Set- 1 Q.1a Who is a holder? How does a holder differ from a holder in due course? Q1b.

What precautions should a banker take in making payment of the cheque? Ans. A 1. Meaning: Holder means any person entitled in his own name to the possession of the negotiable instrument and to recover or receive the amount due thereon from the parties thereto. A holder in due course on the other hand, means a holder who takes the instrument in good faith for consideration before it is overdue and without any notice of defect in the title of the person who transferred it to him. 2. Consideration: A person who claims to be a holder in due course must show that he acquired the instrument for consideration. However consideration may not pass from a holder of the instrument. 3. Title: Holder of negotiable instrument does not acquire a better title than that of the person from whom he acquired the instrument. Thus a holder does not acquire a good title if the title of any of the prior parties is defective. But a holder in due course gets a good title even though there was a defect in the title of any prior parties to the instrument. 4. Liability: A holder in due course can sue all prior parties to a negotiable instrument until the instrument is duly satisfied. Whereas a holder of the instrument can enforce it against the person who has signed it and also against the transfer-or from whom he obtained it. 5. Maturity: A person will be a holder in due course only if he acquires the instrument before the amount mentioned in it become payable. But a holder may acquire the instrument even after it has become due for payment. B Payment of Customer Cheques According to section 31 of the Negotiable Instrument Act, 1881, The drawee of a cheque having sufficient funds of the drawer in his hand properly applicable to the payment of such cheque, must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage caused by such default. The above section clearly states that the bank is under statutory obligations to honor the cheque of the customer keeping in mind certain conditions. But, if the bank fails to do so, then the bank is liable to pay damages or compensation not only to the customer but also to the true owner of the cheque. Those conditions are as follows: 1. The drawer should have sufficient fund in his account with the bank.

2. These funds are meant for payment of such cheque. 3. There should be proper demand in order to make the payment. Precautions to be taken before honoring a cheque The bank should take the following precautions in order to safeguard its interest, before honoring a cheque. 1. Proper presentation of the cheque: The paying bank should see whether the presentation of the cheque is proper or not and this can be found out in the following ways: (a) Type of cheque: The bank should find out the type of cheque before honoring it .whether it is opened cheque or crossed cheque. If it is open cheque then the payment will be made at the counter. But in case of crossed cheque the payment will be made to a follow banker. So the bank should take proper care regarding it. (b) Account: It may be possible that the customer may have two or more accounts in the same branch and for each account the bank must have issued cheque book. So the paying bank should taken proper care in honoring the cheque and should see that the cheque of one account is not used for withdrawing the amount from another account. (c) Banking hours: The cheques should be presented for payment during banking hours on a working day. (d) Mutilation: The paying bank should not honor the cheque if it is mutilated. 2. Proper form of the cheque: The definition of the cheque in clearly given in the Negotiable Instrument Act, but the Act is silent regarding the proper farm of the cheque. So it in the duty of the bank to see whether the form of the cheque is proper or not before honoring a cheque. 3. Sufficient balance: The customer must have sufficient funds in account with the bank, to get it cleared. If the customers has been sanctioned a overdraft limit then the banker cannot refuse to honor the cheque which is drawn within the limit. 4. Signature: The signature of the customers has to be compared with the specimen signature and if does not match then the banker is not liable to honour the cheque. 5. Endorsement: Endorsement, if any, appearing on the cheque must be proper and regular. When bank refuse to pay cheque In the following circumstances the bank may refuse payment of the customer cheque. (a) When the cheque is post dated. (b) When the amount in the account is insufficient. (c) When the cheque is drawn on another branch of the same bank. (d) When the cheque is of doubtful legality. (e) When the cheque is not properly presented

(f) When a cheque has become stale.

