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Q1) Explain the meaning and Importance of financial services?

Ans) Financial system are of Crucial significant to capital formation that adequate Capital formation
that adequate Capital formation is necessary for speedy economic development of country because the
main function of these financial system is mobilizing the saving and there by stimulate capital
formation thus we can say that the process of capital formation involves saving and investment
The relationship between saving and investments judges the rate of capital formation in an
economy because saving need transfer process to be converted in investments and this process or
service is performed by financial intermediaries such as Banks, Insurance Companies, Mutual Funds,
Non-Bank finance companies, Merchant bankers etc..
These financial intermediaries play a significant role in the organization of financial system.
They play a vital role in economic development through capital formation. These financial
intermediaries come in between ultimate borrowers and lenders in the saving investment process.


i.) Commercial Banks: - These collects saving primarily in the form of deposits and traditionally
finance working capital requirements. Thus these Commercial Banks pool out saving from the small
savers and lend to the needy investors. But in course of time these commercial bank have also entered
into term lending and investment. In capital market is also common in these days by the Commercial

ii.) Mutual Funds: - A Mutual Funds is a special type of investments institution. It pools the savings
of relatively small investors in a well diversified port folio of investments. Mutual funds issue
securities known as units to the investors which are known as unit-holders. The profits or losses are
shared by the investors in proportion to their investment. A mutual fund is set up in the form of a trust
which includes Sponsor-Promoter of the company, trustee’s holds its property for the benefit of the
unit holders and an asset management company which manages the funds by making investment in
various securities.

iii.) Insurance Organisation: - Insurance Organisation or companies essentially invests the savings
of their policy holders and in exchange promise them to provide benefits at a later stage or on maturity
of the insurance policy. They differ from Mutual Funds because the main business of Mutual Funds is
that of investments are securities incidentally but where as the insurance organisaions are concerned
other than the benefits they provide protection against risks.
Economic development of country depends upon its financial system. It is the essential
segments of the economy which deals with financial services. If these services are efficient than the
system will built a powerful economy thus the financial services play a significant role. The
advantages of financial services are as follows:-

1) Advantages to the Borrower:-

a) Borrowers are able to get adequate funds for investments.
b) If the financial services are efficient than the cost of borrowings will be less.
c) Financial services will help the borrower to enjoy the benefits of specialisation.

2) Advantages to Economy: -
a) These services are responsible too built strong financial system.
b) It promotes saves and investors.
c) It directly contributes towards Economic development through capital formation.

Q2) Explain the structure of Indian financial system?

Ans) Finance is a facility that built the Gap between deficit sector to surplus sector by shifting funds.
The financial service is an activity relating to bridging gap with various means. Thus the financial
services ca be defined as for the purpose of investments.
Every country aiming at its progress depends on the efficiency of this economic system which
depends upon financial system. The financial system is the network of institutions and individuals
who deal in financial claims to various instruments.

Definition of Indian Financial System

“It is a set of institutions instruments and markets which fosters saving and channels them to
their most efficient use”.
- H.R. Machiraju

Structure of Indian Financial System


Financial Market Financial Institution Financial Instrument Financial Services

Money Banking Institution Long Term Banking

Market Investment Services

Capital Non- Banking Short Term Non-Banking

Market Institution Investments Services

Foreign Other

i) Financial Market: - It is a system through which funds are transfered from surplus sector to the
deficit sector. On the basis of the duration of financial Assets and nature of product money market can
be classified into 3 types:

a) Money Market: - It is the institutional arrangement of borrowing and.

lending into 2 sectors i.e. organised sector headed by RBI and unorganized
sector no way related with RBI. Further depending upon the type of
instrument used money is divided into various sub market

b) Capital Market: - It deals with long term lending’s and borrowings. It is a

market for long term instruments such as shares, debentures and bonds. It
also deal with term loans. This market is also dividend into 2 types:-
a) Primary or New Issue Market
b) Secondary Market of Stock exchange.

c) Foreign Exchange market: - It deals with foreign exchange. It is a market

. where the exchanging of currencies will takes places. It the market where
currencies of different country are purchased and sold.

ii) Financial Institution: - It is classified into categories:-

Banking Institution:- It includes commercial banks, private bank and

foreign banks are operating in India. There are 27 Commercial Banks of
Public Sector further, we have Development Banks (ICICI, IDBI)
Agriculture Bank (RRB, Cooperative Banks, NABARD).

b) Non-Banking Institution: - These are established to mobilise saving in

different modes. These institutions do not offer banking services. Such as .
accepting deposit and Lending Loans. For example LIC, UTI, GIC.

iii) Financial Instruments: - It includes through these instruments financial

Institution mobilise saving. These are of 2 type’s i.e.

a) Long Term: - Shares, Debenture, Mutual Funds, Term Loans.

b) Short Term: - Call Loan (money market), Promissory Notes, Bills of exchange etc.

iv) Financial Services: -

a) Banking service provided by Commercial banks and Development banks.
Accepting Deposits and lending loans.

b) Non-Banking Services: - These services are provided by Non-Banking

Companies such as LIC and GIC. They accept saving in different modes and
mobiles to various channels of investments.

c) Other Services: - In modern days banks are providing various new services
such as ATM, Credit Cards, Debit Cards, Electronic Transfer of Funds(ETF),
Internet Banking, E-Banking, off sure Banking.

Q3) Define Bank and Explain the function of Commercial Banks?

Ans) A Bank is a financial Institution whose main business is accepting deposits and lending loans. A
Banker is a dealer of money and credit. Banking is an evolutionary concept i.e. expanding its network
of operations.
According to Banking revolutions Act 1949, the word BANKING has been defined as
“Accepting for the purpose of lending and investment of deposits of money from the public repayable
on demand or otherwise.

Functions of Commercial Banks

Globalisation of transformed commercial banks into super markets of financial services. These
commercial banks offer a variety of functions which are shown with the help of the following chart.
Functions of Commercial Banks

Primary Function Secondary Function

Accepting Deposits Lending Loans Agency General Credit

Function Utility Creation
Fixed Deposits

Current Account
Deposits Cash Credit

Saving Bank Term Loans


Recurring Deposits Discounting Bill

I. Primary Functions
These are further classified into 2 categories
i) Accepting Deposits: - Deposits are the capital of banker. Therefore, it
is first Primary function of the banker. He accepts deposits from those
who can save and lend it to the needy borrowers. The size of operation
of every bank is determined by size and nature of Deposits. To attract
the saving from all sort (categories) of individuals, Commercial banks
accepts various types of deposits account they are:
a) Fixed Deposits
b) Current Deposits
c) Saving Bank account
d) Recurring Deposits

ii) Lending Loans: - The 2nd important function of the commercial bank is
advancing loans. Bank accept deposits to lend it at higher rate of
interest. Every Commercial Bank keep the rate of interest on its
deposit at lower level or less that what he charges on its loans which is
as NIM (Net Interest Margin). The banker advances different types of
loans to the individual and firms. They are: -
a) Overdraft
b) Cash Credit
c) Term Loan
d) Discounting Bill

II) Secondary Functions

i) Agency functions: Bankers act as an agent to the customers it
means he performs certain functions on behalf of the customers such
services are called Agency Services.
a) Bank pay electricity bill, water bill, Insurance Premium etc.
b) They guide the customer in Task Planning.
c) Bank provides safety locker facility.
d) Pay salaries of customers employees.

ii) General Utility Services: - Bankers are the past of society. They offer :
several services to general public they are:-
a) It provides cheap remittance (transfer) facilities.
b) The banks issue traveler cheque for safe traveling to its customers.
c) Banks accepts and collects foreign Bills of Exchanges.
Other than these services the bankers also provide ATM services, Internet Banking,
Electronic fund transfer (EFT), E-Banking to provide quick and proper services to its customers.

iii) Credit Creation: - It is a unique function of Commercial Banks. When

a bank advances loan to its customer if doesn’t lend cash but opens an
account in the borrowers name and credits the amount of loan to that
account. Thus, whenever a bank grants loan, it creates an equal
amount of bank deposits. Creation of deposits is called Credit Creation.
In simple words we can define Credit creation as Multiple expansion of.
deposits. Creation of such deposits will results an increase in the stock
deposits. Creation of such deposits will results an increase in the stock
of money in an economy.

Q4) Explain the function of Reserve Bank of India (RBI)?

Ans) The RBI is the Central Bank of our country. It is the open Institution of India Financial and
monetary system.
RBI came into existence on 1 st April, 1935 as per the RBI act 1935. But the bank was
nationalised by the government after Independence. It became the public sector bank from 1st January,
1949. Thus, RBI was established as per the Act 1935 and empowerment took place in banking
regulation Act 1949.
RBI has 4 local boards basically in North, South, East and West – Delhi, Chennai, Calcutta, and

Functions of Reserve Bank of India (RBI)

i) Monopoly in Note Issue: - RBI enjoys monopoly of Notes issue since its establishment. The banks
issue the currency notes of all denominations. Except coins which are issued by the ministry of
finance in the government of India. But these coins are put into circulation only through the RBI.
The Bank (RBI) issue currencies to a minimum reserve system under which Rs 20\- crores
worth of Gold and foreign exchange reserve should be kept out off these 200 crores, 115 crores values
should be in the form of Gold only.
To undertake this function RBI established 2 department i.e.
a) Issue Department
b) Banking department

a) Issue Department: - issue department is involved in issued of currencies and banking manager
currencies circulation.

ii) Banker to the Government: - RBI acts as a banker to the central and state Government. As a
banker it provides all the services like a commercial bank to these Governments.
It accepts deposits of the Government and allows them to withdrawal of cheques. It makes
payments and collect receipts on behalf of the government. It also provide temporary advances for
maximum period of 3 months to these governments. It is known as “Ways” and “Means advances”. It
is also the financial advisor to the central and states. It also helps them in formulation of financial

iii) Bankers bank: - RBI is the apex financial institution acts as banker to other bank. RBI accepts
deposits, maintains cash reserves and lends loans to all the banks operating under its preview. It is a
bankers bank in the following contacts:
Its provides short-term loans to the banks for 3 months against (recurity) i.e. eligible securities.
It is known as lenders of last resort in the times of financial emergency. It also gives loans at
concessional rate of Interest for a specific purpose. It also offers refinance facilities to all the eligible

iv) Regulatory and Supervisor Function: - The most significant provision of the
Banking regulation act is supervision and regulation of banks. Section 35 of the act say’s that RBI can
inspect any branch of Indian Bank located in or outside the country. Further, it issued licensing for the
banks and can establish new branches to maintain regional balance in the country. It also arranges for
training colleges to the banks employees and officers.

v) Controller of Credit: - RBI is an important controller of credit in our credit. The credit created by
bank leads to inflation or depression and disturbs the smooth functioning of the economy. Therefore,
to regulate credit RBI uses qualitative as well as Quantitative credit control measures. They are:
a) Bank rate policy
b) Variable Reserve Ratio [CRR]
c) Open market operations
d) Moral suasion
e) Direct action
f) Publicity

Q5) Define Insurance? What are its principles?

Ans) The term Insurance originated form the word insure which means assurance of compensation
against loss. It is a contract between insurer and Insured.
The origin of insurance can be traced in India long back. The first insurance company was
established by Europeans in our country i.e. Oriental Life Insurance Company. After independence
government. Introduced the act known as Life Insurance Corporation act in 1956 and LIC was created
on 1st September, 1956.

Definition of Insurance
Insurance is a contract between 2 parties where by 1 party called Insurer agrees to pay the other
party (insured) a certain sum of money on the happening of a specified loss.

Terms of Insurance
Certain term are used very often in Insurance business they are:
a) Insurer: - He is the risk bearer, It is the party who agrees to pay money on the happening of an
b) Insured: - The party who seeks protection against the risk by paying premium.
c) Premium: - It is the money is paid by the Insured to the Insurer.
d) Policy: - It is the official document issued by the insurer to the Insured.

Principles of Insurance
i) Insurance is a contract
ii) Utmost good faith
iii) Indemnity
iv) Insurable Interest
v) Proximate cause
vi) Risk must Attached
vii) Contribution
viii) Subrogation
ix) Period of Insurance
x) Insurance against a specified risk.

i) Insurance is a contract: - It is a contract between the Insurer and Insured. Therefore, it is a

general contract governed by the basic principles of law of contract. In this contract offer is the
proposal and acceptance is the issue of the policy and consideration is payment of premium
against loss.

ii) Utmost good faith: - As we know insurance is a contract to make if valid and effective the
insured should disclosed facts about every aspect, Good faith refers to absence of fraud and
insurer will estimate the risk and decide the premium on the basis of the information given by
the insured. Therefore and insured should give all factual required information to the insurer.

iii) Indemnity: - it means, in case of loss the insured shell be paid the actual amount of loss not
exceeding the amount of the policy. Further, it refers to make good to the loss. It should be
equal to the value of the policy. The contract of indemnity applies for Non-life Insurance. The
significance of this principle is that the insured is not suppose to make any profit out off the
loss incurred.
iv) Insurable Interest: - It is an important component of Insurance. It is the first most important
principle of insurance. The insurance contract will be valid only when there is insurable interest
among the parties involved in it. If it is not present then the contract become invalid which
cannot be enforced in the court of law. Hence the person getting insurance policy must have
insurable interest in the property of life insured.

v) Proximate cause: - It is derived from the Latin word cause proxima. It means deciding the
actual cause of loss when a number of causes have contributed for the occurrence of loss.

vi) Risk must attached: - The contract of insurance can be enforced only if the risk is attached.
The insurer receives the premium for the risk coverage. If by mistake or by negligence it does
not cover risk than the insurer must return thee premium.

vii) Contribution: - This principle applies in case of double insurance. In this case the total loss
suffered by the insured contributed by all the insurers in the ratio value of their policies. The
principle insures equitable distribution of the losses among the insurers.

viii) Subrogation: - The principle of subrogation applies in case of general insurance. The insurer
after making payment to the insured for the loss entitled to place of insured. In the other word
after paying the compensation the insurer will take the place of insure and fight with the 3rd
party to recover the loss.

ix) Period of Insurance: - Usually general insurance is for a certain period. Usually it will be 1
year. The contract comes to end after the expiry of that period. The contract of life insurance is
the continuing contract with a condition that the premium is to be paid at regular intervals
otherwise the policy lapses.

x) Insurance against a specified risk: - The concept of insurance originated and different from
the idea of Risk coverage. Therefore risk is base on which insurance is built.
Q6) Explain the kinds of Insurance?
Ans) There are different kinds of Insurance. Depending upon the types of risk insure. We can classify
them into 2 groups i.e.


Life Insurance General Insurance

Marine Insurance

Fire Insurance

Miscellaneous (or) Other


i) Life Insurance: - It is governed by the LIC act 1956. It is contract in which the insurer, in
consideration of payment of premium compensate to a person on death or on the expiry of
certain period which ever is earlier.

ii) General Insurance: - General Insurance covers a wide range of services. Section 6(b) of the
insurance act 1938 defines General Insurance. It includes all the risks except life. Classified 3.

a) Marine Insurance: - It is a contract where by the insurer undertakes to compensate for the
marine losses. Section 13 (a) of the Insurance act define Marine Insurance.
b) Fire Insurance: - Fire Insurance is a contract where by the insure undertakes in consideration
of the premium paid to make good any loss cause by the fire during a specific period. The
specific amount to be assured or claimed in case of loss should be mentioned or specified in the
c) Miscellaneous insurance:- Health, Motor, Deposit and Postal Insurance comes under this
category. Health insurance provides for the payment of benefits to cover the loss due to
sickness. Motor Insurance provides the benefits in case of, damage or loss due to accident.
Deposit insurance provides Insurance against bank deposit. This scheme was introduced by our
government in 1962. Postal insurance was introduced in 2006 by postal department of India.
This scheme provides insurance to postal saving account holders for accidental death.

