Session 3 HDFC-JOINT CERTIFICATION PROGRAMME HDFC-IBS Mumbai

8/4/2019 Session 3 HDFC-JOINT CERTIFICATION PROGRAMME HDFC-IBS Mumbai

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FUNCTIONSOF BANKS

Third Session

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2.1.1BANKERCUSTOMERRELATIONSHIP Debtor- creditor : when customer deposits money with

the bank, the customer becomes lender and bankbecome borrower.

The money handed over to the bank is debt.

The relationship between the banker and the customer is

that of a debtor and creditor. The bank is free to use themoney beneficial to them.

On demand the repayment has to be made. Bank willnot pay voluntary.

The demand should be made proper manner-duringworking hours and in particular branch.

No security is provided by the bank for the deposit

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Creditor-Debtor relationship: when bank lendsmoney to the customers, the customer is borrower andthe bank is lender.

Bailee- Bailor Relationship : when customer deposits

certain valuables, bonds, securities, with the bank fortheir safe custody, the bank become trustee-bailee andcustomer bailor and bailor will be liable for any loss.

Agent Principal Relationship: Bank is agent andcustomer is principal. The bank provide the services like

collection of remittances , collection of cheques, bill.Further it under take the payment of electric bill ,insurance, telephone bills payment. In all such casesbank act as agent. The agency relationship will getterminated after the death of the customer.

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2.1.1

Lessor and lessee : the bank provide safe depositlocker to the customer who hire them on lease basis.

The relationship therefore is that of lessor and lessee.

Different Deposit Products :

Deposits are normally classified as demand depositsand time deposits.

Demand Deposits : Payable on demand, low interestrate no interest. It include current, saving, overdue

deposits, unclaimed deposits. Current Deposits : are opened foe business transactions

, not entitle for interest, the minimum balance differ bankto bank, no restriction on transactions per day.

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Saving Deposits :It is opened by individuals / trustee.

Interest is paid at a rate determine by RBI

The customer can withdraw the amount either by chequeor withdrawal form.

Interest is paid on a half yearly basis.

Number of withdrawals restricted by each bank. The

minimum amount has to be maintain in the account. Time or Term Deposits :Account may be opened by

individuals or firm or corporate.

Amount is repayable on maturity. Rate of interest is fixed.

Interest payment may cumulative or quarterly. Term deposits are not tranferable.

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SERVICESLENDERBYTHEBANKS

The main objective of services to customers and investors isto provide comprehensive range of services.

Merchant Banking : Mobilize the funds either through IPO,private placement of debt or equity.

Lease Financing :

Plastic Money : Plastic money in the form of credit card andother cards has become preferred mode of payment.

Charge cards : In this transactions by the cardholder areaccumulated over a period of time and total amount is chargedand debited to the account of the cardholder.

The amount is payable immediately If there is insufficient amount the cardholder is given 25 to 50

days time

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Credit cards :

Debit Cards : Debit cards are the same as the creditcards.

The only difference in this card is that the amount ofdues from the cardholder for each and every

transactions is debited to the cardholders accounts assoon as each transaction is notified by the issuer.

ATM Card : These are the cards issued to the savingaccount holders for drawing cash from ATM.

some of the debt cards are also used for ATM

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BANKERSLIEN

Lien is the right of the banker to retain possession of thegoods and securities owned by the debtors until debt ispaid.

The bank acquire the right to sell the goods in caseborrower failed to pay debt.

Right to set

off: Set of is the right of debtor to take intoaccount a debt owned by him by a creditor.

In case of a banker the right of set off enables him toadjust a debt balance in a customers account with anybalance outstanding to his credit in the books of thebank.

In other words, the banker can adjust his claim from theaccount that is payable to the customer.

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2.1.1KNOW YOUR CUSTOMER (KYC):

In November 2004, RBI issued comprehensive guidelines. The

objective of the guidelines is to prevent banks from being used,intentionally or unintentionally, by criminal elements for moneylaundering activities or for financing of terrorism.

KYC procedures enables banks to know / understand theircustomers and their financial dealings better which in turn helpthem manage their risks prudently.

Banks have been asked to frame their KYC policiesincorporating the following for key elements:

Customer Acceptance Policy

Customer Identification Procedures

Monitoring of Transactions

Risk Management Recent relaxation in KYC Norms

For opening small accounts, banks need to seek only aphotograph of the account holder and self-certification ofaddress.

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TYPESOF RETAIL BANKING PRODUCTS

Liability Products:

Opening of Deposit Accounts :

Photographs:

Two copies of photographs of customer / Authorized Signatories

For minors, guardians photographs

Photographs should be recent

Only one set of photograph should be taken and separatephotographs are not needed for different categories of different

accounts in the same name Photographs may be waved in cases of

Ordinary SB Account without cheque facility Fixed and other Term Deposits up to Ts 10,000/- Banks, local authorities and government departments Borrower accounts

Bank staff Address

Independent confirmation from telephone bill, electricity bill, passport,etc.

