannot be questioned because fixed deposit was already available and sufficient notice was given regarding the intention of the bank to exercise right of set off.d) The bank had not granted the overdraft of Rs. 2000/- at the request of the minor. Therefore, the question of entering into contract with the minor did not rise. The overdraft was caused by mistake. There was alternative but to exercise the right of set off. The bank has done the correct thing for recovery of the overdraft.

5. Mr. Milind is a blind person and wants to open a cheque operated Saving Account with your branch in his sole name. You want to help him in opening the account. Which of the following statements does not form part of bank’s instructions in dealing with such a request? a SELF OPERATED CHEQUE FACILITY can now be provided to the visually impaired / blind depositorsb He may be permitted to operate the account under the signature of a duly constituted ‘power of attorney’.c If the depositor insists on self operated cheque facility account, his request may be acceded to, provided he agrees to furnish an undertaking on the prescribed format, that the self operated cheque book facility be provided at his own risk. d SELF OPERATED CHEQUE FACILITY can not be provided to the visually impaired / blind depositors.

6. You have sanctioned Demand Loan of Rs.5 lacs against the security of a TDR of Rs.6 lacs favouring Mrs.Maya. Today, you have received a garnishee order attaching a sum of Rs. 3 lacs due from the Bank to Mrs. Maya. Mrs. Maya has no other deposit with you. While dealing with the above situation which of the following statements is not true? a Banker has a prior right to set-off and is not bound by the attachment orders. c The balance amount shall have to be considered as attached and to be paid to the court on demand raised by it. b In this case the Bank can exercise the right to set-off against the TDR to the extent of the outstanding in the Demand loan account. d The Bank has to seek a mandate from the depositor for acting upon the Garnishee Order.

7. Mr. Pradeep presents a cheque for payment at the counter. He is given a token. But he does not turn up for getting payment from the cashier. Next day, he calls at the bank and explains that he felt uneasy the previous day and had to rush for immediate medical attention. The Bank Manager is satisfied with the explanation given by Mr. Pradeep, and agrees to effect payment. Before the payment is actually made, the bank receives stop payment instructions from the drawer, followed by a Garnishee Order on the a/c. Mr. Pradeep contends that the cheque was presented on the previous day and hence it should be paid. Discuss the position.a) The money can be paid to Mr. Pradeep because the cheque was received on the previous day.



b) The money can be paid to Mr. Pradeep because all the entries in relation to the payment of the cheque were made on the previous day.c) The Bank cannot pay cash against the cheque to Mr. Pradeep as garnishee order has been received in the account before parting with cash. The garnishee order is applicable to this amount and all the internal entries of the bank made in this regard will be cancelled.d) Cash payment cannot be made to Mr. Pradeep but the amount can be credited to his account.

8. Mr.Ravi, draws a cheque for Rs.500/- in favour of Smita, his daughter aged 13 years. When Smita presents the cheque for payment across the counter, the Single Window Operator refuses to pay the cheque because in his view, Smita being a minor can not receive payment of a cheque. Which of the following statements is not correct in such a situation? a The payment of cheque to a minor cannot be made as per Contract Act. c The SWO can pay the cheque on proper identification of Smita. b A minor can become a payee of cheque without any legal impediment as per section 26 of NI Act. d The SWO’s view point is not correct in the instant case.

9. A cheque issued by Mr. Kartik is presented to you on 24/3/20012 and paid. The cheque was dated 11/3/2012. On 25/3/2012, Mrs. Kartik comes to the Branch and gives a letter stating that Mr. Kartik died on 7/3/2012 and demands restoration of the amount of the cheque. Which one of the following statements is not correct in such a situation? a It is immaterial whether the cheque had a date prior to the death of Kartik or not. b A drawer can always issue a post dated cheque if his intention is that the cheque should be paid only on or after a particular date.c Banker gets a valid discharge as long as he has made payment in due course. d A cheque issued by a deceased depositor prior to his death is not a valid mandate. Hence the Bank is supposed to make good the amount to legal heirs.

10. Mr. Manish has a saving bank account and also a Current account. A cheque for Rs. 6,5007-drawn on the Current account is received. However the account is showing a credit balance of only Rs. 5000. The counter clerk informs that Mr. Manish is maintaining a saving bank account and it is showing a credit balance ofRs. 10,000. Can the bank appropriate and pay the cheque received in Current account?a) The bank can appropriate and pay the cheque received in the Current account.b) The bank can not appropriate and the cheque will be returned . c) The bank will appropriate and pay the cheque received in the Current account and take confirmation from Mr. Menon afterward. d) None of these.

