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This document provides an introduction to banking theory, law, and practice. It defines key banking terms like bank, banker, and banking. It outlines the relationship between a banker and customer, including the general relationship as debtors and creditors and more specific relationships as trustee/beneficiary and agent/principal. The document also describes the obligations of bankers to honor cheques and maintain secrecy of accounts, as well as the rights of bankers including lien, set off, appropriation, and interest charges. Finally, it examines different types of bank accounts like fixed deposits, savings accounts, current accounts, and recurring deposits.
This document provides an introduction to banking theory, law, and practice. It defines key banking terms like bank, banker, and banking. It outlines the relationship between a banker and customer, including the general relationship as debtors and creditors and more specific relationships as trustee/beneficiary and agent/principal. The document also describes the obligations of bankers to honor cheques and maintain secrecy of accounts, as well as the rights of bankers including lien, set off, appropriation, and interest charges. Finally, it examines different types of bank accounts like fixed deposits, savings accounts, current accounts, and recurring deposits.
This document provides an introduction to banking theory, law, and practice. It defines key banking terms like bank, banker, and banking. It outlines the relationship between a banker and customer, including the general relationship as debtors and creditors and more specific relationships as trustee/beneficiary and agent/principal. The document also describes the obligations of bankers to honor cheques and maintain secrecy of accounts, as well as the rights of bankers including lien, set off, appropriation, and interest charges. Finally, it examines different types of bank accounts like fixed deposits, savings accounts, current accounts, and recurring deposits.
& Practice Dr. A. Balu, Senior Lecturer KCC Kodaikanal 624 104. Unit 1 Introduction Banker Customer Relationship Types of Deposits Types of Customers Bank Meaning: French word Bancus or Banque A bench on which early bankers transacted their banking business German word Back (termed as Banco in Italy) A Joint Stock Fund. Banker Definition: The banker at present has three ancestors viz., merchants, goldsmiths and money lenders - Geoffery Crowther Banking Definition: Section 5 (b) of Banking Regulation Act 1949
Accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise
Features of the Definition: Performance of essential functions The phrase deposit of money from the public Time and mode of withdrawal Resource mobilisation
Customer Definition: To constitute a customer there must be some recognizable course or habit of dealing in the nature of regular banking business - Sir John Paget
It is known as Duration theory Features of Customer: - Have an account in a bank - Dealing with a bank - Dealing must be in the nature of banking business - Dealing may be of short or long duration
Relationship between a banker and customer
Relationship General Relationship Special Relationship General Relationship General Relationship Primary Secondary Primary Relationship Debtors & creditors relationship: - Demand for payment - Demand at proper time - Demand in proper manner Secondary Relationship 1. Trustee & Beneficiary relationship (at the time of keeping valuables): - Bankers does not get ownership - It does not compensate the creditors at the time of banks liquidation - Deposits carry any standing instruction (trustee & beneficiary) and vice versa - cheque deposits for collection (trustee & beneficiary) and vice versa. 2. Agent & Principal relationship: - Collection of bills of exchange on customer behalf. - Purchase or sale of securities on customers behalf. - Payments of customers dues like insurance premium, telephone & electricity bills etc. on customers behalf. Special Relationship Special Relationship Obligation Rights Obligation of the banker 1. Obligation to honour the Cheques: - Sufficiency of funds - Applicability of funds - Proper requirements for payment - No garnishee or attachment order 2. Obligation to maintain secrecy of accounts: a. Legal necessity it will disclose if it is required by; - Income tax act - Companies act - RBI act - Banking regulation act - Gift tax act - Order to court - Foreign regulation act b. Banking Practice:
1. Disclosure with customers consent - Express consent (customer can instruct) - Implied consent (guarantor) 2. Disclosure for bankers own interest - To bankers lawyer (recovery of dues) 3. Disclosure of request by other banks - Can furnish data except the actual figures 4. Disclosure for public interest - When it helps to find a criminal - Person involves in Illegal activities
Consequences of wrong disclosure: Liability to the customer: Banker should compensate the loss due to the wrong disclosure Liability to the third party: Banker should compensate the loss for the wrong disclosure
Rights of a banker 1. Right of lien: - Lien is a right of the person who can retain the goods of another in his position until a debt due to him is paid. - Particular lien on particular property. - General lien Any property can be retained. Conditions to be satisfied in lien: - Banker must possess the property/security. - Property/security must be in the name of the customer alone. - The possession obtained by banker legally. Exception to the right of lien: - Valuable accepted for safe custody. - Bill of exchange/other documents deposited for other purposes. - Money deposited for special purposes like purchase of securities - Documents/valuables left with the banker by mistake - Trust a/c operated by the customer against his personal a/c. - Securities lodged with a banker for getting a loan before sanctioning such loan 2. Right of Set Off: - Banker can exercise the right by setting off a debit balance in one a/c with the credit balance in another a/c maintained by the same customer. Right of set off subject to the following conditions: - No agreement contrary to this right. - Formal notice to the customer. - Capacity of the customer must be same in all the a/cs. - Different branches of bank will constitute one entity. - Banker has the option (customer cant compel the banker). - Banker can do this even after the receipt of garnishee order. 3. Right of Appropriation: - Appropriation of amount will arise when a customer; - Owes several debts to a banker and - His payment is not sufficient to discharge all his debts. 4. Right of charge interest, incidental charges etc: - Banker has the right to charge interest on due from customers - It has the right to charge incidental charges on customers a/c Types of Deposits or Account: - Fixed Deposit - Saving Bank Deposit - Current Deposit - Recurring Deposit