Q7) Explain Insurance sector reforms in India

Ans) Insurance sector has been open up for competition from Indian Private Insurance companies with
the enactment of Insurance regulatory and development authority act 1999. As per the provision of the
act Insurance regulatory and development authority was established on 19th April, 2000. To protect the
interest holders (policy holders) and to regulate promote and ensure orderly, growth of the Insurance
The authority has notified 27 regulations on various issues which include registration of
insurers, regulation of Insurance agents, Re-insurance, solvency margin investment and accounting
procedure, protection of policy holder interest etc. The authority has its head quarters in Hyderabad.
The Insurance sector reforms can be classified into 2 categories i.e.
i) Reforms during 1990-2000
ii) Reforms during 2001-2008

i) Reforms during 1990-2000: - A committee was set up o reforms in the insurance sector during
1993. It was headed by RBI Governor R.N.Malhotra. Therefore, the committee was setup to evaluate
the Indian Insurance sector and make the necessary recommendation. These committees submitted
were discussed below;

a) Customer Services: - The committee recommended that LIC should be interest on delays in
payments beyond 30 days. It emphasis more to improve the customer services by updating of
technology. It also recommended to improve the coverage of insurance Industry.
b) Structure: - The committee recommended that all the insurance companies should be given
grater freedom to operate and government stake in the insurance companies to be brought down
to 50%.
c) Competition: - The committee recommended that no company should deal in both Life and
General Insurance through a single entity. Priivate company with a minimum paid up capital of
Rupees Ten Billion should be allowed to enter the industry.
d) Investment: - The mandatory investment of LIC in government securities to be reduced from
75% - 50%. Thus, the Malhotra Committee recommended for the above recommendations
which where mostly implemented as reforms in the Indian Insurance Sector.
During this act only regulatory and development authorities was established and
total more or less 29 regulations where implemented in the insurance sector. In the area such as
Licensing of agents, registration of the insurers, protection of policy holders, Re-insurance,
obligation to rural sectors etc.

ii) Reforms during 2001-2008: - The Government introduces the insurance laws
bill as a part of insurance reforms in 2004, i.e.
a) Increase the cap on foreign Investment in Private company from 26% - 49%.
b) It permits the foreign insurance to setup branches in India with the help of Indian promoters of
Insurance Company.
c) It fix the minimum investment limit for Health Insurance company i.e. Rs 50 crores to
encourage companies with smaller capita to launch health insurance business
d) It permits the State owned General Insurance Company to go public and raise funds from the
capital markets.


1Q. Explain the different types of banking systems?
Ans. A bank is an institution which deals with money and credit. It accepts the deposits
from public and makes the funds available to those who need them. A modern bank performs a
variety of functions and they purview is different from each other. Depending upon their functions,
size etc.. we can classify the banking system into the following categories :

1. Unit banking system

2. Branch banking system
3. Group banking system
4. Chain banking system
5. Deposit banking system
6. Investment banking system
7. Correspondent banking system
8. Mixed banking system

Different countries adopt different types of banking system depending upon their economic structure.


Under this type of banking system an individual bank operates through an single
office. The size and area of operation is much smaller than in other types of banking system. It was
originated and grew in USA. The main reason for the development of unit banking system in
America is the fear of emergence of monopoly in banking business.
In this type of banking system a big bank as a single owner ship operates through a
network of branches spread all over the country. This type of banking system was initially developed
in England. Later on it become popular in other countries like Canada, India and Australia etc.


This banking system refers to the system of banking in which two or more banks are
directly controlled by a corporation or an association or a business trust. The holding company may
or may not be a banking company. In this system each bank maintains its separate identity. Its
business is managed by the holding company. This type of banking system was popular in USA.
It is another form of group of banking. It refers to the system in which two or more
banks are brought under common control by a device other than the holiday company. They have
common management and policies. The management may consist of group of persons through
stock ownership or otherwise.
Commercial banks are the best examples for deposit banking. Deposit bank will have
to maintain liquidity i.e. enough cash reserve to meet withdrawals. Deposits bank are those banks
which accept deposits of short term and loans will also be for short term periods. The business in
this type of banking system is less risky. The loans provided by deposit bank are in the form of
overdraft, cash credit and discounting bills of exchange.
These banks are those financial institutions which provide long term finance to
business. They invest in capital market i.e. stocks & shares of different companies. These banks act
as intermediaries between savers and investors. These investment bankers are classified into
various categories such as underwriters and retailers. An investment banker performs highly useful
services to the co-operative bodies by supplying long term capitals. They also provide services to
small investors. They mobilize the investment through shares, stocks and mutual funds.
It is another important type of banking system. A correspondent bank is one which
connects the two banks under unit banking system. The best examples of correspondent bank in
India are RBI or central bank.


If the banks provide both short term and long term loans to the industries it is called as
mixed banking system. German banks are the best examples of this type of banking system. These
banks accept both short term and long term deposits. Therefore they are able to provide both short
and long term loans required by the industry. The banks were facilitated to invest the surplus funds
for the industrial development of the country in this type of banking system.


ANS. Under unit banking system an individual bank operates through a single office. The
size and area of an operation of a unit bank is smaller as compared to that of a branch banking
system. Its advantages are as follows:
Unit banking system is a localized banking. The bank has specialized knowledge of
the local problem and serve the requirements of the local people, because the fund of the locality are
utilized for local development.
In this banking system there is no transfer of resources from back word areas to the
big industrial and commercial centers. It has to make investments in those areas only where ever it
exists. Thus, promotes regional balances.
The management and supervision of a unit bank is much easier and more effective
due to its smaller size.
Unit banks have full knowledge and greater involvement in the local problems. They
are in a position to take initiative to tackle the local problem through financial help.
Unit banking system brings a small scale independent bank which can maintain
personal contact with the customers for efficient banking.

The banks under unit banking system are highly localized without any branches. So,
there us no possibility of diverting the risk.
Another disadvantages of unit banking system is lack of specialization. Because of
their small size unit banks are not able to introduce division of labors and specialization. Further
these banks cannot appoint or employee highly trained & specialized staff.
Unit banks are local in nature. Therefore pressure and interference generally
disturb their normal functions.
Limited resources of the unit bank restrict their ability to face the financial prices.
These banks will not have any ability to withdraw in sudden crises or rush of withdrawals.
Under unit banking system easy and cheap remittance of funds and deposits
doesn’t exists. Every bank maintains its own rate of interest. Therefore interest rate varies
considerable from place to place or bank to bank.


ANS. The branch system means each commercial bank will be a very large institution.
The bank will have a number of branches spreads all over the country and even outside the country.
Thus, we can say that branch banking system which carries on business through a number of
branch offices.

The advantages of branch banking system are as follows:
Under branch banking system the bank with a number of branches posses’ huge
financial resources and enjoy the benefits of large scale operations. In this type of banking system
highly trained & experienced staff is appointed which increases the efficiency of the management.
Another advantage of branch banking system is lesser risk and greater capacity to
meet risks. Since there is a wide geographical spreading and diversification of risk is possible in this
system. Further the possibilities of failures are very less.
Under this system a particular branch can operate without keeping large amount of
ideal resources. The funds can be easily transferred from one branch to another.
In this type of banking system as branches are spread all over the country. So it is
easier and cheaper to transfer the funds.
Under branch banking system mobility of capital increases as a result of equality in
the rate of interests. The funds can be transferred from the excess branches to the shortage
branches. Consequently uniformity in the rate of interest prevails in the whole area.
The following are the important disadvantages of branch banking system.
Under branch banking system a number of difficulties regarding management and
supervision and control may arise. Banks get concentrated at the head office. The branch manager
has to seek permission from the head office on each and every matter. This results in unnecessary
delay in banking business.

In this type of banking system the branch manager generally lacks of initiatives on
all the matters. He cannot take independent decisions on every matter. He has to wait for the
clearance signal from head office.
Under this system the financial resources collected in the rural areas and back
word regions are transferred to big industrial sectors. This encourages regional imbalance in the
Branch banking encourages monopolistic tendencies in the banking system of a
country. It may lead to the concentration of resources in few hands. A few banks may dominate the
whole banking system in the country.
In this type of banking system weak and unprofitable branches continue to operate
under the protection of large and profitable branches
ANS. An overview of Indian banking system

Structure of Indian Banking System

Organized sector unorganized sector

Capital market intermediary’s Money market intermediaries Money lender

Development banks LIC Agriculture finance NBFS Indigenous

GIC institution Banker

Leasing Companies

Hire Purchases Companies Pawn Broker

Investment Companies

RBI Commercial Bank Co-operative Bank Post office saving Bank Government


ANS. The govt. of India appointed 9 members committee under the chairman ship of
Mr. M. Narshimam to evaluate the banking sector and make necessary recommendations to
strengthen it. The committee submitted its report on 17th dec.1991. The recommendations of
committee are as follows:-
o Reduction in CRR (cash reserve ratio)
o Reduction in SLR ( statutory liquidity ratio)
o De-regulation of interest rates
o Debt recovery tribunals
o Restructuring Indian banking sector
o Removal of licensing policy
o Equal opportunity to foreign
In April 1992 RBI issued quick lines on prudential norms. According to these
norms assets should be classified into performing and non-performing assets and consider the
interest or installment on recovery basis and not on annual basis.
The committee also recommended for proper asset classification for proper
income recognition which provides for the stability and strengthening the banking system. This
classification is as follows:
An asset becomes non-performing asset when it ceases or stops generating
income to the bank. In other words NPA can be defined as credit facility in which the installment of
principle “past due for 90days”. It is treated as past due when it has not been paid for 30days from
the due date.
For the identification of NPA’s the following norms were implemented:
o Installment over due for a period of more than 90days is respect to term loan and overdraft.
o The account remains out of order for the period more than 90days in case of cash credit.
o A bill remains over due for a period more than 90days in case of discounting bill.


An account will be treated as out of order status if the outstanding balance exceeds
the sanctioned drawing limit.

Assets can be classified into the following categories
The assets which are regular in all the respects are called as standard assets. They
bring income to the banks
An asset which is NPA for a period up to 12 months is known as sub-standard
An asset which is NPA for more that “12 months”.
It is a credit facility where the loss has been identified by the auditors or RBI


The policy of income recognition is based on record of recovery.
1. The income on the NPA is not recognized on annual basis but on recovery basis. There fore it
should be considered when it is actually received.
2. The income on the term deposits should be taken into income account on the due date only.
3. Fees, commission earned by the banks should be recognized on accrual.


It is basically a measure of bank capital. It is expressed as a percentage of banks,
risk weighted, credit exposure. The ratio protects the depositor’s interest. It promotes the stability
and efficiency of the banking system. It is known as the ratio of capital funds in relation to

Features of capital adequacy norms:

Its features are categorized into tiers.

Tire 1:-
It consists of:
o Paid up capital
o Statuary reserve
o Disclosed fee reserves
o Equity investment in subsidiaries
o Losses in current period ad those brought forward from previous years.

Tire 2:-
It consists of:
o Revaluation reserve
o Subordinated debt.
o Surplus provision/loss
the capital adequacy is calculated by the following formula:
Weighted risk asset *100
Capital adequacy = capital fund

The Narshimam committee recommended for the adoption of Basel norm on capital adequacy for
banks which was accepted by RBI and implemented in 1992.


ANS: In 1990’s Indian banking sector saw a great emphasis on the replacement of
technology with the new innovations. Banks began to use these new technologies to provide better
and quick services to the customers at a great speed. Some of the innovations techniques
introduced in Indian banking sector in post reform era are as follows:

o Automated teller machine (ATM)

o Electronic transfer of funds (ETF)
o Tele-banking
o Home banking
o Internet banking &
o Demate facility


An ATM is a computerized Tele-communication device which provides the customers
the access to financial transactions in public places without human inter-mention. It enables the
customers to perform several banking operations such as withdrawals of cash, request of mini-
statement etc.
This is an electronic debit or credit of customers account. Bank customers can buy
goods and services without caring cash by using credit or debit cards. There cards are issued to the
customers by the bankers. This system works on a pin (personal identification number). The
customer swipes the card by using the card reader device to make the transactions. The
development of electronic banking and internet banking helped the customers to utilize their

It is increasingly used in these days. It is a delivery channel for marketing, banking
services. A customer can do non-cash business related banking over the phone any where and at
any time. Automatic voice recorders are used for rendering tele-banking services.
It is another important service provided by the banks recently. The customers can
utilize it with the help of a cell phone. The bank will install particular software and provide a
password to enable a customer to utilize this service.
It is another important innovation took place in Indian banking sector. The
customers can perform a no. of transactions from their home or office. They can check the balance
and transfer the funds with the help of a telephone. But it is not that popularly utilized in our country.

It is the recent trend in the Indian banking sector. It is the result of development
took place in information technology. Internet banking means any user or customer with personal
computer and browser can get connected to his banks website and perform any service possible
through electronic delivery channel. There is no human operator present in the remote location to
respond. All the services listed in the menu of bank website will be available.
It is nothing but de-materialization. This is a recent extant in the Indian banking
sector. The customer who wants to invest in stock market or in share and stock needs to maintain
this account with the commercial banks. The customer needs to pay certain annual charges to the
banks for maintaining this type of accounts.


ANS. With the view to fill up institutional credit gap in the rural areas govt. of India under
multi-agency approach set up RRB’s in 1975. The main objective of the RRB is to increase the local
evolvement of the banks. In order to meet credit requirements of weaker sections and marginal

The policy of RRB’S are starting in nature provides no freedom for any commercial
improvements. RRB’S manager had virtually no authority to make any strategic decision
regarding its operation.
The board of RRB’S did not monitor their performance and had no interest in the
affairs of the bank. Further multiple ownership of RRB’S little prospectus for profit and diluted their
Deposit the impressive coverage of RRB’S, it suffered from poor financial help,
especially because of increasing loan losses and poor recovery.
Many RRB’S are actually showing improvement in their performances by moving
away from their objectives to serve the poor. They are investing to rich clients. As a result, rural poor
are still depending upon the unorganized money lenders.
RRB’S are permitted to lend only for productive purpose. The consumption credit is
not allowed by RRB’S. As a result the rural people have to depend upon local money lender for such

Suggestions by NABARD FOR RRB’S:

o Participation of local people in the equity share capital should be allowed.

o The activities of RRB’s, PAC’s and commercial banks must be complimentary and not
o RRB’s may also provide market guidance and consultancy services for the villagers.
o RRB’s should provide a wide range of services which could help a lot in developing banking
habits among rural people.


ANS. Indigenous banker constitutes the ancient banking system of India. They have been
carrying on their age old banking operation in different parts of the country. They are called by
different names in different areas. Such as madras, shettys and marvadies, benal- seths and
The indigenous bankers accept deposits from the public in two types.
a) Deposit which are repayable on demand.
b) Deposit which are repayable after a certain fixed period

Indigenous bankers advances loans to its customers against the securities of land,
gold etc..
The indigenous bankers carry on non banking functions with banking activities.
Simultaneously such as banking and non banking

The indigenous bankers deal in hundies, they write sell and buy hundies and there
by meet the financial requirement of the traders.


