Retail Banking 413 v1 PDF

RETAIL BANKING
Sub Code-413
Developed by
Prof. Raghu Palat
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe  2. Dr. B.P. Sabale  3. Prof. Dr. Vijay Khole  4. Prof. Anuradha Deshmukh 
Group Director  Chancellor, D.Y. Patil University, Former Vice-Chancellor  Former Director 
Welingkar Institute of Navi Mumbai  (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

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NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.
1st Edition (June-2014)
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CONTENTS
Contents
Chapter No. Chapter Name Page No.

• Retail Banking
1 Retail Banking 5-8

• Retail Liabilities
2 Deposit Accounts 9-12

3 Opening of Deposit Accounts 13-39
4 Current Account 40-53
5 Savings Account 54-70
6 Fixed Deposit Account 71-94
7 Certificates of Deposit 95-101
8 Nomination 102-106
9 Unclaimed Deposits 107-110
10 Deceased Depositors 111-116
11 Settlement of Claims in Respect of Missing Persons 117-119
12 General Account Monitoring and Operations 120-134
13 Prohibitions 135-139
14 Deposit Insurance 140-146
• Retail Assets
15 Retail Loans 147-149

16 Personal Loans 150-153
17 Consumer Durable Loans 154-156
18 Loans to Professionals and Self Employed Persons 157-160
19 Education Loans 161-173
20 Loan for Vocational Education and Training 174-179
21 Vehicle Loans 180-184
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CONTENTS
22 Loans Against Shares and Debentures 185-189

23 Housing Finance 190-197
24 Reverse Mortgage Loans 198-202
25 Retail Credit Analysis 203-207
26 Fair Practices Code for Lenders 208-213
27 Recovery Agents 214-222
• Other Offerings
28 Mutual Funds 223-231

29 Dematerialization of Shares 232-237
30 Bancassurance 238-240
• Payment Instruments
31 Bank Drafts 241-245

32 Pay Orders 240-248
33 Traveller’s Cheques 249-252
• Clearing
34 Clearing 253-270
35 Truncated Cheque Clearance 271-285
36 Electronic Clearing Service 286-293
37 National Electronic Clearing Service 294-298
38 Speed Clearing 299-301
39 Asian Clearing Union 302-306
• Payment Methods
40 Standing Instructions 307-309

41 Mail and Wire/Telegraphic Transfers 310-315
42 Money Transfer Service Scheme 316-321
43 Real Time Gross Settlement 322-333
44 Electronic Funds Transfer 334-338
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CONTENTS
45 National Electronic Funds Transfer 339-343

46 SWIFT 344-350
47 Indo-Nepal Remittance Facility Scheme 351-354
• Cash
48 Cash 355-376
• Electronic and Other Banking Channels
49 Electronic Banking 317-383

50 Telephone Banking 384-386
51 Mobile Banking 387-396
52 Cards 397-424
• Other Services
53 Telemarketing 425-431
54 Doorstep Banking 432-435
55 Safe Deposit Lockers 436-443
56 Safe Custody 444-446
• Conclusion
57 Conclusion 447-448
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RETAIL BANKING
Chapter 1
Retail Banking
Objectives
This chapter will explain the importance of retail banking and its growth in
recent years.
• Exemption provisions of small service provider.

• Export of services.
• Special audit.
Structure
1.1 Retail Banking

1.2 Growth
1.3 Self Assessment Questions
1.1 RETAIL BANKING
What is retail banking? I believe it is important to define retail banking as it

is the arm of banking that has been growing at a staggering compounded
annual growth rate of 24% per annum for the last two decades. With new
banks about to be given licences, this trend is likely to gain momentum.
Retail banking is the provision of banking facilities and services to

individuals and entities. This may be in the form of acceptance of deposits
or the giving of consumption loans – loans for the purchase of vehicles,
loans for marriage or travel, loans to purchase a house or loans for
education.
1.2 GROWTH
Retail banking is the fastest growing segment in banking in the country

and its growth really began in 1969 when Mrs. Indira Gandhi nationalized
14 large banks. Until then banking was (as it is in the rest of the world) a
commercial activity. The purpose of nationalization was to take banking
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RETAIL BANKING
into areas where no bank had gone before – where there was practically no
banking activity and to finance those whom banks in the normal course
would not have extended loans. Banking became a social activity as
opposed to a commercial initiative. Nationalized banks were forced to open
branches in rural locations to make banking facilities accessible to villagers.
Consequently, every nationalized bank opened hundreds of branches every
year. The next phase of movement took place in the early 1990s when the
new generation banks were established. Not burdened by the restrictions
that faced foreign banks, these banks realized that reach, presence and
innovation are imperatives. Till then banking was staid and very boring.
Banking was not segmented. Bankers accepted deposits, gave corporate
loans and offered investment advice.
The new generation banks are customer centric, focused and driven. They
want growth, market share and a dominant presence. This is being
achieved by creating specialist groups and developing expertise. As a
consequence banking has become functionally segmented – retail banking,
corporate banking, trade finance, merchant banking, private banking and
treasury.
Of these retail banking is the most vibrant. Banks in their desire to be

accessible and have the greatest reach have opened branches with
amazing speed. Some banks open a branch every three days. This
mushrooming of branches has resulted in an enormous need for persons
knowledgeable about banking. In this there is a void as demand has far
outstripped supply. In addition, because of this enormous demand, banks
have not had the time to train most of their new inductees. The
consequence causes grave concerns. There have been many instances of
bankers permitting something the Reserve Bank does not. This has
occurred not because the bankers were willfully disobeying directives but
because they were not aware of the directives. This can compromise the
bank.
Going forward, without a doubt, retail banking will continue to be one of

the leaders of growth. The Reserve Bank is poised to issue licences for the
opening of a few banks. These new players will be those with an All India
presence. This will result in more branches being opened especially in
under developed areas in conjunction with the Government’s drive for
financial inclusion.
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RETAIL BANKING
There will in the years to come mergers and consolidation. There will be
greater use of technology. It will be an exciting period.
This book apart from discussing retail banking also includes clearing,
payments and remittances as these are inalienable from retail banking.
Cheques deposited have to be collected and cleared. Payments/remittances
have to be made. In addition the book also has services offered by banks
as these are offered to the retail customer. In addition, I have focused on
customer services and on other services.
1.3 SELF ASSESSMENT QUESTIONS
1. What is retail banking?
2. What was the result of the nationalization of banks in 1969?
3. How is retail banking likely to grow in the immediate future?
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RETAIL BANKING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
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DEPOSIT ACCOUNTS
Chapter 2
Deposit Accounts
Objectives
This chapter will introduce you to deposit accounts.
Structure
2.1 Introduction
2.2 Types of Deposit Accounts
2.3 Demand Deposits
2.4 Fixed Deposits
2.5 General
2.6 Service Charges
2.1 INTRODUCTION
• The acceptance of deposits and maintenance of these deposits is the core

activity of banks. It is arguably the most important function as without
deposits banks will not have funds to invest or lend.
• The relationship between a banker and a customer begins when the

customer opens an account and deposits an amount in that account.
• As customers have different needs, bankers offer different types of