Fixed Deposit: Features: - Deposit accepted for fixed period - Period mentioned - cash reserve not required - Can be used by bank in more profitable manner - Rate of interest is comparatively high
Opening of Fixed deposit A/c - Filling of an Application - Name, Age, Sex, Address, Period, Nominee if any etc., - If it is joint a/c (who is the payee) - Specimen signature of the depositors - Verification of application - Collecting of money - Issuing FD Receipt Contents of FDR: On its face On its back Name of the bank Columns for marking payment of interest, principal and renewals if any Holder of deposit Amount and period of deposit Rate of interest Column for customer signature Date of maturity Not transferable & Not negotiable Legal position of a banker as regards to FDR - Premature withdrawals [interest 1% less] - Advance against FDR - Interest 3% more than FD interest - 75% value of FD - Payment of interest - Monthly or Quarterly or Half yearly or Annually - Repayment of FD [on surrender of FDR] - Repayment of third person [authorised person] - Donatio mortis causa [Gift death of donor donee] - Loss of FDR [Duplicate FDR] - Change in the name of the depositors - Fixed deposits in joint names 2. Savings bank Account Features: - Restriction of Deposits - Minimum balance - Cheques payable to others can not be deposited - Restriction on withdrawals - Through cheques /withdrawal forms - Total withdrawals < 500 in half year - Interest - Interest 3 4.5% p.a. - Calculated once in 46 days (varies) - It is transferable form one branch to another 3. Current Account Features: - Suitable for business and big organisations - No interest - Incidental charges [Min Bal. not maintained] - Privileges - OD facility - Third party cheques can be deposited - Granted loans are credited in the a/c Opening of Current Account: - Application - Letter of introduction if not - Bankers loose their statutory protection - OD will be irrecoverable - Fraud or misrepresentation occur - Specimen signature - Mandate for operation by agent - Verification of documents - Opening of an account - Issue of pay in slip, cheque book & passbook 4. Recurring /Cumulative Deposit: Features: - Features of saving/fixed deposits are applicable - It can also transferable Special features: - Depositors can select the amount period - Amount in multiples of 100 - Period 1 to 10 years - Any person including minor can open - Passbook will be given - At the end interest and principal Differences between FD & SB a/c FD A/c SB A/c Repayment on certain date On demand No need of cash reserve CR is needed Introduction not necessary It is necessary High rate of interest Low rate of interest Suitable for investors Suitable for small savers Loans available on FDR No loan facility Practically he is not a customer He is a customer Only deposit receipt is given Cheque book, passbook & pay in slip will be given if necessary Differences between FD & Current a/c: FD A/c Current A/c Time deposit Demand deposit No need of cash reserve CR is needed Introduction not necessary It is necessary High rate of interest No interest Suitable for investors Suitable for business people Loans available on FDR OD facility available Practically he is not a customer He is a customer Only deposit receipt is given Cheque book, passbook & pay in slip will be given if necessary Differences between SB & Current a/c: SB A/c Current A/c Object to promote the habit of savings Provide convenience to customers Third party can not be deposited Can be OD not available Available Reasonable rate of interest No interest Withdrawals are restricted No restriction Comparatively lesser cash reserve More CR required New schemes of deposits 1. Super savings packages: 1. Monthly deposit 2. 15 40 years 3. Lump sum at the end 2. Cash certificate 1. Higher face value (IVP/KVP) (8 years) 2. Period should be mentioned 3. Maturity time will be mentioned Annuity deposits: - Provide regular monthly income - Period 36, 60, 84 or 120 months - Only one Initial investment - Monthly payment of interest 4. Cash certificate 1.Development of FD schemes 2.Interest calculated periodically 3.Interest is reinvested Perennial premium plan: - Regular monthly payment for fixed period - After that regular monthly pension scheme for some years or will be given 6. Cash certificate: 1.Development of FD schemes 2.Interest calculated periodically 3.Interest is reinvested 7. Educational Plans: 1.Helps to meet children education expenses 2.It encourages the parents 3.Monthly deposit specified period 4.Sum assured on maturity Types of Customers: Minor Married woman Lunatic Drunkard Illiterate person Trustees Executors & Administrators
Attorney Joint Hindu Family Partnership firm Joint Stock Company Society & other non- trading concern Local authority 1. Minor: Less than 18 Less than 21 Guardian He/She can not enter into a contract Banker can open Precautions to be taken by bank: 1. Type of Account 2. Date of Birth 3. Death of minor or guardian 4. Loans to minor 5. Loan to minor on the guarantee of 3 rd person 6. Liability regarding negotiable instrument 7. Minor as a partner 8. Minor as an agent Guardian: Natural guardian Testamentary guardian Appointed by the court 2. Married woman: Can enter into a valid contract Husband cant liable except she act as agent for her husband purchase of necessaries not provided by her husband Precautions to be taken by bank: 1.Any type of A/C 2.Enquire about her personal estate 3.Husband assets can be taken as collateral 3. Lunatic Unsound Mind: Cant enter valid contract Cant open A/c If an A/c holder become lunatic Precautions to be taken by bank: 1. Suspend the operation of A/c 2. Confirm with proper evidence 