11. Mr. Raja and Mr. Ketan approached the bank for availing a Safe deposit Locker Facility in joint names to be operated by jointly. But considering their old age, they want to have separate nominees for each of them. Which is the most appropriate answer in such a situation? a The bank can not accede to their request because nomination is not allowed in Joint names. b The Bank can accede to their request c As per Banking Regulation Act, In case Safe deposit Locker of Joint operation without survivorship benefit, each locker holder can nominate a person. d Nomination facility is available only in Deposit accounts but not in Safe Deposit Lockers accounts.

12. Master Jacob, a minor, is having a Savings bank account under the guardianship of his mother, Ms. Annie. After attainment of majority, Jacob serves a legal notice claiming that his money to the extent of Rs. 20,000 has been used by his mother for the purpose other than for his benefit and the bank should compensate him for this. How will you handle the legal notice?a) The bank will entertain the claim of Jacob. He will be compensated.b) Bank has no concern with the purpose/use of money. This is the internal matter between the

erstwhile minor and the guardian. The bank usually takes a declaration to the effect that the money being withdrawn is for the benefit of minor. This declaration is considered enough for giving protection to the bank. As such, the bank is not liable to the minor. The minor (now major) can file a suit in a competent court for claiming relief.



c) The bank will file a case against Ms. Annie to recover the amount, which she is alleged to have misutilized, as per the legal notice received.

d) The bank will not accept liability. The bank will advise the lawyer to file case against Ms Annie if the merits of the case justified.

13. Kishor has pledged gold ornaments and availed a demand loan. He agreed to keep the gold ornaments till the other loan a/c (he is having a Term loan) is repaid. He repaid the term loan and the gold loan. He is a surety to one loan a/c of Mrs. Yamini. He demanded the delivery of the gold ornaments. The Bank refused to give delivery as the loan of Mrs. Yamini is still outstanding. Which of the following statements is not correct in relation to the instant case? a The bank is well within its rights to keep the ornaments till the gold loan and other loan of Mr. Kishor is repaid. b The action of the bank in retaining the ornaments till the loan guaranteed by him is repaid is not in order. c The borrower's liability is a contingent liability only in respect of the loan availed by Mrs. Yamini. Hence, the bank has to deliver the ornaments.d The Bank can exercise its right of general lien to retain the gold ornaments till the closure of the loan for which Mr. Kishor stood as surety.

14.Shri Rahul, uncle of master Vivek (minor), nominated him for a Term Deposit Account of Rs.75,000/-. The nomination was made on 23.11.2011 when the minor’s age was 10 years. On 20th September 2012, the depositor died. The minor came to the bank on 28th September 2012 and asked for payment. Which is most appropriate solution in the instant case? a In case no other individual, not being a minor, was appointed to receive the money, during the nominee’s minority, the deposit will be continued and paid to the nominee on his attaining majority. b As the minor has already attained the age of 10 years, the amount can be paid to him. c The amount can be paid to minor jointly with his father and natural guardian. c The amount can be paid to minor jointly with his father and natural guardian. d The amount can be paid to minor jointly with his father or mother.

15. Mr. Prasad a sole proprietor of M/s Prasad Chemicals, has given a power of attorney to his father to operate the account. After his marriage, he comes to the branch along with his wife and wants to give the mandate to his wife to operate the account. How wife you handle Mr. Prasad’s request?a) Mr. Prasad has the absolute right to give the mandate in favour of his wife and his wife will be allowed to operate the account.b) Mr. Prasad has no absolute right to give the mandate in favour of his wife till the power of attorney given in favour of his father is cancelled..c) Mr. Prasad has the absolute right to give the mandate in favour of his wife but confirmation will be required from his father about his acceptance So the cancellation of power of attorneyd) Up to the time earlier power of attorney is not specifically cancelled, Mr. Prasad, cannot allow his

wife to operate the account,e) None of the above.

Keys:1 2 3 4 5 6 7 8 9 10

b c b a d d c a d b

11 12 13 14 15

c b d a d

MODULE CChapter No. 8 of notes

1. What do you mean by WAN (Wide Area Network) ? a. It is a set up which is spread across geographical locations rather then a small complex or building.b. It connects various branches/offices of the bank situated at different places/cities.c. The computer terminals are connected to main computer called server.d. All of the above.