Sending a letter to the customer at the recorded address

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For companies : to verify the name of the company(1)certificate of incorporation, Principal place of business,resolution of board director for opening account, power

of attorney granted to manager, PAN allotted letter,Telephone number and telephone bill.

For Partnership firm: To verify the name (1) registrationcertificate (2)power of attorney granted to operate the

account (3)Any other vaild document to verify thepartners.

For Trust :( 1) registration certificate power of attorney totransact the business (3) document to identify the trustee

(4) resolution passed by the trustee.

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TYPESOF RETAIL BANKING PRODUCTS

Liability Products:

Opening of Deposit Accounts :PAN Number / General Index Registrar Number (GIRnumber is given by an assessing officer to assessee)

For deposits of Rs 50,000/- and above

Form 60 of Income tax Department for persons who do not

have PAN / GIR number Specimen Signature

Personal Presence

Legible, having relevance to the name

Must not be in dots and dashes Authorization

Opening should be authorized by the Branch Managers

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2.1.2PAYMENTANDCOLLECTIONOF CHEQUE

A bank is under statutory obligation to make payment of a

cheque drawn on an account, if there are sufficient funds in theaccount.

Bank has to ensure that the cheque is drawn properly fulfillingvarious requirement.

The cheque is the bill of exchange drawn on a specified

banker. It include the electronic image. It contains instructions in writing by the account holder to his

bank for the payment of money from his account.

There is statutory obligation on the part of banker to make thepayment of the cheque if

1. The cheque is properly drawn2. There is sufficient balance in account

3. There is no legal restriction on bank duty to pay.

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2.1.2The branch on which it is drawn : presented for thepayment only at the branch where account is

maintained. Now a days multi city cheque facility the customer can

present the cheque at any of its branch.

Date :A cheque may bear future date, current date.

Payee : A cheque may be payable to a single payee orjoint payees.

Whether order cheque or bearer cheque :

Whether the amount stated in word and figure are thesame : if it not tally , the amount stated words shall be

paid. Whether crossed ?:

Signature of the drawer :

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2.1.2LIABILITYOFTHEPAYINGBANK

As per the N.I. Act the drawee bank is under theliability to honor a cheque drawn on its account that ishaving a sufficient balance.

In case of default the bank must compensate the drawerfor any loss or damage cause by such default.

If funds are not sufficient, the payment of the cheque isstopped.

Forged endorsement the payment is stopped

Forged Instrument : Forged instrument means forging

the signature of the drawer or endorser. Forgery insignature and alteration in payee name, amount anddate are not protected under law.

The transferee will not be able to enforce payment fromparties to bill.

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2.1.3OPENINGACCOUNTFORVARIOUSTYPESOFCUSTOMERS

Bankers deals with various types of customers likeindividuals , partnership firm, companies.

While opening and in conduct of account of theseperson s, the banker has to comply with the lawapplicable to each of them.

There are certain types of depositors / borrowerswhich are different than the individuals requiringsome care and attention.

Every person is legally capable of opening anaccount with a banker provided the bank issatisfied with his bona fide.

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2.1.3DOCUMENTATION

a. Sole proprietorship firm

Certified true copy of shops and establishments license or any

other approval from the Government Declaration that he is the sole proprietor

b. Hindu Undivided Families (HUF):

HUF Declaration signed by all coparceners affirmingcomposition of HUF, its Karta and names and relations of all

coparceners including minor sons and their dates of birth. HUF deed

Account is opened in the name of the Karta / HUF business

Certified true copies of the IT returns for last 2-3 years

c. Partnerships:

Certified true copy of Partnership Agreement. List of all the partners and their addresses

Attested true copy of a resolution of the partners / letter signedby all the partners addressed to the bank to open an accountand the manner how it is to be operated

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d. 2.13Association / Society / Club:

Certificate of registration

Certified true copy of bye-laws

Copy of Management Committee Resolution Names and address of all Committee Members including

phone numbers

e. Trust Account

Certified true copy of the trust deed

Bye-laws

Resolution of the trustees to open an account and themanner it is to be operated

f. Limited Companies

Memorandum and articles of associations

Certificate of incorporation

Certificate of commencement of business (for public relatedcompanies)

Resolution passed by the Board of Directors to open theaccount and the manner it is to be operated along with theauthority given to them

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2.1.3Minor Account : As per the section 11 of the IndianContract Act 1872 when the age of maturity has beenprovided by law to be 18 years, any persons less thanthat age, even by a day would be minor in law.

The minor is not competent to open the account.

Usually, the account should be opened by the guardianon behalf of minor.