3. Acceptance of any bill etc he will not be liable 4. Operation after court order 4. Drunkard: Legal position of a person disturbed by liquor or drugs Contract void Cant open an A/c Precautions to be taken by bank: 1. Dishonour the presented cheque 2. Dishonour the 3 rd party cheques 5. Illiterate Person: Allowed to open account Thump impression - Signature Precautions to be taken by bank: 1. Left hand thump impression 2. Identification marks 2 3. Photographs 2 4. Explain the operational Conditions 5. Withdrawal In person with passbook 6. Trustee: Trust for the properties of a deceased person Manager Trustee Beneficiary for whom the trust is formed. Precautions to be taken by bank: 1. Careful study of trust deed 2. Authorized person to operate a/c 3. Death or retirement of trustee 4. Insolvency of trustee 5. Loan to trustee 1. Not allowed 2. Cant sell the property 3. Special provision in the deed. 7. Executor & Administrator: Executor Appointed by the will of a deceased person to settle his accounts. Court permission is required Official confirmation of the will probate. Administrator Appointed by court when no executor is appointed or he is not willing to act. Duties are same Realize the assets & pay off the liabilities. Precautions to be taken by bank: 1. Examination of documents 2. Style of account 3. Operation of the account 4. Misappropriation of funds 5. Borrowing powers of executor/ administrator 8. Attorney: Attorney a person appointed by a document called Power of attorney to act on behalf of another person. In writing, stamped and registered Attorney
general Special (All Transactions) (Particular Transaction) Precautions to be taken by bank: 1. Examination of power of attorney 2. Time period of power 3. No loan/OD unless special power 9. Joint Hindu Family: It is governed Hindu law Precautions to be taken by bank: 1. Knowledge of law & customs 2. Dealing with karta 3. Karta personally liable 4. Members liable to the extend of their share 5. Purpose of loan 6. Incase of trading JHF manager karta pledge & borrow. 10. Partnership Firm: It is governed Partnership act 1932 Precautions to be taken by bank: 1. Study - partnership deed 2. Opening of account 3. Letter or mandate from partners 4. Revocation of authority and stop payment of cheque 5. Firms cheque endorsed in favour of a partner 6. Implied authority of a partner 7. Power to borrow 8. Order of payment of firms debt and personal debts 9. Reconstruction of a firm 11. Joint Stock Company: Artificial person by companies Act 1956 Separate existence It can sue & be sued by others Precautions to be taken by bank: 1. Verify the certificate of incorporation 2. Verify the certificate of the commencement of the business. 3. Verify the MOA 4. Verify the AOA 5. Obtain a copy of MOA & AOA 6. Obtain a copy of financial statements 7. Obtain a copy of board of resolution 8. Borrowing powers of the company 9. Registration of charges 12. Societies & Other Non-Trading Association: Artificial person by societies registration act or the cooperative societies act Act 1956 Educational institutions, hospitals clubs etc., Precautions to be taken by bank: 1. Verify the registration of association 2. Obtain the copies of memorandum & Articles. 3. Check the objectives 4. Check the rules & by-laws 5. Copy of resolution 6. Person to operate the a/c 7. Borrowing powers 13. Local Authorities: Artificial person by government provisions. Municipality, corporation etc., Precautions to be taken by bank: 1. Study the special act 2. Can have different a/c for each section 3. Copy of resolution 4. Borrowing power for OD Different forms used in day to day banking: - Withdrawal slips/forms - DD forms - SB A/c deposit forms (pay in slips) - Current A/c deposit forms (pay in slips) - Recurring A/c deposit forms (pay in slips) - Multiple purpose forms - A/c opening forms Assignment topics: The students are advised to take any one of the above mentioned assignments and submitted with in a week from the completion of the unit. Banker Customer Relationship Types of Deposits Types of Customers Further Reading:
Banking Theory - Sundaram Varshney Banking theory law and practice - S.M. Sundaram Banking Theory - E. Gorden & Natarajan Practical Banking - M. Radhaswamy Unit II Commercial Banks State Bank of India Regional Rural Banks Reserve Bank of India recent development in banking sector Unit II 1.Before British period Indigenous bankers 2. Britishers Difficult to deal with them 3. Britishers Encouraged agency houses to start banking 4. Britishers Setup bank of Hindustan in 1770 5. Indian government RRB in 1976 6. Co operative banks 7. Branches of foreign banks 8. Industrial banks Commercial Bank Origin and Growth Functional of Commercial Banks Functions Primary Secondary/ Subsidiary PRIMARY FUNCTIONS Receiving deposits from the Public Granting Loans and Advances All kinds of deposits savings term recurring current Receiving Deposits Cash Credit Overdraft Loans System Purchase & Discounting of Bills Making Loans and Advances SUBSIDIARY & SECONDARY FUNCTIONS Functions Agency service Miscellaneous & General utility Payment of subscription, premium, rent etc Collection of promissory note, dividends, salaries, pension etc Purchase and sale of stocks and shares Acting as Trustee, Executor, Administrator or Attorney AGENCY SERVICES Safe custody of customers valuables Letter of Credit Travellers cheque Remittance of funds Merchant banking Miscellaneous or General Utility Service Dealing in foreign exchange business Import & Export Finance Housing Finance Under writing of securities Tax Consultancy Credit cards Gift Cheques Teller System Role of Commercial Banks in the Economic Development of the Country 1. Collection of savings 2. Productive Investment A mere injection of money and credit cannot star a process of growth - Rockfeller David 3. Agricultural & Rural development 4. Industrial development 5. Development of Trade and Commerce 6. Development of foreign trade 7. Balanced regional development 8. Optimum utilization of natural resources 9. Finance to government 10. Creation of employment opportunities 11. Government sponsored programme Modern Services Rendered by Commercial Banks 1. Financing Lease: Lessor Lessee No provision in act 1949 amendment act 1983 with the permission of Lessor. 