These bankers generally combine banking and non banking business which is against
the principles of sound banking.
The indigenous do not pay the attention to the purpose of loan and they also grand
loans for unproductive purpose.
These bankers do not follow proper banking principles by granting loans. They
provide loans against insufficient securities and they also do not distinguish between the short
term and long term loans.
These banker usually charge higher rate of interest for their loans. It adversely
effects the inducement to invest.
These bankers are involved in all types of malpractices and exploitation.
The following are the important reforms for indigenous bankers.
o They should be directly linked with RBI.
o They should separate their banking and non banking business.
o They should stop exploitation of their customers and other malpractices.


The commercial banks set up their branches in rural and semi urban areas with
new technology. It was thought that these developments were lead to sunset for indigenous bankers.
But these bankers where prepared to take the risk that could not be undertaken by the commercial
banks. Further these bankers invest without any security. Therefore the customer who does have
any thing to offer as a security has to seek indigenous bankers for the credit. Because of these
reasons the indigenous bankers are surviving yet and will have a promising future.
ANS. Co-operative banking is established on the bases of mutual co-operative like other
commercial banks. Co-operative banks are counted by collecting funds accepting deposits etc. The
history of Indian co-operative banking started with the passing of co-operative society’s act 1904.
This act was re-organized in 1912.

Structure of Co-operative Credit Society

Agricultural Non-Agricultural

State Co-operative Central Co-operative Primary Agricultural

Bank {SCB} Bank {CCB} Co-operative credit

Societies {PACS}


It is the apex institution in the three tier structure of cooperative credit society. It is
operating at the state level. Every state has a state co-operative bank. It occupies a unique position
in the co-operative credit structure.

SCB obtains capital from its own funds from RBI, its deposits and borrowings.

o It provides a link between RBI and other co-operative societies.
o RBI provides credit to other co-operative societies through SCB.
o It controls supervisors and regulates the function of central co-operative banks.


CCB’S are in the middle of the three-tier credit cooperative structure. CCB’S are of
two types:

1) Co-operative banking union whose membership is open only to co-operative societies.

2) Member ship is open for both co-operative societies and individuals.
The main functions of CCB’S are to provide credit assistance to the primary
agricultural societies (PACS). This CCB will also give loan to the individuals for agricultural
purpose against the security of immovable properties.


It forms the base in the three tier co-operative credit structure. It is village level
institutions which directly deal with the rural people. It encourages savings among the rural
population. It also accepts deposits and gives loans to the needy borrowers. It serves as the link
between rural people and higher agencies such as CCB, SCB and RBI.
A “PACS” may be started with two or more persons of the same village. The
member ship fee is nominal. So that even the poorest agriculturist can also become the member.

The working capital of PACS comes from the deposits and borrowings. Further it
gets the credit assistance by CCB
LDB’S are constituted for meeting the long term financial requirements of the
formers. These banks provide long term loans to the farmers for the purchase and improvement
of the land. LDB was started for the first time in Chennai. These banks mortgage the land & give
loans up to 50% of the mortgage.


The role of co-operative credit societies can be discussed with the help of following


The main objective of co-operative credit banking is to provide an effective
alternative to traditional defective credit system of money lenders. These banks protect the
village people from the clutches of rural money lenders.
The banks provide cheap credit to the rural people. It means they charge low rate
of interest as compared to that of money lenders.
An important benefit of the co-operative credit system is to bring a change in the
nature of loans. These banks discourage unproductive loans and encourage productive loans.
These banks develop the habit of savings among the agriculturists and thereby
encourage savings and investments among rural people.
These credit societies have greatly helped in introducing better agricultural
methods. By providing cheap credit facilities to the formers.


One of the important problems of these societies is problem of overdue loans. It
has been increasing continuously. In the year 1991 & 1992 overdue at CCB level was 41% and
39% at (PACS) village level.

There has been a large regional disparity in the distribution of co-operative credit
society. As a result there occurs regional disparity in the country.
Most of the benefits from the societies have been enjoyed by the big land
owners. The farmers of small holdings received a very less % of credit assistance.


ANS. In India anti-poverty programs were implemented to assist the poor and
unprivileged sector of the society. Micro finance was launched by USA for the 1st time. It got further
popularity when prof. Mohammed Younus, the founder of gramin bank of Bangladesh. Awarded
noble prize for peace. The concept of micro finance was initiated in India by NABARD & SIDBI in
early 1990’s.

Definition of micro finance:

Micro finance refers to small savings, credit and insurance services extended to
socially and economically disadvantaged segments of the society. It can also be defined as
“provision of thrift” credit and other financial services and products of very small amounts to the poor
rural areas, semi-urban or urban areas for enabling them to raise their income levels and improve
their standard of leavings. In India at present a large part of micro finance activity is confined to
credit only. Majority uses of micro-finance services in our country are women.

Features of micro-finance:
Indian micro finance sector has been making rapid progress. Some of its features
are as follows:

o Among financial institutions banks have the highest share in linkage with SHG followed by
RRB’s and co-operatives
o The no. of poor families benefited through SHG is increased from 24.3 million as on 31st
march 2005 to 32.9 million 31st march 2006.
o Southern region of India obtains better linkages and secured highest loans.
o Among the states Andhra Pradesh occupied 1st place in terms of link age and credit disperse-
o SHG bank linkage model is popular and have wide geographical coverage. It started
“NABARD” as a pilot project.


SHG is a small voluntary association of the poor people. Preferably from same
socio- economic background. They come together for solving their common problems through
mutual help. It promotes small savings among the members. This common fund is maintained in
name of SHG. This model can be further classified into three groups.
Banks them self take up the work of forming the SHG’s. Their savings bank
accounts and providing them bank loans.
In this model SHG’s are formed by NGO’S but directly financed by banks.
In this model SHG’S are financed by banks through NGO’S and other


ANS. 27 years ago on July 12 1982 by an act of parliament NABARD came into
existence. Its basic objective is providing focused and undivided attention to the development of
rural areas which was a crucial necessity for economic progress. NABARD has 28 regional offices at
the state capital, a sub office at port Blair and 376 districts development offices.
NABARD refinances through commercial banks, cooperative banks and regional
rural banks. In other words ‘NABARD’ is involved in indirect finance. It promotes loans for minor
irrigation, animal husbandry, fisheries, handy-crafts etc.
NABARD has efficiently brought a no. of innovations in rural credit domain they


It is a homogeneous group of poor framed to overcome their financial difficulties.
It was introduced in 1992 in 500 cities. Under this scheme 3.3 corers of Indian hose holds were
covered during 2005-2006.
It was introduced with a view to bring about co-operative and mutual help among
This project helped in development of rural areas. Till the end of 2005-2006
NABARD sanctioned RS.51283 crores loans under this RIDF. It has a separate window for
villages whose population is less than 500.
It was established in the year 1999-2000 with an initial capital of Rs. 200
crores. Now it is covering 124 districts and 14 states.
In this regard NABARD introduced several schemes for rural artisans crafts-
men and women to help self employment association. NABARD arranges exhibitions to increase
the marketing of their products.
It is a program supported by NABARD to motivate and train educated
unemployed rural youth. So far more than 2 lacks individuals have been trained under this

In these 27 years of its journey NABARD has been making silent in roads in the
fields of rural life. It also made its reputation in the battle against poverty. Its role in agricultural
sector is significant one.

13Q. Explain SIDBI ?

Small Industries Development Bank of India was established as whollyn owned subsidiary of
industrial development bank of India . Under the small industries development if India Act, 1989, it is
the principal institution for promotion, financing and development of industries in the small scale
sector. It also co-ordinates the functions of institutions engaged in similar activities. For the purpose
SIDBI has taken over the responsibilities of administering and National equity fund from IDBI.

SIDBI started its operations from April 1990 with an initial authorized capital of Rs.250
Crores, which o Rs.100000 Crores. It also took over the outstanding portfolio of IDBI relating to
small scale sector held under small Industries Development Fund as on March 31, 1990 worth over
Rs. 4000 Crores.

In the setting up of SIDBI the main purpose of the government was to ensure larger flow of
assistance to the small scale units. To meet this objective, the immediate thrust of the SIDBI was on
the following measures:
initiating steps for technological upgradation and and modernization of existing units;
expanding the channels for marketing the products of the small scale sector;
promotion of employment-oriented industries, especially in semi-urban areas to create more
employment opportunities and thereby checking migration of population to urban areas.


SIDBI provides assistance to the SSI sector in the country through the existing banking and other
financial institutions, such as SFC, SIDC, Commercial Banks, Co-operative banks and RRB’s etc.,
The major functions of SIDBI are given below:
It refinances loans and advances provided by the existing lending institutions to the Small Scale
It discounts bills arising from sale of machinery to and manufactured by SSI units.
It extends seeds Capital/Soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and
Mahila Vikas and Seeds Capital Schemes.
It extends financial support to state small industries corporations for providing scarce raw materials
to and marketing the products of the small scale units.
It provides services like factoring, leasing, etc to small units.
It extends financial support to state small industries corporations for providing scarce raw materials
for marketing.
It extends financial support to State small industries corporations for providing leasing, hire
purchases and marketing support to industrial units and small scale sector.
Another programme is providing financial assistance to integrated infrastructure development
centres scheme of the union ministry of small industries.
It has been operating single window scheme to cover units in identified areas.
It also provides refinance under Automatic Refinance Scheme.
It also set up venture capital fund to assist entrepreneurs.

Q14. Explain State Finance Corporation.

Ans. The Industrial Finance Corporation provides financial assistance to large public limited
companies and cooperative societies and does not cover the small and medium seized industries. In
order to meet the varied financial needs of small and medium sized industries, the Government of
India passed the State Finance Corporations Act in 1951 which empower state Government to
establish such corporation in their states. The first state finance corporation was set up in Punjab in
1953. At present, there are 18 SFCs operating in the country.

Various functiond smd types of financial assistance to be provided by the SFCs are given below:

• The SFCs have been established to provide long term finance to small scale
and medium- sized industrial concerns organized as public or private
companies, corporations, partnership or proprietary concerns.
• The SFCs extend loans & advances to the industrial concerns repayable within
a period of 20 years.
• The SFCs gurantee loans raised by the industrial concerns in the market or from
scheduled or co-operative banks and repayable within 20 days.
• The SFCs subscribe to the debenture of the industrial concerns repayable within
a period of 20 years.
• The SFCs guarantee loans raised by the industrial concerns from schedule or
co-operative banks & repayable within 20 years.
• The SFCs underwrite the issue of stocks, shares, bonds & debenture by
industrial concerns.
• The SFCs guarantee the deferred payments for the purchase of plant,
machinery etc., within the country.
• The SFCs are probihited from subscribing directly6 to the shares or stock of any
company having limited liability, except for undersriting purposes, and granting
any loan or advance on the security of own shares.
• The SFCs can act as agent of the central or state government or some industrial
financing institution for sanctioning & disbursing loans to small industries.

The capital resources of the SFCs include:
Share capital & reserves
Bonds & Debentures
Borrowing from the Reserve Bank, the state Govts,
Finance from industrial Development Bank of India, and

Important features are as follows:
The SFCs were set up with the objective of providing financial assistance to small as well as
medium industrial concerns. Though there has been a notable rise in the overall financial
assistance, the performance in individual corporation differed largely due to the attitudes &
motivation of the local entrepreneurs in different states.
Prior to 1966, the SFCs showed preference for medium industries. But, now there has been a
marked shift in their lending policies in favour of the small units. In 1985-86, the share of small units
in the total loans sanctioned was 82%.
In order to encourage self employment, the SFCs have formulated schemes of assistance to
technician entrepreneurs.
Major beneficiaries of the financial assistance of the SFCs have been the food processing , service
sector, chemicals textiles, etc.,
A special features of the lending operations of SFCs has been the provision of finance to industrial
concerns of backward areas. In 1985-86 the share of backward areas in the total assistance
sanctioned by the SFCs was 53%.
The SFCs provide concessional assistance to the industrial units located in backward areas in terms
of soft loans at concessional rates, lower margins, reduced service charges etc.,

The actual performance of the SFCs has been criticized mainly because of the following
defects & inadequancies:
The financial resources of the SFCs are inadequate. Moreover they face the difficulty of finding
The SFCs have not been able to provided adequate financial assistance to meet the requirements of
small & medium industries.
The SFCs charge very high interest rates on all the loans other than the soft loans. Moreover, the
terms & conditions of assistance are also hard.There is also a shortage of technical personnel for
judging the soundness of the proposed schemes of the borrowing units.
The SFCs lack self-sufficient organizational set up along with adequate specialized & trained staff for
ensuring their efficient functioning.
Many difficulties are faced by the SFCs while extending financial assistance to the small industrial
The SFCs also face the serious problems of increasing magnitude of overdues. The main reasons
for overdues are delays in the implementation of projects & industrial sickness.

UNIT 3 Banker and Customer - Relationship

Q1. Define banker and customer. Explain the relationship between them.

Ans. A Banker is one who honors cheques drawn by the customers up on him and who receives
money as depositsd. Banking means accepting for the purpose of lending or investments. He
receives deposits of money from the public repayable on demand or withdraw able by a cheque,
draft or otherwise.

Definition of Banker
According to Sir.John Paget, “ A person to be called as a banker should perform these four
• Take deposit accounts
• Take current accounts
• Issue and pay cheques

Definition of customer
The term customer has no statutory definition. In general we can define a customer as a
person who has an account in the bank. Where as in modern days the customer is one who is
engaged u\in any type of transaction with the bank.


The relationship between banker and customer can be classified into two cateogaries:
1. general relationship
2. special relationship

1. General relationship;
There are three types of general relationship between banker and customer:

A. Debtor and Creditor relationship:

The relationship between banker and customer and the customer is that of a
debtor and creditor. The respective position between them is being deceided by the
circumstances prevailing there in.
The money deposited by banker becomes his property and available for further
investments. Here there is a debtor and creditor relationship between them. Banker is debtor and
customer is a creditor when the customer take loan or overdraw his account. The banker will be the
debtor and customer is the creditor.
trustee and beneficiary relationship: The banker is a trustee when he accepts valuable
from his customer for safe custody. Here customer will be continued as the owner of the valuable.
Because, banker is a trustee. he just looks after and customer is a beneficiary.

Agent and principal relationship: By performing various agency services banker functions
as an agent of its customers. The banker becomes an agents. when he collects cheques, bills and
pays insurance premium, electricity bill, water bill etc., on behalf of its customers.

2.Special Relationship:-

A Statutory obligation to honour cheques: When a customer opens an account their

arises a contractual relationship between them which is called the statutory obligation under section
31 of the negotiable instruments acts of 1881.This statutory obligation to honour cheques is limited
in the following ways:

* There should be sufficient balance in the customers Deposit account

* The cheque should be submitted in the proper form only dealing working hours of the bank.
* There should be no garnishee order issued by the court to freeze the account.
* The cheque should be mutilated one.
* It should not be a post dated cheque or a stale cheque.

B. Banker’s Lien: Another special feature or relationship between banker or customer is

banker’s lien. A lien is a right of a person to retain the goods in his possession until the debt due to
him has been settled. The banker can exercise the right of lien on all the goods entrusted to him as a

C. Maintain secrecy of customer’s accounts: It is obligatory to the banker not to

disclose the state of customer’s account, and maintain the secrecy. However, the banker can
disclose the details if it is legally necessary or on account of the banking practises.