Q.2 Explain the significance of DICGC Act. Highlight the latest amendments to the act. Ans. Deposit Insurance and Credit Guarantee Corporation Act The functions of the DICGC are governed by the provisions of The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) and The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961 framed by the Reserve Bank in exercise of the powers conferred by sub-section (3) of Section 50 of the said Act. As no credit institution is participating in any of the credit guarantee schemes administered by the Corporation, presently it is not operating any of the schemes and deposit insurance remains the principal function of the Corporation. The concept of insuring deposits kept with banks received attention for the first time in the year 1948 after the banking crisis in Bengal. The issue came up for reconsideration in the year 1949, but was held in abeyance till the Reserve Bank set up adequate arrangements for inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee supported the concept. Serious thought to insuring deposits was, however, given by the Reserve Bank and the Central Government after the failure of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced in Parliament on August 21, 1961. After it was passed by Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962. Deposit Insurance Scheme was initially extended to all functioning commercial banks. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India. With the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, deposit insurance was extended to co-operative banks also and the Corporation was required to register eligible co-operative banks as insured banks under the provisions of Section 13 A of the DICGC Act. The Government of India, in consultation with the Reserve Bank, introduced a credit guarantee scheme in July 1960. The Reserve Bank was entrusted with the administration of the scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other credit institutions to small scale industries. The Reserve Bank operated the scheme up to March 31, 1981. The Reserve Bank also promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The credit guarantee schemes introduced by the Credit Guarantee Corporation of India Ltd., aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector as defined by the RBI.

With a view to integrating the functions of deposit insurance and credit guarantee, the two organizations, the DIC and the CGCI, were merged and the Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. The Deposit Insurance Act, 1961 was thoroughly amended and it was renamed as The Deposit Insurance and Credit Guarantee Corporation Act, 1961. With effect from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of Indias credit guarantee scheme. With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances. Insurance coverage Under the provisions of Section 16(1) of the DICGC Act, the insurance cover was originally limited to Rs.1,500/- only per depositor for deposits held by him in the same capacity and in the same right at all the branches of a bank taken together. However, the Act also empowers the Corporation to raise this limit with the prior approval of the Central Government. Accordingly, the insurance limit was enhanced from time to time as follows: Effective from May 1, 1993 July 1, 1980 January 1, 1976 April 1, 1970 January 1, 1968 Insurance Limit Rs. 1,00,000/Rs. 30,000/Rs. 20,000/Rs. 10,000/Rs. 5,000/-

Q.3 When a bank obtains a guarantee of a third party as a collateral security, what factors will it examine in it? Ans. Case Laws on Indemnities/Guarantees Responsibility of Paying/Collecting Banker

Vinitec Electronics Ltd vs HCL Infosystems Ltd. 2007 The Supreme Court dismissed the appeal of Vinitec Electronics Ltd against the Delhi High Court judgment in its dispute with HCL Infosystems Ltd. over the invocation of bank guarantee given by Vinitec to HCL. According to the agreement between the two companies, HCL had agreed to buy UPS systems from Vinitec. Later, disputes arose over the payment. Vinitec argued that HCL was not entitled to invoke the bank guarantee without paying the balance due. The Supreme Court emphasised that a bank guarantee must be honoured if there was no fraud or irretrievable injustice. In this case, there was neither, the court pointed out. Moreover, the arbitral tribunal was hearing the dispute over the bank

guarantee. Therefore, the court dismissed the appeal without expressing any opinion on the entitlement. U.P. Cooperative Federation vs Singh Consultants (AIR 1988 (1) SCC 174) In the case of U.P. Cooperative Federation vs Singh Consultants (AIR 1988 (1) SCC 174) held that a bank cannot be compelled to honour a bank guarantee given by it when it has knowledge of fraud committed either by the contractor or the beneficiary. If the bank concerned detects with a minimal investigation on the fraudulent action of the seller (the beneficiary), the payment under a bank guarantee could be refused. Moreover, the obligation of a bank on a guarantee issued by it on behalf of its customer, should not be extended to protect an unscrupulous seller /beneficiary who is responsible for the fraud. M/s. Escorts Ltd. vs M/s. Modern Insulators & Another AIR 1988 Delhi 345 In M/s. Escorts Ltd. vs M/s Modern Insulators & Another AIR 1988 Delhi 345, the Delhi HC held that banks in case of having any doubt over the fraudulent action of the beneficiary/creditor, the banks have to seek appropriate direction from courts. In case of any suspicion over the genuiness of the invocation of bank guaranteee, the banks should approach the court of law forthwith. State Bank of India versus Mula Sahakari Sakhar Kharkhana Ltd. 2006 The Supreme Court last week set aside a judgment of the Bombay High Court in a case, State Bank of India versus Mula Sahakari Sakhar Kharkhana Ltd. The cooperative sugar factory had a contract with Pentagon Engineering Ltd for setting up a paper factory from bagasse. The bank furnished a guarantee/indemnity for the deal. When disputes arose, the matter went to the High Court, which held that the deed was a bank guarantee and should be honoured as such. On appeal, the Supreme Court held that it was not an unconditional bank guarantee, but constituted a contract of indemnity.