deposit accounts.
2.2 TYPES OF DEPOSIT ACCOUNTS
The different types of deposit accounts a customer can place his money in
are:
• Demand deposits;
• Fixed or time deposits.
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DEPOSIT ACCOUNTS
2.3 DEMAND DEPOSITS
• Demand deposits are those deposits where the money deposited is

available to the depositor on demand.
• There are three types of demand deposit accounts. These are:
- Current Accounts: This is defined by the Reserve Bank as “a form of

demand deposit wherefrom withdrawals are allowed any number of
times depending upon the balance in the account or upto a particular
agreed amount and shall also be deemed to include other deposit
accounts that are neither savings deposit nor term deposit.”
- Savings Accounts: A savings account has been defined as “a deposit

account ….. which is subject to the restrictions as to the number of
withdrawals as also the amounts of withdrawals permitted by the bank
during any specified period.”
- Call Deposits: These are deposits maintained by banks. These are

kept overnight or for a period of time and are interest earning. They
are available on call, i.e., notice has to be given when the deposit is to
be encashed.
2.4 FIXED DEPOSITS
• Fixed Deposit: A fixed or time deposit is defined as “a deposit received

by a bank for a fixed period and which is withdrawable only after the
expiry of the said fixed period and shall also include deposits such as
recurring, cumulative, annuity, reinvestment deposits, cash certificates
and so on.”
2.5 GENERAL
• Banks are required to formulate a transparent and comprehensive policy

setting out the rights of depositors in general and small depositors in
particular. The policy should be explicit in regard to secrecy and
confidentiality of matters relating to customers.
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DEPOSIT ACCOUNTS
• It should be noted that banks cannot accept interest free deposits other
than in current accounts.
• Banks do not need to obtain prior concurrence from RBI to launch new
domestic deposit mobilization schemes. This is subject to:
- The scheme being approved by the board of directors; and

- The bank ensuring RBI guidelines are being followed.
2.6 SERVICE CHARGES
• Banks must ensure charges are reasonable. Customers with a low

volume of activities should not be penalized.
• The manner these accounts operate and their differences are detailed in
the ensuing chapters.
2.7 SELF ASSESSMENTS QUESTIONS
1. What is the core activity of a bank?
2. What are Demand Deposits and what types of Demand Deposits are
there?
3. Define a Fixed Deposit.
4. Can a bank accept interest free deposits?
5. What are the criteria a Bank must ensure before launching a new
domestic deposit mobilization scheme?
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DEPOSIT ACCOUNTS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !13
OPENING OF DEPOSIT ACCOUNTS
Chapter 3
Opening of Deposit Accounts
Objectives
This chapter will explain to you the factors that you should consider and
the documents that you should procure to open an account.
Structure
3.1 Introduction
3.2 Opening of Deposit Accounts
3.3 Introduction to Open Accounts
3.4 Photographs
3.5 Address of Account holder
3.6 PAN/GIR Number
3.7 Specimen Signature
3.8 Authorization
3.9 Completion of Formalities
3.10 Additional Precautions for Current Account
3.11 Savings Account Rules
3.12 Information from Clients
3.13 Nomination
3.14 Documentation
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3.1 INTRODUCTION
• By opening a deposit account, an individual who has no other account

with the bank, begins a relationship. The beginning of a relationship
imposes several obligations on a banker. He must therefore be careful
regarding whose accounts he opens.
• An account can be opened by anyone who can enter into a valid contract.
Minors may open an account jointly with their guardians. Bankers may
allow minors above 12 to open savings accounts in their single name and
operate the account. These will be savings accounts and minors will not
be permitted to overdraw these accounts. This is to inculcate banking
habits.
• Deposits are opened by those who have funds in hand. These include:
- Individuals;
- Sole Proprietorships;
- Hindu Undivided Families (HUF);
- Partnerships (including Limited Liability Partnerships);
- Trusts;
- Associations/Societies and Clubs;
- Limited Companies.
3.2 OPENING OF DEPOSIT ACCOUNTS
A large number of frauds are perpetrated in banks mainly through opening

of accounts in fictitious names, irregular payment of cheques, manipulation
of accounts and unauthorised operations in accounts. Considering the fact
that opening of an account is the first entry point for any person to become
a customer of the bank, utmost vigilance in opening of accounts and
operations in the accounts is called for. Even the legal protection under the
Negotiable Instruments Act, 1881 which governs payment and collection of
negotiable instruments and provides certain rights, liabilities (obligations)
and protections to the issuers/drawers, payees, endorsees, drawees,
collecting banks and paying/drawee banks, will be available, only if the
bank makes the payment or receives payment of a cheque/draft payable to
order in due course. Any payment or collection of a negotiable instrument
is deemed in due course only when the bank acts in good faith and without
negligence and does so for a customer.
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3.3 INTRODUCTION TO OPEN ACCOUNTS
• Before implementation of the system of document-based verification of

identity, as laid down in PML Act/Rules, introduction from an existing
customer of the bank was considered necessary for opening of bank
accounts. In many banks, obtaining of introduction for opening of
accounts is still a mandatory part of customer acceptance policy even
though documents of identity and address as required under our
instructions are provided. This poses difficulties for prospective
customers in opening accounts as they find it difficult to obtain
introduction from an existing account holder.
• Since introduction is not necessary for opening of accounts under PML

Act and Rules or Reserve Bank’s extant KYC instructions, banks should
not insist on introduction for opening bank accounts of customers.
• There is a contradiction though as the banker will get legal protection

under Section 131 of the Negotiable Instruments Act (which governs
payment and collection of negotiable instruments) only if the bank has
acted in good faith and without negligence. It is presumed that he has
been negligent if he accepts a customer who has not been properly
introduced and does not perform checks (Indian Bank vs. Catholic Syrian
Bank; Bharat Bank vs. Kishinchand Chellaram).
• The RBI also states that proper identification enables the bank to trace
the person later if required.
• Therefore the RBI states that the practice of obtaining proper

introduction should not be treated as a mere formality but as a measure
to safeguard against opening of accounts by undesirables or in fictitious
names to deposit unaccounted money and for protection under Section
131 of the Negotiable Instruments Act.
• The account should not normally be opened without a meeting between

the bank official and the customer.
• The introduction should be by:
- An existing customer. It is required that the individual should be of

some standing and been a customer for at least 6 months. This is to
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ensure accounts are not opened on the introduction of new account

holders or persons having small and marginal balances. The RBI
recommends this interval to enable the bank to monitor transactions in
the account and satisfy itself that transactions in the introducer’s
account are satisfactory.
- A respectable person of the local community known to the bank or the

bank’s staff. This is often the case when a bank is opening its first
branch in a town/city.
- Another bank/banker. This occurs when a person is new to a location

but has been having a banking relationship with another bank in
another city.
• Bank managers/bank staff should be discouraged from giving the

introduction. In these cases, apart from verifying the signatures with the
specimen signatures on record, written confirmation should be procured
of the introduction. Till the confirmation is procured, the bank should not
collect cheques/drafts through the newly opened account.
• The banker will seek from the introducer comfort that the person being
introduced is a respectable person – that he is honest, with integrity and
morals. It should be noted that the introducer has only a moral
responsibility. He cannot be sued or otherwise taken to task if the person
he has introduced turns out to be an undesirable person.
• Where the customer is not able to provide a satisfactory introduction, it

