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BFSI Sector Council of
India
Occupational Standard
Business Correspondent & Business Facilitator
Sector : BFSI
Sub Sector : Banking
QP Code : BSC/ Q 0301
Occupation : Financial Inclusion Services
NVEQF/NVQF level : 3
Minimum Educational Qualifications : 10th
Maximum Educational Qualifications : NA
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Table of Contents
CHAPTER PAGE NO
CHAPTER 1: BC MODEL IN INDIA 1
CHAPTER 2: BASICS OF BANKING 18
CHAPTER 3: BANKING STRUCTURE IN INDIA 22
CHAPTER 4: BANK DEPOSIT ACCOUNTS 25
CHAPTER 5: BASICS OF BANK LENDING 34
CHAPTER 6: RELATIONSHIP BETWEEN BANK AND CUSTOMER 45
CHAPTER 7: EVOLVING TRENDS IN MODERN BANKING 56
CHAPTER 8: EXERCISE 62
CHAPTER 9: INTERVIEW QUESTION WITH MODEL ANSWER 76
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CHAPTER 1 BC MODEL IN INDIA
Introduction
To support the financial inclusion effort, as well as leverage advances in banking technology, two kinds
of third party banking agents were created Business Facilitators (BF) who would primarily be involvedin processing and opening accounts and Business Correspondents who could, in addition to the BF
functions mobilize deposits and disburse credit on behalf of the bank .
As per the current regulations, the following entities are permitted to act as BCs for banks: NGOs
(typically microfinance institutions (MFIs) set up as Societies/Trusts), Cooperative Societies, Section 25
companies in which no NBFC/telecom company/bank held more than 10% of ownership, post offices,
retired government/bank employees and ex-servicemen. In order to operate within the regulation,
technology service providers organizations such as FINO, EKO and A Little World have created Section 25
companies with whom they partner.
Key components of the regulatory framework surrounding BCs include:
Banks pay a (undefined) commission to BCs though BCs/banks are not allowed to charge the
end-user a service charge for any BC transactions;
BCs can service clients only within a 30 km radius from the bank branch and in case of urban
areas the radius should not be more than 10 km;
All transactions undertaken through BCs must be recorded in the books of the bank by the end
of working day;
Know Your Customer (KYC) norms must be observed by the promoting banks for all BC clients
Most of banks forays have been experimental rather than full-fledged strategic or scalable approaches;accounts have been opened through a diverse set of institutional arrangements. The most typical
arrangement appears to be a bank-Section 25 partnership where the Section 25 company is floated by a
technology service provider such as FINO or A Little World. Since the technology companies themselves
cannot, by regulation, act as BCs, they are provided by associated NGOs, FINO Fintech Foundation and
Zero Mass Foundation, respectively. The technology company then acts as a partner for operations with
their associated NGO and the bank. Promoting banks do not always choose a single model or BC entity.
The Union Bank of India (UBI) has engaged with various business correspondents including
Infrastructure Leasing and Financial Services Limited (IL& FS), FINO and DRISTI for distinct services.
What is Financial Inclusion? Financial Inclusion is delivery of banking facilities / financial services to all the people in a fair,
transparent and equitable manner at affordable cost.
Financial Inclusion has the potential to improve the financial condition and standards of life of
the poor and the disadvantaged.
Financial services permit individuals and households to manage the risk and uncertainties to
save on better terms, to invest in a business venture or property or to cope with unforeseen
expenses.
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The need for Financial Inclusion:
Consequences of financial exclusion will vary depending on the nature and extent of services
denied and may lead to social exclusion.
It may lead to higher incidence of crime, general decline in investment, difficulties in gaining
access to credit or getting credit from informal sources at exorbitant rates and increased
unemployment etc.
The financially excluded people may suffer due to higher cash handling costs, delay in
remittances of money etc.
Financial Inclusion A business opportunity
Providing mass banking with no-frills SB, Syndicate General Credit Card (SGCC) etc. can become
a win -win situation for the branch and also the people. Basically these banking services need to
be marketed to such population segments.
Branches can extend banking facilities to the low income people, on relaxed terms.
Branches can enlarge the clientele base and build up low cost deposits.
Branches can achieve targets under agriculture / priority sectors, since 50% of the creditoutstanding under SGCC can be classified as indirect finance to agriculture.
Branches can increase the business volume, as the banking relationship can be used for cross
selling of other products.
Objectives of Financial Inclusion
Every eligible person shall be invited and assisted in opening a bank account. To begin with, it
should be ensured that each family shall have an account in the name of one of their eligible
members.
Extend credit, based on the need and potentiality for the purpose of encouraging economic
activity and income generation. SGCC upto a limit of Rs.25,000/- may be considered. Aim at preparing family credit plan and village credit plan for implementation of programmes.
Cross sell various products based on potentiality
Benefits of Financial Inclusion
For the customer can avail a variety of financial products provided by institutions regulated and
supervised by credible regulators.
The regulator benefits from the audit trail which is available as transactions are conducted
transparently in supervised environment.
The economy benefits, as greater financial resources become transparently available for
efficient intermediation and allocation, for uses that have the highest returns. It strengthens the financial deepening and leads to financial development in a country, which
would in-turn accelerate economic growth of the country.
BC Banking Channel: The Basics
Banks operate a number of channels through which they deliver financial services like, branches,
extension counters, ATMs and the internet. The Business Correspondent option offers a new channel
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through which banks can extend services. The RBI guidelines are written in a way which requires that a
bank has to be involved and is the ultimate provider of services. While RBI has regulatory responsibility
for the BC banking channel as part of its regulatory regime, the principal banks are fully responsible for
the acts of their correspondents. This new channel works through a process of collaboration by the bank
with one or more partners. These partners often includes:
Technology Vendors, who often provides a range of hardware and processing capacity and
connectivity which can link clients to BCs and BCs to the bank.
Business Correspondents which are organizations or individuals that organize and offer one or
more points of transaction outside of bank branches. The BCs organize and manage a network
of such transaction points in partnership with a bank.
Customer Service Points are individuals, shops or other outlet points which are responsible for
the direct contact with the clients. CSPs open bank accounts, conduct KYC, cash out
withdrawals, receive payments and in some cases, extend credit. For the channel to become
financially viable, regulations require that all revenues from the services are to be collected by
the bank. The tech vendors, BCs and CSPs are not permitted to charge fees to clients for theservices. The banks revenue may come from the extension of services like, accounts, savings,
credit and payments. The bank under contractual relationships, then makes payment of service
charges to the BCs and technology vendors.
For the smooth functioning of the BC channel, the bank must work in collaboration with some or all of
the different component partners who make up the BC banking channel. It is well understood that all
the constituent pieces of the channel will have to work in tandem, be motivated to participate and
receive appropriate revenues in order for the channel to grow and prosper. There is no single successful
approach, however, and there are many arrangements which are currently being tested.