2. Merchant Banking Service to entrepreneurs Commencement of business Project Counselling Feasibility Reports Economic Technical Financial Market survey. Raising of loans new issues of shares & debentures Financial planning modification & restructuring of capital Organisational restructuring Amalgamation, Absorption, conversion of partnership into Pvt. ltd Co, Pvt. Ltd. Co into Public ltd Co. 3. Factoring Continuing arrangement between banker and trader Purchase of traders books Administration of traders sales ledger Making prepayments for the debts purchased Collection of debts purchased Meeting the credit risk involved 4. Tele-banking Facility Ordering for DD Faxing of annual statements Payment of bills Booking tickets 5. Stock Invest Customers can pay subscription to capital issues Banks will issues Money will be in the investors A/c Interest will be paid till allotment 6. ATM Draw cash Deposit cash Get mini statement View the balance Request for cheque book Transfer of funds (one a/c to another in the same branch) Deposit of cheque for collection 7. Credit cards For reputed customers Purchase of goods & services Credit limit fixed by banks Sales voucher given after purchase Customer signature is must Signature verification Charges will be applicable 8. Debit Cards Similar to credit cards Purchase all over the world Purchase by Debiting bank account ATM cum Debit card Charges is applicable 9. Internet banking Using E-mail ID Instruction to bank officials Anywhere Banking Withdrawal of cash Deposits of cash Transfer of funds Collection of local Cheques Issue mini statement Balance enquiry SBI - Origin Established in 1 st July 1955 By an separate Act By taken over Imperial bank of India 1959 8 state owned banks were constituted as subsidiaries. Among 8 two of them merged in 1963 All together called State Bank group. First bank under public sector Largest commercial bank in; Branch network Resources Man power It holds major portion of banking of public & private sector undertakings SBI Share Capital Started with an authorised capital of Rs. 20 Crores. (20,00,000x100) It has grownup to 200 crores A major portion of shares with RBI The Capital of its subsidiary was 114 crores. SBI Management Managed by central board of directors; A Chairman & Vice-Chairman Central Government 2 Managing directors Central Government 6 directors Elected by share holders other than RBI 8 directors Nominated by central Government with the consultation RBI 1 director nominated by Central Government 1 director nominated by RBI 2 directors Appointed to represent the officers & Staff of the bank Apart from this there are local boards at: Kolkota Mumbai Chennai New Delhi Kanpur Hyderabad Ahmedabad Bhopal Patna SBI Functions & Workings Peculiar features of its functions 1. Agent of RBI Act as an agent where there is no branch for RBI Helps in implementing the monetary & credit policy 2. Clearing operations
Clearing operation are managed by SBI where there is no branch for RBI For this purpose it maintains all other commercial banks accounts 3. Finance to industry Finance to large scale industries Finance to SSI schemes Finance towards Working capital Expansion Modernisation
4. Advance to priority sector
5. Finance to small business 6. Merchant Banking Financial advise to new projects Helps in technical feasibility studies Organises different types of financial assistance Helps the small, medium and new entrepreneurs 7. Finance to foreign trade Finance to Export & Import projects Finance to Indian companies doing construction abroad Obtaining status report of overseas buyers Providing information about overseas development Attracting NRI funds 8. International banking Started off-shore banking units First Indian organisation to enter into the international Euro Yen bond market Built branches & offices in many countries 9. Innovative Banking Community service banking SBI cards Debit & Credit Customer councils SBI capital market Ltd SBI mutual funds Regional Rural Bank (RRB) Started to strengthen the banking system in rural areas Combination of the following:- Rural atmosphere Local feeling Knowledge of cooperative institutions Modern banking practices First RRB October 1975 RRB Act 1976 Features Formation of Regional Rural Banks Separate Body Corporate established by the government of India As per the provision of act Commercial banks request the Government to start The bank request called Sponsored bank Sponsored banks provide finance and technical assistance Area of operation Government specifies the area limit Can have branch with in the limit Initial authorized capital was Rs. 1 Crore It increased to Rs. 5 Crores Issued capital Rs. 1 Crore Future of RRBs RBI conducted a survey on RRBs in 1981 Survey Khusro Committee Narasimham Committee MC Bhandari Committee Khusro Committee The weakness of RRBs were endemic. Non-viability was built in their structure They had huge accumulated losses Some case losses erode the deposits RRBs were not able to serve the larger group There was no place for RRBs in the countrys rural system Narasimham Committee Due to many restriction on RRBs, earning capacity was low Wages & salary is almost close to commercial banks no growth like. Sponsored banks have rural branches near by RRB No restriction on targeted group Interest rate structure of RRBs in the same line like commercial banks M.C Bhandari Committee Suggested measured for restructuring RRBs. Most of them were implemented They are; The issue of share capital has been enhanced NABARD should help on; Productivity Cash management Advances portfolio Recovery performance No restriction on area of operation Relocate the loss making branches Extension counters can be opened in suitable cases Allow them to provide finance to Non priority sector Investment Policy of Banks FEATURES: Deals with Technicalities of Investment Investment of bank funds is a difficult task Maintain proper balance to honour the customers demand Make profit and pay dividend Earn more to meet administration cost Get more FDs Reinvest the FDs IN TOTAL WE CAN SAY: It should bring more profits for share holders Provide maximum security to depositors Guiding Principles of a Good Investment Policy Safety & Security Liquidity Profitability Banker can not ignore any one of this. Because they are inter related Safety & Security Deal with customers money Invest in secured & safety assets Prefer to grant advances to businessmen by discounting short- term bills Invest in short term government securities Safety can not be sacrificed for more profits No lending for unworthy borrowers Liquidity Ability to produce cash on demand Definition: If an asset is converted in to cash quickly, then they are said to be liquid Ratio of Liquid Asset to Total Current Assets Cash reserve 10 %