must be made incumbent on him to provide sufficient proof of his
antecedents before the account is opened.
• Customers of good standing should be made to realize the implications of

introducing an account without knowing the person introduced.
• The RBI makes concessions regarding those who gets credits by way of
salary and makes payments by cheques to government, semi-
government agencies and individuals. In their case a simple introduction
is considered adequate.
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• However, in the case of accounts which are to be used for remittance

transactions and for collection of cheques of substantial amounts besides
business payments, deeper enquiries are required.
• The RBI has advised banks to incorporate a certificate in account opening

forms confirming the identity, occupation and address of the prospective
customer signed by the introducer.
• The RBI has also said the role of the introducers should be made more
specific. It is not adequate to say that he has known the person for a
sufficient length of time.
• There may be times when the introducer may be unable to visit the bank
to introduce the customer (introduction in absentia). The bank should
first verify the signature of the introducer with the specimen signature on
record. The bank should then send a letter to the introducer thanking
him for introducing the customer and the introducer must confirm in
writing that he has introduced the account. This is to satisfy the banker
that the introducer has indeed introduced the customer. Till the written
confirmation is procured, the bank should not collect cheques/drafts
through the newly opened account. The bank should also send a letter to
the customer and get his confirmation for opening the account. A cheque
book should be issued only after written confirmation is received from
both the customer and the introducer.
• If the account has not been properly introduced:
- Deposits received from an un-discharged insolvent not properly

introduced carries the risk of attachment.
- The bank may be exposing itself to the dangers of laundered money.
• Several banks permit accounts to be opened by a “self introduction.” This

is by the person opening the account depositing a cheque drawn by him
on another bank where he maintains an account. Banks consider this an
acceptable risk. However, this does not give the banker any comfort with
regard to the moral standing of the person.
• The RBI states that regarding customers whose income is from salary
and whose payments are by cheques to government/semi-government
! !18
agencies/individuals, simple introduction along with photograph, would

suffice.
• While individuals must be introduced, limited companies, trusts and other

bodies cannot be. In these cases the documents that permit their
existence are taken into account such as the certificate of incorporation
and the certificate of commencement of business.
• Banks should send a letter by post to the customer and the introducer
and seek confirmation of the account opening. Cheque books should be
issued only after this.
• In case of accounts, which are likely to be used for putting through

remittance transactions and for collection of cheques of substantial
amounts besides business payments, deeper enquiries would be
necessary on the part of the bank.
3.4 PHOTOGRAPHS
• Banks must obtain photographs of the customer/customers and all those

who are authorized to operate the account. This applies to all types of
deposits (fixed, recurring, cumulative, etc.), and apply to all categories of
depositors whether resident or non-resident. This is to check the identity
of the person operating the account. In the case of minors, the
guardian’s photograph should be obtained. The bank should obtain the
photograph of pardanashin women, in those cases where they open/
operate an account. Photographs of all NRI account holders (NRE, NRO
and FCNR account holders) must also be procured.
• In the case of minors, the guardian’s photograph should be obtained.
• The photographs should be recent.
• The cost of the photographs to be affixed on the account opening forms

may be borne by the customers.
• The customer/s must submit a set of two photographs. Obtaining

photocopies of driving licences/passport containing photographs would
not suffice.
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• Only one set of photographs need be obtained. Separate photographs

should not be obtained for each category of deposit. The applications for
different types of deposit accounts should be properly referenced.
• Fresh photographs need not be obtained when an additional account is

opened by the account holder.
• For operations in the accounts, banks should not insist on the presence
of the account holder unless the circumstances so warrant.
• Photographs cannot be a substitute for specimen signatures.
• Photographs need not be insisted upon in the following cases:
- Banks, local authorities and government departments (excluding public

sector undertakings or quasi-government bodies) are exempt from the
requirement of photographs.
- Photographs need not be obtained for borrowal accounts – cash credit,

overdrafts and the like.
- Banks need not insist on photographs for accounts of staff members

(single/joint).
3.5 ADDRESS OF ACCOUNT HOLDER
• Banks must obtain full and complete address of depositors and record
these in the books and account opening documentation so that the
customers can be traced without difficulty.
• Independent confirmation of the address must be obtained in all cases

(recent telephone bill, electricity bill that is in his name or some other
acceptable correspondence or document like a ration card. A driving
license and even a passport (sometimes) is not an acceptable document
in support of one’s address (as they may not be upto date). As an
abundant precaution, banks should, after the account has been opened,
send a letter to the customer at the address on the account opening
form.
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3.6 PAN/GIR NUMBER
• PAN/GIR of account openers with an initial deposit of ` 50,000 and above

must be obtained.
• If an account opener does not have a PAN/GIR number, he must be

requested to submit Form 60 of the Income Tax Department (form of
declaration to be filed by a person who does not have a permanent
account number and who enters into any transaction specified in Rule
114B).
3.7 SPECIMEN SIGNATURE
• The specimen signature of the client has to be procured with the account
opening documentation, as it is on this signature that cheques and other
documents of instruction will be actioned.
3.8 AUTHORIZATION
• The opening of new accounts should be authorized by the branch

manager or by the person to whom the authority has been delegated
such as the officer in charge of the deposit accounts department at
bigger branches.
3.9 COMPLETION OF FORMALITIES
• It must be ensured that all account-opening facilities are undertaken at

the bank’s premises and documents should not to be taken out for
execution.
• When an exception has to be made banks may depute an officer to verify

the particulars, obtain a signed photograph on a suitably formatted
verification sheet, forward by registered post account opening forms to
clients for verification, etc., before any operations are conducted in the
account.
! !21
3.10 ADDITIONAL PRECAUTIONS FOR CURRENT ACCOUNT
• Banks must insist on a declaration from the account holder to the effect
that he is not enjoying any credit facility with any other bank or obtain a
declaration giving particulars of credit facilities enjoyed by him with any
other bank.
• The account opening bank must ascertain all the details and should
inform the concerned lending bank.
• The account opening bank should ensure branches do not open a current
account for a company enjoying credit facilities from another bank
without obtaining a no-objection from lending banks. Non-adherence to
this can be perceived to be abetting siphoning of funds. If a response is
received, the bank should assess the situation and arrive at a conclusion
based on the information received. If no response is received after a
fortnight the account may be opened.
• If there is a consortium, the bank must inform the consortium leader or if

there is a multiple banking arrangement, all the banks in the
arrangement.
3.11 SAVINGS ACCOUNT RULES
• Savings banks rules should be annexed as a tear-off portion to the

account opening form so that account holders can retain the rules.
3.12 INFORMATION FROM CLIENTS
• Banks should treat the information received from customers as

confidential and note that divulging any details for cross selling or any
other purpose would be in breach of customer confidentiality obligations.
• Banks must ensure that information sought is relevant and not intrusive.
• The information collected should not be used for cross-selling.
• If information is sought for purposes other than KYC, it should not form
part of the account opening form. This information must be collected on
! !22
a purely voluntary basis after explaining the objectives to the customer

and taking his express approval.
3.13 NOMINATION
• The bank must insist that the individual opening an account makes a
nomination.
• If the individual declines, the bank must explain the advantages of

making a nomination.
• If the individual still refuses, the bank should ask for a letter from the
individual stating that he does not wish to make a nomination.
• If the individual refuses to give such a letter, this fact should be recorded
on the account opening form.
• The account can then be opened.