2. Many computers connected to single computer falls in the category of : a. Internet b. LAN c. Brach Automation d. None of the above. 3. Machine, within or outside the bank premises that enables customers to conduct cash withdrawals and other specific banking transactions without help of bank staff, is called : a. Automated teller Machine (ATM) b. P.C. c. Internet d. Intranet e. Servers 4. Which of the following steps is not required by the user for withdrawing money from ATM a. Inserting ATM card in the card slot. b. Entering PIN c. Entering account No. d. None of these. 5. The account of the customer is debited for the amount on the basis of customer's signature on the cheque. Which of the following acts as equivalent to the customer's signature for debiting his account while with drawing of from ATM ? a. ATM card b. PIN c. TIN d. Fascimile of customer's signature recorded in the magnetic strip on the back of ATM card 6. Name the certifying authority of digital signatures in banking and financial sector : a. The IDRBT Certifying Authority b. Individual Banks c. Reserve Bank of India d. IBA

7. Passwords in computer environment means : a. Secret words known to authorized personals only b. Secret words that computer uses to communicate with other computers. c. Words that are needed to be transferred between two computers. d. None of the above. 8. Encryption is used in computers to: a. Protect data from unauthorized access b. Protect data from damaging. c. Prevent the computer from unauthorized users d. None of these 9. Name the processing mode used for multiple users : a. On line b. Batch processing c. Real time d. None of the these.

10. A working group on cheque truncation and e-cheques was constituted by the Reserve Bank of India under the chairmanship of Dr. R.B.Barman and major recommendations of group include :a. the physical cheque will be truncated within the presenting bank.b. Settlement will be generated on the basis of current MICR code line datac. Electronic images will be used for payment processingd. All of the above

11. Who has launched Special Electronic Fund Transfer scheme w.e.f 01.04.2003 ? a. Govt. of India b. Clearing House of Mumbai c. Reserve Bank of Mumbai d. State Bank of India

12. Networking system functions with the help of : a. server b. radio waves c. remote sensor d. None of the above.

13. The most popular network architecture for LANs is : a. Ethernet b. Token Ring c. Apple Talk d. Are net 14. The LANs are located in small geographical boundaries ranging from : a. within a room b. 50 meters to 100 meters c. 100 meters to 2 km d. 2 km to 10 km 15. Information on network can be protected by : a. Fire wire b. Fire wall c. Proxy server d. HTP server



16. a network that links the intranet of business partners over the internet is called. a. Extra net b. Business net c. Corporate net d. Private net 17. The term …….. is used for a single computer or terminal in a Network. a. Server b. CPU c. Work station d. Host 18. The computer that acts as a server accepts commands from the … to process. a. Client b. Internet c. LAN d. WAN 19. ISDN stands for : a. Integrated services Digital Network b. Integrated System Development Networkc. Information System Detabase Network d. Intelligent System Dialing Node 20. What are the various means of Electronic Payment systems ? a. Credit card b. Scratch card d. Smart card e. None of these 21. Debit cards : a. are plastic cards embedded with electro magnetic identification. b. Are issued by banks to its customers who could use them to pay for their purchases or services at specified points of sale terminals.c. Facilitate the customers to effect the transactions on their accounts, remotely:

d. None of the above. 22. ________approach involves the use of computer for testing o logic and controls within the system and records produced by the system. a. Audit around the computer b. Audit through the computer c. Audit with the computer d. Audit without computer 23. Full form of CAAT is…… a. Computer Animated Audit Technique b. Computer Aided Audit Techniquec. Computer Access Audit Technique d. Clerk Aided Audit Technique

24. _____ committee on Technology issues recommended application of Banknet, SWIFT, Credit Card and eFTPOS and Training of staff. a. Rangarajan b. Second Rangarajan c. Saraf d. Shere 25. As per shere committee, the RBI may operate EFT system through…… a. Bank b. CMC c. Agency or Subsidiary d. Government Department e. Computer Institute. 26. As per Shere committee, the RBI may restrict its…..for a high value interbank funds transfer on RTGS basis. a. EFT system b. ATM c. SWIFT d. SPNS 27. The need for a secure and common messaging solution that would serve as the basic platform for intra-bank application and would fulfill the requirements of domestic financial messaging, gave birth to the : a. internet b. Structured Financial Messaging Solution (SFMS)c. RBI net d. Infinet 28. How many banks in India have joined the International Telecommunication Network of SWIFT ? a. 249 b. 46 c. 28 d. 19 e. 27

29. Real Time Gross Settlement System means a payment system in which : a. both processing and final settlement of funds transfer instructions can take place continuouslyb. final transaction takes place at the end of the dayc. final payment is physically effected within 24 hours



d. final settlement of funds take place at 3 PM daily

30. Which of the following was set up as a exclusive data communication network fro banks in term of recommendations of committee on communication network of banks? a. BANKNET b. SWIFT c. MICR d. None of these 31. Information Technology (IT) is looked at as an integrated technology of ….. a. Manual Processing System b. Manual Communication System c. Information Processing Technology (Computers) d. Information Transmission Technology (Communications)e. Only ( c ) and (d)

32. The system in which users use the network without knowing the details of the Hardware, communication method etc. such a world-wide network is known as a. LAN b. Internet c. CICNET d. ERPNET e. Banknet 33. Banknet and SWIFT for transmission of messages were commissioned in India in the year …. a. 1951 b. 1991 c. 1961 d. 1971 e. 1981