After attaining majority. The guardian is not allowed tooperate the account any further. Two minor can not open

joint account.

If guardian dies during the minority, then balance can bepaid to the minor after his attaining major.

If the minor account holder dies the balance will be paidto gurandian.

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2.1.3Joint Account Holders : A joint account is anaccount opened by two or more persons.

While opening account an account opening form shouldbe signed by all account holders.

The instructions for operating the account may be one ofthe following (1) either or survivor (2) both jointly (2)former or survivor.

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Negotiable Instruments (NI):

The NI Act 1881-

The NI Act is based upon English Common Law relating toPromissory Notes, Bills of Exchange and Cheques

Negotiable Instrument::

Definition

A Negotiable Instrument is one the property in which isacquired by anyone who takes it bonafied and for value notwithstanding any defect of title in the person from whom hetook it.

Characteristics: Free transferability by delivery, by endorsement and

delivery

Title to transferee transferee gets good title despite anydefect in title of transferor

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Presumptions:

Considerations

Date

Acceptance before maturity

Transfer before maturity

Order of indorsements Holder in due course

Proof of dishonor

Rules of Estoppel:

Deny original validity of the document

Deny capacity of the payee to indorse Deny signature or capacity of prior party

Payee

Payable to bearer

Payable to order

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2.2 CREDIT

The main source of funds for a banker is deposits from the public,which are payable whenever demanded.

The banker while lending should therefore follow the soundprinciples of lending .

Principles of lending : The business for lending is not without certaininherent risks

The cardinal principles for lending are :

Safety

Liquidity

Profitability

Purpose

Diversification

Security

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1.Safety :Safety first is the most important principles of lending.

The repayment of loan depends upon the borrowers (1) Capacity topay (2) willingness to pay (3) income generation.

The banker must therefore take utmost care in ensuring that theenterprise or business for which loan is sought, is sound and theborrower is capable of carrying it out successfully.

2. Liquidity : It is to seen that money lent is not going to be lockedup for long time

The money should return to the bank as per repayment schedule.

3.Profitability : A fair return on investment is essential

Bank is commercial organization and profit earning is the motto ofbank.

It is prudent for a bank to look at the overall profitability from allbusiness undertaken from customers instead of applying the test ofprofitability against each components of business.

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4.Purpose: Loan for un desirable and speculative purposes can notbe granted.

5.Diversification of risk: It mean that the banker should not grantadvances to only a few business houses, undertakings, cities,industry or region.

6. Securities : The security offered against the loans may consist ofa large variety of items.

It may be plot or land, building, flat, shop shares bonds.

The banker must realize that it is only a cushion to fall back upon incase of need.

2. Non-Fund Based Limit : The non fund based limit are normally twotypes (1) bank guarantee (2) letter of credit

Guarantee : By issuing guarantee , the guarantor bank accept theresponsibility for an obligation.

While assessing the bank guarantee limit required by the borrower,details such as the nature of guarantee , it purpose , the particular ofthe contract period and the amount is sought and assessed.

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Letter of credit : A letter of credit is a binding document that buyer ofthe goods can request from the bank in order to guarantee that thepayment for goods will be transferred to the seller.

Working Capital :The term working capital denotes the requirementof the money by manufacturing enterprise for its day to financing.

It is for (1) purchase of raw materials (2) Payment of wages (3)payment of other expenses .

There are two concepts of working capital. (1) gross working capital

and (2) net working capital. Estimation of Working Capital need : There are four methods of

working requirement of a borrower:

The operating cycle method (2) The projected net working capitalmethod (3) The projected turn over method and (4) The cash budget

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Difference between Term loan and working Capital : The majordifference between term loan and working capital finance lies in thepurpose of finance and type of assets created out of it.

Term loan used for acquisition of fixed assets while working foracquisition of current assets.

The term loans for longer period, while working capital for one year

The working capital finance is generally available of in cash credithypothecation account.

Credit Appraisal : In credit appraisal process, the decision makermake the attempt to find the answer to two important questions.

First, whether the enterprise required the funds, also what is hiscredentials?

Second question is all about the extent of his requirement and theway in which the requirement will met.

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Credit Management : Credit management is the management of thecredit portfolio of the bank.

The credit management includespre- sanction appraisal .sanction,

documentation, disbursement, and postlending supervision andcontrol.

The credit management encompasses the following :

1. Capital adequacy norms

2. Risk Management

3. Exposure norms

4. Risk pricing

5. Assets classifications

6. Appraisal

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Credit Monitoring :

The credit monitoring in a bank is to ensure that the funds are utilizedfor the sanctioned purpose.