Q.4 Highlight the main provisions of SARFAESI ? Ans. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks/Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: Securitisation. Asset Reconstruction. Enforcement of Security without the intervention of the Court. The Act empowers the Bank: To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.

To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. Any Security Interest created over Agricultural Land cannot be proceeded with. If on receipt of demand notice, the borrower makes any representation or raises any objection, authorised officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of such representation or objection. A borrower/guarantor aggrieved by the action of the Bank can file an appeal with Debt Recovery Tribunal (DRT) and then with Debt Recovery Appellate Tribunal (DRAT), but not with any civil court. The borrower/guarantor has to deposit 50% of the dues before an appeal with DRAT. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures: Take possession of the security. Sale or lease or assign the right over the security. Manage the same or appoint any person to manage the same.

Q.5 Outsourcing raises a variety of concerns such as operational, reputation and legal risk. Airtel extended into MOU with IBM for managing its back office operation. Detail the pros and cons of such array on SBI for offering mobile banking semi in partnership with Airtel. Ans. Tele-banking or telephone banking means the provision of certain banking services (such as account balance inquiry, funds transfer, and payment of bills) through telephone. Internet Banking Services is an additional delivery channel just like tele-banking, ATM with internet as the medium of operation. The major advantage of Internet banking is that the user can utilize the services from anywhere at any time. It simply requires a personal computer and an internet connection. The user connects to the bank's website through internet and log in to the services by using valid corporate-id, user-id and password. Legal issues Considering the legal position prevalent, there is an obligation on the part of banks not only to establish the identity but also to make enquiries about integrity and reputation of the prospective customer. Therefore, even though request for opening account can be accepted over Internet, accounts should be opened only after proper introduction and physical verification of the identity of the customer. From a legal perspective, security procedure adopted by banks for authenticating users needs to be recognized by law as a substitute for signature. In India, the

Information Technology Act, 2000, in Section 3(2) provides for a particular technology (viz., the asymmetric crypto system and hash function) as a means of authenticating electronic record. Any other method used by banks for authentication should be recognized as a source of legal risk. Under the present regime there is an obligation on banks to maintain secrecy and confidentiality of customers accounts. In the Internet banking scenario, the risk of banks not meeting the above obligation is high on account of several factors. Despite all reasonable precautions, banks may be exposed to enhanced risk of liability to customers on account of breach of secrecy, denial of service etc., because of hacking/ other technological failures. The banks should, therefore, institute adequate risk control measures to manage such risks. In Internet banking scenario there is very little scope for the banks to act on stoppayment instructions from the customers. Hence, banks should clearly notify to the customers the timeframe and the circumstances in which any stop-payment instructions could be accepted. The Consumer Protection Act, 1986 defines the rights of consumers in India and is applicable to banking services as well. Currently, the rights and liabilities of customers availing of Internet banking services are being determined by bilateral agreements between the banks and customers. Considering the banking practice and rights enjoyed by customers in traditional banking, banks liability to the customers on account of unauthorized transfer through hacking, denial of service on account of technological failure etc. needs to be assessed and banks providing Internet banking should insure themselves against such risks.

Q.6 You recently were in a tour to South East Asia & made extensive use of credit card for payments. Upon return of India got SMS message that Rs. 52000 debit has been made to your account for a transaction you did in Nepal. You are in a shock as you had never visited Nepal. How will you deal with such situation? Ans. Financial transaction cards are a means to access an existing account or a preapproved line of credit. The terms debit card and credit card are used for account access and line-of-credit access respectively. They may be used in the purchase of goods from merchants who have agreed to accept the card in exchange for goods or as a means to acquire cash. Financial transaction cards may be magnetic stripe cards, which may store information on magnetic media or smart cards which may process information as well as to store it. Financial Card Associations, as a corporate policy, maintain their own minimum security standards for financial organisations and contractors. RBI guidelines Physical Security: To protect against the destruction, disclosures or modifications of transaction card information during the processing stages, it has to be ensured to locate the local facility in an area regularly, patrolled by the public law enforcement services and by fire protection services. Further, it has also to be ensured that the local facility should be protected by an intrusion (detection) alarm system with auxiliary power.