D. Right to claim incidental charges: It is another special relationship between banker

and customer. These are also called as service charges.
Ex: commission on D.D, Travellers cheque etc.,

E. Right to charge compound interest: As per general law imposing compound interest is
strictly prohibited but a banker has given a special previlage of charging compound interest in the
absence of any agreement.

Q.2. Define Banker & Customer. Explain various types of Bankers customers.

Ans: A Banker is one who honors cheques drawn by the customers up on him and who receives
money as depositsd. Banking means accepting for the purpose of lending or investments. He
receives deposits of money from the public repayable on demand or withdraw able by a cheque,
draft or otherwise.

Definition of Banker
According to Sir.John Paget, “ A person to be called as a banker should perform these four
• Take deposit accounts
• Take current accounts
• Issue and pay cheques
• Collect crossed & uncrossed cheques of his customer
Illiterate:-- An illiterate is a person who can not read and write. The Indian contract Act permits
every person who is a major and who has a sound mind and is not disqualified from entering into
contract to open an account. Hence an illiterate person who is of sound mind can open an account
with the bank.

Lunatics:- Under Section 12 of the Indian contract act, persons of unsound mind are disqualified
from entering into contract. But the disqualification does not apply to contracts entering into by
lunatics during periods of sanity or which are ratified during such periods. According to Indian Law,
contracts with persons of unsound mind are not only voidable but void.

Drunkards:- If a person who is party to a contract can prove that at the time of entering in to the
contract he was incapable, from the effect of liquor, or understanding the contract and of forming a
rational judgement as to its effects upon his interest which fact was known to the other party, he may
have the contract set aside by the court. If a customer tenders, when drunk, a cheque for which he
demands payment, the banker would be advised to have a witness to the signature and the payment
of the amount.

Joint Accounts:- When an account is opened in the names of two orm more persons, who are not
partners in a firm or who are not joint trustee, it is called a joint account. When a joint account is
opened the banker the banker should obtain a comprehensive mandate. The mandate should cover
all points because the right to draw cheques conferred upon a person does not automatically confer
upon him the right to deal in securities, to contract debts, or to deal in bills of exchange. If one of
the joint account holders obtains an overdraft , the other do not have liability. So it is necessary that
definite instructions should be obtained on the following matters.
Partnership:- The Indian partnership act, 1932 defines partnership as “ the relation between the
persons who have agreed to share to share the profits of the business carried on by all, or by any6
one of them acting for all persons who have entered into partnership agreement are individually
called partners. All the poartners are collectively called a ‘firm’.
Joint Hindu Family Firms:-- The Joint Hindu family firm is an institution peculiar to our country.
The firm is managed by the karta. When the karta dies the business also devolves on the legal heirs
just like any others property. Every male member born into the family becomes a co-partner from
the time of his birth. The right of the members are determined according to the Hindu Law.

Short note: PASS BOOK

Ans: The Pass Book is a small handly book, issued by the banker to his customers to record all
the transactions taken place b/w them. It is a copy of customer’s accounts transactions. The
objective of issuing the pass book to the customers is to make aware of his periodical transaction
with the bankers. It is called the Pass Book because it passer periodically between customer and
banker and vice versa. The pass book contains all the rules and regulations governing the different
types of deposit account. Entries in the pass book are to be made by bank staff only. The customer
can not make any entry in the pass book. It must send by the customer to the banker to obtain the
entries. The Banker is responsible for entry in the pass book and such entries should be rectified by
the banker immediately.

Q3. Who is a paying banker and explain his duties ? (OR)

Who is a paying banker ? What are the precaution taken by him ?

Ans: A paying banker is one who is responsible to honor the cheque of the customer. The
position of the paying banker is very sensitive, because if he honours any cheque wrongly he loose
the money and if he dishonours the cheque wrongly he has to pay for the damages.

The money deposited with the banker will always belongs to the customer, and the bank will
bound to return him (customer) at his order on demand.

Precautions taken by the paying banker:

In order to his interest as well as the customer’s interest the paying banker should take the
following precaution.

(i) Precautions regarding the form of cheque: Cheque should be in the proper form. It must
be drawn in the printed forms supplied by the banker. In such cases only the banker can honor its
customers cheques. If it is not given in the printed form it is subjected to dishonor.

(ii) Precautions regarding date:- The banker should refuse to honor undated cheque.
Ex:- 30th February.
In case of post dated cheque the banker should honor it only after that date mentioned in the

In case of out dated cheques, the banker will dishonor after a certain period. Usually, it will
be after 6 months. It means the cheques order than 6 months are considered as “state” cheque,
subjected to dishonor.

(iii) Precautions regarding the amount:- The banker should see that the amount mentioned
in figures & words should be same. In case they differ the banker may dishonor.

In case the amount has been mentioned only in words and not in figures, the banker should
pay for such cheques. If the amount has been mentioned only in figures the banker should dishonor
such cheques.
(iv) Precautions regarding founds of the customers:- These should be sufficient founds in
the account of the customer for the payment of cheque. Because a cheque has to be paid in full and
not in part. Therefore inadequacy of funds will result in dishonor of the cheque.

(v) Precautions regarding material alternation:- In case a cheque is materially altered, the
banker has to take the precautions for such material alteration.

(vi) Precautions regarding the drawer’s signature:- A banker is expected to know the
signature of his customers, if his signature has been forged and the banker makes the payment of
such cheques then he shall not be entitled to debit the customers account with the payment, the loss
will be on the banker. When there is a joint account all the signature is forged the banker should not
make the payment.

(vii) Precautions regarding the Mutilated cheques:- A cheque is said to be mutilated

when it is turn into two or more pieces, such a cheque should not be paid unless the banker is
satisfied that mutilation was unintentional.

(viii) Precautions regarding the banking hours:- The bankers should not make payment of
such cheques which are not presented to it during working hours, and make the payment for such
cheques only which are presented to him during working hours.

(ix) Precautions regarding crossing:- If a cheque is crossed then it should not be paid on
the counter. A paying banker has to make the payment for crossed cheques in case they are
presented through a banker only.

3Q Who is a collecting banker ? Explain his obligation (OR)

Who is a collecting banker ? What are the precautions taken by Him?

Ans: Introduction:
A paying banker is one who is responsible to honor the cheques. A collecting banker is
one who receives payment of a crossed cheque on behalf of his customers, collecting the cheque is
not a legal duty of the banker, yet the banker generally acts as a collecting banker for the
convenience of his customer once when the collecting banker accepts the cheque from his customer
his position is that of a holder of value.

Duties of a collecting banker:-

(i) present the cheque within a reasonable time:-

The collecting bank should present the cheque collected from the customer to the drawee
bank within the reasonable time otherwise he is liable for the loss suffered by the customer due to

(ii) Reasonable care:-

A collecting banker as an agent of the customer is bound to protect the interest of the
customer. If he is not careful while discharging the duty as an agent, it may lead to a loss to the
customer. Therefore, the collecting banker is not supposed to be negligent.

(iii) Notice of dishonor:-

In case the cheque is dishonored the collecting banker should give notice of dishonour to the
customer by returning the cheque with a covering letter including the reason of dishonour of the
cheque. It may be given orally or in writing. It may be given in person or by post.

(iv) Appointment of sub-agent:-

In case of out-station cheques the bank may appoint sub-agents. These sub-agents. These sub-
agents are liable only to the agents. If the customer asks the banker only to forward a cheque to a
specified banker for the collection then that bank may be treated as an agent and not as an sub-

(v) Collecting banker as holder for value:-

The collecting banker becomes the holder for value when he pays the cash to the payee before the
cheque is collected from the paying banker.

Statutory protection for collecting banker:-

A collecting banker is given statutory protection under sec. 31 of the Negotiable Instruments
Act, as a banker who has in good faith and without negligence receives the payment of the cheque
crossed. In the case, the title of the cheque proves defective incur any liability to the owner of the
cheque by reason of having received such payment.

The collecting banker have got the following statutory protections.

(i) Good faith & without negligence:- The collecting banker have performed this function
in good faith, honestly and without negligence. In case of dispute, a collecting banker has to prove
that he acted without negligence in collection of the cheque.

(ii) Received crossed cheque:- The collecting banker cannot claim protection if the cheque
is crossed after coming to his hands, further he cannot claim for protection. If he allowed the
customer to open an account without proper introduction.

(iii) Examination of Endorsement:- A collecting banker must satisfy himself that all the
endorsements on the cheques are regular.

4Q What is Negotiable Instruments Act, 1881 ? OR

Explain the different types of Negotiable Instruments ?
Ans: The term negotiable instruments literally means a written document which creates a write in
favour of some person and which is easily transferable.

According to section 13 of Negotiable Instrument Act “A Negotiable Instrument means a

Promissory Note (or) a Bill of Exchange (or) A cheque payable either to order or to the bearer of the

There are three types of Negotiable Instruments. They are :-

1. Promissory Note
2. Bills of Exchange
3. Cheque

1. Promissory Note:
Section 4 of the Negotiable Instrument Act, “A Promissory Note is an instrument in writing
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to
or to the order of a certain person, or to the bearer of the instrument”.

Features of Promissory Note:

• It is an instrument in writing
• It is a promise to pay
• The undertaking to pay is unconditional
• It should be signed by the maker
• The maker must be certain.
• The promise to pay should be in money and money only.
• The amount should be certain
• The creditors name and address should be mentioned

Specimen of a Promissory Note:

Rs.500/- 22-

On demand. I promise to pay Shri. Surya or order a

sum of Rupees Five Hundred value received.

Shri. Suresh
2. Bills of Exchange:
A bills of exchange is defined by Section 5 of negotiable act as on instrument in writing
containing an unconditional order signed by the maker ordering him to pay or to order a certain sum
of money only to the bearer or to the order of the instrument.

Features of Promissory Note:

• It must be in writing
• It must be signed by the Drawer
• The Drawer, Drawee and Payee must be certain
• The sum payable must also be certain
• It is an order to pay which is properly stamped.

In case of bills of exchange their right be two or more parties.

Drawer, Drawee and Payee. The person who makes the bill is the drawer, the person who
is directed to pay is called the Drawee. The person to whom the payment will be made is called
payee. The Drawer and Payee might be the same person.

Specimen of a Bills of exchange:

Rs.500/- 22-


Three months after date pay to me or order, a sum of

rupees five hundred value received.

Shri. Surya
Raj & Co.

3. Cheque:
It is another type of negotiable instrument section 6 of the negotiable instrument act defines
cheques as a Bills of exchange on a specified banker and not expressed to the payable otherwise
than on demand.
A cheque can be defined as a bill of exchange on a particular banker which is payable on

Features of Cheque:
• A cheque is an instrument in writing.
• It is an unconditional order.
• It should be always drawn on a specified banker.
• A cheque must be an order to pay a certain sum of money.
• It is always payable on demand and not necessary to use the word on demand.
• The payee must be certain, it means the person to whom payment is to be made must be

Specimen Copy of a cheque:



Pay to _____________________________
Rupees ______________________________________ only

Cheque No.


5Q What do you mean by cheque crossing : Explain its kinds:

Ans: A cheque is said to be crossed when two transverse parallel lines drawn across the cheque
on the left top of the cheque. A crossing is the direction to the paying banker to pay the money
through his deposit account to a particular person and not the bearer of the cheque.

Objectives of Crossing:

Crossing ensures security to the owner. Since payment of such a cheque made through a
banker. It can therefore helps in detecting the person who receives the money in case of loosing the
cheque crossing helps to avoid money going in wrong hands. A cheque without crossing is known
as open cheque open for many risks.

Kinds of Crossing:
Crossing can be classified into two kinds.
• General Crossing
• Special Crossing
i) General Crossing: Section 123 of the negotiable instruments act defines
general crossing as “A cheque bears a crossing on its face with or without the wards not negotiable
in other words drawing two parallel transverse lines on the left top of the cheque is called as general

The effect of general crossing is to direct the paying banker not to make payment unless it is
presented through a banker.

Features of General Crossing:

The transverse parallel lines are of great importance in general crossing.

• The line must be transverse

• They should not be straight lines
• The lines are generally drawn on the left top of the cheque.
• The words not negotiable, and company might be written in between those two lines, but it is
not necessary.

Specimen Copy of General Crossing:



Pay to _____________________________
Rupees ______________________________________ only

Cheque No.



Not negotiable

Pay to _____________________________
Rupees ______________________________________ only

Cheque No.

In General Crossing the amount of crossed cheque should not be paid all the counter of the
paying banker, but it is to be paid to a banker. If the crossed cheque have the words not negotiable
it cannot be transferred to other persons. If such a cheque is endorsed the paying banker will not
accept such cheques.

(ii) Special Crossing:

As we know the holder of a crossed cheque cannot obtain payment over the counter. If a
cheque is crossed specially the paying banker cannot make the payment unless it is presented
through the bank specially named in the crossing. The holder of the specially crossed cheque
cannot obtain payment unless he has an account with the bank named in the crossing.

Section 124 of the negotiable instruments act defines a special crossing as “where a cheque bears
across its face on addition of the name of a banker without (or) with the word ‘not negotiable’.

Thus the specially crossed cheque requires the name of a banker to be written across its face. Its
effect is that the cheque should be paid to the banker only. The main objective of the specially
crossing is to prevent wrong parties from receiving payments. Further to locate the person to whom
cheques are paid. Specially crossing is more advantageous as the banker named in it will not
collect the cheques unless it knows the payee.

Features of Special Crossing:

• Two transverse parallel lines are not necessary.

• The name of the banker must be specifically mentioned.
• The crossing should take place on the left top of the cheque.
• The word not negotiable are not necessary.

Specimen Copy of Special Crossing:


6Q Explain various types of loans and advances ?

Ans: Loans & advances constitute by far the most important revenue of investment of banker’s
resources and are the principal source of profit. Other sources of income such as bank commission
and bank charges are comparatively small. Banks provide accommodation to industrial and
commercial establishment by discounting their bills of exchange and by granting term loans,
overdrafts and cash credits.

Advances by Indian banks generally take four forms – loans, overdrafts, and cash credit and
discounting bills of exchange.

(i) Loans: A loan is a type of advance made by the banker to the borrower with or without
security. Under loan system, credit is given for a definite purpose and for a Predetermined Period.
After the loan is sanctioned, the bank either credits accounts of the borrower or pay the amount in
cash. It is given for a fixed period at a agreed rate of interest repayment is made either in
installments or at the expiry of a certain period. The customer has to pay interest on the total
amount even if he uses loan partially. No cheque book is issued on a loan account.

Loans may be demand loans or term loans or bridge loans.

a) Demand Loans: These are sanctioned against goods & documents of title of the
goods, bank’s own fixed deposits, gold ornaments etc., generally such loans are sanctioned for short

b) Term Loans: These are the loans granted for a fixed period exceeding one year and is
repayable as per schedule of repayment. If the loan is for a period between one and five years, it is
called Medium Term Loan. If the period of the loan exceeds five years, it is called Long Term Loan.

c) Bridge Loan: As per RBI directive, abridge loan can be sanctioned by banks for the
following purposes:-

Against public issue of equity in India for which SEBI approval is obtained.
Against term loan commitments of financial institutions and other banks which are facing temporary
liquidity constraints.

Bridge loans should be within five percent of banks’ incremental deposit of the previous year. The
loan is against the amount covered by underwriting. It should be ensured that 75% of the issue of
underwritten by banks, financial institution etc.