At the same time complying with all sanction term and conditions. Under credit monitoring arrangement bank ensure the following :

1. Borrower should maintain reasonable estimates of current andcurrent liabilities.

2. Maintain the classification of current and current liabilities

3. Maintain minimum current ratio 1.33

4. Ad-hoc limit are sanctioned for the period not exceeding threemonths.

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2.2.2DOCUMENTATION

Documentation is one of the vital areas in the credit portfolio of a bank.

The purpose of taking documents are fix the terms and condition

between the bankers and borrowers. There are some enactment such as Indian contract Act, Partnership Act,

Companies Act, Indian Registration Act, Limitation Act, Indian Stamp Actwhich affect directly the banker loan documentation.

Different types of Documents : The documents taken by the banker for aloan may be:

(a) Demand Promissory Notes (DPN) (b) Agreement (c) Forms

1.Demand Promissory notes :

Where no specification for fixed period for the repayment of loan isgiven.

In DPN the borrower makes a promise to the banker to repay the loan

amount on demand with agreed rate of interest.

It should be in conformity with N.I Act. It attract stamp duty.

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Agreements:

The form of agreement should be in conformity with Indian ContactAct.

The terms and conditions are set in the agreement. The amount of loan, rate of interest, rate of panel interest, period

repayment, right of banker in case of default, details of security, areincluded in the agreement.

The agreement attract the stamp duty. It vary state to state.

Forms : Forms are not in the nature of promise or agreement.

These are obtained to specify clearly the intension of the borrower.

For example , when loan is granted against the security of a fixeddeposit standing in joint names, one of the depositor gives an

authorization to the other to raise the loan on the deposit . Such authorization is taken in a form.

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Documentation Procedure :

The document should be error free.

Selection of correct set of documents: Documentation variesdepending upon the nature of the facility and type of person.

The document prescribed for a cash credit facility may not be used forterm loan facility.

Similarly a document meant for an individual borrower can not use forcompany.

Stamping : Next step of document is stamping.

The document should stamped in accordance with Indian Stamp DutyAct

Filling :The banker are using the preprinted formats of documents withblank in appropriate places.

It is necessary to fill these blank as per the terms of sanctions

Execution : The next step is the execution of document- signing of

document. It should ensure that the signature in the document tallies , signature all

pages of document.

The document should executed in the presence of bank officials.

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Legal Formalities :

Some documents should be submitted to some legal authorities.

Keeping Document Alive :The documents taken by the bank for

credit facilities dot not have perpetual life. The provision of limitation Act apply to them.

The limitation Act prescribes the period of limitation for different typesof documents

Renewal of Document:

The bank should obtain a fresh set of documents.

It is not mandatory to obtain fresh sets of documents for renewal ofcredit facility

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TYPESOF CHARGES Banks tend to safeguard their advances by taking different types of

securities.

The method of creating charge over the property depend uponnature of property and nature of charge.

Banks charge over the properties confines itself to one or more of thefollowing six types charges .

(1) Assignment (2) Lien (3) Set-off (4)Hypothecation (5) Pledge (6)

Mortgage Assignment :It is method of providing security to a banker for an

advance.

It is transfer of the right , property or debt.

In banking practice , borrower may assign the book debt , money due

from government and LIC policies as a security. Lien :Lien is the right of the banker to retain possession of goods and

securities owned by the borrower. The bank acquire the right to sell.

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2.2.2 MORTGAGE

There can be immovable property that are offered as

security.

The process of offering immovable property as security

is know as mortgages.

According to section 58 of Transfer of Property Act

1882, the concept of mortgage has been defined.

Mortgage is the transfer of an interest in specific

immovable property for the purpose of securing the

existing or future debt, or the performance of an

engagement which may give rise to pecuniary liability.

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Through mortgage the interest and the right on themortgage property are transferred from mortgagors(borrower) to mortgagee.

There are essentially six type of mortgages.

Simple Mortgage-A simple mortgage take placewithout delivering possession of the mortgagedproperty .And any failure the mortgagee has right tosell the property.

An equitable mortgage is created by way of deposit

of title deeds. The ownership documents of theproperty are deposited with the bank. No formalmortgage deed is executed. This is the simplest andcheapest form of bad credit mortgage.

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Registered mortgage is the safest form of mortgage.This is also referred to as English mortgage.

No documents of property are required to create anEnglish Mortgage. The borrower has to enter into a

mortgage agreement with the bank. This deed is then stamped and registered in order to

make it enforceable.

This is an expensive mortgage. The stamp and

registration charges have to be borne by theborrower.

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The borrower binds himself to repay themortgage loan amount as per an agreed scheduleand transfers property absolutely to themortgagee (lender) subject to the condition that

the bank or lending institution would transfer theproperty back to the mortgagor on repaymentdues.

An English Mortgage is distinct from a mortgage

by conditional sale. In the former, there is anabsolute sale in the beginning and in the case ofthe latter, there is only an "ostensible sale" andnot an absolute sale.

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