• The nomination made must be acknowledged.
• The nomination must be registered.
• Nomination details should be recorded on the passport/fixed deposit
receipt.
• Nomination should cover all existing and new accounts.
3.14 DOCUMENTATION
Individual
An individual should:
• Make an application in the prescribed form. The applicant should state:
- His name;
- Occupation;
- Full address;
- His Permanent Account Number (PAN). If he does not have one he
should fill in and submit form 60 issued by the Income Tax
Department.
! !23
• Before opening an account, the banker must be satisfied of the identity

of the person and that he is respectable. If not the banker is within his
rights in refusing to open the account. The normal documents seen to be
satisfied on identity are:
- Driving licence;
- Passport;
- Photo credit card;
- Election ID Card (Voter’s identity card);
- Personal Account Number (PAN) card;
- Government ID Card. The Reserve Bank has advised banks that pay
books or postal identification cards or identity cards of armed forces/
police/government departments or passports may be considered
acceptable to establish the identity of a person seeking to open a
savings account without a cheque facility;
- Letter from a recognized public authority or public servant verifying the

identity and residence of the customer to the satisfaction of the bank;
- With regard to address, telephone bill, bank statement, recent

electricity bill, ration card or letter from employer will suffice.
• At the time of opening the account, the account holder and all those
authorized should sign their names on the specimen signature card. It is
this signature the banker will compare with when cheques are issued on
the account or instructions are given.
• If the signature is not attested the signature can be verified from the
person’s passport or by a self cheque or it can be verified by another
banker (if the individual has another account).
Minors
• An account may be opened for minors. Banks are required to take

adequate safeguards to ensure the accounts are not overdrawn and
remain always in credit. It should be noted that as a minor cannot enter
into a binding contract, that a bank cannot claim on the minor if the
account goes into an overdraft.
! !24
• Generally, the banks are reluctant to open deposit account in the name of
minor, with mother as a guardian. Presumably, reluctance to allow
mother as a guardian when the father is alive, is based on Section 6 of
the Hindu Minority and Guardianship Act, 1956 which stipulates that,
during his lifetime, father alone should be the natural guardian of a
Hindu minor. The legal and practical aspects of the problem have been
examined by the Reserve Bank. If the idea underlying the demand for
allowing mothers to be treated as guardians related only to the opening
of fixed, recurring deposit and savings banks accounts, notwithstanding
the legal provisions, such accounts could be opened by banks provided
they take adequate safeguards in allowing operations in the accounts by
ensuring that minors’ account opened with mothers as guardians are not
allowed to be overdrawn and that they always remain in credit. In this
way, the minor’s capacity to enter into contract would not be a subject
matter of dispute. Further, in cases where the amount involved is large,
and if the minor is old enough to understand the nature of the
transaction, the banks could take his acceptance also for paying out
money from such account.
Client Accounts Opened by Professional Intermediaries
• When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified.
• Banks may hold ‘pooled’ accounts managed by professional

intermediaries on behalf of entities like mutual funds, pension funds or
other types of funds. Banks also maintain ‘pooled’ accounts managed by
lawyers/chartered accountants or stockbrokers for funds held ‘on deposit’
or ‘in escrow’ for a range of clients.
• Where funds held by the intermediaries are not co-mingled at the bank
and there are ‘sub-accounts’, each of them attributable to a beneficial
owner, all the beneficial owners must be identified. Where such funds are
co-mingled at the bank, the bank should still look through to the
beneficial owners.
• Where the banks rely on the ‘Customer Due Diligence’ (CDD) done by an
intermediary, they should satisfy themselves that the intermediary is
regulated and supervised and has adequate systems in place to comply
! !25
with the KYC requirements. It should be understood that the ultimate

responsibility for knowing the customer lies with the bank.
Accounts of Proprietary Concerns
In the case of proprietary concerns, at the time of opening of the account,

the banks have to verify, in addition to the identity of the individual
proprietors, the identity of the proprietary concern also. Accordingly, banks
should call for and verify the following documents:
(i) Identity as also the address proof of the proprietor, such as passport,
PAN card, Voter ID card, Driving licence, Ration card with photo, etc., –
any of these documents is to be obtained.
(ii) Proof of the name, address and activity of the concern, like registration
certificate (in the case of a registered concern), certificate/licence
issued by the Municipal authorities under Shop and Establishment Act,
sales and income tax Returns, CST/VAT certificate, Licence issued by
the Registering authority like Certificate of Practice issued by Institute
of Chartered Accountants of India, Institute of Cost Accountants of
India, Institute of Company Secretaries of India, Indian Medical
council, Food and Drug Control Authorities, etc., – any two of the
documents are to be obtained. These documents should be in the
name of the proprietary concern. Apart from these documents, any
certificate/registration document issued by Sales Tax/Service Tax/
Professional Tax authorities may also be considered for verification of
the proof of name, address and activity of the proprietary concern.
(iii) With effect from May 11, 2012, it has been decided to include the
following documents in the indicative list of required documents for
opening accounts of proprietary concerns:
a) The complete Income Tax Return (not just the acknowledgement)

in the name of the sole proprietor where the firm’s income is
reflected duly authenticated/ acknowledged by the Income Tax
Authorities.
b) Utility bills such as electricity, water and landline telephone bills in

the name of the proprietary concern.
! !26
Accounts of Multi Level Marketing Firms
Certain firms posing as Multi Level Marketing agencies for consumer goods
and services have been actually mobilising large amounts of deposits from
the public with promise of high returns. The representatives of such firms
had opened accounts at various bank branches to facilitate what was
essentially a deposit taking activity and the funds used apparently for
illegal or highly risky activities. Banks must be careful in opening such
accounts/undertake review of such accounts and ensure strict compliance
with Know Your Customer (KYC)/Anti-Money Laundering (AML) Guidelines.
Accounts of Politically Exposed Persons (PEPs) Resident Outside