Various Models Employed by Banks
Banks have sought out a range of different partners and offered a range of different banking services
through the scheme. In some cases, the banks have used the BC option to open large number of no frills
accounts. In some cases, this has also been combined with channeling government payments (G2P) such
as NREGS, pensions and other social payments. In a few cases, the focus has been on extending the
credit either in partnership with an MFI or through a relationship with an SHG Federation or network.
The big difference in performance and partnerships appears to be between those BC efforts that are
account and savings focused and those who focus on delivering credit services. The partners chosen,
products offered, costs incurred, and revenues earned under different models can be quite different.
Advantages of Using BCsSome of the advantages of using BCs as listed out by various banks are :
Better Alternative than Bank Branches: Normally a rural bank branch can serve 3,000 to 4,000
families in 12 to 15 villages within a radius of around 15 kms. A public sector bank branch may
typically require more than 5 years to break even in unbanked area, while a private sector and
foreign bank with IT connectivity may require more time. The BC option potentially enables
banks to reach out at much lower cost.
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Reaching the Unreached: The model enables banks to extend financial services to the unreached
clients their branch network as beneficiaries of the BCs are mostly located at unbanked and
under banked areas.
l Doorstep Banking: Loan disbursement and recovery are at the doorsteps of the beneficiary.
l Better Quality of Assets: As target clients are known to local NGOs, Post Offices, and local social
bodies, loan facilitation by the BCs (who are the promoter/builder of the groups) enhances
quality of assets.
l Scaling up: In this model scaling up is possible within a short span of time.
Challenges to the BC Model: Banks Perspective
The banks reported many operational issues/risks, viability Issues and regulatory concerns in employing
BCs for banking services. These were:
Operational Issues
Cash Handling: Allowing BCs to handle cash is the biggest challenge. Ninety-nine percent of the
financial transactions are in cash, warranting high-cost handling operations and involving addedoperational risks. Moreover, clients tend to perceive that the BCs are the owners of the
transactions and not facilitators on behalf of the banks.
Irregular Accounting: Irregularities have been observed in accounting of clients withdrawals
and deposits by BCs and, as a result, there are delays in accounting the transactions with the
bank by the BC.
Gullible Client Profile: Recipients of BC services are mostly illiterate and unfamiliar with technology
rendering them susceptible to misguidance by the BCs.
Fraud & Misappropriation: Since the BCs staff operate individually without any line supervision,
the risk of fraud and misappropriation is higher. There have been instances of
miscommunication by BCs. Failure to account for cash and falsification of records have beennoticed and dealt with by banks.
Viability Issues
Inactive No Frills Accounts: The majority of no frills accounts opened by BCs are not operational. In
some locations that have achieved 100 per cent financial inclusion, the accounts in use have
been less than 25 per cent. The average balances in savings accounts have been very low at
uneconomic levels for banks.
Model Viability: There is a shortage of funding to BCs for meeting the group promotion costs in the
case of SHG-Bank linkage models. Additionally, there are financial constraints on the part of the
BCs for capacity building initiatives, such as investing in training for their staff. BCs Losing Money: Initial losses are forcing many BCs to shut their operations. Business continuity
risk in such cases is impacting banks adversely. It is time-consuming, costly and ineffective for
banks to substitute these BCs with new entrants.
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Regulatory Concerns
PLR Capping: Reaching the unbanked areas involves higher delivery costs and the rate cap on
interest rate small loans doesnt allow much room for banks to recover the costs. Although
banks have the freedom to set their BPLR, they generally cannot fix BPLR at high levels.
Distance Criteria: Banks do not always find it easy to get waivers in respect of distance criteria from
District Consultative Committees which are necessary to operate in certain areas. A number of
requests are pending for approval and many requests have been rejected without any
explanation.
Cash Settlement: Current regulations mandate BCs to complete accounting and settle cash with bank
branches within 24 hours of transaction. Given the area of operation of BCs - rural areas with
accessibility issues - making settlements within the prescribed timeframe has become a
challenge.
Experience of BCs
To date, a range of organizations and even individuals played the role of Business Correspondents. It
includes newly formed not-for-profit Section 25 companies, NGOs, and retired bank officials. India Postoffice has tied up with SBI to act as a BC.
Implementation Model 1: Financial Inclusion in Madhya Pradesh (MP)
SCAs (NICT & AISECT) Sign BC Agreement with SBI
AISECT and NICT, SCAs in MP, have signed Business Facilitator (BF) and Business Correspondent (BC)
agreements with the State Bank of India (SBI) to offer financial services in the State. Both offer these
services at rural CSCs.
As a Business Facilitator the CSCs generate business for the bank from the communities living in and
around their CSCs and book the business to nearest linked SBI branch. As a Business Correspondent, theCSCs with adequate ICT infrastructure act as a Banks Branch and offers the selected banking facilities.
Services being offered include:
Business Correspondent (BC) Services:
Savings Account Opening
Deposit / Withdrawal in Account
NREGS Wages Distribution & Govt. Pension Distribution (NREGS Wages Distribution is enabled
by SBI Kiosk using Biometric Thumb Impression Device at CSCs.)
Business Facilitator (BF) Services offered
New Saving or Current Account Opening
Loan Distribution (Application & Information)
Kisan credit card, Micro Finance, Loan for Agriculture and Animal
Loan for Tractor, Vehicle and House
Recurring Deposit & Fixed Deposits in Bank
Loan Recovery
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Implementation process:
Both AISECT & NICT have adopted SBIs Kiosk banking model, which enables biometric based
online user authentication in real-time via SBIs Portal.
As per the agreement, the BC has to pay the bank a minimum bank guarantee and has to
maintain a prepaid settlement account with SBI, against which all transaction settlement is done
on a daily basis. The CSCs are added under the BC, as their CSPs. The selection of CSPs is done by
the BC. The customer is recognized through a biometric authentication process.
The equipment requirement to enable kiosk banking includes a computer, printer, internet
connectivity and a low cost biometric scanner (approximately Rs.2600).
While AISECT is in the process of enabling all its CSCs as CSPs, NICT has undertaken a rigorous
VLE selection process to ensure success. This was the most important part of its implementation
process. VLE selection parameters included:
Understanding and ability to deliver financial services
Financial and family background
Local property ownership
Social status
Police & physical verification
To ensure success, VLEs are required to undergo training on an ongoing basis. Further, the SCAs
have to take proactive steps to motivate the VLEs to go out into the community and build
awareness around the benefits of kiosk banking at their CSC.
SCAs have also taken proactive steps to ensure that various Government Scheme disbursals
including NREGS wages, old age pension and scholarship payment, happen through the CSCs.
This requires educating and lobbying local government officials including collectors and
sarpanchs.
The BC- CSC Business Model: Enabling Kiosk Banking
The model that is emerging from financial inclusion implementations via CSCs in States is SCAs
becoming SBIs BC, and delivering financial services through the CSCs via SBIs online kiosk
banking solution.