(ii) Overdrafts: ‘Overdraft’ means allowing the customer to overdraw his account it is
allowed only to current account holders. Unlike a loan account, an overdraft is a running account
wherein the balance will be fluctuating from debit to credit or vice-versa. Under overdraft
arrangement, the customer is allowed to draw cheques upto the agreed limit over and above the
credit balance in his account. Generally, overdraft is granted for short periods.

There are two types of overdrafts – clean overdraft & secured overdraft. It is customary for
bankers to allow clean or unsecured overdrafts for small amounts to their current account holders for
temporary periods. They are allowed purely on the personal credit of the party. There is no security
against such overdrafts. Secured overdrafts are allowed against some tangible security such as
government securities, shares, bonds, LIC policies, NSCs, Units of Mutual Funds etc.

(iii) Cash Credit: A cash credit is similar to an overdraft. In the case of an overdraft,
the arrangement is in relation to the customer’s current account and the customer is permitted to
overdraw from his account, upto the limit agreed upon. In the case of a cash credit, the customer
continuously avails himself of the bank credit without at any time keeping a credit balance. Usually
each credit is allowed against either a bond of credit by one or more sureties or certain other
securities. A cash credit differs from an overdraft in that it is usually a more permanent

(iv) Discounting Bills of Exchange: The banker may also provide accommodation to
the customer by discounting bills of exchange. These trade bills generally arise out of commercial
transactions. A person selling goods may draw on the buyer a three months bill for the amount of
sale. By this, the buyer is given credit for three months and the seller, if he so desires, can realize
cash immediately by discounting the bill with the banker. In other words a commercial bill is the
means by which the seller is enabled to sell his goods on credit and at the same time realize the sale
proceeds in cash.

7Q Discuss briefly the Principles of sound lending ? (OR)

What are the Principles of lending by commercial bank ?

Ans: Introduction:
The main business of banking company is to receive deposits and lend money. Receiving deposits
in bonds has no risk, since the banker has to repay the deposits on demand by the customer but
lending always involves much risks because there is no certainty of re-payment. Since all the loans
given by the commercial banks should be followed by certain principles they are :-

i) Safety:--- Safety should be the first Principle in granting loans. Safety means that the
borrowers should be in a position to repay the loans borrowed with interest. The capacity of the
borrower depends upon the success of his venture. The willingness depends upon the success of
his venture. Hence before lending money the banker should ensure or ascertain whether the
borrower is a person of good character or not and whether the security offered is adequate and
closely liquid or easily releasable.

ii) Liquidity:- It is nothing but the ability of the banker to convert an asset into cash
without much loss, because the long term loans leads to a loss of liquid, and they cannot be
received at the times of need. Further liquidity also depends upon the type of the asset which
banker accepts as security while granting loans. Thus, the principal of liquidity requires that the
banker should mostly limit his lendings to short term, against assets (security) which can be
converted into cash immediately.

iii) Profitability:- A banker cannot run the banking business without profit. It is essential to
meet the day-to-day transactions (expenses) of the bank. Profitability demands that the banker
should maintain less liquidity and invest more to earn maximum profits.
iv) Purpose of loan:- It is another important principle of sound lendings the banker should
enquire the purpose of loan before granting it. Because the repayment of the loans depends on it.
Always the banker should sanction production loans. Because it helps in easy repayment. If he
sanctions loans for unproductive purpose it will be more risky and no guarantee of repayment.

v) Assured Repayment:- The banker should come forward to lend only when the repayment
is assured. Because when there is a default in repayment the banker’s ability to create for there
credit will be affected. Hence, while advancing the loans the bank should see the source of

vi) Social Objective:- While making advances the banker should give the highest priority
for the national interest. Now-a-days every bank have a social objective and responsibility.

vii) The law of Limitation Act:- According to the law of limitation act, a debt will become a
bad one after its expiry of three years from the date of loan. Such a bad debts are not goods for the
banks performance. Therefore, the banker should get the repayment before the expiry of the loan

viii) Security:- No banker will check the Horoscope of the customer. Before lendings he
calculates risks for the investment to minimize that risk the banker should insist for such a security
which can be easily releasable.

ix) Diversification of Risks:- A banker should not concentrate all his loanable funds into
one industry. If he does so his survival will be questionable. Particularly when that industry fails in
which the banker had invested. Therefore, a banker should invest in different sectors. So as to
diversify the risks among different sectors.

8Q What do you mean by credit appraisal ? Explain the process of credit appraisal by the
commercial banks.

Ans: A credit refers to the loan advanced by the banks for a specific purpose. Credit appraisal
refers to the method of appraising the excess credit on the request of the customer. All the
scheduled commercial banks in India refers to the guidelines directed by RBI in this regard. They
finance those sectors or industries which are considered as first priority from RBI.

Earlier bank used to encourage loans to the traditional industries which engaged in
production activities, but in modern days commercial banks are concentrating more on IT sector and
service sector.


Process of Credit Appraisal can be discussed under the following four parts:

Term Loans:- Credit proposal for the term loans are evaluated and decided on the basis of their
feasibility as follows:-
i) Technical Feasibility:- It is concerned with assistment of various requirements of the
production process such as type of technology, quality, availability of inputs etc.

ii) Economic Feasibility:- It is concerned with earning capacity of the project. As it is based
on the volume of the sales. Good sales result in good profits. Therefore, it decides the profit and
recovery of the loans to the banks.

iii) Managerial Feasibility:- A good manager makes his business to earn more profits.
Hence, managerial skills are very much necessary for consideration to the banks. They also
consider his experience, marketing capacity before credit appraisal.

iv) Financial Feasibility:- It depends upon the cost of the project, and estimations of
profitability. Banks also consider the past performance and debt equity ratio. It describes the
borrowers capacity to repay the loans.

The process of credit appraisal for working capital finance has to be conducted strictly by the
banks as per the norms. The working capital requirement can be assessed for a future period based
on the recent financial statement. If the borrower has a new firm then it will be decided on the basis
of a certain logic by the banks experience.

The banks will also issue letter of credit on behalf of the buyer to the seller to pay for the
goods and services. The letter of credit, it includes transport document, insurance documents,
quality certificates etc., the banker has to analyse the maximum limit of better of credit and purpose
of seeking credit for credit appraisal.
Other than the term loan and other types of credit commercial banks also provide guarantee
for certain loans. Here, the commercial banks will not provide any credit instead it given the
guarantee for the loans sanctioned by other financial institutions.

9Q Explain different modes of creating charges of securities ?

Ans: The way by which the banker obtains control over the security is called the mode of creating
charge. If the security not properly charged in favour of a banker he will remain as on unsecured
creditor. Therefore, a banker has to select an appropriate method of charging depending upon the
type of the security and type of loan. There are different modes of creating charges. They are:-

 Lien
 Pledge
 Hypothecation
 Mortgage

i) Lien:- Lien is a right of a person to retain the goods in his possession which belongs to
another person until this demand is satisfied. In other words, it is nothing but the right to retain the
goods in his possession until the loan due to him is settled. Lien gives a person only a right to retain
the possession of the goods, and not the power to sell unless the right is conformed. There are 2
types of lien.
(a) Particular Lien:- It is attached to some specific goods in connection with the
debt arise. It is restricted to that particular goods.

(b) General Lien:- It entitle a person to retain the possession until all the claims are

ii) Pledge:- Pledge means the bailment of the goods for the payment of debts, or
performance of promise, the person who pledges the property is called the pledges or bailer, the
person to whom the property is bailed is called the pledgee or bailee. In the contract of pledge the
pledges must deliver the goods to the pledgee. Therefore the pledge is possible only in case of
morable goods. The pledge has a right to sell the security in case pledges fails to repay the loan.

Bailment: This is the delivery of the goods by one person to another for some purpose
upon a contract and to be written returned or otherwise disposed according to the directions given by
the pledges.

iii) Hypothecation:- This is a mode of creating an equitable charge against the

property for a payment of debt which continues to be in possession of the debtor. Here in this type
of mode the security remains under the control of debtor and not creditor. The creditor can take the
possession if need arises. It is also called as Mortgage of movable property. The agreement such
took place is called as Hypothecation Deed.

• No transfer of possession of security
• No transfer of ownership to the creditor
• There is an obligation to repay the debt on the part of the borrower.
• IN the event of non-payment of loan the creditor has a right to sell the property through court.

iv) Mortgage:- It is the method of charging which can be created only for immovable

According to section 58 of the transfer of property act “A mortgage means transfer of an

interest in specific immovable property for the purpose of securing the payment of money advanced
as loan”.

The person who mortgaged the property is called the mortgager, and to whom the property
is transferred is called the mortgage and the instrument by which mortgage is taken place is called
the Mortgage Deed.

1Q Explain the structure of Indian Money Market (OR)

Explain the constituents of Indian Money Market ?

Ans: The term money market refers to the institutional arrangements for borrowing and lendings
of short term funds. Money market is the centre of the Indian Financial System. It is the base for
effective monetary policy. It mobilizes savings from different sources and make them available for

In a money market funds may be borrowed from a day, a week and upto one year. In
money market the transactions may take place even without the personal contact b/w the Debtor &

According to Prof. Crowther “the money market is a collective name given to the various
firms and institutions, which deals with various types of near money”.

Structure of Indian Money Market

Organised Sector Unorganised Sector

RBI & Other NBF Sub Markets Indigenous Local Money

Scheduled, (LIC, Bankers Lenders
Private, Foreign GIC,
And Non UIT)
Scheduled Banks

Call Money Markets

Collateral Market
Acceptance Market
Bill Market

Treasury Bill Market Commercial Bill Market

(I) Organised Sector:--- It consists of RBI, Nationalized Commercial banks and other scheduled and
non-scheduled banks. Foreign banks and regional rural banks. It is called as the organized sector
because they are systematically coordinated by RBI.

Non-Bank Financing Companies (NBFCs): These are the institutions such as LIC, GIC & UTI.
These provide finance for different purposes for a short period of time, and this deals in the India
Money Market.
Sub-Markets of Indian Money Market: The organized sector of Indian Money Market can be further
classified into the following sub-market, they are:-

(a) Call Money Market: It is the most important component of organized money market.
Call money represents the amount borrowed by the commercial banks from each accounts for a very
short period, to meet the cash reserve requirements. The money under call money market can be
borrowed without any security. This type of money market is also called as call notice money
market. The money from this type of market can be borrowed from one day to 14 days.

(b) Collateral Market: Loans are offered against collateral securities like stocks and bonds
in this type money market. The loans are backed with the security in this type.

(c) Bill Market: A bill of exchange is a written unconditional document usually 90 days
duration. It is a market in which bills are brought and sold. This type of market can be further
divided into two types, they are :-

Treasury Bills Market:- These are the short term liabilities of the government of India. These are
usually of 90 days, 182 days, 364 days duration. These are brought and sold by RBI.
Commercial Bills:- These are the bills issued by the firm engaged in business, these bills are
generally of 90 days duration.

(d) Acceptance Market: It refers to the market for banker’s acceptances.

A banker acceptance is a draft drawn by an individual or a firm upon a bank, ordering it to pay the
bearer of the instrument a certain sum of money at a particular future date.

These types of banker’s acceptance mostly used in financing foreign trade.

(II) Un-organised Sector: The unorganized sector consists of indigenous bankers and money
lenders it is unorganized because its activists are not systematically co-ordinated by RBI the money
operate through out the country but without any link among themselves.

Other than these institutions semi-government bodies. Large companies, co-operative

banks and post office saving banks can also make their surplus funds available to the organized
money market for a short period.
2Q Explain the features of Indian Money Market ? (OR)
Explain the features of under developed money market ?

Ans: Money market refers to the institutional arrangements dealing with short term borrowings
and lendings. It is a short term credit market which deals with relatively liquid & quickly marketable

RBI defined money market as the center for dealing mainly of short term character and
provides liquidity to the lenders.

Features of under developed money market:

Developed money market refers to a better organized, effective and sensitive money market.

Ex:- England

The money market of developing countries like India and its features are discussed below:-

(i) Presence of Central Bank: An essential condition for a developed money market is
presence of central bank, which functions as a regulatory authority on banking. A powerful central
bank guides and regulates money market effectively, but in under developed money market the
central bank cannot adopt effective monetary polity because of the presence of unorganized sector.

(ii) Developed Banking System: A developed money market requires the existence of a well
organized commercial banking system. For that there should be the existence of banking habits
among the public. In an under developed money market banking activities are limited to urban areas
only. Further the presence of indigenous bankers and local money lenders will also effect in the
smooth functioning of money market.

(iii) Availability of Financial Assets: An efficient money market requires a regular and
adequate supply of financial assets. In an under developed money market there is an insufficiency
in the supply of financial assets.

(iv) Existence of Sub-Market: Developed money market is characterized by a well

developed and organized sub market. Each specializes in a particular financial asset. But the under
developed money market is limited to all loans. There is no existence (or) limited existence of other

(v) Integrated Structure of Interest Rates: In a developed money market interest rates
prevailing in different submarkets are integrated. Where as in under developed money market like
India rate of interest prevailing in different submarket will be different.

(vi) Availability of adequate resources:- In a developed money market adequate resources

are available to finance the transactions of various sub markets. But in an under developed money
market, dependency on domestic finance is more. It do not attract foreign funds largely. Because of
the political instability and unstable exchange rates prevailing in these countries.

3Q Explain the problems and reforms of Indian Money Market:

Ans: The money market in India is not only under developed but also a heterogeneous market. It
has a number of problems or defect which are listed as follows:-

(i) Lack of Co-ordination: The money market in India is not only under developed because of
the absence of co-ordination between organized and unorganized sector.

(ii) Pre-dominance of Unorganised Sector: Another important defect of Indian Money Market is
pre-dominance of unorganized sector. The indigenous bankers occupy a significant position in rural
areas. Further this unorganized sector has no clear cut distinction b/w long term and short term

(iii) Wasteful Competition: In the Indian Money market there exists the competition b/w
organized and unorganized sectors and also b/w the members of the sectors with in.

(iv) Shortage of Capital: Indian money market suffer from shortage of capital, which is in
sufficient to meet the needs of the industry and trade. The main reason for this is low savings
among the people due to inadequate banking facilities.

(v) Diversity of Interest Rate: Another defect of Indian Money Market is disparity in the interest
rates due to credit immobility and costly means of transferring money. A part from this due to lack of
co-ordination between the organized and unorganized sector also results in diversity of interest

(vi) Absence of All India Money Market: Indian Money market has not been organized into a
single integrated all Indian money market. It is divided into small segments, and there is a very little
contact among them.

Reforms of Indian Money Market:

RBI has taken various step to improve the Indian Money Market and develop sound money
market. They are:-

a) In 1970, a scheme to connect Primary Agricultural Credit Society by commercial bank were

b) 182 days treasury bills were introduced in 1987 and 364 days treasury bills were introduced
in 1993.

c) Certificate of deposits were also introduced in the year 1999, to give the investors great
flexibility in employment and short term funds.
d) Total deregulation of interest rate took place from 1985.

e) To provide flexibility to borrowed commercial papers (C.P.) were introduced as a new

instrument into the Indian Money Market.

f) In April 1988 discount and finance house limited was introduced with view in increase
liquidity in the money market.

g) In 1991, the scheduled commercial banks and their subsidiaries were permitted to setup
money market, mutual fund to increase the flow of funds into Indian money market.

4Q Explain the new instrument introduced in the India Money Market recently.