India
• Politically exposed persons are individuals who are or have been

entrusted with prominent public functions in a foreign country, e.g.,
Heads of States or of Governments, senior politicians, senior
government/judicial/military officers, senior executives of state-owned
corporations, important political party officials, etc.
• Banks should gather sufficient information on any person/customer of

this category intending to establish a relationship and check all the
information available on the person in the public domain.
• Banks should verify the identity of the person and seek information about
the sources of funds before accepting the PEP as a customer. The
decision to open an account for PEP should be taken at a senior level.
This should be clearly spelt out in customer acceptance policy.
• Banks should also subject such accounts to enhanced monitoring on an

ongoing basis.
• The above norms may also be applied to the accounts of the family
members or close relatives of PEPs.
Accounts of Non-face-to-face Customers
• With the introduction of telephone and electronic banking, banks are

increasingly opening accounts for customers without the need for the
customer to visit the bank branch.
! !27
• In the case of non-face-to-face customers, apart from applying the usual

customer identification procedures, there must be specific and adequate
procedures to mitigate the higher risk involved.
• Certification of all the documents presented may be insisted upon and, if

necessary, additional documents may be called for. In such cases, banks
may also require the first payment to be effected through the customer's
account with another bank which, in turn, adheres to similar KYC
standards.
• In the case of cross-border customers, there is the additional difficulty of

matching the customer with the documentation and the bank may have
to rely on third party certification/introduction. In such cases, it must be
ensured that the third party is a regulated and supervised entity and has
adequate KYC systems in place.
Lower Income Groups
• The RBI has stated that KYC guidelines should not be an excuse for
banks to keep the poor away from the banking system. Though the KYC
guidelines require an individual opening a new account to produce a
number of identification documents, these could be done away with for
lower income groups. The RBI has asked banks to ensure that the
inability of the lower income group to produce documents to establish
their identity and address does not lead to their financial exclusion and
denial of banking services. A simplified procedure could be provided for
opening of accounts in respect of those persons who do not intend to
keep balances above ` 50,000 and whose total credit in one year is not
expected to exceed ` 1,00,000.
Disabled Persons with Autism, Cerebral Palsy, Mental Retardation

and Multiple Disabilities
• Banks may accept guardianship certificates issued by the District Court

under the Mental Health Act 1987 or local authorities in regard to
persons with disabilities issued by local level committees set up under
the National Trust for the Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities Act, 1999. Banks must give
parents, relatives guidance so that they do not face difficulties.
! !28
• The legal guardian may be permitted to operate the account.
Sick, Old and Incapacitated Non-pension Account Holders
• Sick, old and incapacitated non-pension account holders should be given

the same facilities as pension account holders.
• In order to facilitate old/sick/incapacitated bank customers to operate

their bank accounts, procedure as laid down below may be followed. The
cases of sick/old/incapacitated account holders fall into the following
categories:
i. an account holder who is too ill to sign a cheque/cannot be physically

present in the bank to withdraw money from his bank account but
can put his/her thumb impression on the cheque/withdrawal form,
and
ii. an account holder who is not only unable to be physically present in

the bank but is also not even able to put his/her thumb impression
on the cheque/withdrawal form due to certain physical defect/
incapacity.
• The banks may follow the procedure as under:
i. Wherever thumb or toe impression of the sick/old/incapacitated

account holder is obtained, it should be identified by two independent
witnesses known to the bank, one of whom should be a responsible
bank official.
ii. Where the customer cannot even put his/her thumb impression and
also would not be able to be physically present in the bank, a mark
obtained on the cheque/withdrawal form which should be identified
by two independent witnesses, one of whom should be a responsible
bank official.
• In such cases, the customer may be asked to indicate to the bank as to

who would withdraw the amount from the bank on the basis of cheque/
withdrawal form as obtained above and that person should be identified
by two independent witnesses. The person who would be actually
! !29
drawing the money from the bank should be asked to furnish his
signature to the bank.
• In this context, according to an opinion obtained by the IBA from their

consultant on the question of opening of a bank account of a person who
had lost both his hands and could not sign the cheque/withdrawal form,
there must be physical contact between the person who is to sign and
the signature or the mark put on the document. Therefore, in the case of
the person who has lost both his hands, the signature can be by means
of a mark. This mark can be placed by the person in any manner. It could
be the toe impression, as suggested. It can be by means of mark which
anybody can put on behalf of the person who has to sign, the mark being
put by an instrument which has had a physical contact with the person
who has to sign.
• Reserve Bank has been advised by the National Trust for the Welfare of
Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities (the Trust) that a question had been raised as to whether the
banks and the banking sector could accept the guardianship certificates
in regard to persons with disabilities issued by the Local Level
Committees set up under the National Trust for the Welfare of Persons
with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities
Act, 1999. The Trust has mentioned that the above Act was specifically
passed by the Parliament in order to provide for appointment of legal
guardians for persons with disability that is covered under the said Act.
The above Act provides for appointment of legal guardians for persons
with disability by the Local Level Committees set up under the Act. The
Trust has opined that a legal guardian so appointed can open and operate
the bank account as long as he remains the legal guardian. It may also
be noted that the provisions of Mental Health Act, 1987 also allows
appointment of Guardian by District Courts. Banks are therefore advised
to rely upon the Guardianship Certificate issued either by the District
Court under Mental Health Act or by the Local Level Committees under
the above Act for the purposes of opening/operating bank accounts.
Banks may also ensure that their branches give proper guidance so that
the parents/relatives of the disabled persons do not face any difficulty in
this regard.
! !30
Hindu Undivided Families (HUF)
Hindu undivided families should submit:
• A HUF declaration that has been signed by all the coparceners affirming
the composition of the HUF, its karta and names and relationship of all
coparceners including minor sons and their dates of birth;
• A HUF deed (if there is one);
• The account is opened in the name of the karta or in the name of the
HUF business;
• Certified true copies of the IT Returns for the last two/three years.
Partnerships
Partnership Companies should submit:
• A certified true copy of the partnership agreement;
• A list of all the partners and their addresses (including telephone

numbers) mentioning if there are any limited partners;
• Attested true copy of a resolution of the partners to open an account and

the manner how it is to be operated or a letter signed by all the partners
addressed to the bank to open a deposit account. This is to ensure their
joint and several liability;
• Power of attorney granted to a partner or an employee to transact

business;
• PAN Card;
• Telephone or other bill as proof of address.
Limited Liability Partnership
• All the documents required for a partnership as mentioned above.
! !31
• Registration certificate (certificate of incorporation) from the Registrar of

Companies.
Association/Society/Club
An association/society/club should submit:
• Its certificate of registration (if it is required to be registered);

• A copy of its governing body resolution;
• A certified true copy of its bye-laws/model byelaws;
• List of the management committee members;
• Names and addresses of all committee members including phone
numbers;
• Management committee resolution to open a deposit account and the
manner it is to be operated.
A Trust/Nominee or Fiduciary Account
• There exists the possibility of trust/nominee or fiduciary accounts being

used to circumvent the customer identification procedures. Banks should
determine whether the customer is acting on behalf of another person as
trustee/nominee or any other intermediary. If so, banks may insist on
receipt of satisfactory evidence of the identity of the intermediaries and
of the persons on whose behalf they are acting. The bank should also
obtain details of the nature of the trust or other arrangements in place.
• While opening an account for a trust, banks should take reasonable

precautions to verify the identity of the trustees and the settlors of trust
(including any person settling assets into the trust), grantors, protectors,
beneficiaries and signatories. Beneficiaries should be identified when they
are defined. In the case of a ‘foundation’, steps should be taken to verify
the founder managers/directors and the beneficiaries, if defined.
• A trust/nominee or fiduciary account should submit:
- A certified true copy of the trust deed or the charter under which it is
operated;
- Its byelaws;
- A list of its trustees including their address and phone number;
! !32
- A resolution of the trustees to open a deposit account and the manner

it is to be operated.
Limited Companies
• Limited Companies should submit:
- Their memorandum and articles of association;

- The certificate of incorporation;
- The certificate of commencement of business (public limited
companies);
- A copy of a resolution passed by the board of directors to open a

account and the manner it is to be operated including names/
designations of the persons permitted to operate the account along
with the authority given to them;
- Principal place of business;