30 % Call money & bill of exchange 20 % Total liquidity Investments 20 25 %
70 % Advances 45 50 % Total 100 % Profitability RBI - Meaning Introduction: Amalgamation of 3 presidency banks & function as central bank upto 1935 1925 Hilton young recommended a separate central bank. 1927 RBI bill introduced in assembly 1934 Act was passed 1935 April RBI formally inaugurated Initially functioned as private bank with share capital of 5 crores. Nationalised in 1948 by RBI (transferred to public ownership) Act. Private share holders were paid @ 118.10 per share. Operation (Bombay, Calcutta, Madras, Delhi and Rangoon) (Myanmar) 1947 Rangoon office was closed. RBI - Management Boards Central Board Local Boards Mumbai Chennai New Delhi Kolkota Central Board Governor C.G US 8 (1) (a) RBI Act 1934 (5 years) Not more than 4 deputy directors C.B US 8 (1) (a) RBI Act 1934 (5 years) 4 directors nominated by C.G (1/local board) US 8 (1) (b) (4 years) 10 Directors nominated by C.G US 8 (1) (c) (4 years) 1 Government official nominated by the C.G US 8 (1) (d) Local Boards Each board 5 members Appointed by central Government Appointment 4 years & eligible for re-appointment. Duties Advising on central board Performing other duties delegated by the central board from time to time RBI - Functions 1. Issue of Bank Notes: Sole right to issue currency notes (except coins and subsidiary coins) It has separate department known as issue department. Makes adequate arrangements for distribution of notes & coins. Issue department has offices in important cities. 2. Banker to Government: Accepting & maintaining money on account of central & state Governments. Making payments on their behalf. Carrying out their exchange, remittance & their banking operations. Managing the public debt including new loans & Treasury bills of central government. Advances to central & state governments Advising the government in all financial matters. 3. Bankers Bank: Act as banker to scheduled banks in India. Maintain cash reserves of scheduled banks. (% on their liabilities) Servers as lender of last resort. (rediscounting the bill of exchange etc) 4. Custodian of Foreign Exchange Reserve: Responsible for maintaining the external stability of rupee value. Controlling & regulating the foreign exchange. 5. Controller of Credit: As per the Acts (1934 & 1949) have powers to control & regulate the credit. Controlling of credit 6. Collection & Publication of Information: Collects & publishes information on: General economic. Financial & banking developments. 1. Issue Department: Issue & management of bank notes 14 branches in the country Each branch has: Cash department Currency transactions General department Managing supply 2. Exchange control department: Control foreign exchange & maintain stable exchange rate 3. Department of Banking operation and development: Control & supervise the working of banks in India. Visits banks periodically 4. Department of Financial Companies: Control & supervise the non banking financial companies. Central office in Kolkota Four regional offices in Bangalore, Mumbai, Kolkota and New Delhi. Method of Credit Control 1.Bank Rate Rate at which RBI grants loans to commercial banks Changes in this rate reflect on the lending rate of Commercial Banks 2. Open Market Operation Purchase & sale of securities in the market. Sells the securities reduces the money supply. Buys the securities increases the money supply (credit). 3. Variable Reserve Ratio
Increase the ratio reduce the credit.
Decrease the ratio increase the credit. 4. Statutory liquidity Requirement
As per Se. 24 of B.R.Act banks have to maintain the liquid assets like cash, gold and approved securities.
Any change in the ratio will have a reflection in the credit. 5. Credit Authorization Scheme
Banks get permission from RBI before releasing loans exceeding certain limit. 6. Moral Suasion
Advising the banks to follow the guidelines of RBI Maintaining good relation by having meetings etc. 7. Fixing of Lending Rate
RBI has the right to fix the lending rate
Increase or decrease in the rate and interest
Currency Chest
Quantitative Vs Qualitative Credit Control Quantitative Qualitative It is in indirect control It is a direct control Objective is to control the amount of credit & expenses on credit Objective is to control the purpose & flow of credit Doest not control the flow of credit (unproductive purpose) Controls the flow of credit to various purposes like socially relevant and economically useful Eg. Bank rate, open market operation, variable reserve ratio. Eg. Rationing of credit, direct action, regulation of consumer credit, moral suasion and publicity. RBI Bill Market Scheme Dealing in short-term bills generally of 3 months duration Dealt with bill of exchange, trade bills, finance bills or promissory notes and treasury bills Ideal source of investment Easily realisable Bill Market Scheme 1952 First time introduced by RBI To increase the liquidity position of commercial banks Features are: RBI release advance to commercial banks against the trade bills & promissory notes (maturity 90 days) It was introduced initially for 4 years Initially, offered to banks who had: Deposits > 10 crores Advances - > 25 lakhs 1953 Extended to all scheduled commercial banks. RBI will consider; Financial soundness of the banks. Mannerism in conducting business. 