Following is a summary of the requirements to implement this model.
Description SBIs kiosk banking solution enables real time banking through SBIs
Portal, nearly similar to core banking, where customers are
authenticated through biometric fingerprint authentication. It
eliminates the need for smart cards and POS and is carried out online
on the SBI Kiosk Banking Portal.
Bank-BC Relationship
Bank- State Bank of India
Business Correspondent (BC) & Business Facilitator (BF): SCA
Customer Service Point (CSP): CSC/VLE
Equipment
Requirement Computer
Printer
Biometric Fingerprint Scanner
Internet connectivity
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Investment Required BC (SCA) needs to provide bank guarantee of Rs. 10 lakhs to SBI
BC (SCA) must maintain a prepaid settlement account with SBI, for daily
transaction settlement. The amount is decided by the BC and will
determine the number of transactions that the BC can execute.
CSP (CSC) needs to invest in a low cost biometric fingerprint scanner,
approximately Rs. 2600. BC (SCA) needs to invest in manpower for CSP (CSC) training, community
awareness building and monitoring activities.
Commission Paid SBI offers the following commissions to the BC:
Opening of new account: Rs. 25 per account (one time)
Transaction commission: 0.5% per transaction for deposits and
withdrawals
Additional commissions are paid for business facilitator activities such as
loan and kisan credit card processing
Note: SBI is in the process of revising the commission paid
Expected Revenue Based on initial implementations, BCs on an average are earning the
following:
Rs. 8,000- Rs. 10,000 per month per CSP from basic banking activities, with
a minimum of Rs. 3000 per month per CSP
Up to Rs. 50,000 per month per CSP from business facilitator activities (eg.
loans and kisan credit card processing)
Note 1: These earnings are based on the number of Government Scheme wage
and benefit disbursements that are linked with banking activities at CSCs.
Note 2: SBI pays commission to its BC- in this case the SCA. The BCs CSPs- in
this case the CSC/VLEs earning will depend on its revenue share agreement
with the BC (SCA).
Estimated Revenue from Delivery of Financial Services
Initial implementation in Madhya Pradesh reveals that a CSC can earn between Rs. 3000 and Rs.50,000 a month through financial service offerings, and linkages with Government Scheme for
wage and benefit disbursements.
Experience from existing implementations indicates that when Government Scheme wage and
benefit disbursements are linked to bank accounts, income increases.
Example: Assume a Block which has 20 CSCs, and approximately 20,000 MGNREGS beneficiaries
of which only 12,000 are active workers. Following is the potential earning of a BC per CSP
(based on practiced remuneration structures as offered by SBI):
o Opening of bank accounts: 20,000 @ Rs 25 each = Rs 5,00,000 (one time)
o MGNREGS wages for all active beneficiaries per annum: 12,000 nos. @ Rs 12,000 per
annum = Rs 14,40,00,000
o Commission for BCs @ 0.5% of total transactions = Rs 7,20,000 per annum
o Earnings per BC per annum per CSP: Rs 7,20,000 / 20 = Rs 36,000 (i.e, Rs 3000 per
month per CSP)
o Note: 20 BCs located in 20 Panchayats can comfortably open 10 accounts a day each,
thus achieving a target of 20,000 accounts in 100 days.
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The above illustration clearly demonstrates that just one Government linkage can make the
creation of a viable banking facility in rural areas easy. Linking other schemes such as
scholarships, pensions etc. can make financial inclusion more viable and profitable. Further, as
the market matures, and with the availability of more relevant financial services, earning
potential for CSPs will increase.
Government Scheme Linkages Ensure Sustained Banking through CSCs
While opening bank accounts for the unbanked in rural India is a first step in ensuring financial
inclusion, it is important that these accounts remain active with citizens regularly accessing their
accounts for:
o Withdrawal of money
o Making deposits
o Ensuring savings
o Getting loans and credits
o Investing in other financial plans
This requires that citizens are sensitized and educated about the benefits of banking and howthey can avail of other financial services like loans and credits.
Further, since the amount of financial transactions that citizens undertake at the CSP, directly
impacts the BC and CSPs income (they are paid a commission based on each financial
transaction), it is important to increase number of financial transactions that occur at a CSP to
ensure sustainable income.
The fact that needs to be accepted is that currently in rural areas, citizens do not have sufficient
avenues for regular inflow and outflow of funds to make banking necessary. Thus, it is important
to identify streams of earnings for rural citizens that will require them to avail of banking
services.
One way to encourage banking activity by rural citizens is to link the disbursement of various
Government Schemes wages and benefits to citizens via bank accounts at CSCs. Schemes to be
considered include:
o NREGS wage disbursement
o Government pension payment
o Scholarship payment
o Aadhaar incentive payment for BPL citizens
Further, enabling such processes also has the benefit of transparent, timely and efficient
disbursal of Government funds.
Key Success CriteriaTo ensure successful delivery of financial services via CSCs, the following criteria must be met:
Internet Connectivity: The kiosk banking model of BC-SP can only work when the CSCs have
reliable internet connectivity. Thus, the government and banks should collaborate to ensure
that the CSCs have reliable connectivity.
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VLE Training & Motivation: It is important to ensure that the VLEs undergo training in delivering
financial services to rural customers, at regular intervals. Training should include technical
aspects of kiosk banking as well as for selling financial products. Further, VLEs need to be
constantly motivated to proactively build awareness within their community (including local
government officials) about the financial services they offer.
Linkages with Government Schemes: Government and banks need to work together to ensure
regular cash flow via banks in rural areas by linking Government Scheme wage and benefit
disbursement through banking services at CSCs.
Awareness & Community Sensitization: Banks and the Government need to take proactive steps
to build awareness and sensitize citizens and local government leaders in rural areas regarding
financial inclusion.
VLE Selection: In order to mitigate risks associated with defaults and fraud, SCAs need to
undertake a rigorous vetting process before making a VLE its CSP. Some suggested vetting
criteria for VLEs include:
o Understanding and ability to deliver financial services
o Social ties with the community (indicators include family background, social status)
o Financial Stability (indicators include financial background and local property ownership)
o Police & physical verification.
APPROACHES AND PROCESSES
Smart Card (Biometric) Solution:
Each customer is provided with Smart Card, which works as electronic pass book.
Contains details of the account holder
Used to authenticate the account holder through biometrics
BCs are provided with PoS (Point of Service) terminal which are equipped with wirelessconnectivity, printer, biometric scanner and voice enunciation in local language.
Mobile Based (Biometric) Solution:
This model also works similarly as smart card based
The only difference is biometric of the customers are stored on the NFC enabled Mobile phone
provided to BC
Customers are issued a plastic photo identity card which carries a unique number, which is
linked to the account of the customer
When this number is dialed on mobile, it prompts for biometric authentication
A customer biometric is verified with one stored on Mobile phone and the one scanned at thetime of transaction at PoS terminal with BC
Mobile -2- Mobile Based (non-Biometric) Solution:
The customers should have an account and must possess a mobile with SMS facility available.