Insider Abuse: To prevent fraudulent transactions being made through access to card information, the following steps have to be taken: (a) Store all media containing valid account information, including account numbers, PIN numbers, credit limits and account balances in an area limited to selected personnel. (b) Keep the production and issuing function for cards physically separate from the production and issuing function for PINs. Transportation of PINs: To prevent losses through the use of PINs having been intercepted by unauthorised persons, it has to be ensured to handle the PINs, Personal Identification Number (PIN) Management and Security, as appropriate and required. Personnel: To prevent the assignment of unsuitable personnel to credit card processing duty, it has to be ensured to conduct credit and criminal record checks for all employees handling embossed or unembossed cards. Audit: To ensure the integrity of control and audit information, it has to be ensured that the controls and audit logs are maintained for the printed plastic sheets, plates, embossing and encoding equipment, signature panel foil, holograms, magnetic tape, semi-finished and finished cards, simple cards, information on cardholder account numbers and equipment for disposal of waste. Enforcement: To ensure continued compliance with the security standards and the maintenance of the Audit Control Logs, it has to be ensured to appoint at least one person to serve as the prime security officer responsible for performing the security functions. Prevention of Counterfeit Card: To prevent information, disclosed on the sale of drafts from being used to produce counterfeit magnetic stripe cards, it has to be ensured to encode cryptographic check digits on the magnetic stripe and validate these digits on as many transactions as possible. To prevent the intercepted information, if any, from being used to produce counterfeit cards, it has to be ensured to use the physical Card Authentication Method (CAM) to validate the authenticity of cards.

Set- 2 Q.1 Explain the pros and cons of extending core banking facility ?

Ans. Concept of Core Banking Function Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices. Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the Corporate Banking division of the institution. Core banking basically is depositing and lending of money.

Fig. 13.1: Core Banking Solutions by ICICI Bank For Example, ICICI Bank underwent a phase of organic and inorganic growth, first by acquiring Bank of Madura followed by a reverse merger of the bank with its parent organization, ICICI Limited. The scalable and open systems based architecture, enabled Finacle to successfully manage the resultant increase in transaction levels from 400,000 transactions a day in 2000 to nearly 2.1 million by 2005 with an associated growth in peak volumes by 5.5 times. With Finacle, the bank currently has the ability to process 0.27 million cheques per day and manage 7000 concurrent users. Figure 13.1 shows the core banking solutions of ICICI bank. 1 Core banking solutions The revolution in the field of internet has brought in another banking product at the service of the customer called as Core Banking Solutions or Centralised Banking Solutions wherein the customers can transact business any banking branch of the country which is under the system. Core Banking Solutions is a process that is conducted at a centralized environment, which means that all the information is stored at the central server of the bank which is connected to the branches through net working system. This makes withdrawal of funds or deposit of funds or transaction of business anywhere in the country from a branch connected under CBS possible. For example, let us take two branches of XYZ bank one at Bangalore and the other at Guwahati. It is assumed that these branches are connected to the central server through CBS system. In this case, the customer of Guwahati branch can withdraw money from the Bangalore branch without any hassle. Any banking transaction of the Guwahati branch customer can be carried out at Bangalore in one go. 2 Features of the core banking system