34. Basic component of a data Communication System is …. a. Transmitting/Receiving devices b. Interface equipments c. Transmission mediumd. Transmission Processors 35. is the first national level. Network in India which was commissioned in Fabruary 1991. a. Internet b. INET c. BANKNET d. VSAT d. APRANET 36. INET was set up by … in the year 1991. a. RBI b. SBI c. CMC Ltd. d. Department of Telephones

37. In PSPD technology, data from each one of sources is fragmented into …. a. Bundles b. Buckets c. Packets d. Switches38. ______is India's Largest Wide Area Network. a. Bank Net b. INET c. RBINER d. NICNET 39. VSAT stands for… a. Vast Satellite Access terminal b. Voice Sensing Advance Terminal c. Very Small Audio Terminal d. Very Small Activity Terminal e. Very Small Aperture Terminal. 40. In VSAT single hop system uses……topology. a. Star b. Bus c. Ring d. Mesh

41. In VSAT double hop system uses……. Topology. a. Star b. Bus c. Ring d. Mesh 42. A ……. Comprises of NS_ Network control system, which provides control of network operation and monitor network components. a. Terminal b. Hub c. Node d. Super System 43. Full form of TDMA is …… a. Transmitted Data Multiple Access b. Transmission Division Multiple Accessc. Time Division Multiple Access d. Time Division Multiplexing Act 44. Full form of FDMA is ……. a. Frequency Division Multiple Access b. Financial Data Multiple Accessc. Financial Data Multiple Act d. Fund Division Multiple Access

45. A modem performs to function of …. a. Modulating binary data for voice line transmission



b. Demodulating the transmitted data for computer processingc. Multiplexing of several signalsd. Only (a) and (b) 46. ________ modulation allows highest transmission rate. a. Frequency b. Amplitude c. Phase d. None of the above 47. ______ is the set rules which is followed by all the computer that make up the internet. a. Topology b. Laws c. Procedures d. Protocols

48. ______ is looked at as an integrated technology of 'Computers' and 'Communication'. a. Information Technology b. Integrated technology c. Com Com System d. Internet Technology e. Computer Network Technology 49. If you want a shareware program that is available on a computer on the internet, you could transfer the program to your computer by using…. a. Usenet b. FTP c. SMTP d. Telnet e. The U.S. Mail 50. The …. Of data is crucial security issue. a. Collection b. Processing c. Privacy d. Storage 51. A…..administers computer systems and monitor their operational performance. a. System Analyst b. System Designer c. System Administrator d. Computer Administrator.e. Programmer. 52. ….analyses the existing systems and design improved computer based systems. a. Programmer b. System Analyst c. Teacher d. Computer Operator e. Network Engineer 53. Full form of VIRUS is … a. Visual Resource Under Siege b. Vital information Resources Under Siegec. Visual Information Resources Under siege d. Very Important Resources Under Siege

54. Data privacy assumes significant dimension; viz…. a. authority to access data b. authority to use data only for specified purposesc. authority to withdraw money without telling others d. both (a) and (b) 55. A regular program of independent test of security and control procedure by…..help in identifying lapses before the banking operations are seriously put to risk. a. Managers b. Clerks c. Customers d. Government Agents. e. Auditors

56. The Universal set of standards for EDI is known as A. EDIFACT B.EDI C.ISO D.BIS E.None of these

57. Data mining techniques can be applied in A. Predicting future trends based on applied in B. Credit Risk analysisC. Analysing demographic information about customers D. All of the above

58. Cheque truncation can be done by A. using MICR data B. sending cheque by speed post C. using image processingD. a & c

59. In star topology A. Each node is joined to the central node by separate linkB. Devices are connected in close loopC. Information is passed from one node to the other in seriesD. Devices on the network are connected to a single continuous



60. In bus topology A. Each node is joined to the central node by separate linkB. Devices are connected in close loopC. Information is passed from one node to the other in seriesD. Devices on the network are connected to a single continuous

61. In ring topology A. Each node is joined to the central node by separate linkB. Devices are connected in close loopC. Information is passed from one node to the other in seriesD. B & c

62. The Committee which has recommended for establishment of Data Warehouse is known as A. Vasudevan Committee B. Rangarajan Committee C. Saraf CommitteeD. Shere Committee

63. Which of the following is the gateway in India for EDI services worldwide A. Satyam online B. BSNL C. MTNL D. VSNL

64. VOIP stands for a) Voice over Internet protocol b) Voice on Internet protocol c) Voice over Internet phone d) Voice on Internet phone