Customer would call a toll free no. of the bank and would get routed to an Interactive Voice
Response system (IVR) in the language preferred.
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A call would originate to the registered mobile no. and the customer would ask to choose a PIN,
which is a secure PIN for carrying out financial transaction and the PIN would be a interactive
PIN and would not stored in the handset.
Once PIN is obtained, the customer can call the toll free number and provide his/ her PIN and
choose the financial services.
In case of cash withdrawal, the customer would be prompt to enter the amount of withdrawal.
The customer would get an SMS with the Transaction ID and the One Time Password (OTP).
With this, the customer can approach the BC.
On entering the Transaction ID, the system verifies whether it is a valid transaction and then
prompts for the OTP, on entering the OTP the system display the complete transaction to the BC
and the BC pays the requisite money to the customer.
A pilot is being initiated using Mobile as delivery channel in Anand district of Gujarat state.
Micro ATM solution
Bank plans to introduce micro-payment platform in order to facilitate banking in Urban and
Semi- Urban areas.
The platform will enable Business Correspondents (who could be a local kirana shop owner and
will act as micro ATM) to conduct instant transactions.
The Micro ATM is an emerging concept, in which it constitute mobile phone, scanner, smart card
reader, printer, voice enunciation capability etc.
A customer who is having Mobile phone enabled, or smart card enable, or Biometric ID card can
transmit at micro ATMs deployed with BC.
The micro platform will enable function through low cost devices (micro ATMs) that will be
connected to banks across the country.
This would enable a person to instantly deposit or withdraw funds regardless of the bank
associated with a particular BC.
This device will be based on a mobile phone connection and would be made available at every
BC.
Essentially, BCs will act as bank for the customers and all they need to do is verify the
authenticity of customer using customers UID or finger prints.
Mobile ATM Solution:
Mobile ATM Solution is one of the means to cover financially excluded people.
A mobile ATM machine will be moving from one place to another in order to provide basic
banking services like cash withdrawal, cash deposit, fund transfer, balance enquiry, mini
statement etc.
It is a most suitable model in urban inclusion. Bank is also planning to deploy few Mobile ATMs
in urban area.
FINANCIAL INCLUSION - PROCESS & BUSINESS MODEL
The scope of Financial Inclusion is not only restricted to the opening up of No-Frills Account but also
extending a gamut of affordable financial products and services such as micro-loan, micro-pension,
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micro-remittance, micro-insurance etc to the poor after an in-depth study of their financial needs.
Providing various financial products to the rural masses would also make Financial Inclusion Initiatives a
viable proposition for the Bank. Therefore, taking into the viability of the financial inclusion business into
consideration a process and business model has been sketched which is as under.
1) Identification of Villages by the Branch.2) Linking the villages to the Bank Branch which will be the Base Branch.
3) Identification of Business Correspondents (BC) as per RBI guidelines.
4) Screening and Interview of the identified field BCs (FBCs).
5) Training session for the FBCs to be conducted through the Bank staff and Service Provider.
6) Hand-holding of the FBCs by the Bank staff and Service Provider.
7) Allotment of FBCs to the identified villages.
8) KYC of the FBCs and their A/c opening in the Branches.
9) Conducting a campaigning programme by the FBC and the Bank staff for creating awareness in
the villages.
10) Household economic and personal survey to be conducted. This survey is to be carried out toprepare a credit plan for each household according to the financial needs. This would facilitate
to provide a customized financial service to each household.
11) Initiation of Enrollment Process by FBC in their respective villages which involves: (a) Filling up of
forms of customers, (b) Photograph of customers, (c)Capturing Biometrics of customers, (d)
Arranging introduction etc.
12) Submitting forms to branches for verification and authentication for A/c opening.
13) Uploading data for card preparation.
14) Dispatch of cards to respective branches.
15) Distribution of cards to FBCs for onward delivery to customers with biometric verification.
16) Uploading of data of card distributed for card activation.17) Extending various other products/services simultaneously as per the evaluation of the needs of
the survey and the judgment of the Bank Officials.
18) Quarterly review of the transactions by the BC and the Branch Manager.
19) Understanding the reasons for non-operation of the accounts.
20) Feedback by FBC and Bank staff to be provided to the Branch Manager.
Eligibility to become a Business Correspondent :
As per the RBI guidelines, the following entities are eligible for appointment of Business Correspondents
(BCs) for banks:
NGOs/ MFIs set up under Societies/ Trust Acts,
societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative
Societies Acts of States,
Section 25 companies that are stand alone entities or in which NBFCs, banks, telecom
companies and other corporate entities or their holding companies did not have equity holdings
in excess of 10 per cent,
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post offices ,
retired bank employees,
ex-servicemen ,
retired government employees.
Individual kirana/medical/fair price shop owners
Individual Public Call Office (PCO) operators
Agents of Small Savings Schemes of Government of India/Insurance Companies Individuals who
own petrol pumps
Retired teachers
Authorized functionaries of well run Self Help Groups (SHGs) linked to banks Non deposit taking
NBFCs (non-banking finance companies) in the nature of loan companies whose micro finance
portfolio is not less than 80 per cent of their loan outstanding in the financially excluded districts
as identified by the Committee on Financial Inclusion
RBI has now permitted banks to engage any individual, including those operating Common
Service Centres (CSCs) as BC, subject to banks comfort level and their carrying out suitable duediligence as also instituting additional safeguards as may be considered appropriate to minimize
the agency risks
Appointment of BCs
Must be a permanent resident of the area in which they propose to operate.
They should be well established, enjoy good reputation and have the confidence of the local
people.
The ability of BCs to invest in POS machines and other equipments.
In case of individuals selected as BCs, the criterion are as under :
A minimum education qualification of Xth pass.
Field Investigation /RCU for verification of residence and dealings, etc. to be conducted.
Credibility check A/c with any other bank.
Should open account with IDBI Bank (base branch)
Suitable amount of Security deposit /Bank guarantee based on business volumes.
Scope of Activities to be undertaken byBCs
The scope of activities undertaken by BCs are as under :
Creating awareness about savings and other products and education and advice on managing
money and debt counseling.
Identification of potential customers
Collection and preliminary processing of various forms for deposits including verification of
primary information / data
Filling of applications / account opening forms including nomination clause and submission to
the Bank.
KYC will also be completed by the BCs.
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Opening of no frill deposit accounts and other products as permitted from time to time by
leveraging technology.
Collection and payment of small value deposits and withdrawals ; Min : nil; Max : Rs. 2000/- per
transaction.
Receipt and delivery of small value remittances / other payment instruments, as per FI Plan of
IDBI Bank.
In respect of all such transactions, the BC/his agent will be authorized to accept / deliver cash
either at his place of work or at any convenient location subject to the ceilings per customer (Rs
2000/- in each case).
Furnishing of mini account statements and other account information, for a period of 3 months.