The given below are the key features of core banking: 24X7 Banking Anywhere Banking Integration with strategic sectors Strengthening MIS, DSS and EIS Business Process Re-engineering (BPR) 3 Impact of core banking The Core banking systems have to satisfy the requirements of all the entities that form part of the eco-system of the bank. Bank Employee: Head office, regional offices, branches etc: Using Core banking system. With appropriate authority employee as given above can help customers do their financial transaction. Bank Management: Executives/managers at respective locations, head office, regional offices, branches etc. can obtain the financial position from core banking systems related the respective sphere of banking operations and thus help pinpoint potential problems so as to avoid crises. Bank Customers: can operate any of their accounts from any branch or preferred delivery channel and have access to his funds any time 24 hours a day. Bank Auditors: ones accounts audited, they operate the same year on year thus enabling auditors to focus more on systems and procedures at delivery channels like branches, call center etc. Bank Regulators: core banking systems produce the required reports for regulatory bodies like the central bank, financial statement, asset and liability reports, nonperforming assets reports, large currency transaction reports etc. are all produced by either the deposits, or the loan or a combination of deposit, loan and general ledger system. Bank Shareholders: core banking provides the desired return to shareholders from banking operations. Trends overtime on such data informs shareholders about how the banks is doing and help take timely action to accelerate or improve performance. Q.2 Distinguish between secured and unsecured advance Ans. Advances against goods are allowed to traders for their trading activities, to manufacturers and producers for their requirements of raw materials etc and also to enable them to sell their products at better prices. The account is to facilitate the borrower to hold on to the goods for a short period, by creating a pledge in favour of the Bank. This is a type of account where the credit for a specified period of time, generally for one year and release of goods are allowed any number of times during the currency of the limit, within the limit/Drawing power. This limit cannot be allowed to be operated by the borrower by issuance of cheques or by deposit of cash and other instruments for collection.

Advances against goods are allowed on the basis of pledge or hypothecation of goods depending upon the credit worthiness and the requirements of the borrower, keeping in mind that the security by way of pledge, where possible and practical is always preferable to hypothecation. Operations in hypothecation accounts are allowed on submission of stocks statements by the borrowers. The manager has to ensure that: (a) Stocks hypothecated are as per the terms of sanction; (b) Valuation is based on the guidelines of the bank; (c) The banks name plates reading as under is displayed; (d) Facility is allowed well within the drawing power; (e) Value of security-margin relevant to the limit sanctioned. RBI guidelines In addition to the safeguards mentioned in the previous paragraphs, the RBI has also advised the following safeguards that may be observed while allowing cash credit advances: 1. Godowns in which goods pledged to the bank are kept should be properly secured under joint custody with locks made by well known manufacturers with the bank's name engraved thereon. The bank's name plates/boards should be invariably displayed at the shops/ godowns where the stocks hypothecated to it are stored. As even nameplates/boards facilitate removal/replacement, more enduring arrangements like painting/engraving clearly on the godowns/premises should be considered. 2. Periodical stock statements (in terms of the sanction) should be obtained from the borrower in respect of hypothecated goods and scrutinised. Surprise inspection of stocks hypothecated should be conducted at irregular intervals. The stock statements should be compared with balance sheet figures. 3. Meticulous verification of the borrower's title to goods pledged/ hypothecated and their quality/quantity should be done periodically on regular basis. 4. Adequate insurance cover should be taken for the hypothecated/ pledged goods. The insurance should invariably be obtained with Bank Clause. 5. Controlling Offices should obtain a monthly statement from the branches indicating that periodical stock statements are received and the hypothecated/pledged stocks are verified by the branch officials, commenting on their quality, turnover, value etc. Q.3 Explain the procedure for re-dressal of grievances under Banking Ombudsman Scheme ? Ans. Banking Ombudsman The Banking Ombudsman Scheme, 2006 offers you recourse for resolution of:

your complaints, by the Banking Ombudsman, against your bank, in respect of such services of the bank which are stipulated under the Scheme; and resolution of claim of the bank against you, by the Banking Ombudsman (as an arbitrator), provided that the value of the claim in such dispute does not exceed Rs.10 lakhs; without affecting your right to go to court, in case you are not satisfied with the Award of the Banking Ombudsman, under the Scheme. Under the Scheme, the Banking Ombudsman assumes jurisdiction on receipt of complaints against a bank alleging deficiency in banking service for consideration and resolution of such complaints. As an arbitrator, the Banking Ombudsman assumes jurisdiction on receipt of reference of a dispute (between a bank and its constituents or between a bank and another bank) with mutual consent of both the parties, for arbitration. Banking Ombudsman is competent to receive and consider complaints of following nature: non-payment/inordinate delay in the payment or collection of cheques, drafts, bills, etc; non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof; non-issue of drafts to customers and others; non-adherence to prescribed working hours by branches; failure to honour guarantee/letter of credit commitments by banks; claims in respect of unauthorized or fraudulent withdrawals from deposit accounts, or fraudulent encashment of a cheque or a bank draft, etc; complaints pertaining to the operations in any savings, current or any other account maintained with a bank, such as delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits; complaints from exporters in India such as delays in receipt of export proceeds, handling of export bills, collection of bills, etc. provided the said complaints pertain to the bank's operations in India; complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank-related matters; complaints pertaining to refusal of open deposit accounts without any valid reason for refusal and any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking service.