65. WAP stands for a) Water available point b) Wireless Application Protocol c) Wireless Access Point d) Wind and Power

66. How many digits contains in UTR number (Unique Transaction Reference) a. 11 digits b. 16 digits c. 10 digits d. 8 digits 67. Binary is a counting system using _____ digits.a. 2 b. 4 c. 6 d. 8

68. One Terabyte is equal toa. 1024 megabyte b. 1 Gigabyte c. 1024 Gigabyte d. 100 Gigabyte

69. What is POPa. Popular Punjabi song b. Post office protocol c. Postal office protocol d. None of the above

70. Icon stand fora. Inter connected b. Internal console c. Image of console d. None of the above

Keys:-1 2 3 4 5 6 7 8 9 10d b a c b a a a a d11 12 13 14 15 16 17 18 19 20c a a c b a c a a a

21 22 23 24 25 26 27 28 29 30a b b c c a b b a a31 32 33 34 35 36 37 38 39 40c b b a c d c d e c

41 42 43 44 45 46 47 48 49 50a b c a d c d a b c51 52 53 54 55 56 57 58 59 60c b b d e a d d a d

61 62 63 64 65 66 67 68 69 70c a d a b b a c b c

MODULE D



Chapter No. 9 of notes

1. The buying process starts when the buyer recognizes a _________.a. Product b. an advertisement for the product c. a salesperson from a previous visit d. problem or need

2. Which of the following best identifies how marketing must be understood today?a. Satisfy customer needs b. Marketing c. Selling d. Behaviour

3. Market can be classified into different types based on : a. Geographical Area b. Products c. Nature of transaction d. Volume of transactione. All of the above.

4. Which of the following statements are correct in respect of concept of marketing? a. Marketing is a concept of selling the products and services.b. Marketing is also considered advertising or promoting a product.c. Marketing is essentially related to customer satisfaction.d. Marketing is both a concept and a practice.e. All of the above.

5. Marketing is a: a. Political activity b. Legal activity c. Socio-economic activity d. All of the abovee. None of these.

6. A market may comprise: a. one seller and many buyers b. Many sellers and one buyerc. Many sellers and many buyers d. Few sellers and many buyerse. All of the above.

7. _____ consists of a group of customers who share a similar set of wants.a. Micro Marketing b. Mass Marketing c. Market Segment d. Market targeting

8. Market, on the basis of volume of transactions, can be nature of transactions: a. Retail Market b. Wholesale Market c. Scattered Market d. (a) and (b)e. None of these.

9. Marketing is a functional area of : a. management b. production c. infrastructure activities d. All of the abovee. None of these

10. Marketing aims at earning profit by maximizing a. sales volume b. customer satisfaction c. workers satisfaction d. All of thesee. None of these

11. What are the various functions of Marketing Management? a. Analysis b. Planning c. Implementation d. Control e. All of these

12. The main the various functions of Marketing Management ? a. Intangibility b. Inseparability c. Heterogeneity d. Perishability e. All of the these.

13. Which of the following are the characteristics of physical goods? a. Tangible b. Homogeneous c. Ownership d. Can be kept in stock e. All the these

14. A service is : a. any act or performance that one party can offer to anotherb. That is essentially intangible c. And does not result in the ownership of any thing.d. All of the above e. None of these.



15. Which of the following are marketing mix tools? a. Product b. Price c. Place d. Promotion e. All of these

16. Enumerate 4 Cs: a. Communication b. Customer needs and wants c. Cost to the customer d. Conveniencee. All of the these

17. What forms the basis of marketing? a. Identification of consumer's requirements. b. Satisfaction of consumer's requirements.c. Both (a) and (b) d. Product design e. None of these

18. Which of the following are the features of service? a. Services are by and large activities b. Services are a series of activities rather than things.c. The services are intangible d. The services are produced and consumed simultaneously.e. All of the above.

19. What are the various components of product personality? a. The core b. The associated features c. The Brand name and logo. d. All of the above.

20. What are the various elements of product planning? a. Product Line b. Product Mix c. Branding d. Packaging and New Product Development.e. All of the above

21. The concept of product life cycle implies the following: a. products have a limited life span and sales of a product during its life span passes through distinct stagesb. Each of the stage poses different challenges. Opportunities and problems.c. The profits varies at different stagesd. Different marketing strategies for required for every stage e. All of the above

22. Which are the various stages of product life cycle? a. Introduction b. Growth c. Maturity d. Decline e. All of these

23. What are the various weaknesses of the product life cycle? a. Undefined concept b. Non uniform shape c. Unpredictable turning pointsd. Unclear implications e. All of the above

24. The sale of a new product, in the introduction stage do not depend on: a. product features b. Product price c. Seller's brand d. Product brand namee. None of these

25. The product life cycle operates : a. at three levels namely the product level, the product sub-category level and the brand level.b. At two levels viz., the product level and the brand level.c. At one level i.e. the or and level d. No such level concept e. None of the above

26. At introduction stage of product life cycle, which of the following statements is correct? a. This stage is a period of low stages and slow growth in salesb. At this stage, there is no profits due to heavy expenses incurred for introducing the productc. At this stage, sales grow rapidly due to fast expansiond. Both (a) and (c) e. All of the above.