Any other service on behalf of the Bank, duly authorized by the appropriate authority.
The activities undertaken by the Business Correspondents would be within the normal course of
the Banks banking business, but conducted through and by the entities at places other than the
Banks premises.
In respect of all such transactions, the BC/his/her agent will be authorized to accept / deliver
cash either at his place of work or at any convenient location subject to the ceilings per day / per
customer as laid down. The Business Correspondents will be linked to a nearby branch (base
Branch).
Cross-selling of other financial products like insurance / mutual fund products / pension
products / any other third party product, as and when they are assigned to do so.
In case duly appointed sub-agents of BCs, BCs to take care of reputational risks involved.
Due Diligence of Field BCs
Should be well established, enjoy good reputation and stature and have the confidence of the
local people.
Should have a satisfactory track record and should be able to generate the funds required for
this service.
Should be a permanent resident of the area
Age should not be exceeding 65 at the time of selection, continuation subject to annual review
of the performance, till the age of 75 years
Police verification to be completed before appointing
Complete KYC norms to be followed before appointment
Monitoring of FBCs/CSP
Daily records of End of Day (EoD) and Beginning of Day (BoD) transactions Cash Box how he handles the cash
No. of visits/ presence of CSP/FBC in villages
Feedback from villagers, Panchayats
Set up tie ups with few villages to get regular feedback etc
Daily settlement with the branch
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Roles of the Key Stakeholders
Role of the State Government/SDA:
o Linking current government scheme wage and benefit disbursement with bank accounts, to
ensure regular cash flow in rural areas
o Providing basic infrastructure to bankso Integrating CSC project with the banking mandates for the State
o Ensuring connectivity in rural areas
o Mobilizing and sensitizing Government functionaries
Role of Banks:
o Partnering with SCAs and other CSC partners for BCs and BFs agreements, to enable CSCs to
deliver financial services in rural areas
o Provide the technical solutions necessary for online kiosk banking delivery, user authentication
and monitoring
o
Offering a wide variety of banking services in rural areas via their BCso Synchronizing with Government machinery
o Training the SCAs and VLEs for delivery of financial services
Role of SCAs:
o Getting appointed as BCs and BFs for banks
o Vetting and selecting VLEs to become the customer service points
o Ensuring adherence to banking norms as per BC guidelines
o Ensuring power and connectivity at its customer service points
o Ensuring timely service delivery
o Providing an online mechanism that enables VLEs to deliver financial services via the Banks
online solution.
o Supporting awareness building and training activities.
Role of Village Level Entrepreneurs (VLE):
o Getting trained to deliver financial services
o Signing the relevant agreement with the BC to become CSPs
o Educating the citizens and local government officials on the benefits of availing financial services
at CSCs
o Ensuring timely service delivery and adherence to the banking norms
Role of Base Branch Manager /Officialso Identification of villages for implementing FI.
o Identification of Field BCs (FBCs) which includes:
a) Screening
b) Interview
c) Due diligence
o Arranging for Training Programmes for BCs.
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o Coordinating with the Service Providers for various trainings on processes, products and
technology use.
o KYC of the field BCs including police verification.
o Arranging for campaigning Programme in the villages for spreading financial awareness.
o Providing publicity material and Bank display Board to FBCs/CSPs. For this Branch Manager
should co-ordinate with Regional Offices/ Lead District Managers.
o Arranging for economic and personal survey of the households in the villages.
o Coordinating with all entities (i.e. FBCs/CSPs and Service Providers) so that the initiation of the
enrollment process is conducted smoothly.
o Ensuring enrollment and KYC verification of customers for account opening is done in time.
o Handing over of KYC verified account opening forms in village-wise lots to Technical Service
Providers for card preparation.
o Receiving cards and account opening forms with list in same lots from Technical Service
Providers.
o Verification and tallying of AOFs, list and cards and handing over the same to the FBCs/CSPs for
delivery of cards against proper acknowledgement.
o Weekly review of the transactions and interaction with FBCs/CSPs.
o Reconciliation of transactions.
o Collecting and analyzing feedback received from the field BC and Bank Staff.
o Monitoring of CSPs/FBCs along with monitoring and follow up of business generated by them.
o Having all checks and balances in place so that there are no frauds and corruption.
Role of Lead District Manager / District Coordinator
o Clustering/Mapping of villages with Base Branches.
o Village wise Road Map for implementation
o Coordination of engagement of FBCs/CSPso Coordination of training of Field BC and Branch Staff
o Awareness Camp: Taking initiative to increase the pace of FI activities.
o Coordination with Service Providers
o Fortnightly Review of:
a) Road Map of FIP
b) The performance, working and conduct of the BC.
o Liaison with the District Authorities for routing of Govt. benefits through the cards and also for
the float fund of various Govt. funds.
o Liaison with Block level and Panchayat level officials.
o Redressal of grievances and disputes between the base branch or customers & FBC/CSP.o Surprise visit in villages. Submission of visit report to the Regional Manager
Role of Regional Offices
o Review of Road Map for FIP of Region.
o Arranging for training of district Coordinators, Lead District Managers and Branch Managers
o Due Diligence of BC
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o Full details of BC to be collected for posting information on our website.
o Awareness Camp to be conducted by using Publicity materials & Stationery and displaying Bank
Board at identified Customer Service Points.
o Coordination with Service Provider
o Arranging for Quarterly Meeting
o Liaison with Govt. Officials.
o Review Meeting with LDM & Coordinators of Regional Office regarding the performance of the
FBC/CSP with respect to target achieved.
o Quarterly Review with Branch Manager.
o MIS Submission to Zonal Office/Central Office
o Scrutinizing the bills / Invoices and after vetting recommending for payment to Central Office
o Redressal of Grievances.
o Surprise check of base branches and villages by RO staff w.r.t verification of various activities,
checks and balances and submission of reports to Zonal Office and Central Office.
Role of Zonal Officeo Review of Road Map of FIP for Zone and submission of status report to Central Office for placing
information before the Board and Top Management .
o Training of Branch Managers of base branches at Zonal Staff Training Centres.
o Due Diligence of BCs
o Monthly review of progress with Lead District Manager
o Quarterly review with Regional Manger
o MIS Submission to : Central Office and RBI/Govt.
o Follow-up of irregulatory pointed out by auditors their rectification and closure
o Redressal of Grievances Closure of Complaints.
o Monitoring and follow up of all FI activities
Dos and Donts for BC
DOs
o Treat every customer with due respect
o Maintain friendly relations with the Banks Branch Manager
o Protect yourself well while traveling to and from Bank with cash
o Perform Day End and Settlement as per the terms
o Maintain the cash registers and transaction receipts carefully
o Read the manuals carefully and clarify doubts
o If you have any problem with the terminal or branch, report to Field Supervisor immediately
o Keep the terminal clean, safe and well charged
DOs FOR DISBURSAL
o Complete the disbursals effectively and efficiently
o Before the disbursal period starts, ensure the terminal is ready for disbursals
o Take measures to protect the cash meant for disbursal
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o Disburse the amount to all the intended recipients. If required, take the terminal to the
customers or keep late hours
DONTs
o Do not discriminate the customers based on religion, caste, creed, political party, family feuds,
social status, personal friendshipo Do not charge the customers for any transactions or providing any help
o Do not exploit customers do not solicit or extract any favors in return of services you provide
in cash or kind
o Do not give an impression that you are a benefactor of a customer, you are doing your duty
o Do not encourage informal borrowing or lending
o Do not reveal transaction details of the customers to anybody else
o Do not complete a cash transaction in the terminal until cash actually changes
o Do not mix up personal money with Banks or customers
o Do not keep large amounts of cash for long time
o Do not leave the cash or terminals in unsafe places for longo Do not keep customers card or customers copy of transactions with you.