Ans: Since, a long time the Indian Money Market has been characterized as ill liquid and ill
developed. Money market therefore on the recommendation of the Chakravarthi Committee, the
new instrument were introduced in reform.

(i) 182 days treasury bills:- In November 1986, the Govt. of India introduced 182 days
treasury bills as one of the new instruments in Indian Money Market. It was introduced with a view
to widening the scope of money market. It can be purchased by any person or a firm or a corporate
body or any other institutions of India except State Government & Provident Funds.

(ii) Certificate of Deposits:- This scheme has been introduced by RBI in 1989. It
provides a better rates for investment in the banking sector. In this scheme the Scheduled
Commercial Banks are permitted to issue (CDs) without any regulation on interest rates. The
minimum amount of C.D. was Rs.1 crore in multiples of 25 lakhs. It is different from a traditional
term deposits. It is negotiable and marketable. Thus, it offers maximum liquidity to the investors.
The rate of interest on CDs have been ranged from 9% to 16%.

(iii) Commercial papers:- In 1989 another new instrument called as Commercial Paper has
been introduced by RBI. It is a short term negotiable instrument of money market. It is just like a
Promissory Note with a fixed Maturity b/w 3 to 6 months. As per the guidelines of RBI, Commercial
Paper can be issued by a NBFC possessing at least 5 crores of net assets. The other features are
its simplicity and flexibility. Any person or a bank or a corporate body excepts NRIs (Non Resident
of India) can invest in CPs.

iv) Inter bank Participation (IBP):- It has been introduced by RBI in 1988. For lending out
short term liquidity with in the perimeter of banking system. This scheme is limited to scheduled
commercial banks. IBP can be issued for a maximum period of 91 days and maximum of 182 days.
91 days IBPs are more preferable than 182 days, the rate of interest in b/w 14-17%.
v) Money Market Mutual Funds:- This scheme was introduced by RBI in 1992. The main
objective of this scheme is to provide an additional short term investments to the individual investors.
Initially this scheme did not receive a favourable response hence with a view to make this scheme
more flexible RBI permitted certain relaxations in 1995. As per the new guidelines public financial
institutions. Banks and private sectors and also corporate bodies can set up money market mutual
funds (MMMFs).

5Q Explain the structure of Indian Capital Market.

Ans: Capital market refers to all facilities and institutional arrangements for long term lending and
borrowings. Capital market does not deal in capital goods. It is concerned with raising of money

Structure of Indian Capital Market

Organised Sector Unorganised Sector

(A) Stock Market (B) Term Lending Indigenous Local Money

Institutions Bankers Tenders

(1) Gift edged Securities Market (2) Industrial Securities Market

(i) Primary Market (ii) Secondary
(or) Market (or) Stock
New Issues Market
Market (NIM)

Capital Market can be divided into two sectors they are:-

I. Organised Sector:- Organised Sector consists of stock market and term lending
institutions. It is regulated and supervised by RBI. The long term investments of scheduled
commercial banks, private and foreign banks comes under this category.

(A) Stock Market: Stock market comprises of several different markets in securities. The most
important among them are gilt edged securities and industrial securities market, the government as
well as the private organizations raise capital.

(1) Gift Edged Securities Market: If refers to the market for government as well as semi semi-
government securities. These type of securities are backed by RBI. The government will meet the
various developmental expenditures by raising the capital from this market.

(2) Industrial Securities Market: It is the market for securities of government as well as
private business organizations. This market deals with various types of papers, such as
(a) Equity Shares
(b) Preferential shares and
(c) Debentures
(a) Equity Shares:- These are the ownership shares. the holder of equity shares is considered
as the owner of that particular proportion of share holdings the divided on such shares depends
upon the performance of the company.

(b) Preferential Shares: These are the ordinary shares on which the dividend is fixed.
These shares are redeemable (or) irredeemable shares.

(c) Debentures:- These are similar to bonds. These debentures have got a fixed maturity
and fixed dividend.

This market can be further divided into two types.

(i) Primary Market: It deals with new securities.

Therefore, it is also knows as new issues market. It is a market in which new securities are
floating. The main function of this market is to make the arrangements for raising new capital.
There are various methods of floating new issues into the market. They are:-
• Issue through prospectus
• Private placements
• Rights issue
• Bonus issue

(ii) Secondary Market: It deals with the securities which are already existing. In other
words it is a market for second hand shares. We can also call it as a market for previously issued
securities. It is known as stock exchange in India. In this type of market the owners of the securities
can dispose them off as and when they desire. Stock exchange is an systematic organization for
buying and selling of listed (or) approved securities. There are 23 regional stock exchange and 2
national level stock exchange are existing in India.

(B) Term Lending Institutions:- It provide long term finance to the industry. These
institutions are IDBI, ICICI, LIC, GIC etc., these provide long term loans to the industry.

(II) Unorganised Sector:- This unorganized sector includes indigenous banker and local
money lenders. In this sector we can also include NIDHIS and chit funds.

6Q Explain the growth of Indian Capital Market:

Ans: Capital market refers to the institutional arrangements for long term lendings and
borrowings. The term capital market in India was not that popular before independence, because
Indian Capital Market was not properly developed before independence. The steady growth of
Indian capital market took place only after the independence. Therefore, the growth of Indian
Capital market can be divided into two phases. They are:-

Growth before independence

Growth after independence
Growth before Independence:
Indian capital market was not properly developed in this period because of the following

(i) Agriculture was the main occupation and there was very little organized long term lending to
this sector.

(ii) There was a very little growth of security market, because most of the English enterprises in
India looked to the London Market.

(iii) The industrial sector in India was also not developed.

(iv) The government had placed many restrictions on the market.

(v) The specialized financial institutions were not yet developed.

(vi) The individual investors were very few which were limited only to urban areas.

(vii) There was very little scope for the private sector.

(viii) There was lack of banking habits among the people and banks were limited only to urban

(ix) As people are poor their savings are less which results in less investments in the capital

(x) There was lack of encouragement from the government.

Growth after Independence:

Since independence particularly after 1951 the capital market in India has been growing
significantly because of the following reasons.

(i) Steady growth of savings and investments:- The volume of savings and investment in
the country has been growing only after independence. Because Govt. provided all
encouragements to boost savings which result is increased investment. Such as relief, cheap loans,
tax exemption etc.,

(ii) Role of Commercial Banks:- Commercial banks are the important constituents of Indian
Capital market. These banks were increasingly participating to increase the supply of funds into the
capital market. To accumulate more funds these commercial banks started many branches even
into the rural areas.
(iii) Growth of Specialised Financial Institutions:- Soon after independence the Govt. of India
started a series of financial institutions to assist private sector industries. These institutions are such
as IFCI-1948, ICICI-1956, IDBI-1964, LIC-1956 etc.,

(iv) Merchant Banking: Merchant Banking in India was originally started by separate
divisions. Now, ever commercial banks have also started separate subsidiaries of merchant
banking. It help in issuing shares and under write the new issues and also help the companies in
other financial matters.

(v) Lease and hire purchase companies:- A number of companies, banks and NBFCs
provide lease finance and hire purchase finance. Leasing means the firm can acquire the economic
use of assets without owning them. Whereas under hire purchase scheme, loans are provided to
purchase the goods on installment basis.

Other than this mutual fund is the new entrant into the capital market as it provides less risk
and high returns and useful for encouraging the small savings. Therefore, mutual funds are very
popular now a days in the capital market.

7Q Explain the differences b/w Primary & Secondary Market:


Explain the reforms of Indian Capital Market

Ans: Capital market reforms to the institutional arrangements for long term lendings and
borrowings with a view to increase number of service to introduce improved practices the
Government had various reforms of capital market in the post reforms era (1992) few of those are
discussed below:-

General Reforms:-

i) Statutory Status to SEBI:- With an act of parliament, statutory status was given to SEBI
from March 31, 1992. It was provided with the necessary power to control regulate and supervise
stock market.

ii) Permission to foreign institutional investors:- Investment norms for NRIs have been
liberalized so as to attract more funds into the capital market. The foreign institutional investors can
invest into the Indian Capital Market on registration with SEBI.

iii) Permission to Indian Companies:- Indian companies have been permitted to raise capital
for modernization and raise capital from the international capital market.

Reforms of Primary Market:-

The important reforms of Indian primary market are as under:-

1. Merchant banking has been brought under the regulation act of SEBI.
2. It companies are required to disclose all material facts and specific risk factors, which are
associated with their project while making public issues.

3. Stock exchanges are required to ensure that the companies should have a valid
acknowledgement card issued by SEBI. In other words the companies should fulfill all the
requirements to be listed in the stock market as per SEBI guidelines.

4. SEBI has also introduced a code of advertisement for public issue to ensure fair and truthful

Reforms of Secondary Market:

• Unit Trust of India has been brought under the regulatory jurisdiction of SEBI.

• Private Mutual Funds have been permitted and all Mutual Funds are allowed to apply for firm
allotment in public issues.

• Fresh guidelines were issued for advertising mutual funds.

• SEBI has also introduced capital adequacy norms for brokers and main rules for marking
client broker relationship more transparent.

• SEBI also issued guidelines to make the governing body of stock exchange more broad
based. It should have 5 elected members not more than 4 members are nominated by SEBI
and 3 or 4 members are nominated as public representatives further an Executive Director
will also be there

8Q What are the functions of SEBI ? (Securities & Exchange board of India)


Explain the role of SEBI in regulating Indian Capital Market.

Ans: On the recommendations of Narasimham Committee as well as other committees pointed

out a number of short comings in the functioning of stock market to overcome from these defects
securities in 1988. SEBI was given a statutory status in 1992 by an act of the parliament.

Objectives of SEBI:-

(i) Regulating the working of stock market and securities market.

(ii) Dealing with all matters relating to regulate and develop stock market.

(iii) Registering and regulating the working of stock brokers and other intermediaries.

(iv) Providing protection of the investors.

(v) Regulating the working of investment schemes and mutual funds.

(vi) Prohibiting fraudulent and unfair trade practices.

(vii) Promoting investors education and training for intermediaries in stock market.

Role of SEBI (or) Functions of SEBI

(i) SEBI has introduced a programme for inspecting stock exchanges. Under this programme,
inspections of some stock exchange was carried out. The basic objective of this scheme is
improving the functioning of stock market.

(ii) The process of registration of intermediaries had been provided under the provisions of
SEBI act. The broker for the purpose of buying and selling securities can be possible only if he
holds a certificate granted by SEBI.

(iii) SEBI can direct the stock exchanges to set up clearing houses.

(iv) SEBI has authorized to conduct inspections of various mutual funds, and can take the
corrective measures.

(v) Merchant banking has been statutorily brought under the regulatory frame work of SEBI.
These merchant bankers should also be authorized by SEBI.

(vi) Guidelines for tightening the entry norms was issued by SEBI on April 16th 1996.
Accordingly a company should have a track record of dividend payment for minimum 3 years in the
immediate passed can access to the capital market. Otherwise if a company projects are not
approved by commercial banks can also access to the capital market.

(vii) In July 2002, SEBI launched a centralized internet based filing system for listed companies,
which is called EDIFAR (Electronic Data Information Filing And Retrieval System)

(viii) SEBI also launched a provision to buy back for their own securities under the companies act

(ix) With the view to explain the dematerialization process of securities and settlement of
transactions in the depository was made compulsory for banks in 1997.

9Q Define Stock Exchange ?

Ans: Stock Exchange is a market where stocks, shares, and other securities are brought and
sold. It is a market where the owners of securities can dispose them of as and when they desire.
Stock exchange or stock market has both primary and secondary market segments.
A stock exchange is an organization for systematic buying and selling of listed or approved
existing securities. An organized stock exchange requires:

(a) An association of persons (or) firms to regulate and supervise the transaction.

(b) Rules, regulations and standard practices to govern the transactions.

(c) Authorised stock brokers;

(d) The exchange floor or a hall where the stock brokers or their agents transact during fixed
business hours.

Marketing of securities on the stock market can be done only through members of the stock
exchange. The stock exchange members act in one or more capacities as:

(a) Commission Broker (b) Floor Broker

(c) Tarvaniwala (d) Jobber or Dealer
(e) Badliwala or Financer (f) Arbitrageur


(i) An organized stock exchange operating under the well-defined rule and regulations.

(ii) Stock exchange provides a ready market for trading in securities and in this way capital is
made more mobile.

(iii) Stock exchange helps in determining the prices of securities.

10Q Define National Stock Exchange (NSE):-

Ans: National Stock Exchange of India (NSE) was set up in 1993 to encourage stock exchange
reforms through system modernization and competitions. It has been set up by financial institutions
and banks with IDBI as the nodal agency. It is expected to serve as a modal exchange integrating
the stock exchanges all over the country by providing nationwide stock trading facilities and
electronic clearing and settlements.

NSE operates in two different segments :

• Wholesale debt market (WDW) and

• Capital market.
The first is concerned with trading in instruments like Govt. Securities, PSE bonds, Units-64
of UTI, CDs and CPs by corporate entities (like banks, institutions, brokerage houses). The second
is concerned with equity and corporate debt instruments by corporate and individuals. The
encourages high net worth corporate trading members.

In its effort to further improve the settlement system and minimize risks associated therein,
NSE has set up a subsidiary. National Securities Clearing Corporation (NSCC). On par with
clearing corporation world over. NSCC guarantees settlement of trades executed and settle through

11Q Define over the counter Exchange of India (OTCEI) ?

Ans: Over The Counter Exchange of India (OTCEI), with its headquarter at Mumbai, has started
its operations in September, 1992. OTCEI, like NSE, has been set up with nationwide stock trading
facilities, electronic display, clearing and settlement facilities. OTCEI has been jointly promoted by
various financial institutions like UTI, IDBI, IFCI, LIC, GIC, SBI capital market ltd., can bank financial
services ltd.

The main objective of OTCEI is to create ‘over-the-counter market’ in India. It will help the
companies to raise capital from the market atleast cost and on optimal terms. It will also help the
investors to approach the capital market safety and conveniently. It will cater to the needs of the
companies which cannot be listed on the official stock exchanges. It will also eliminate the problems
of illiquid securities, delayed settlements, unfair prices, and so on as faced by the investors.

12Q Explain the Role of Non-Banking Finance Companies (NBFC) in Capital Market ?

Ans: Financial intermediaries are those institutions which link lenders and borrows. The process
of transferring saving from savers to investors is known as financial intermediation. Commercial
banks and cooperative credit societies are called “finance corporations”, or “finance companies”.
These finance companies with very little capital have been mobilizing deposits by offering attractive
interest rates and incentives and advance loans to wholesales and retail traders, small industries
and self-employed persons. They grant unsecured loans at very rates of interest. These are non-
banking companies performing the functions of financial intermediaries. They cannot be called

Number of NBFCs:

The number of NBFCs continued to grow year after year in the nineties. During 1996-97,
the aggregate deposits of 13,970 NBFCs totaled upto Rs.3,57,150 crores. The large finance
companies numbering 2,376 accounted for 63 per cent of deposits. In 1999-2000, 1547 non-
banking companies mobilized deposits of Rs.19,342 crores. There are a number of small, very
small companies about which information is not available to RBI.

Functions of NBFCs:

The functions performed by NBFCs may be described as under:

• They are able to attract deposits of huge amounts by offering attractive rates of interest and
other incentives. Half of the deposits are below two years time period.

• They provide loans to wholesale and retail merchants small industries, self employment

• They provide loans without security also. Hence they are able to charge 24 to 36 per cent
interest rate.