27. Which of the following statements are correct, with reference to growth stage of Product life Cycle a. This stage is a period of low salesb. During this stage, sales grow rapidly due to fast increasing market acceptancec. Profit improves substantial d. (b) and (c) e. All of the above.



28. Which of the following products are at introductory stage, with specific reference to banking industries? a. Home banking through personal computers b. Debit cards c. (a) and (b)d. Auto finance e. None of the above.

29. Home loans and auto loans of banking products are in …. stage of product life cycle a. introduction b. growth c. maturity d. decline e. None of these.

30. Which of the following statements is INCORRECT with regard to product life cyclea. The life span of different products varies significantly. Some products witness increase in sale veryfast and also face a rapid decline.b. Some products have a very short life span c. All of the above d. None of these.

31. Which of the following products of banking services is at maturity stage? a. Home loans b . Debit cards c. Savings Bank Account d. All of these e. None of these

32. Demand drafts, a popular mode of funds remittance from one place to another in banking industries, presently passes through______ of product life cycle. a. decline stage b. Maturity stage c. Growth stage d. At par stage e. None of these

33. What are the main features of decline stage which are faced by the product ? a Sales reduced considerably b Erosion in profits c Both (a) and (b) d Sales remain constant e All of the above

34. Which of the following statements are correct with regard to maturity stage? a Potential buyers of the product have been fully tappedb There is a show down in the growth of salesc Profit are either stabilize or started to decline due to increasing marketing expensesd Marketing expenses started to increasee All of the above

35. At different stages, a product will need marketing mix for achieving the desired goals. a similar b different c no marketing mix required d no marketing mix requirede All of these

36. What should be the suggested marketing mix at introduction stage of the product? a product should be unique offeringb Price of the product should be low and incentive for use should be given.c Focus of advertisement should be to create and build awareness about the product.d Proper attention for building network of distribution.e All of the above.

37. Which of the following statements is correct in regard to growth stage of PLC? a Fast Growth & Rising Profits b Low Sales & Marginal Profit c Low Sales & Marginal Profit d Low Sales & Marginal Profite All of above

38. Marketing strategies which are based on the product element are called: a product techniques b marketing skills of product c Product strategiesd All of he above e None of these

39. Which of the following are considered as product strategies? a Product modification b Product elimination c Product diversification d All of these e None of these

40. Adding new features to a product is advocated by which of the approaches?a. Product Approach b. Production Approach c. Marketing Approach d. Selling Approach



41. Diversification refers to : a entering attractive opportunities b Which are outside the existing business of the firmc (a) and (b) d continuing into same businesses e None of these

42. Goods, bought by a consumer based on a comparison of suitability, quality, price and style arecalled _____________ goods a consumer b shopping c industrial d convenience e All of these.

43. Which of the following statements is incorrect? a A brand name should suggest something about the product's benefits and qualities.b Product line consistency refers to the number of versions offered of each product line.c The characteristic of service that it cannot be stored for future use if known as intangibility.d (b) and (C) e None of these

44. Enumerate the various elements of market mix. a Product b Price c Promotion d Place e All of these

45. Which of the following elements of market mix generates revenue for the organization? a Product b Price c Promotion d Place e None of these

46. Which of the following elements of market mix involves cost? a Product b Price c Promotion d Place e (a), (c), & (d)

47. In simple terms, price is the amount of money charged for a: a Product or b Service c (a) & (b) d something e none of these

48. Which of the following purpose are served by the price for the consumers? a Price helps buyers to allocate their purchasing power among various products to meet their needs & wantsb Price gives information about the quality or value of the product to consumerc (a) & (b)d price gives information about satisfaction consumer will get from the producte none of the above

49. Which of the following is not the pricing method? a Mark up pricing method b Absorption cost pricing method c Target return pricing method d Marginal cost pricing method e None of the above

50. Which of the following are the pricing methods? a Perceived Value pricing methods b Price discount & allowance c Psychological pricingd Promotional pricing e All of the above

51. In market skimming pricing strategy? a Initial price is low & is maintained low b Initial price is high & then it is reducedc Initially price is lower & then it is increased d Initial price is high & is maintained highe All of the above

52. What are the various external factors affecting the pricing of a product? a Policy of various competitors b Government controls & regulationsc Buyer's behavior & bargaining power d Characteristics of market-such as-demand, customer, competition etc.e All of the above