- Copy of the PAN card;
- Mailing address and fax number;
- Proof of address.
- Banks need to be vigilant against business entities being used by
individuals as a ‘front’ for maintaining accounts with banks. Banks
should examine the control structure of the entity, determine the
source of funds and identify the natural persons who have a controlling
interest and who comprise the management. These requirements may
be moderated according to the risk perception, e.g., in the case of a
public limited company it will not be necessary to identify all the
shareholders.
General
• Some banks have introduced a new column for ‘religion’ in account

opening forms. This is partly due to the Government asking public sector
banks to collect data on minority lending.
! !33
‘Know Your Customer’ (KYC) Guidelines
a. As part of KYC principle, Reserve Bank has issued several guidelines

relating to identification of depositors and advised the banks to put in
place systems and procedures to prevent financial frauds, identify
money laundering and suspicious activities, and for scrutiny/monitoring
of large value cash transactions. Instructions have also been issued
from time to time advising banks to be vigilant while opening accounts
for new customers to prevent misuse of the banking system for
perpetration of frauds.
b. KYC guidelines have been revisited in the context of the

Recommendations made by the Financial Action Task Force (FATF) on
AML standards and on Combating Financing of Terrorism (CFT). These
standards have become the international benchmark for framing AML
and CFT policies by the regulatory authorities.
c. Banks are advised to ensure that a proper policy framework on KYC and
AML measures is formulated and put in place with the approval of the
Board. While preparing operational guidelines, banks may ensure that
information sought from the customer is relevant to the perceived risk,
is not intrusive, and is conformity with the guidelines issued in this
regard from time to time. Any other information from the customer
should be sought separately with his/her consent and after opening the
account.
d. An indicative list of the nature and type of documents/information that

may be relied upon for customer identification was given by the Reserve
Bank. It has been brought to the notice of Reserve Bank that this list,
which was clearly termed as an indicative list, is being treated by some
banks as an exhaustive list as a result of which a section of public is
being denied access to banking services. Banks are, therefore, advised
to take a review of their extant internal instructions in this regard.
e. It is clarified that permanent correct address, as referred to in the list

means the address at which a person usually resides and can be taken
as the address as mentioned in a utility bill or any other document
accepted by the bank for verification of the address of the customer. It
has been observed that some close relatives, e.g., wife, son, daughter
and parents, etc., who live with their husband, father/mother and son,
! !34
as the case may be, are finding it difficult to open account in some
banks as the utility bills required for address verification are not in their
name. It is clarified, that in such cases, banks can obtain an identity
document and a utility bill of the relative with whom the prospective
customer is living along with a declaration from the relative that the
said person (prospective customer) wanting to open an account is a
relative and is staying with him/her. Banks can use any supplementary
evidence such as a letter received through post for further verification of
the address.
f. To ease the burden on the prospective customers in complying with KYC

requirements for opening new accounts, it has been decided that if the
address on the document submitted for identity proof by the prospective
customer is same as that declared by him/her in the account opening
form, the document may be accepted as a valid proof of both identity
and address.
g. If the address indicated on the document submitted for identity proof

differs from the current address mentioned in the account opening form,
a separate proof of address should be obtained. For this purpose, apart
from the indicative documents listed a rent agreement indicating the
address of the customer duly registered with State Government or
similar registration authority may also be accepted as a proof of
address.
h. Unique Identification Authority of India (UIDAI) has advised Reserve

Bank that banks are accepting Aadhaar letter issued by it as a proof of
identity but not of address, for opening accounts. If the address
provided by the account holder is the same as that on Aadhaar letter, it
may be accepted as a proof of both identity and address.
i. NREGA job card may be accepted as an ‘officially valid document’ for

opening of bank account without the limitation applicable to ‘Small
Accounts’.
j. It has been brought to the Reserve Bank’s notice that banks are not
promoting opening of ‘Small Accounts’ for greater financial inclusion.
The Reserve Bank has advised banks to open ‘Small Accounts’ for all
persons who so desire. It is reiterated that all limitations applicable to
‘Small Accounts’ should be strictly observed.
! !35
k. While issuing operational instructions to the branches on the subject,

banks should keep in mind the spirit of instructions issued by the
Reserve Bank and avoid undue hardships to individuals who are,
otherwise, classified as low risk customers.
l. “Money mules” can be used to launder the proceeds of fraud schemes,

(e.g., phishing and identity theft) by criminals who gain illegal access to
deposit accounts by recruiting third parties to act as “money mules”. In
some cases these third parties may be innocent while in others they
may be having complicity with the criminals. In a money mule
transaction, an individual with a bank account is recruited to receive
cheque deposits or wire transfers and then transfer these funds to
accounts held on behalf of another person or to other individuals, minus
a certain commission payment. Money mules may be recruited by a
variety of methods, including spam e-mails, advertisements on genuine
recruitment web sites, social networking sites, instant messaging and
advertisements in newspapers. When caught, these money mules often
have their bank accounts suspended, causing inconvenience and
potential financial loss, apart from facing likely legal action for being
part of a fraud. Many a time the address and contact details of such
mules are found to be fake or not up to date, making it difficult for
enforcement agencies to locate the account holder. The operations of
such mule accounts can be minimised if banks follow the guidelines
contained in the various circulars of the Reserve Bank on Know Your
Customer (KYC) norms/Anti-Money Laundering (AML) standards/
Combating of Financing of Terrorism (CFT)/Obligation of banks under
PMLA, 2002. UCBs are, therefore, advised to strictly adhere to the
guidelines on KYC/AML/CFT issued from time to time and to those
relating to periodical updation of customer identification data after the
account is opened and also monitor transactions in order to protect
themselves and their customers from misuse by such fraudsters.
m. With a view to containing the risk of fraud involved in opening bank

accounts of salaried employees, banks need to rely on certification of
identity as well as address proof only from corporates and other entities
of repute and should be aware of the competent authority designated by
the concerned employer to issue such certificate/letter. Further, in
addition to the certificate from employer, banks should insist on at least
one of the officially valid documents as provided in the Prevention of
Money Laundering Rules (viz., passport, driving licence, PAN Card,
! !36
Voter’s Identity card, etc.), or utility bills for KYC purposes for opening
bank account of salaried employees of corporates and other entities.
n. When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified. Banks may hold ‘pooled’ accounts
managed by professional intermediaries on behalf of entities like mutual
funds, pension funds or other types of funds. Banks also maintain
‘pooled’ accounts managed by lawyers/chartered accountants or
stockbrokers for funds held ‘on deposit’ or ‘in escrow’ for a range of
clients. Where funds held by the intermediaries are not co-mingled at
the bank and there are ‘sub-accounts’, each of them attributable to a
beneficial owner, all the beneficial owners must be identified. Where
such funds are co-mingled at the bank, the bank should still look
through to the beneficial owners. 
 
If a bank decides to accept such accounts in terms of the Customer
Acceptance Policy, the bank should take reasonable measures to identify
the beneficial owner(s) and verify his/her/their identity in a manner so
that it is satisfied that it knows who the beneficial owner(s) is/are. 
 