What is the process flow for enrolments?
o On pre-decided date and time, BC organizes an enrollment camp
o Potential Customers and BC Operator shall be present at the enrolment camp for the enrollment
process and Details are captured in system by face to face interaction
o Photograph and biometrics are captured simultaneously
o Data submitted to DC for account opening and card personalization
o Cards along with forms are sent to CSP/BM for introduction and authentication respectively
o CSPs distribute the cards against biometric authentication and cards/accounts are activated.
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CHAPTER 2 BASICS OF BANKING
Introduction
Banks have played a critical role in the economic development of some developed countries such asJapan 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. Thetransformation 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.
Definition of banks
In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act),
1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts thebusiness of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise, and withdrawals, by cheque, draft, order or otherwise.' This definition points to the three
primary activities of a commercial bank which distinguish it from the other financial institutions. These
are: (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii)
collect cheques for the bank's customers.
Evolution of Commercial Banks in India
The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal
in Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of
Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras
(established in 1843). In 1921, the three Presidency banks were amalgamated to form the Imperial Bank
of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government.
The Imperial Bank of India was established with mainly European shareholders. It was only with the
establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-
central banking role of the Imperial Bank of India came to an end.
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In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment
of joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders.
Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India,
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
After independence, the Government of India started taking steps to encourage the spread of banking inIndia. In order to serve the economy in general and the rural sector in particular, the All India Rural
Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank
taking over the Imperial Bank of India and integrating with it, the former state-owned and state-
associate banks. Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959,
the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former
state-associate banks as its subsidiaries.
To better align the banking system to the needs of planning and economic policy, it was considered
necessary to have social control over banks. In 1969, 14 of the major private sector banks were
nationalized. This was an important milestone in the history of Indian banking. This was followed by the
nationalization of another six private banks in 1980. With the nationalization of these banks, the major
segment of the banking sector came under the control of the Government. The nationalization of banks
imparted major impetus to branch expansion in un-banked rural and semi-urban areas, which in turn
resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy. It
also resulted in scaling up of lending to agriculture and its allied sectors. However, this arrangement also
saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting burdened
with large non-performing assets.
To create a strong and competitive banking system, a number of reform measures were initiated in early
1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision
over banks, creating competitive conditions and developing technological and institutional
infrastructure. These measures led to the improvement in the financial health, soundness and efficiency
of the banking system.
One important feature of the reforms of the 1990s was that the entry of new private sector banks was
permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank
were set up.
Commercial banks in India have traditionally focused on meeting the short-term financial needs of
industry, trade and agriculture. However, given the increasing sophistication and diversification of the
Indian economy, the range of services extended by commercial banks has increased significantly, leadingto an overlap with the functions performed by other financial institutions. Further, the share of long-
term financing (in total bank financing) to meet capital goods and project-financing needs of industry
has also increased over the years.
Functions of Commercial Banks
The main functions of a commercial bank can be segregated into three main areas: (i) Payment System
(ii) Financial Intermediation (iii) Financial Services.
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(i) Payment System
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 Intermediation
The 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 channeling funds into profitable as well as socially
productive uses.
(iii) Financial Services
In 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.
Competitive Landscape of Banks in India
Banks face competition from a wide range of financial intermediaries in the public and private sectors in
the areas of financial intermediation and financial services (although the payments system is exclusively
for banks). Such intermediaries form a diverse group in terms of size and nature of their activities, and
play an important role in the financial system by not only competing with banks, but also
complementing them in providing a wide range of financial services. Some of these intermediaries
include:
Term-lending institutions
Non-banking financial companies
Insurance companies
Mutual funds
(i) Term-Lending Institutions
Term lending institutions exist at both state and all-India levels. They provide term loans (i.e., loans withmedium to long-term maturities) to various industry, service and infrastructure sectors for setting up
new projects and for the expansion of existing facilities and thereby compete with banks. At the all-India
level, these institutions are typically specialized, catering to the needs of specific sectors, which make
them competitors to banks in those areas. These include the Export Import Bank of India (EXIM Bank),
Small Industries Development Bank of India (SIDBI), Tourism Finance Corporation of India Limited (TFCI),
and Power Finance Corporation Limited (PFCL).
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At the state level, various State Financial Corporations (SFCs) have been set up to finance and promote
small and medium-sized enterprises. There are also State Industrial Development Corporations (SIDCs),
which provide finance primarily to medium-sized and large-sized enterprises. In addition to SFCs and
SIDCs, the North Eastern Development Financial Institution Ltd. (NEDFI) has been set up to cater
specifically to the needs of the north-eastern states.
(ii) Non-Banking Finance Companies (NBFCs)
India has many thousands of non-banking financial companies, predominantly from the private sector.
NBFCs are required to register with RBI in terms of the Reserve Bank of India (Amendment) Act, 1997.
The principal activities of NBFCs include equipment-leasing, hire purchase, loan and investment and
asset finance. NBFCs have been competing with and complementing the services of commercial banks
for a long time. All NBFCs together currently account for around nine percent of assets of the total
financial system.
Housing-finance companies form a distinct sub-group of the NBFCs. As a result of some recent
government incentives for investing in the housing sector, these companies' business has grown
substantially. Housing Development Finance Corporation Limited (HDFC), which is in the private sector
and the Government-controlled Housing and Urban Development Corporation Limited (HUDCO) are the
two premier housing-finance companies. These companies are major players in the mortgage business,
and provide stiff competition to commercial banks in the disbursal of housing loans.
(iii) Insurance Companies
Insurance/reinsurance companies such as Life Insurance Corporation of India (LIC), General Insurance
Corporation of India (GICI), and others provide substantial long-term financial assistance to the
industrial and housing sectors and to that extent, are competitors of banks. LIC is the biggest player in
this area.
(iv) Mutual Funds
Mutual funds offer competition to banks in the area of fund mobilization, in that they offer alternate
routes of investment to households. Most mutual funds are standalone asset management companies.