53. What are the long objectives of pricing? a Profit optimization b Stabilizing prices & margins in the marketc Achieving a particular market share d All of the above e None of these

54. Which of the following pricing strategy is not ideal for new products?



a Discriminatory pricing strategy b Market penetration c Market skimming strategyd Promotional pricing strategy e All of the above

55. Which of the following is not an objective of pricing? a Expansion of business b Profit c Market share d Product qualitye None of the above

56. Public sector banks offer additional rate of interest ranging from 0.25% to 1.00% on term deposit to the senior citizens of 60 years & above, these banks are practicing: a Segmental pricing b Promotional pricing c Product mix pricingd All of these e None of these

57. Under which pricing method, the products are priced below list price, even below cost, for a temporary period to create buying urgency? a Promotional b References c Market penetration d Marked upe All of these

58. Under product-mix pricing: a The products which are a part of product mix, the pricing becomes more complexb The price is split into a fixed component and a variable component linked to the usagec By products obtained in production of other products can be priced at the value they have for consumers. This helps in charging a lower price in the main productd All of the above e None of these

59. Under Geographical pricing: a Different prices are fixed for different location, regions, cities or countriesb The incidence of higher transportation cost makes the product costlier to a customer at a distant locationc Same prices are fixed for all locations d (a) & (b) e none of these

60. In Dutch auctions: a This system is followed in one seller, many buyers & many sellers, one buyer situationb In one seller, many buyers situation-the seller announces the high price for the product & then slowly reduces the price till a bidder accepts itc In many sellers, one buyer situation-the buyer calls for bids from the price, with other things being similard (b) & (c) e all of the above

61. What are the various internal factors, which influences the pricing system? a Characteristics of the product b Composition of the product line of the firmc Life cycle stage of the product d Price elasticity of the demand of the particular producte All of the above

62. Distribution refers to: a The set of activities b Which makes the goods/services reachc From the producer/service provides to the consumersd All of the above e None of these

63. Marketing channels refer to: a Set of independent organizations b Involved in the process of makingc For use or consumption d All of the above e (a) & (b)

64. What are the various functions performed by the members of a distribution channels? a Market information b Promotion c Contract d Matching e All of these

65. The number of intermediary levels in distribution indicates: a The length of a channel b The width of a channel c The volume of a channeld The area of a channel e None of the above



66. Name the factor, which influences the selection of distribution channel: a Product characteristics b Market characteristics c Company resourcesd All of the these e None of the above

67. In banking services, which are major characteristics affecting the channel selection: a Intangibility b Inseparability c Variability d Perishability e All of these

68. Which of the following statements are corrected in regard to Inseparability with specific references to services rendered by the bank? a In most of the cases, it is not possible to separate the services from the seller & an interaction at least once with some staff of the bank is necessaryb The interaction may be done either in person, over phone or through e-mail or similar mannerc The direct channel between buyer & seller is very much suitable in distribution of banking servicesd All of the above e None of these

69. Which of the following statements is TRUE? A Banking is a service Industry. The layout of the branch along with the interior decor make an impact on the customerb In a selection of marketing channel, the product characteristics are relevant & market characteristics are of no consequencec The maximum number of entities at any of the levels in a distribution channels is called the length of the channeld (b) & (c) e none of the above

70. What are the various distribution channels in banking services? a Physical channel of distribution b Personal channel of distributionc Indirect channel of distribution d (a) & (b) e all of the above

71. What are the various electronic & telecommunication based outlets, used by the banking industries? a Telephone banking & call centers b Automated teller machines c Plastic cardsd Virtual branches & automated video banking e All of the above

72. Enumerate the various services offered through telephone banking: a Balance inquiry b Request for Cheque book c Product inquiryd All of these e None of the above

73. Some of the banks, have utilizing the services of intermediaries because they: a Increase the availability of convenience of a servicesb Increase its use or the revenue from its usec Help maintain existing users, and to attract new usersd (b) & (c) e (a), (b), & (c)

74. The various types of intermediaries, working for banks, can be classified into: a Direct sales agent b Automobile dealers c Merchant establishmentsd All of these e None of the above

75. What are the various factors, which effect the physical distribution? a Transport b Distribution c Storage d All of the abovee None of these

76. Which of the following characteristics is found only in some services like banking & not found in case of many services? a Client relationship b Inseparability c Variability d Perishabilitye None of these



77. Computerised banking service has helped in working around the following characteristics: a Intangibility & inseparability b Variability c Customer relationship & perishabilityd Inseparability & client relationship e None of the above

78. Which of the following intermediaries are not working for banks? a Direct sales agent b Automobile dealers c Whole sellers d Merchant establishment e None of the above

79. The following is not among the tasks performed under physical distribution: a Forecasting demand for product b Taking order c Storage of goodsd Servicing of the product e None of the above