Q.4 You are a customer of State Bank of Mysore. Nearby your house you can have an ATM of South India Bank [SIB] & you find it convenient to utilize SIBs ATM.

However SBM is charging service charges for transaction you make through SIBs ATM. Offer your views from marketing perspective Ans. Automated Teller Machine (ATM) Automated Teller Machines (ATM) are those devices that allow a customer to check account balances, make cash withdrawals, make deposits, pay bills or perform other functions which are generally associated with the tellers. These devices may be located inside an organisations buildings, attached to the outside of any such buildings or be away from the organisations office. Ever since its introduction in the late 1960s, ATM cards are rapidly gaining popularity. The first ATM was installed in India by HSBC in 1987, 20 years after the cash dispensers made their first appearance in the world. Thanks to liberalization and the reduction in ATM cost due to fall in customs duty, banks are able to install more ATMs in order to render efficient customer service. Yet, the number of ATMs in India today is not more than 1% of the number of ATMs in the world. With the pace of change sweeping Indian banking scene, the world ATM survey has ranked India as No. 1 among the top 10 countries ranked according to the percentage growth in installation. ATM cards can now be used as debit cards and credit cards. The card, popularly known as a bank card, enables a customer to perform banking tasks at ATMs and make point-of-sale transactions. RBI guidelines Precautions have to be taken to reduce robbery and vandalism to the machines e.g. through installation of CCTV etc. The manufacturers of these devices and the ATM network providers supply general public security guidelines for the use of ATMs. These guidelines should be kept in view while deciding on the location of ATM and use thereof. For user identification To provide assurance to the authorised users of the ATMs, the following steps have to be taken: (a) Require the use of Personal Identification Numbers (PINs) to activate the ATM. (b) Educate the users to understand that the maintenance of the secrecy of the PIN is their responsibility. To prevent unauthorized transactions, caused by guessing the PIN of a card being used by an unauthorized person, it has to be ensured to limit the number of attempts for the entry of a PIN to three attempts only. Further, the mechanism has to be such that the card used in such an attempt should be captured, so that the owner of such a card could be contacted to ascertain the nature of the problem. Authenticity of information To prevent the unauthorized modification of the information transmitted to and from the ATMs, it has to be ensured to use a Message Authentication Code (MAC) for each such transmission.

To prevent unauthorized modifications, destruction or disclosures of information residing in an ATM, it has be ensured that the physical access controls to the interior of the ATMs are consistent with the physical protection controls to the containers of currency. Disclosure of information To prevent the unauthorized use of ATMs or the Point of Sale Terminals through the unauthorized disclosure of information, the following steps should be taken: (a) Encrypt within the ATM or to use smart card for introducing any PIN into the ATM prior to transmission. (b) Consider encrypting all information transmitted from the ATM. (c) Manage PINs in accordance with relevant International standards. Fraud prevention To detect and prevent fraudulent use of the ATMs such as the kitting schemes, empty envelope deposits and disallowed transactions, the following steps have to be taken: (a) Limit the number of transactions and the amount of funds which can be withdrawn per day per account. (b) Balance the ATM under dual control daily. (c) Install video cameras at the site for capturing the images of all the users of the ATM. (d) Maintain the operation of the ATMs on-line i.e. the ATMs should have the ability to check the account balances prior to the completion of the transaction. If on-line operation is not possible, it has to be ensured to establish more stringent card issuance requirements which would be used for on-line operation of the ATM. Maintenance and service To prevent unauthorized access to information during the maintenance and the servicing of the ATMs, the following steps have to be taken: (a) ATMs as placed out of service to customers, prior to any maintenance being performed. (b) Establish dual control procedures for the servicing of the ATMs involving opening of the vault Q.5 Explain the RBI guidelines for advances to priority sector and credit guarantee fund scheme? Ans. RBI Guidelines for Priority Sector Lending Financing to priority sector is done through direct and indirect methods. These are as follows: 1 Finance to agriculture sector