1958 Extended to export bills New Bill Market Scheme 1970 Introduced in 1 st November 1970 Features are: All scheduled banks are eligible for rediscounting the bills with RBI Rediscounts Trade bills and not accommodation bills Drawn on and accepted by purchasers bank. Maturity period is < 120 days. Maturity period for rediscounting is < 90 days Bill should bear two or more good signatures; one must be scheduled banks Bill value for rediscount is > 5000/bill Total bill value for rediscount is > 50,000 at a time CHANGES MADE AFTER INTRODUCTION The scheme extended to Government departments and quasi-Government bodies, statutory corporations and government companies. Procedure for rediscounting was liberalised Exempted bills value was < 2 lakhs from actual lodgement 1973 This lodgement value increased to 10 lakhs. Minimum amount of bill for rediscount was reduced to Rs. 1000 Bills drawn and accepted by ICICI Ltd was covered under this scheme. Powers under Banking Regulation Act 1949 1. Licensing of Banks: Every commercial bank must obtain the license from RBI Cancellation of license: If the company ceases to carry on banking business in India If the company fails to comply with any of the conditions imposed by the RBI. 3. Inspection of Banks: Inspect the banks in the best interest of the depositors 4. Power to issue directions: RBI can issue directions at any time when it requires. 5. Control over Management: If Private sector banks RBI has to approve for appointment, reappointment and remuneration of director or CEO. If Public sector banks RBI has to consult with the government for the same. 6. Control over investment & advances: The purposes for which the advance granted. The margins for secured advances Maximum limit of the advances for company, firms or individuals. Limit for guarantee of advances Interest rate & other terms and conditions. 7. Collection of information: Can collect any information relating to commercial banks. 8. Power incase of amalgamation & & Liquidation: RBI has the power to examine or sanction the amalgamation It can recommend or supervise the liquidation 9. Power to advise banks
10. Power to advise to the Central Government 9. Other Powers: It may call for a meeting of a commercial banks at any time. It may require any officer of a commercial bank to meet with an officer of RBI. It may depute one or more officers to monitor either the board meeting or the proceedings of any commercial banks at times. 1. Diversified Activities: Merchant banking Venture capital Mutual funds Housing finance Equipment leasing Other financial services. Recent development in banking sector 2. Innovative Banking: Phone banking Internet banking ATM, etc., 3. Adoption of capital: RBI introduced capital adequacy accounting norms since 1992 93 in respect of; income recognition Asset classification and Provisioning for bad debts etc., 4. Privatisation of banks: Licensing for new private banks disinvestment policy clearly shows the Privatisation of commercial banks in the near future. 5. Reduction in SLR & CRR: Pave the way for more investment in various sector. 6. Decontrol and reduction of interest rate: Encourage the healthy competition among the banks. 7. Recovery of debts: Recovery of debts due to banks and financial institutions Act 1993 helps them in speedy recovery. Assignment topics: The students are advised to take any one of the above mentioned assignments topics and submitted with in a week from the completion of the unit. Commercial Banks State Bank of India Regional Rural Banks Reserve Bank of India Recent development in banking sector Further Reading:
Banking Theory - Sundaram Varshney Banking theory law and practice - S.M. Sundaram Banking Theory - E. Gorden & Natarajan Practical Banking - M. Radhaswamy Unit III Cheques Crossing Endorsement
Cheques Crossing Endorsement Meaning: - Negotiable instrument - Transferable from one to another Cheque - Se 6 of NI Act A bill of exchange drawn on specified banker and not expressed to be payable otherwise than demand Definition Requisites of an valid cheque 1. It must be an instrument in writing. 2. It must be an order. 3. The order must be unconditional 4. It must be drawn on specific banker 5. Payee must be a certain person 6. Amount must be certain 7. It must be dated 8. It must be signed by the drawer 9. Payable on demand Drawing of Cheque 1. Drawer writer 2. Drawee banker 3. Payee to whom the payment Dishonour of a cheque According to Se. 138 of NI Act punishable under criminal offence.
but the following conditions to be satisfied. Conditions to be satisfied 1. Issued to settle debt / consideration. 2. Presented with in the valid time 3. Dishonoured due to insufficiency of funds. 4. Payee demand payment < 15 days 5. No payment by drawer < 15 days. Differences between Cheque Draft Drawn by customer on a bank Banker on other banker Facility only to customer To all Payable to bearer or order Payable only on order May be dishonoured Always be honoured Differences between Cheque Bills of exchange Drawn on bank Drawn on any person No acceptance Requires acceptance Payable on demand Expiry on a fixed period No grace days 3 days Grace days Stamp may be required Compulsory Can be crossed Cant be crossed Intended for immediate payment Not intended for immediate payment Easy discount not possible Possible Types of cheque 1. Antedated cheque 2. Postdated cheque 3. Stale cheque 4. Order cheque 5. Bearer cheque Crossing of cheque Cheques which has 2 parallel transverse lines across its face with or with out any words. Payment done only through bank account and not at counter. Crossing does not affect its negotiability It can be hand written, stamped, printed or perforated on its face. Types of Crossing Crossing General Se. 123 NIA Special Se. 124 NAI Essential of G.C. 1. Two parallel lines 2. Crosswise direction 3. Words are & co and company not negotiable Account payee. 4. Effects Not at counter If so banker will loose their statutory protection. Essential of S.C. 1. Specify the banker name. 2. General words may be required. 3. Words may be Indian bank not negotiable Indian bank. In addition other types of crossing 1. Not Negotiable Crossing 1. Word not negotiable 2. Can be transferred. 3. Transferee will not get better title. 4. To get a better title Conditions to be satisfied 1. Received the cheque for consideration. 2. There should not be any prior bad title. 2. Account Payee Crossing 1. General crossing with the words Account payee only. 2. Banker have to accept for the person only. 3. Law does not restrict the endorsement. 3. Double Crossing 1. Banker in whose favour a cheque is drawn may cross it again in favour of another banker being his agent for collection. 2. Allowed When there is no branch otherwise double crossing is invalid according se 127 of NAI.