Hence, any professional intermediary, who is under any obligation that
inhibits bank’s ability to know and verify the true identity of the client on
whose behalf the account is held or beneficial ownership of the account
or understand true nature and purpose of transaction/s, should not be
allowed to open an account on behalf of a client.
o. In view of the risks involved in cash intensive businesses, accounts of

bullion dealers (including sub-dealers) & jewellers should also be
categorised by banks as ‘high risk’ requiring enhanced due diligence.
The banks are also required to subject ‘high risk accounts’ and the
transactions to intensified monitoring. High risk associated with such
accounts should be taken into account by banks to identify suspicious
transactions for filing Suspicious Transaction Reports (STRs) to FIU-IND.
p. The instructions contained in the guidelines on KYC norms and AML

Measures also require banks to put in place a system of periodical
review of risk categorization of accounts and the need for applying
enhanced due diligence measures in case of higher risk perception on a
customer.
! !37
q. Banks are further advised that such review of risk categorization of

customers should be carried out at a periodicity of not less than once in
six months. Banks should also introduce a system of periodical updation
of customer identification data (including photograph/s) after the
account is opened. The periodicity of such updation should not be less
than once in five years in case of low risk category customers and not
less than once in two years in case of high and medium risk categories.
It is, however, observed that there are laxities in effective
implementation of the Reserve Bank’s guidelines in this area, leaving
banks vulnerable to operational risk. Banks should, therefore, ensure
compliance with the regulatory guidelines on KYC/AML/CFT both in
letter and spirit. Accordingly, UCBs are advised to complete the process
of risk categorization and compiling/updating profiles of all of their
existing customers in a time-bound manner.
r. With a view to ensuring that the banking channels are not used for
unlawful/illegal activities, it is reiterated that all banks must put in place
a system of periodic review of risk categorization of customers and
updation of customer identification data to ensure strict adherence to
the KYC/AML/CFT guidelines issued by Reserve Bank from time to time.
s. Banks are advised that KYC once done by one branch of the bank should
be valid for transfer of the account within the bank as long as full KYC
procedure has been done for the concerned account. The customer
should be allowed to transfer his account from one branch to another
branch without restrictions. In order to comply with KYC requirements
of correct address of the person, fresh address proof may be obtained
from him/her upon such transfer by the transferee branch.
t. Banks may transfer existing accounts at the transferor branch to the

transferee branch without insisting on fresh proof of address and on the
basis of a self-declaration from the account holder about his/her current
address, subject to submitting proof of address within a period of six
months.
u. Banks may also accept rent agreement duly registered with State
Government or similar registration authority indicating the address of
the customer, in addition to other documents listed as proof of address.
! !38
v. Banks are advised to initiate steps for allotting Unique Customer

Identification Code (UCIC) to all their customers while entering into any
new relationships for individual customers to begin with. Similarly,
existing individual customer may also be allotted UCIC. The UCIC will
help UCBs to identify customers, track the facilities availed, monitor
financial transactions in a holistic manner and enable Banks to have a
better approach to risk profiling of customers. It would also smoothen
banking operations for the customers.
w. KYC verification of all the members of Self Help Group need not be done
while opening the savings bank account of the SHG and KYC verification
of all the office bearers would suffice. As regards KYC verification at the
time of credit linking of SHGs, it is clarified that since KYC would have
already been verified while opening the savings bank account and the
account continues to be in operation and is to be used for credit linkage,
no separate KYC verification of the members or office bearers is
necessary.
1. Who can introduce an account?
2. In what cases is it not necessary for a bank to insist on photographs?
3. If an account opener does not have a PAN/GIR number, what must he

be requested to submit?
4. Is it permissible to open a account without specifying a nomination?
5. Under what circumstances can the KYC guidelines be done away with?
6. What documentation is required to open the account of:
a. A Hindu undivided family

b. A partnership and
c. A Public Limited Company
! !39
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !40
CURRENT ACCOUNT
Chapter 4
Current Account
Objectives
This chapter will tell you all that you need to know on current accounts.
Structure
4.1 Definition
4.2 Who Opens Current Accounts?
4.3 Opening of a Current Account
4.4 Credit Discipline
4.5 Nomination
4.6 Manner of Operation
4.7 Opening Deposit
4.8 Current Accounts Operation
4.9 Clean Overdrafts
4.10 Cheque Book
4.11 Stopping Operations
4.12 Interest
4.13 Precautions in Opening Joint Accounts
4.14 Monitoring Operations in New Accounts
4.15 Monitoring Operations in All Accounts
4.16 Inactive and Dormant Accounts
4.17 Charges
4.18 Deceased Depositor
4.19 Closing an Account
4.20 Prohibitions
4.21 Passbook/Statement
! !41
CURRENT ACCOUNT
4.1 DEFINITION
• This is defined by the Reserve Bank as “a form of demand deposit

wherefrom withdrawals are allowed any number of times depending upon
the balance in the account or upto a particular agreed amount and shall
also be deemed to include other deposit accounts that are neither
savings deposit nor term deposit.”
• A current account is opened usually for commercial or business purposes

where there are a large number of transactions.
• It is a running and active account and there are no restrictions on the

number of transactions and the amount of transactions.
4.2 WHO OPENS CURRENT ACCOUNTS?
• Current accounts are opened by those who have commercial interests

and have the need to issue many cheques. These include:
- Individuals;
- Partnerships;
- Limited Liability Partnerships;
- Trusts;
4.3 OPENING OF A CURRENT ACCOUNT
• The RBI has advised banks to incorporate a certificate in account opening

forms confirming the identity, occupation and address of the prospective
customer signed by the introducer.
• If the account has not been properly introduced:
- The banker cannot avail of the statutory protection under Section 131
of the Negotiable Instruments Act, if he collects a cheque, bill and the
! !42
CURRENT ACCOUNT
likes on behalf of a customer who has no title to it or whose title is

defective.
- If an overdraft has been given by mistake, the bank bears the risk of
loss if the overdraft is not repaid.
- Deposits received from an un-discharged insolvent not properly

introduced carries the risk of attachment.
- If a cheque book is given to an undesirable customer, the bank faces

the risk of cheques being issued without sufficient balance.
• Several banks permit accounts to be opened by a “self introduction.” This

is by the person opening the account depositing a cheque drawn by him
on another bank where he maintains an account. Banks consider this an
acceptable risk. However, this does not give the banker any comfort with
regard to the moral standing of the person.
4.4 CREDIT DISCIPLINE
• At the time of opening an account, the RBI has stated that to maintain
credit discipline:
- Banks should insist on a declaration from the account holder to the

effect that he is not enjoying any credit facility with any other
commercial bank or obtain a declaration giving particulars of credit
facilities enjoyed with any other commercial bank. If the prospective
customer is enjoying credit facility from any other commercial or
co-operative bank, the bank opening the current account should inform
the concerned lending bank and insist on a no objection certificate. If
the facility is from a co-operative bank, it is essential for the bank to
comply with the requirements of the co-operative societies act/rules of
the state regarding membership and borrowings. The RBI insists that
banks must scrupulously ensure that their branches do not open
current accounts of entities which enjoy credit facilities (fund or non-
fund based) from the banking system without specifically obtaining a
NOC from the lending bank. Non-adherence to this could be perceived
to be abetting the siphoning of funds.
! !43
CURRENT ACCOUNT
- Banks may inform, in the case of a prospective customer who is a