80. Mark incorrect statement: a Direct marketing channel is suitable for industrial productsb The branch network of a bank is affected by RBI among other factorsc The two main transport modes in India are Rail & Roadd Physical distribution function of marketing distribution channel does not have effect on servicee None of the above

81. A direct marketing channel is also known as -------------- level channel a Zero b One c Two d Three e Four

82. Which of the following form part of five tools used in promotion mix? a Direct marketing b Personal selling c Advertisingd All of the above e None of these

83. Choose the correct statement in respect of advertising: a Advertising reaches people geographically dispersed & it can be repeated several timesb The use of colour, visuals & sound etc. made advertising very expressivec Advertisement are impersonal as they address a large audienced Banks also use the local advertisement media like hoardings on roads, railway stations, bus stands etc.e All of the above

84. Promotion seeks to influence the buyer in decision making through: a Persuasion b Reminding c Information d Reinforcemente All of these

85. Direct marketing does not cover: a Public relation b On line marketing c Personal selling d Catalogue marketing e None of these

86. Bank marketing management must systematically manage the process of: a Collecting b Evaluating c Dissemination market information d All of these e None of the above

87. ________ markets are made up of members of the distribution chain.a. Consumer b. Business-to-business (industrial) c. Channel d. Institutional

88. Mr. Lopez buys goods and services for use in the production of products that are sold and supplied to others. Mr. Lopez is involved in ________.a. consumer buying behavior b. post-purchase dissonance c. retail buyer behavior d. business buyer behavior

89. The extended Ps of service marketing mix are :a. People, Product, Place b. Price Physical Evidence, Promotion c. Physical Environment, Process, People d. Product, Process, Physical Environment



90. Services can not be stored. This describes the ___________characteristic of services. a. Intangibility b. Variability c. Inseparability d. Inconsistency e. Perishability

91. Successful service companies focus their attention on both their customers and their employees. They understand______, which links service firm profits with employee and customer satisfaction. a. Internal marketing b. Service-profit chains c. Interactive marketing d. Service differentiation

92. Standardized and customized flow of activities , simple and complex number of steps and customer involvement by which a service is delivered is called –a. Place Mix b. Physical evidence mix c. Process mix d. People mix

93. Which of the following is not an element of physical evidence? a. Employee Dress b. Employee Training c. Equipment d. Facility Design

94. The intangibility of services has implications for the choice of _________ a.Price b. Location c. Brand elements d. Product features e. Channels of distribution

95. Marketing concept is rested on four main pillars. Which of the following is not amongst four pillars?a.Target Market b. Customer needs c. Profitability d. Segregated Marketing

96. Sales promotion is the key ingredient in marketing _____.a. campaign b. promotion c. program d. distribution

97. You decided to purchase a car. You started paying more attention to car ads, started reading magazines related to car, getting ideas from car owned friend, currently you are in which stage of buyer decision process?a. Need recognition b. Evaluation of alternatives c. Information search d. Purchase decision

98. A product with a low-price image requires_____ distribution.a. Intensive b. Selective c. Exclusive d. None

99. Price of a T-shirt is Rs999. This is an example of _________________ pricing policy.a. Rapid penetration b. Psychological pricing c. Cost plus d. Skimming

100. MIS stands for______.a. Marketing Information System b. Management Information System c. Management Interface system d. Market Interface system

101. One of the reason for the failure of a new product is ________a. Faulty product b. Distribution related problems c. Both a and b d. None

102. Four Ps of Marketing were given bya. H.Fayol b. Peter Drucker c. McCarthy d. All of these

103. In _____, only a single product is produced and offers to the entire market.a. market aggregation b. concentrated marketing c. market segmentation d. mass marketing

104. Marketing information system is based on the _________________ to marketing and business planning.a. systems approach b. market approach c. machinery approach d. capital approach

Keys:1 2 3 4 5 6 7 8 9 10

D A C C C E A D A D

11 12 13 14 15 16 17 18 19 20



E D E D E e C C C E

21 22 23 24 25 26 27 28 29 30

C E E D A D D C B B

31 32 33 34 35 36 37 38 39 40

C A C E B C A C D A

41 42 43 44 45 46 47 48 49 50

C B D D B C C C E E

51 52 53 54 55 56 57 58 59 60

A C D A A A A D D C

61 62 63 64 65 66 67 68 69 70

C D D C A D E D A D

71 72 73 74 75 76 77 78 79 80

E D E D D A A C D D

81 82 83 84 85 86 87 88 89 90

A D E E A D c d c d

91 92 93 94 95 96 97 98 99 100

b c b c d a c a b a

101 102 103 104

a c b a

******WISH YOU ALL THE BEST

FROM ISFA

Date post:	01-Sep-2019
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