union bank To SBI as agent for collection Obliterating a Crossing 1. Erasing the crossing. 1. If the obliteration is not apparent & Payment made in due course 2. Banker will not be liable. Opening of Crossing 1. Cancellation of the crossing. 1. Only the drawer can 2. Striking off the crossing, Writing pay cash & his full signature Alteration of Cheques 1. Making some correction. Types of Alteration Alteration Material Immaterial Material Alteration an alteration which affects the fundamental characters of cheques Examples of Material Alteration 1. Altering the date. 2. ,, ,, place of payment 3. ,, ,, name of the payee 4. ,, ,, amount 5. ,, ,, word order as bearer 6. ,, ,, crossing Effects of Material Alteration 1. Generally it is void. 2. Do not pay. 3. Required drawers signature. 4. If the alteration not apparent & payment made in due course banker will not be liable. Immaterial Alteration an alteration is immaterial and will not make a cheque as void if; 1. It does not affect the fundamental character of the cheque 2. It is allowed by law 3. It is made before the issue of the cheque 4. It is made for the purpose of correcting the mistake 5. It is made to carry out the common intention of the original party 6. It is made with the consent the parties of the cheque. Example of immaterial Alteration Conversion of a endorsement in blank into an endorsement in full. Crossing of an opening cheque. Conversion of GC into SC Conversion of bearer into order Fill up the blank in an instrument. Meaning: - Transferring the instrument - Bearer instrument - delivery - Order instrument - Endorsement delivery - Endorser Who transfers - Endorsee To whom the transfer made - Endorsement On its back Endorsement - If there is no space on its face. - A piece of paper attached to it. Allonge - According to Se. 15 of NIA when the maker or holder of a negotiable instrument signs the same, otherwise than such maker, for the purpose of negotiation, on its back or face thereof, or on a slip of paper annexed thereto .. he is said to have endorsed the same and is called the endorser. Definition Significance of Endorsement 1. Ownership transferred to endorsee. 2. Endorsee will get the right to sue. 3. Endorsee will get the right to recover the money. 4. Endorsee will get the right of further negotiation. Rules Regarding Endorsement 1. Done by endorser or an agent with signature. 2. Payee or endorsee must sign on its face. 3. Endorsement should be in ink. 4. Incase of married women Husband name 5. Illiterate person Thump impression. 6. Joint stock company Authorised person 7. Partnership Authorised person 8. Deceased person Legal representative 9. Endorsement completed by delivery of the instrument. Types of Endorsement 1. Blank or General Endorsement: Endorser simply sign on the back with mentioned anything. 2. Full or Special Endorsement: Endorser mention the name of the person to whom to pay; Pay to Alagu Sundaran Endorser 3. Partial Endorsement: endorsed only for the part of the amount cheque Not possible bill Possible 4. Restrictive Endorsement: Restrict the endorsee from further negotiation Pay Grocery Rashith only Endorser Pay Gundu Dinesh for my use Endorser 5. Conditional or Qualified Endorsement: It limits the liability of the endorser It imposes certain condition. Pay to Rabit Binil or order on his marriage with Mouse Vanitha Endorser This may done two forms; Conditional or Qualified Endorsement C/Q Endorsement Sans Recourse Sans Frais Sans Recourse Endorsement: Endorser free from liability.
Pay to Trouser Benson without recourse to me
Endorser Sans Frais Endorsement: Endorsee free from liability.
Pay to Fraud Price Without expenses to me
Endorser 6. Per Pro Endorsement: Endorsement done by an agent inform the banker regard the delegation of authority
Pay to Regular Rajasekar or order
Povendraraja Per Pro M. Som Assignment topics: The students are advised to take any one of the above mentioned assignments topics and submitted with in a week from the completion of the unit. Cheques Crossing Endorsement Further Reading:
Banking Theory - Sundaram Varshney Banking theory law and practice - S.M. Sundaram Banking Theory - E. Gorden & Natarajan Practical Banking - M. Radhaswamy Unit IV Paying and Collecting Banker
Collecting banker Paying banker
Meaning: - Banker to whom the cheque is drawn & presented for payment Paying Banker 1. Form of cheque: 2. Date of cheque 3. Amount of cheque 4. Sufficiency of funds 5. Material alteration 6. Drawers signature Precautions to be taken by Paying Banker 7. Mutilation 8. Payment during the banking hours 9. Open or crossed cheque 10.Endorsement if any 11.Legal restriction if any 12.Countermanding order 13.Notice of death or insanity or insolvency of customer.
1. Countermanding of payment 2. Death of the drawer 3. Insolvency of the drawer 4. Insanity of the drawer 5. Receipt of garnishee order 6. Receipt of notice of assignment 7. Breach of trust Dishonouring of cheques 8. Post dated or stale cheque. 9. Insufficiency of funds. 10.In proper format. 11.Materially altered cheque. 12.Forged signature. Statutory protection to the paying banker: 1. Protection incase of order cheque Se. 85 (1): 1. Verify the endorsement 2. Payment made in due course 2. Protection incase of bearer cheque Se. 85 (2): 1. Payment at the counter 2. No need to verify the endorsement. 3. Protection incase of crossed cheque [Se. 128]: 1. Payment through A/c 2. Payment made in due course Payment made by mistake: Recoverable Irrecoverable Received malafide Mistake of law Mistake of fact Paid on a negotiable instrument Mistake between banker & receiver Paid by mistake to an agent Forgery of drawers signature: 1. Dont pay for the cheque. 2. Even the payment made in due course banker will be liable. 3. Lewes sanitary Laundry Co Vs Barclays Bevan & Co., (secretary) 4. Green wood Vs Martins Banks Ltd., (Husband & Wife) Holder: 1. He must be acquired legally. 2. A thief or finder of an instruments can not be considered as a holder. 3. Entitled to receive the money Rights of a Holder: 1. Convert the blank endorsement into full 2. Cross a open cheque 3. Claim & sue 4. Can obtain the duplicate copy of a lost cheque. Holder in due course: 1. Se. 9 of NIA Any person who become the possessor of a negotiable instrument payable to bearer or endorsee or payee thereof for consideration. Conditions to be satisfied: 1. He must obtain the possession 2. Obtain by payment of consideration not by way of a gift 3. Must be a holder before the maturity period. 