• They run Chit Funds, discount hundies, provide hire-purchase, leasing finance, merchant
banking activities.

• They ventures to provide loans to enterprises with high risks. So they are able to charge high
rate of interest. They renew short period loans from time to time. They therefore become
long period loans.

• They are able to attract deposits by offering very high rate of interest. In the process many
companies sustained losses and went into liquidation. The bankruptcy of many companies
adversely affected middle-class and lower income people. There is no insurance protection
for deposits as in the case of bank deposits.

• The finance companies are able to fill credit gaps by providing lease finance, hire purchase
and installment buying. They provide loans to buy scooter, cars, TVs and other consumer
durables. Such extension of functions makes them almost commercial banks. The only
difference is that NBFC cannot introduce cheque system. This is the difference b/w the two.

13.Q Describe briefly the various types of financial intermediaries services?

Explain the recent trend in financial services?

In general all types of activities which are of financial nature may be regarded as “ fianacial
services”. The term financial services in a broad sense means, mobilizing and allocating savings”. It
thus includes all activities involved is the transformation of saving into investment.
The financial service is called financial intermediation. Financial service is called financial
intermediation. Financial intermediation is the process by which funds are mobilized from savers
and make them available to the corporate customers for investment.


Besides the traditional services, the financial intermediaries render a good number of
services in recent times.
The prominent financial services are described below:
Merchant Banking:-- Merchant banking is basically a service non-fund based services of arranging
funds rather than providing them. The merchant banker merely acts as an intermediatory, whose
main job is to transfer capital from those who own it to those who need it with the increase in the
complexities and requirements of modern business, the role of a merchant banker has undergone a
substantial change. The merchant banker now acts as an institution which understands the
requirements of the entrepreneur promotes on the one hand and financial institutions banks, stock
exchanges and money markets on the other.

Mutual Funds:- The first mutual fund in India is the UTI which was established by the government of
India on July 1, 1964. Mutual funds are investment institutions . They mobilize resources from
savers and invest them in equities bonds, government securities, money market instruments etc.,
and thus build up a diversified portfolio. Investment planning is carried on by professional fund
managers who are backed up by a research them. The fund manager acts as portfolio managers for
a large number of investors. Through diversification of investment across various sectors
companies, they reduce risks of individuals investors. Investment in mutual fund products thus
represent indirect investment in shares and bonds of several companies to minimize risk and
maximize returns.
Individual investors buy units of mutual funds. Each unit represents a share in the assets of a
scheme. The income earned by the scheme from its investments in shares and bonds and capital
appreciation are shared by the unit h9olders in proportion to the shared by the unit holders in
proportion to the number of units owned by them.

Factoring:- Factoring is a continuing arrangement between a financial institution (factor) business

concern(client) selling goods and services to trade customers. As a result of this arrangement, the
factor undertakes collection of the client’s debts and finance the client on the basis of his account

However, the scope of factoring in modern times has considerably

increased. It is continued service arrangement under which a financial institution undertakes the
task of recording, collecting, controlling and protecting the book debts for its clients including the
purchase of his bills receivable. Thus, as a result of factoring services, the manufacturer, seller or
dealer in goods can concentrate on manufacturing, advertising and selling functions alone, the
record keeping functions of sales, book debts, bills receivable and their utilization are completely
vested with the factoring agency.

Forfaiting:- The origin of fortaiting lies in afresh term forfeit which means to forfeit or surrender one
right on something to some other person. It is a mechanism of financing exports. It is done by
discounting export bills without recourse to the exports. Finance varies from medium to long term
finance is provided upto 10 percent value of export bill after deducting service charges.

Forfeiting can be defined as the non recourse purchase by a bank or any

financial institution of receivable arising from export of goods and services. It is a trade finance
provided by a financial institution to an exporter for an export transaction involving deferred payment
terms over a long period at a firm rate of discount. It is generally extended for export of capital
goods, commodities and services where the importers asks for supplied on credit term.
Hire Purchase:- Hire purchase is a method of selling goods. In this transaction goods are let out
on hire by a finance company to the hire putrchase customer. The buyer is required to apy the
agreed price in periodical installments during the specified time. The ownership of the property
remain with the creditor. It passes on to the hirer only on the payment of last installment.
Hire purchase transaction is different from credit sale. In the case of sale the title
of the ownership of property passes on to the purchaser immediately. In hire purchase ownership
remains with the seller till the last installment is paid. If the hirer fails to any installment, the finance
company can take possession of the goods. Hire purchase differs also from installment sale. In
installment sale, the title of ownership as well as property passes on to the buyer. The seller cannot
take possession of good if an installment remains unpaid. He can approach the court for recovery of
the amount.

Leasing:- Leasing has became a growing business activity in Indian. It has gained momentum in
the last few years and has become a jmajor source of financing the projects of commercial and
industrial equipments. Leasing may be defined as a method of acquiring right to use an equipment
or asset for consideration. It enables the entrepreneur to reduce this investment in the project by
taking plant or equipment on hire rather than owning them. Lease finance has become a popular
sources of finance for companies needing equipments like computers, aircrafts, plants etc.

Stock Invest:- Stock invest instruments has been introduced by the government on the suggestion
made by the securities and exchange board of India. It is an additional facility available to an
investor for payment of share application money against the shares applied by him. The instruments
is essentially a combination of a letter of authority and guarantee cheque which as good as cash.
The scheme provides for various denominations of stock invest in order to enable partial
The investor who has an account or a deposit with the bank issuing the stock invest will apply
for blank stock invests. The issuing bank will give the stock invest duly signed and also marketing
the date to the investor. Simultaneously, the bank will mark to the investor ‘s account to the extent
of the stock invests issued. The investor, while applying for public issues, will enclose the stock
invest forms filling in his part along with the application form and send them to the collecting bank as
he normally does in case of cash cheques and drafts under existing system.

Underwriting:- The term underwriting means under taking the responsibility by a person or firm or
an institution that if the shares or debentures offered to the public for subscription are not fully
subscribed for the underwriter will subscribe for such unsubscribed shares or debentures. The
underwriting is thus in the inadequate subscription.

Credit Rating:- The credit rating concept originated in the USA. It spread to other countries
including India. A number of companies accept deposits and raise funds directly from the capital
market by issue of shares and bonds. Several companies in India recently defaulted in repaying
deposits and paying interest and repaying principal on bonds. So the size or the name of the
company is not adequate to establish its credit when it invites public deposits programmes.
Convertible and non convertible debentures and also credit assessment of companies. Rating is
given with symbols; FAAA, FAA, FB, and so on.
In India the credit rating information services of India ltd. (CRISIL) was established in 1988 as the
first credit rating agency. Following this, investments information and credit agency of India was
promoted in 1991 and credit analysis and research ltd. Was floated in 1993. All the three credit
rating agencies are
approved by the RBI.

14. Define Loan Syndication?

There has been an increase in the size of business units with consequent expansion of
capital expenditure. The growing need for capital expenditure cannot be financed by a single bank
or financial institution. In such cases a group of banks come together, form themselves into a
syndicate and provide jointly, finance to an enterprise to meet its capital expenditure. Now a days
more and more corporations are looking for loan syndication.

“ Syndication is an arrangement where a group of banks, which may not have any other
business relationship with the borrower, participate in a single loan”.
A syndicated facility is a lending facility defined by a single loan arrangement in which
several or many banks participate.
If a company want a huge loan for a heavy expenditure, a single bank does not come
forward to provide loan. The risk in financing such loan is heavy. It is beyond the capacity of a
single bank to bear the entire risk. In such cases it is a better for a group of banks come together to
provide finance. They thereby can share the risk. When a group of banks come together, they
select one among them as a lend bank which handles all deals with the financed company. The
lead bank negotiates the terms of loans including rate of interest. The finalized deal is signed by the
company and bank. Loan syndication is done to share risk and liability.

17. Define Depository system?

A depository is an organization which hold s shares in the form of electronic accounts in the
same way as bank holds deposits. The physical shares are converted into electronic form. Buying
and selling of shares in the electronic form is just like selling physical shares. There is no physical
transfer of shares. The transfer of ownership of securities is done by book entry similar to transfer of
bank deposits. This system, thus, eliminates paper work, facilitates automatic and transparent
trading in scrips. It also shorts settlement period. The Depository undertakes to distribute dividend,
bonus shares., to its account holders.
A depository interfaces with investors through its agents called depository participants (DP).
When an investor wants to utilize the service offered by depository, he has to open an account with
DP. This is just like opening of a bank account to utilize services of bank.
17. Define Venture Capital:

The term venture capital refers to institutional investor that provide equity finance to young
business and play an active role advising their management. According to SEBI “ Venture capital
means a fund established in the form of company or trust, which raises money through loans,
donations, issue of securities or units as the case may be and makes or proposes to make
investments in accordance with the regulations”.


The three main features of venture capital are:

venture financing is an actual or potential equity participation through direct purchase of

shares, options or convertible securities. The object is to make capital gains by selling off the
investment once the enterprise become profitable.
Long term investment:- It is a long term capital investment. It has to wait for a long period say 5
years-10years to make large profits.
Participation in management:- The venture capitalist participates continuously in the management of
financial unit. This helps him to protect his investment. More than finance venture capitalist gives
his marketing, technology, planning and management skills to the new firms.

18. Define Depository Participant (DP)

A Depository participant is an agent of depository . If an investor wants to utilize the service

of depository, he has to open an account with DP. Dp functions as an intermediary between the
investor and depository DP maintains the ownership records of every beneficial owner in book entry
form. The DP has also to be registered with SEBI.
The following is the list of DPs operating in India :
• ANZ Grindlays Bank,
• Canara Bank
• Citi Bank
• IciCi
• IDBI etc

19. DFHI


1) Explain the procedure of issuing life insurance?

A) The procedure laid down by the life insurance (amendment) act 1950 and IRDA rules and
regulations for issuing life insurance policy is as follows:
a) proposal for insurance policy.
b) Providing proof of age.
c) Undergoing medical examination.
d) Confidential report of the agent.
e) Acceptance of proposal.
f) Payment of first premium.
g) Preparing and issuing insurance policy.

a) Proposal for insurance policy: The person intending to take an insurance policy has to make a
written requisition in the prescribed form to the insurance companies. The insured has to provide
information on various aspects such as name, occupation, address, family history and health
condition of proposer, details about the income, life, habits, date of the birth, age, mode of payment,
sum assured, length of policy desired etc. The proposer is under an obligation to provide true and
correct information to the insurance company; otherwise the insurance contact cannot be

b) Providing proof of age: The proposer has to give proof of his along with proposal form if the age
is less than 25years and more than 50years.However, if the age is ranging between 25 and 50
years, he need not submit the proof of his age along with the form of proposal. But he has to provide
the relevant document supporting age at the time of making claim. The age of the insured can be
provided with a certificate issued by Municipal Corporation or municipality or by any other authorized
body or institution. The birth certificate issued by educational institution or a service book maintained
by the employer or a passport is taken as a proof of age of the insured/proposer.

c) Undergoing medial examination: Once the proposal form is submitted in the insurance
company, it is sent to the doctor approved by it for medical examination of the proposer. The insured
has to appear before the doctor for medical examination. The approved doctor examines the
proposer health condition and prepares a report which is forwarded to the insurer. Thus, medical
report forms a basis for issuing a policy by insurer to the insured.

d) Confidential report of the agent: After the medical report is received from the approved doctor
of insurance company, agent is required to furnish a confidential report about the proposer is a
prescribed form. The report of the agent contain the true information about the proposer i.e., health
condition, character, reputation, financial position, family background etc., relevant to the contract of
insurance. This confidential report of the agent is attached with the proposal form give by the
e) Acceptance of proposal: After the proposal form is received from the insured and an getting
reports from the approved doctor and insurance agent, the information provided by them is verified
by the branch officials and id there is no objectionable information, The insurance company may
accept the proposal. The insurer may also contact the references to verify information provided by
the insurer in the proposal form.
The insurance company determines the type of risk, volume of risk, probability of risk, premium rate,
desirability of requisitioned policy etc and if the assessment is favorable, insurer accepts the
proposal. Acceptance letter is sent to the purposes asking him to complete remaining formalities.
The amount of premium to be paid by the proposer is also furnished in the acceptance letter.

f) Payment of the first Premium: On receiving the acceptance letter from the insurance company,
the proposer has to pay the first premium within the time stipulated. Once the first premium paid by
the insurer become liable from the day on which it is paid, but practically the first premium amount is
paid along with the proposal form and if the proposal is reject the amount paid by him is refunded.
Premium may be paid monthly, quarterly, half-yearly or yearly accordingly to the convenience of the
insured the premium receipt is insured by insurer acknowledging the cash received.

g) Preparing and issuing insurance policy: Once the premium receipt is issued by the insurance
company, the policy comes into operation and risk is covered from that date only. Insurance policy is
prepared in the company’s prescribed from, duly stamped and executed or signed by both the
parties and is finally issued to the insured. The policy is affixed with the seal of the insurance
company. The policy document contains the details such as name of the policy, policy holder name,
age, term of the policy, premium amount, sum assured, date of commencement of policy, date of
maturity of policy, mode of payment, nominee’s name, terms & conditions of the policy etc.

2) Explain the procedure issuing duplicate policy?

A) Once the policy is issued by the insurance company, it is the responsibility of the insured to
keep the policy document in safe custody. But due to unforeseen conditions, there is every
possibility of losing the original policy document. This important document may be lost in transit, or in
shifting the house or destroyed in fire accident or damaged due to the problem of white ants or it
may be misplaced or theft might have taken place. The loss or damage does not absolve the insurer
of his liability to pay the policy amount when it becomes matured or claim arises. In such a case the
payment is made to insured on furnishing an indemnity bond. If the policy is in force and not
matured, the policy holder may ask for duplicate policy. The duplicate policy can be made used for
raising loans from banks, and other financial institutions. It can also be used for raising policy loans
from insurance companies. Thus, these necessaries may force the insured to seek a duplicate policy
from the insurer.
For issuing duplicate policy, the insurance company has to follow certain rules and
regulations which are explained below:

a) The insurer has to verify the reasons or circumstances under which the policy is lost.
b) The insurer has to give an advertisement in the newspaper notifying the los of insurance policy.
c) The insurer has to obtain a indemnity bond duly signed by the policy holder and a surety.
d) The insurer should verify whether first information report is filled in police station in case of loss
of policy by theft.
e) The final investigation report of police is required in case the policy is lost by theft.
f) In case the policy document is partially burnt, mutilated or damaged, the remnants may be
produced for examination.
g) The insurers probe whether policy holder has mortgaged or assigned the policy to any person or
institution for raising the loan.
After satisfying with all these formalities, a new policy document is issued by the
insurer to the insured. A rubber stamp indicating ‘duplicate’ may be affixed on the new document. It
is as good as the original policy document for all practical purposes. For issuing duplicate policy
document in place of burnt, mutilated or damaged policy, there is no need for giving an
advertisement and obtaining indemnity bond. The insured has to bear the cost of issue of duplicate
policy, advertisement, stamp duty etc.

3) Define Nomination?