Direct Agricultural Advances: This denotes advances given by banks directly to farmers for agricultural purposes. These include short term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank. The sub-target for direct agriculture advances is 13.5% of the NBC. Indirect Finance to Agriculture: Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other agencies. Sub-target for indirect agriculture advances is 4.5% of NBC. Important items included under indirect finance to agriculture are as under: 1. Credit for financing the distribution of fertilisers, pesticides, seeds, etc. 2. Loans up to Rs. 40 lakhs granted for financing distribution of inputs for the allied activities such as cattle feed, poultry feed, etc. 3. Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energizing their wells. 4. Loans to State Electricity Boards for Systems Improvement Scheme under Special Project Agriculture (SI-SPA). 5. Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained with NABARD. 6. Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for financing pump-set energisation programme in rural and semi-urban areas and also for financing System Improvement Programme (SI-SPA). 2 Finance to small scale industries Indirect finance in the small scale industrial sector will include credit to: 1. Agencies involved in assisting the decentralized sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries. 2. Government sponsored corporation/organisations providing funds to the weaker sections in the priority sector. 3. Advances to handloom co-operatives. 4. Term finance/loans in the form of lines of credit made available to State Industrial Development Corporation/State Financial Corporations for financing SSIs. 5. Credit provided by banks to KVIC under the scheme for provision of credit to KVIC by consortium of banks for lending to viable Khadi and Village Industrial Units. 6. Funds provided by banks to SIDBI/SFCs by way of rediscounting of bills of SSI earlier discounted by the SIDBI/SFCs. 7. Subscription to bonds issued by NABARD with the objective of financing exclusively non-farm sector. However, the investments made by banks on or after April 1, 2007 in such bonds issued by NABARD, shall not be eligible for classification under priority sector lending.

8. Financing of NBFCs or other intermediaries for on-lending to the tiny sector. All new loans granted by banks to NBFCs and other intermediaries for on-lending to SSI sector with effect from November 11, 2003. 9. Deposits placed with SIDBI by Foreign Banks in fulfillment of shortfall in attaining priority sector targets.

Q.6 Outsourcing raises a variety of concerns such as operational, reputation and legal risk. Airtel extended into MOU with IBM for managing its back office operation. Detail the pros and cons of suc array on SBI for offering mobile banking semi in partnership with Airtel. Ans. Tele-banking or telephone banking means the provision of certain banking services (such as account balance inquiry, funds transfer, and payment of bills) through telephone. Internet Banking Services is an additional delivery channel just like tele-banking, ATM with internet as the medium of operation. The major advantage of Internet banking is that the user can utilize the services from anywhere at any time. It simply requires a personal computer and an internet connection. The user connects to the bank's website through internet and log in to the services by using valid corporate-id, user-id and password. Legal issues Considering the legal position prevalent, there is an obligation on the part of banks not only to establish the identity but also to make enquiries about integrity and reputation of the prospective customer. Therefore, even though request for opening account can be accepted over Internet, accounts should be opened only after proper introduction and physical verification of the identity of the customer. From a legal perspective, security procedure adopted by banks for authenticating users needs to be recognized by law as a substitute for signature. In India, the Information Technology Act, 2000, in Section 3(2) provides for a particular technology (viz., the asymmetric crypto system and hash function) as a means of authenticating electronic record. Any other method used by banks for authentication should be recognized as a source of legal risk. Under the present regime there is an obligation on banks to maintain secrecy and confidentiality of customers accounts. In the Internet banking scenario, the risk of banks not meeting the above obligation is high on account of several factors. Despite all reasonable precautions, banks may be exposed to enhanced risk of liability to customers on account of breach of secrecy, denial of service etc., because of hacking/ other technological failures. The banks should, therefore, institute adequate risk control measures to manage such risks. In Internet banking scenario there is very little scope for the banks to act on stoppayment instructions from the customers. Hence, banks should clearly notify to the customers the timeframe and the circumstances in which any stop-payment instructions could be accepted.

The Consumer Protection Act, 1986 defines the rights of consumers in India and is applicable to banking services as well. Currently, the rights and liabilities of customers availing of Internet banking services are being determined by bilateral agreements between the banks and customers. Considering the banking practice and rights enjoyed by customers in traditional banking, banks liability to the customers on account of unauthorized transfer through hacking, denial of service on account of technological failure etc. needs to be assessed and banks providing Internet banking should insure themselves against such risks.