4. Must become the holder in good faith. Rights of a Holder in due course: 1. He can get better title 2. He can recover the amount form previous parties 3. He can sue Holder Holder in due course Need not pay consideration Must pay some consideration Need not take care about the transferors titles Must care He takes the instrument subject to all defects Takes free from all defects Obtain the possession at any time Can obtain only before the due date Differences between holder and holder in due course Meaning: - Banker who undertake the responsibility of collection. - He can do this in the capacity; - Holder for value - Agent for collection Collecting Banker - Banker will allow the customer to make use of the amount before the execution of the collection. CB as holder for value Circumstances: 1. Lends on the strength of the cheque 2. He pays the amount or part of it before it is collected. 3. Permit to draw before it is collected. 4. Receive the cheque to reduce the OD. Rights of banker as holder for value 1. Rights are same as holder in due course, in addition, 2. If the endorsement is forged, he can recover 3. If the cheque gets dishonoured, he can sue all the previous parties. - When he undertake the collection he will be act as an agent. CB as an agent for collection Duties of a collecting banker 1. Exercise of reasonable care. 2. Presentation of cheque for Payment within a reasonable time. (local & outstation). 3. Remittance of proceeds. 4. Notice of dishonour. Statutory protection of a collecting banker 1. US 131 of NIA banker can claim against the collection of crossed cheque if the following conditions are satisfied Conditions 1. Collection for customer 2. Collection in good faith with out any negligence Collection against demand draft 1. Se. 131A of NIA give protection 2. If he collect crossed DD in good faith without negligence Negligence on the part of a collecting banker 1. Baker act carelessly in the collection of cheques, he will be liable for gross negligence. Instances of gross negligence 1. Fail to present the cheque with in the reasonable time. 2. Fail to give notice of dishonour 3. Fail to verify the endorsement 4. Fail to enquire the authority incase of perpro endorsement. 5. Partnership cheque deposited in the partner personal account 6. Cheque payable to a Co. deposited into secretary personal account. 7 Collecting a stale cheque 8. Collecting cheque for a person who doesnt have an account. Assignment topics: The students are advised to take any one of the above mentioned assignment topics and submitted with in a week from the completion of the unit. Collecting banker Paying banker Further Reading:
Banking Theory - Sundaram Varshney Banking theory law and practice - S.M. Sundaram Banking Theory - E. Gorden & Natarajan Practical Banking - M. Radhaswamy Unit V Lending & Advances Lending Principles of sound lending Types of advances Advances Against various securities Principles of sound lending Safety Liquidity Profitability Purpose Diversification - Repayment Capacity of the borrower - Value of the asset owned - Character & Integrity 1. Safety 2. Liquidity 1. Short term loan advisable 2. Recovery frequency 3. Profitability 1. Interest on Loans. 2. Income to meet all recurring expenses. 1. Interest on deposits 2. Salary for staff 3. Establishment expenses
- Production purpose. - Not for speculative & unproductive purposes. 4. Purpose of loan 5. Diversification of risks Not for similar business and same area. Grant for diff. business in diff. area. Types of Loans and Advances L & A Secured Unsecured Security Security > loans No security/ personal security Character Repaying capacity Loan or Advances Secured: According to Se 5 (n) of the BR Act 1949; a loan or advance made on the security of assets the market value of which is not at any time less than the amount of such loan or advance Unsecured: Opposite Types of L & A (Forms/style) 1. Loans 1. Lump sum 2. Regular due with interest 3. Purpose Purchase of any asset 2. Cash credit 1. Allow to borrow against F. Assets 2. Interest for utilisation only 3. Overdraft 1. For current A/c holders 2. Allow to withdraw over & above the credit balance. 3. Interest for utilisation only. 4. Purchase & discounting of bills 1. Purchase of bills. 2. Discounting the bills. 3. Commission is charged. Other Forms of Secured Advances 1. Advances against life policies Merits 1. Effective 2. Assignment 3. Easy valuation 4. Quick realization Demerits 1. Impossibility of realization (utmost good faith) 2. Risky security 3. Worthless security (sentenced to death) Precautions to be taken by banker 1. Terms & conditions 2. Type of policy 3. Insurable interest 4. Admission of age 5. Payment of premium 6. Surrender value 7. Free from encumbrances 8. Assignment of policy 2. Advances against document of title of goods Document in proof of the possession or control of goods. It authorizes the holder to receive or transfer of goods. Examples Bill of lading, dock warrant, warehouse certificate, railway receipt, wharfinger certificate etc. Risk involved 1. Chances for fraud 2. Forged documents 3. Defective title over the documents 4. Delivery on execution of indemnity bond Precaution to be taken by banker 1. Character of the borrower 2. Documents free from prejudicial remarks 3. Insurance cover 4. Memorandum of charge 3. Advances Against bill of Exchange Purchase & discounting of bills. Purchase bills payable on demand Discount bills payable on a due date Merits Safe lending. Definite payment. Profitable investment of funds. Rediscounting of bills. Fixed value. Higher earning. Precautions to be taken by banker Preference for trade bills. Credit worthiness of parties. Completeness of bills. Bills should be alive. 4. Advances against land & buildings Housing loans Plot loans On the value of land & building Precautions to be taken by banker Clear title Free from encumbrances Value by experts Insurance Legal formalities Creation of charge. 5. Advances against security of goods Advances against Food articles Industrial raw materials Plantation products Manufactured products Merits Easy realisable security Safety of funds Circulation of funds Demerits Decrease in the value of goods. Difficulty in verification. Price fluctuation. Expensive for the banker. Precaution to be taken by the banker 1. Examination of character & financial position. 2. Loan against only easy marketable goods. 3. Watch the commodity market to check the price movement. 4. Proper valuation of goods. 5. Godown key. 6. Name plate in the godown. 7. Insurance. Assignment topics: The students are advised to take any one of the above mentioned assignment topics and submitted with in a week from the completion of the unit. Lending Principles of sound lending Types of advances Advances Against various securities Further Reading:
Banking Theory - Sundaram Varshney Banking theory law and practice - S.M. Sundaram Banking Theory - E. Gorden & Natarajan Practical Banking - M. Radhaswamy