A) The insured who takes the life insurance nominates the person or persons to whom the money
secured by the policy shall be paid in the event of his death. Section 39 of his insurance act enables
the insured either at the time of affecting the insurance or any time subsequent thereto to nominate
any person to receive the policy money in the event of his death. The nomination enables the
nominee to receive the policy proceeds without the necessity of producing any legal representation
to the estate of the deceased life assured. But such nominee is liable to account for the moneys to
the estate of decreased life assured.
Section 39 of the insurance act gives a complete code of nomination by a policy holder
which is detailed below:
a) The holder of life insurance policy may nominate a person to whom the moneys secured by the
policy shall be paid in the event of his death.
b) Where nominee is a minor, the policy holder has to appoint in the prescribed manner any person
to receive the moneys secured by the policy in the event of death during the minority of the
c) Any change in the name of nominee must be communicated by insured to the insurer by an

4) Define policy loans?

A) Availability of loans on the security of the policy is an important privilege to the policy holder.
It provides ready money in times of emergency to the insured. The process is also very simple and
easily loan can be availed. Loans are generally granted up to 90% of the surrender value for the
policies in force and 85% of surrender value for paid up policies. Sometimes the insurers may offer
higher percentage also. The rate of interest currently charged on policy loan is 9.5%p.a payable half
The policy loans are repaid is full or part during the enforcement of
policy or may remain as a debt on the policy moneys until the claim arises. The insured intending to
raise policy loan has to fill in the loan form provided by the insurer.
5) Define surrender value?

A) Surrender is a voluntary termination of the contract by the policy holder. The life insurance policy
holder can surrender the policy at any time before it becomes a claim. The amount payable by
insurer to the insured or the surrender of the policy is called as surrender value.
The surrender value is published by insurance companies either in the prospectus or is
mentioned in the policy conditions. Some companies offer guaranteed surrender values as required
by the law. The actual surrender value may be even better than the guarantee value. The life
insurance corporation by India offers 30% of all the premium paid excluding the first year and all
extra premiums and or additional premium for accident benefit. For single premium policies LIC
offers guaranteed surrender value at 90% of single premium.
The amount of surrender value is calculated on the basis of actual premium paid and the
number of years the policy is in force. Surrender value increases with each premium i.e., for older
policies where in the premium paid is more, the surrender value would also be high. The maximum
period required for surrender value in LIC of India is 3 years.

6) Define Assignment?

Ans) The general meaning of assignment is transfer of property. A life insurance policy is a
property of insured. Under section 5 of the transfer of property act, 1882 of property means an act by
which a living person conveys property, in present & in future, to one or more other living persons.
The term living person includes a company or association or body of individual, whether
incorporated or not.
Characteristic of Assignment:
The transfer of property Act 1882 has described the characteristics of assignment as follows:
1. As assignment is an actionable claim and empower the policy holder to sell, mortgage,
charge or gift the insurance policy to any person of his interest.
2. An assignment transfers the rights & interest of the assignor to the assignee.
3. An assignment can be made by an endorsement or the policy document or as a separate
4. An assignment must be signed by the transferor his duty authorized agent.
5. The signature of the policy holder must be attested by a witness.
6. The assignor must be major & competent to contract.

7) Define policy revival schemes?

Ans) The LIC of India is offering various revival schemes to suit the convenience of the policy
holders. They are ordinary revival scheme, special revival scheme installment revival scheme; loan-
cum-revival scheme & survival-cum-revival scheme. The other life insurance companies may offer
similar schemes for conveniences of policy holder.
a) Ordinary revival scheme: Under this scheme, the policy holder has to make payment of all
the arrears of unpaid premium with interest, along with evidence of good health. A requisition
for revival of policy should be made to the insurance company by the insured and after
verifying the justification of revival the policy may be revived immediately.
b) Special revival scheme : This scheme is applicable

1. To those policies which have not acquired any surrender value on the date lapse.
2. The period expired after lapse is not less than six month &* not more than 3 years &
3. The policy had not been revived under this scheme earlier is also considered.

8) Define claim settlement?

Ans) A claim is the demand foe performance of the promise made by the insurer at the time of
making the contract, the insurer has to settle the claims after satisfying himself that all the condition
for claims settlement is an important aspect of insurance contract & insurer has to evince positive
object5ive in it, the goodwill of the insurance company. The impressions about insurance company
are created in the minds of policyholders is particular & the insuring public is general on the basis of
has to examine the policy and other records for an early settlement of claims.

9) Explain the meaning & types of non-life insurance product?

Ans) Section 2 of the insurance Act 1938 defines non-life insurance as Fire, marine or
miscellaneous business, whether carried on singly or in combination with one or more of them.
Miscellaneous insurance includes in its scope all non-fire, non-marine business i.e. motor insurance,
burglary, personal accident, aviation & engineering insurances etc. thus, the non-life insurance
covers the business and the other activities except the life insurance.

Types of Non-Life Insurance Product

In the non-life insurance business, the general insurance companies offer more than 160 varieties of
policies to the public to suit their different needs. The following chart gives the details of non-life
insurance products offered by general insurance companies
Classification of Non-life insurance products
Commercial line of insurance Personal line of insurance
a. Cottage, tiny & small sectors instance a. Property insurance
b. Traders insurance b. Health insurance
c. Professionals & specific professions insurance c. Accident insurance
d. Industries & commercial organizations insurance d. Liability insurance
e. Rural industries & rural insurance prospects.

A. Commercial lines of insurance: It refers to insurance for business, professionals &

commercial establishments. The various policies offered to meet the requirements of these
institutions are listed below:
a. Policies for traders: The policies offered to traders by the general insurers are
Dukanmitra policy, fire policy, marine cargo policy, cash policy, fidelity guarantee, plate
glass & neon sign insurance, motor insurance, office umbrella policy, burglary policy,
shopkeeper’s policy, trader’s policy etc.
b. Policies for cottage, tiny & small sector industries: The policies intended to meet
the reuirement5s of cottage industries, tiny & small sector industries are burglary
policy, cash policy, and motor policy etc. these policies are also available to specific
traders & general traders.
c. Policies for professional and specific professions insurance: The policies offered
to the professionals and other specific professional include marine hull insurance,
bankers indemnity insurance, stock exchange and brokers insurance etc.
d. Policies for industries & commercial organizations: The policies for industries &
commercial organizations can be taken on the basis of project covers & operational
i. Project covers: under this, the various polices offered to industries &
commercial organizations include storage cum erection insurance, workmen
compensation insurance, marine-cum-erections insurance & contractors plant &
machinery policy
ii. Operational covers: Under this, the various policies offered to industries &
commercial organization include fire insurance, marine cargo insurance, boiler
explosion insurance, cash insurance, fidelity guarantee policy, motor insurance,
special contingency insurance etc.
e. Policies for rural industries & rural prospects: The policies offered to the rural
industries & rural prospects include policies such as plantation insurance, failed well
insurance etc.
B. Personal line of insurance: It refers to insurance for property, accident, healths & liability.
The various policies offered to meet the requirements of these categories of the people are
detailed below:
a. Property insurance policies: The various policies offered for insuring property are fire
A+B policies, pager/ cellular phone insurance, gruha raksha policy motor insurance,
gun insurance, householder policy, television/VCR policy, baggage insurance, pedal
cycle insurance etc.
b. Accident insurance policies: Accident insurance policies offered by insurer are
personal accident insurance, crackle core insurance, passenger flight capon insurance,
suhana safar policy, kidnap & ransom insurance, Bhagya shri policy etc.
c. !Unexpected End of FormulaHealth insurance policy: The various health insurance
policies are med claim insurance, videsh yatra mitra policy. Cancer insurance, sea
farmer’s health insurance, health quartel for non-resident Indian etc.
d. Liability insurance policies: The liability insurance policies offered by insurer are
professional indemnity policy, adhikari suraksha kavach, doctor’s indemnity policy etc.

10. Explain the scope of Fire Insurance

Short notes:

Social insurance:
Social insurance means, offering insurance facilities to the social sector. Social sector includes
unorganized sector, informal sector, economically backward sector and other categories of person
in both rural and urban areas.
Unorganized sector includes self employed workers such as agricultural; labourers, artisans
handloom workers etc.

Rural insurance

India is rural country. More than 70% of our population lives in rural areas. Rural occupations such
agriculture, cottage industries, cattle raring etc., are supporting that 70%of population. All these
occupations includes high level of risks. Therefore, insurance that is rural insurance is very much
necessary. The need of rural areas especially crop insurance, cattle insurance, life and property
insurance, health insurance etc., have great scope for the development.
Crop insurance is the most important component of rural insurance. Insurance require systematic
records and land ownership titles, yield per hectare.
The other component of rural insurance are cattle insurance, sheep and goat insurance, poultry
insurance and fish insurance policy.

10. Explain the scope of fire insurance?

Ans: Ans: Fire insurance is a recent developed concept in insurance sector. It is covered under
the insurance act 1938.
“ Fire insurance is a cover against the risk of loss of property due to fire accident.”
Features of Fire Insurance:
1. It is a General Contract:
It is on of the important feature of fire insurance, It contains all the features of a valid contract. This
is accepted by the insurer for the consideration of the premium. The insurer issues the policy with all
terms and conditions of the contract.
2. Contact of Indemnity:
Fire insurance is a contract of indemnity, in the event of loss the insured can recover actual amount
of loss. Insured is allowed to gain excess amount out of the loss caused due to fire.
3. Insurable interest:
4. period of the policy: Fire insurance policy is issued for one year. Therefore they are popular as
Annual insurance

Types of fire policy:

 Valued policy: under this policy, the value of the property to be insured is
determined at the time of the policy is taken. In the event of loss the fixed
amount is payable irrespective of the actual amount of loss.
 Specific policy: This policy covers the loss up to a specified amount which is
less than the real value of the property \. Thus it is an under- insurance polic. The
whole of the actual loss is payable provided it does not exceed the insured
 Comprehensive policy: Comprehensive policy as the name indicates covers
losses against risks as fire, theft, burglary, riots, civil disturbances etc. therefore
this policy is popular as ‘all in one policy’. It may also cover loss of profits
during the period the business remains closed due to fire.
 Floating policy: it is a policy which covers property at different places against
loss by fire. Example: goods stored in two different warehouses. It covers goods
in two or more localities under one sum assured for one premium.
 Average policy: A policy with ‘ average clause’ is called average policy. The
amount of indeminity.

11. Explain the scope of marine insurance?

Ans: Definition: Marine insurance is the oldest insurance which was introduced long
back to compensate on sea and to compensate the loss due to various sea perils or loss of
the ship etc. In todays context, marine insurance is an important part of trade and commerce
and is a significant part of global insurance business. M arine play a key role in
international trade. Law relating to marine insurance act 1963.
According to section 3 of marine insurance act, 1963 defines marine insurance
as, a contract where by an insurer undertakes to indeminity the assured against marine losses
that is to say the losses incidental to marine adventure.

Features of marine insurance contract:

1. Features of a valid contract: marine insurance is a contract, therefore it should possess the
features of avalid contract, according to Indian contract act. They are;

• The proposal forms called slips are the offer from the merchant. The original slip is
submitted along with the other material information . this is proposal from the merchant
or the ship owner is the offer.
• The master and crew of the ship have an insurable interest in respect of their wages.
• Premium is consideration to contract.
• The policy is prepared, stamped and signed and it will be the legal evidence of the
• When slip is presented to the insurer, he checks it and satisfied he puts initial. Now the
proposal is accepted. once the slip is accepted the offer of the proposer is accepted by
the insurer

2. Insurable interest in marine policy:

• Owner of the goods has insurable interest to the extent of total value of the goods.
• Owner of the ship can insure the ship to its full price
• Buyer of the goods who insured them has insurable interest even he rejects the
• Insurer has an insurable interest in his risk and may reinsure in respect of it.
• The receiver freight can insure up to the amount of freight to be received by him.
• The policy holder has an insurable interest in the charges of any insurance which
he may effect.
• If the subject matter insured is mortgaged, the mortgager has an insurable interest

3. Disclosure by agent: When insurance policy is taken through an agent, the must
disclose to the insurer every fact. The agent is deemed to know all the details of material
information. If the information is false, the insurer can avoid the policy. If negligence can be
held against the broker, he may be liable for breach of contract.

4. Principle of Indeminity: Marine insurance is a contract of indeminity. It implies

that the policy holder cannot make profit out of a claim. In the absence of principle of
indeminity, the policy holder may make profit out of claim. The insurance contract implies
that the indeminifies only to the extent agreed upon. The basis of indeminity is always a cash

5. principle of subrogation: This principle specifies that the policy holder should not get
more than the actual loss. The insurer has a right to pay the amount of loss after reducing the
money received by the policy holder from the third party. After indeminification the insurer
gets all the rights of insured on the third parties. But he cannot file suit in his name. Therefore
he has to take the support of the support of the policy holder.

Types of marine insurance policies:

Time policy: if the policy is to insure the subject matter for a definite period of time it is
called time policy. For example: 6 AM of 1st July 2009 to 6 AM of 31 March 201’0 or 6 Am of
1st March 2009 to 6 PM 28th February 2010. Usually time polices are taken for one year. If the
policy contains a clause ‘continuation clause’, if the ship is till at sea, the policy will continue
for some more time. But the policy holder should take a fresh policy duly stamped for the
continuation period. Time policy is commonly taken for hull insurance.

Mixed policy: if a policy contains the provision of both time policy and voyage policy, it is
called mixed policy. This policy covers the risk during a particular voyage for a specified
period. Example: from Bombay to London for six months.

Valued policy: Valued policy specifies the agreed value of the subject matter insured.
Therefore the value of loss to be compensated by the insurer is fixed and remains constant
throughout. The insurer and the insured agree upon the value at the time of taking the policy.
Thus it is also called insured value or agreed value. The insured value need not be actual value.

Unvalued policy: unvalued policy does not specify the agreed value of the subject matter
insured at the time of taking policy . it left to be valued when the loss takes place. Thus, it is
called as open policy or insurable policy. Unvalued policies are not popular and are also not
common like marine insurance

Floating policies: floating policies gives the description of insurance in general terms.the
policy just mentions the amounts for which the insurance is taken for each shipment. It leaves
other details such as name of the ship etc., to be given in the declaration. Floating policies are
popular in large scale international trade.

12. Explain IRDA act?

Ans: insurance regulatory and development authority (IRDA) act 1999 was passed to make
the insurance regulation more efficient and to develop the insurance sector according to the
fast changing global economic changes especially against the liberalization and globalization.
The act empowered the government to establish an authority to protect the interest
of the insurance policy holders. Its purpose is regulated, promote and ensure orderly growth of
insurance industry.

Malhotra committee: The government of India constituted a high power committee

headed by sri. R. N. Malhotra, former governor of the reserve bank of India in april 199. The
committee was entrusted with the responsibility of examining and studying the structure of
insurance sector and recommend ways and methods to make it more efficient and competitive.

The committee submitted its report in January 1994 with a series of

recommendations. The prominent recommendation stressed by the committee was
establishment of a strong and efficient insurance regulatory authority which should be a
statutory and autonomous body on the lines of SEBI.

After a lengthy discussion and further studies, finally in December 1998, the bills
was introduced along with the recommendations of the standing committee on finance and
finally the act came into force in 1999.

Provisions of the Act: The act empowered the central government to establish insurance
regulatory and development authority. It should be a body corporation having perpetual
succession and a common seal with power subject to the provisions of the act. Authority is
managed by a board headed by chairperson appointed by the central government.

The insurance regulatory and development authority empowered to make necessary

amendments to the insurance act 1938, life insurance act 1956 and general insurance business
(Nationalisation) act 1972. consequently the recommended amendments were made in
respective acts.