In addition, a number of banks, both in the private and public sectors, have sponsored asset
management companies to undertake mutual fund business. Banks have thus entered the asset
management business, sometimes on their own and other times in joint venture with others.
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CHAPTER 3 BANKING STRUCTURE IN INDIA
Banking Structure in India
Banking RegulatorThe 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.
Scheduled Banks in India
Scheduled 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.
Public Sector Banks
Public sector banks are those in which the majority stake is held by the Government of India (GoI).
Public sector banks together make up the largest category in the Indian banking system. There are
currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State
Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalized banks (such as Allahabad Bank,
Canara Bank etc) and IDBI Bank Ltd.
Public sector banks have taken the lead role in branch expansion, particularly in the rural areas.
Public sector banks account for bulk of the branches in India (88 percent in 2009).
In the rural areas, the presence of the public sector banks is overwhelming; in 2009, 96 percentof the rural bank branches belonged to the public sector. The private sector banks and foreign
banks have limited presence in the rural areas.
Regional Rural Banks
Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural
economy. Each RRB is owned jointly by the Central Government, concerned State Government and a
sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small
entrepreneurs and agricultural laborers. Over the years, the Government has introduced a number of
measures of improve viability and profitability of RRBs, one of them being the amalgamation of the RRBs
of the same sponsored bank within a State. This process of consolidation has resulted in a steep decline
in the total number of RRBs to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.
Private Sector Banks
In this type of banks, the majority of share capital is held by private individuals and corporate. Not all
private sector banks were nationalized in 1969, and 1980. The private banks which were not
nationalized are collectively known as the old private sector banks and include banks such as The Jammu
and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector banks was however prohibited
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during the post-nationalization period. In July 1993, as part of the banking reform process and as a
measure to induce competition in the banking sector, RBI permitted the private sector to enter into the
banking system. This resulted in the creation of a new set of private sector banks, which are collectively
known as the new private sector banks.
Foreign BanksForeign banks have their registered and head offices in a foreign country but operate their branches in
India. The RBI permits these banks to operate either through branches; or through wholly-owned
subsidiaries. The primary activity of most foreign banks in India has been in the corporate segment.
However, some of the larger foreign banks have also made consumer financing a significant part of their
portfolios. These banks offer products such as automobile finance, home loans, credit cards, household
consumer finance etc. Foreign banks in India are required to adhere to all banking regulations, including
priority-sector lending norms as applicable to domestic banks.8 In addition to the entry of the new
private banks in the mid-90s, the increased presence of foreign banks in India has also contributed to
boosting competition in the banking sector.
Co-operative Banks
Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-
employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-
operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas,
across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose
operations are either limited to one state or stretch across states. The rural co-operative banks comprise
State co-operative banks, district central cooperative banks, SCARDBs and PCARDBs.9
The co-operative banking sector is the oldest segment of the Indian banking system. The network of
UCBs in India consisted of 1721 banks as at end-March 2009, while the number of rural co-operative
banks was 1119 as at end-March 2008. Owing to their widespread geographical penetration,
cooperative banks have the potential to become an important instrument for large-scale financial
inclusion, provided they are financially strengthened. The RBI and the National Agriculture and Rural
Development Bank (NABARD) have taken a number of measures in recent years to improve financial
soundness of co-operative banks.
Role of Reserve Bank of India
The 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
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Builds up and strengthens the country's financial infrastructure
Acts as the banker of banks
Supervises banks
As regards the commercial banks, the RBI's role mainly relates to the last two points stated above.
RBI as Bankers' Bank
As 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 isone 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 supervisor
To 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 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 fromthem, 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.
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CHAPTER 4 BANK DEPOSIT ACCOUNTS
As stated earlier, financial intermediation by commercial banks has played a key role in India in
supporting the economic growth process. An efficient financial intermediation process, as is well known,
has two components: effective mobilization of savings and their allocation to the most productive uses.
In this chapter, we will discuss one part of the financial intermediation by banks: mobilization of savings.
When banks mobilize savings, they do it in the form of deposits, which are the money accepted by banks
from customers to be held under stipulated terms and conditions. Deposits are thus an instrument of
savings.
Since the bank nationalization in 1969, banks have been at the core of the financial intermediation
process in India. They have mobilized a sizeable share of savings of the household sector, the major
surplus sector of the economy. This in turn has raised the financial savings of the household sector and
hence the overall savings rate. Notwithstanding the liberalization of the financial sector and increased
competition from various other saving instruments, bank deposits continue to be the dominant
instrument of savings in India.
The gross domestic savings of the Indian economy have been growing over the years and the household
sector has been the most significant contributor to savings. Household sector saves in two major ways,
viz. financial assets and physical assets. The financial savings of the household sector, bank deposits are
the most prominent instrument, accounting for nearly half of total financial savings of the household
sector.
Introduction to Bank Deposits
One 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.
The share of deposits of different classes of scheduled commercial banks (SCBs). It can be seen that the
public sector banks continue to dominate the Indian banking industry. However, the share of the new
private sector banks has been rising at the expense of the public sector banks.
Safety of deposits
At the time of depositing money with the bank, a depositor would want to be certain that his/her
money is safe with the bank and at the same time, wants to earn a reasonable return.
The safety of depositors' funds, therefore, forms a key area of the regulatory framework for banking. In
India, this aspect is taken care of in the Banking Regulation Act, 1949 (BR Act). The RBI is empowered to
issue directives/advices on several aspects regarding the conduct of deposit accounts from time to time.
Further, the establishment of the Deposit Insurance Corporation in 1962 (against the backdrop of failure
of banks) offered protection to bank depositors, particularly small-account holders.
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Deregulation of interest rates
The process of deregulation of interest rates started in April 1992. Until then, all interest rates were
regulated; that is, they were fixed by the RBI. In other words, banks had no freedom to fix interest rates
on their deposits. With liberalization in the financial system, nearly all the interest rates have now been
deregulated. Now, banks have the freedom to fix their own deposit rates with only a very few
exceptions. The RBI prescribes interest rates only in respect of savings deposits and NRI deposits, leaving
others for individual banks to determine.
Deposit policy
The Board of Directors of a bank, along with its top management, formulates policies relating to the
types of deposit the bank should have, rates of interest payable on each type, special deposit schemes
to be introduced, types of customers to be targeted by the bank, etc. Of course, depending on the
changing economic environment, the policy of a bank towards deposit mobilization, undergoes changes.
Types of Deposit Accounts
The 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 account
Current 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-depositcomponents. 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.
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Current Deposits
A current account is a form of demand-deposit, as the banker is obliged to repay these liabilities on
demand from the customer. Withdrawals from current accounts are allowed any number of times
depending upon the balance in the account or up to a particular agreed amount. Current deposits are
non-interest bearing. Among the three broad categories of depositscurrent account deposit, savings
accounts deposit and term deposits--current account deposits account for the smallest fraction.
A current account is basically a running and actively operated account with very little restriction on the
number and amount of drawings. The primary objective of a current account is to provide convenient
operation facility to the customer, via continuous liquidity.
On account of the high cost of maintaining such accounts, banks do not pay any interest on such
deposits. In addition, many banks insist on customers maintaining minimum balances to offset the
transaction costs involved. If minimum balances are not maintained, these banks charge the customers
a certain amount. Current accounts can be opened by rich individuals/ partnership firms/ private and
limited companies/ Hindu Undivided Families (HUFs)/ societies/ trusts, etc.
Savings Bank Deposits
Savings deposits are a form of demand deposits, which is subject to restrictions on the number of
withdrawals as well as on the amounts of withdrawals during any specified period. Further, minimum
balances may be prescribed in order to offset the cost of maintaining and servicing such deposits.
Savings deposits are deposits that accrue interest at a fixed rate set by RBI (3.5 percent as of January
2010).
Savings bank accounts are used by a large segment of small depositors as they can put their regular
incomes into these accounts, withdraw the money on demand and also earn interest on the balance left
in the account.
The flexibility provided by such a product means that savings bank accounts cannot be opened by big
trading or business firms. Similarly, institutions such as government departments and bodies, local
authorities, etc. cannot open savings bank accounts. Savings account deposits together with current
account deposits are called CASA deposits
Term Deposits
A "Term deposit" is a deposit received by the Bank for a fixed period, after which it can be withdrawn.
Term deposits include deposits such as Fixed Deposits / Reinvestment deposits/ Recurring Deposits etc.
The term deposits account for the largest share and have remained within the range of 61% to 67 % of
total deposits in the recent years.
Interest is paid on term-deposits, either on maturity or at stipulated intervals depending upon the
deposit scheme under which the money is placed. Also, a customer can earn interest on a term-deposit
for a minimum period of 7 days. Interest rates on term-deposits are usually higher than on savings
deposits. Term deposits include:
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Fixed deposits on which a fixed rate of interest is paid at fixed, regular intervals;
Re-investment deposits, under which the interest is compounded quarterly and paid on
maturity, along with the principal amount of the deposit. Some banks have introduced "flexi"
deposits under which, the amount in savings deposit accounts beyond a fixed limit is
automatically converted into term-deposits; and
Recurring deposits, under which a fixed amount is deposited at regular intervals for a fixed term
and the repayment of principal and accumulated interest is made at the end of the term. These
deposits are usually targeted at persons who are salaried or receive other regular income. A
Recurring Deposit can usually be opened for any period from 6 months to 120 months.
Common Guidelines of Opening and Operating Deposit Accounts
To 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 thebank.16 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
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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.
Requirement of PAN:
In addition to the due diligence requirements, under KYC norms, banks are required by law to obtain a
Permanent Account Number (PAN) from the prospective account holder or alternate declarations as
specified under the Income Tax Act.
Operation of Joint Account:
Deposit accounts can be opened by an individual in his own name or by more than one individual in
their own names (known as a 'joint account'). A joint account can be operated by a single individual or
by more than one individual jointly. The mandate for who can operate the account can be modified with
the consent of all account holders. Joint accounts opened by minors with their parents or guardians can
be only operated by the latter. Accountholders of a joint account can give mandates on the operation of
the account, and the disposal of balances in the event of the demise of one or more of the holders.
Banks classify these mandates as 'Either or Survivor', and 'Anyone or Survivor(s)', etc.
Power of Attorney:
At the request of the depositor, the bank can register mandate/power of attorney given by him
authorizing another person to operate the account on his behalf.
Closure/renewal of deposits:
Term-deposit account holders at the time of placing their deposits can give instructions with regard to
closure of deposit account or renewal of deposit for further period on the date of maturity. In absenceof such mandate, the bank will usually seek instructions from the depositor(s) as to the renewal of the
deposit or otherwise by sending intimation before say, 15 days of the maturity date of the term deposit.
If no mandate is given or received by the bank before the date of maturity of term deposit, the bank will
be at liberty to roll over the deposit on due date.
Nomination:
A depositor is permitted to officially authorize someone, who would receive the money of his account
when the depositor passes away. This is called the nomination process. Nomination facility is available
on all deposit accounts opened by individuals. Nomination is also available to a sole proprietary concern
account. Nomination can be made in favor of one individual only. Nomination so made can be cancelled
or changed by the account holder/s any time. Nomination can be made in favor of a minor too.
Deposit Related Services
As per the RBI guidelines, banks are required to provide some services to the depositors and to
recognize the rights of depositors. The ultimate objective of the banking industry should be to provide a
customer different services they are rightfully entitled to receive without demand. We take a quick look
at some such services provided by banks in India.
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Customer Information
Customer information collected from the customers should not be used for cross-selling of services or
products by the bank, its subsidiaries and affiliates. If the bank proposes to use such information, it
should be strictly with the 'express consent' of the account-holder.
Banks are not expected to disclose details/particulars of the customer's account to a thirdperson or party without the expressed or implied consent from the customer. However, there
are some exceptions, such as disclosure of information under compulsion of law or where there
is a duty to public for the bank to disclose.
Interest Payments
Savings bank accounts: Interest is paid on savings bank deposit account at the rate specified by
RBI from time to time. In case of savings bank accounts, till recently, banks paid interest on the
minimum balance between the 11th and the last day of the month. With effect from April 1,
2010, banks have been advised to calculate interest on savings bank deposit by considering daily
product, which would benefit the holders of savings bank accounts.
Term deposits: Term-deposit interest rates are decided by individual banks within these general
guidelines. In terms of RBI directives, interest is calculated at quarterly intervals on term
deposits and paid at the rate decided by the bank depending upon the period of deposits. The
interest on term deposits is calculated by the bank in accordance with the formulae and
conventions advised by Indian Bank Association. Also, a customer can earn interest on a term
deposit for a minimum period of 7 days.
Tax deducted at source (TDS): The bank has statutory obligation to deduct tax at source if the
total interest paid/payable on all term deposits held by a person exceeds the amount specified
under the Income Tax Act and rules there under. The Bank will issue a tax deduction certificate
(TDS Certificate) for the amount of tax deducted. The depositor, if entitled to exemption fromTDS, can submit a declaration to the bank in the prescribed format at the beginning of every
financial year.
Premature Withdrawal of Term Deposit
The bank on request from the depositor, at its discretion, may allow withdrawal of term deposit before
completion of the period of the deposit agreed upon at the time of placing the deposit. Banks usually
charge a penalty for premature withdrawal of deposits. The bank shall declare their penal interest rates
policy for premature withdrawal of term deposit, if any, at the time of opening of the account.
Premature Renewal of Term Deposit
In case the depositor desires to renew the deposit by seeking premature closure of an existing termdeposit account, the bank will permit the renewal at the applicable rate on the date of renewal,
provided the deposit is renewed for a period longer than the balance period of the original deposit.
While prematurely closing a deposit for the purpose of renewal, interest on the deposit f