corporate or large borrower enjoying facilities from more than one
bank, the consortium leader, if under consortium and the concerned
banks, if under multiple banking arrangement.
- Banks may open current accounts of prospective customers if no

response is received after a minimum period of a fortnight. If a
response is received within a fortnight, banks should assess the
situation with reference to the information provided on the prospective
customer by the bank concerned but are not required to solicit a formal
no objection, consistently with true freedom to the customer of banks
as well as needed due diligence on the customer of the bank.
- Banks should ascertain whether he/she is a member of any other

cooperative society/bank. If so the details should be procured.
4.5 NOMINATION
• See separate Chapter 8.
4.6 MANNER OF OPERATION
• At the time the account is opened, the customer would mention how the
account should be operated. This is important for joint accounts or
accounts with multiple holders.
• This is also important should anything occur to the account holders. The
terms used are:
- Single;
- Joint;
- Either or survivor. In this case, should one of the account holders die,
the survivor can draw the balance in the account.
4.7 OPENING DEPOSIT
• At the time the account is opened, the customer should ideally open the
account with a cash deposit. An account should not be opened on a zero
! !44
CURRENT ACCOUNT
balance (whenever possible) as the banker in this instance has not taken
on deposit any amount.
• However, the RBI permits account opening with a self cheque drawn on
another account with another bank.
4.8 CURRENT ACCOUNTS OPERATION
• An account holder will deposit cash or cheques into his account. The
details are entered in a paying in book/slip and then the book/slip along
with the cheques/cash is handed over to the teller.
• The teller verifies the amount and stamps the customer’s copy confirming
receipt.
• The Reserve Bank has stated that no bank should refuse an

acknowledgement if the customer makes deposit at the counter of the
bank.
• Customers can also deposit cheques/cash in drop boxes/ATMs.
• Customers cannot be compelled to drop cheques in a drop box.
• The customer has to be made aware that he has the option of dropping
cheques in the drop box or tendering them at the counters. Banks have
to display on the drop box a sign stating “Customers can also tender the
cheques at the counter and obtain acknowledgement on the pay in slips.”
This should be in English, Hindi and local regional language.
• Both the drop box facility and the facility for acknowledgement of
cheques at regular collection counters should be available to customers.
• There must be a foolproof method when opening boxes to ensure that

the customer’s interests are not compromised.
• There is no restriction on the amount that may be deposited in a current

account.
• Third party cheques and cheques with endorsements may be deposited in

current accounts.
! !45
CURRENT ACCOUNT
• As a banker one is expected to check the end use of funds. Therefore, if

a partner or an authorized signatory is transferring funds from the
partnership/company’s account to his personal account, the banker
should ascertain and be satisfied with the reason.
• Customers make withdrawals from the account by drawing cheques (or

withdrawal slips if they do not have a cheque book).
• The banker will compare the signature on the cheque, the amount,
whether the customer has sufficient balance and the date. If all are in
order payment will be made.
• Customers who are too ill to sign a cheque or cannot be physically

present can put their thumb impression or a mark on the cheque and this
must be identified by two independent witnesses known to the bank.
• There are no restrictions on the number of withdrawals that may be

made in a period.
4.9 CLEAN OVERDRAFTS
• The RBI states that clean overdrafts for small amounts may be permitted
at the discretion of the branch manager to customers whose dealings
have been satisfactory. Banks should work out schemes in this regard.
4.10 CHEQUE BOOK
• When a cheque book is exhausted, the customer should fill in a cheque

requisition form (contained in the cheque book) and hand it to the bank.
Fresh cheque books should be issued only against production of duly
signed requisition slips from the previous cheque book issued to the
party. In case the cheque book is issued against a requisition letter, the
drawer should be asked to come personally to the bank or cheque book
should be sent to him under registered post directly without being
delivered to the bearer. Loose cheques should be issued to account
holder only when they come personally with a requisition letter and on
production of passbooks.
• Normally banks send new cheque books to customers by courier. The RBI
has stated that cheque books should be handed over to customers/their
! !46
CURRENT ACCOUNT
representatives at the branch of the bank where they bank if they want it
given to them at the bank.
• It should be noted that insisting on dispatching cheque book by courier

after forcibly obtaining a declaration from the depositor that dispatch by
courier is at the depositor’s risk is an unfair practice. Banks must refrain
from taking such a declaration.
• Banks may issue cheques with a large number of leaves if the customer
demands one. If a large number of cheque books are given, it should be
in consultation with the controlling office of the bank.
• All cheque forms should be printed in Hindi and in English. The customer
may write the cheque in English, Hindi or the concerned regional
language.
• Banks must have a condition that in the event of dishonour of cheques of

` 1 crore or more, four times in a financial year for want of sufficient
funds in the account, that no cheque book would be issued. Customers
should be advised of this at the time of reissue of cheque books.
However, for cash credit accounts, overdraft accounts, etc., and the need
for continuance of these facilities, the cheque facility relating to these
accounts should be reviewed by an authority higher than the sanctioning
authority.
• If a cheque is dishonoured for the third time during a financial year. The
bank should issue a cautionary advice to the customer and tell him of the
stoppage of cheque facility if a cheque is dishonoured for the fourth time
in the same account during the financial year. A similar advice should be
given if the bank intends to close the account.
4.11 STOPPING OPERATIONS
• Operations in an account will be stopped:
- On receipt of notice of death of a customer;

- On receipt of notice of the insanity of a customer;
- On being advised that the customer is insolvent;
- On receipt of a garnishee order from the court;
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CURRENT ACCOUNT
- On receipt of notice of assignment of the credit balance in the account

of a customer to a third party.
4.12 INTEREST
• Banks do not pay interest on balances maintained in a current account.
• The Reserve Bank prohibits the payment of interest in a current account.

In addition the Reserve Bank prohibits the payment of countervailing
interest.
• Countervailing interest is defined as “any benefit of interest allowed on

any account in the nature of current account maintained with the bank”.
In short if a depositor is given a free holiday for a current account
maintained, the free holiday would be viewed as countervailing interest.
• Banks are permitted to pay interest on the current account of a Regional

Rural Bank (RRB) they have sponsored. The rate that can be paid is half
a percent lower than the borrowing rate for the RRBs. However, banks
are encouraged to not pay interest on the current accounts maintained
by RRBs with them.
• Banks pay interest on the balances in the current account standing in the
name of a deceased individual depositor/sole proprietorship concern from
the date of the depositor’s death till the date the account is closed at the
rate applicable to savings deposits.
• Banks may pay interest at a rate based on its discretion on the minimum
credit balance in the composite cash credit account of a farmer during
the 10th and the last day of each month at the savings account rate.
With effect from April 1, 2010 this is calculated on the daily balance at
the savings account rate.
4.13 PRECAUTIONS IN OPENING JOINT ACCOUNTS
In the case of too many joint account holders, the banks should keep the
following guidelines in view, while opening joint accounts and permitting
operations thereon:
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CURRENT ACCOUNT
a. While there are no restrictions on the number of account holders in a

joint account, it is incumbent upon the banks to examine, every
request for opening joint accounts very carefully. In particular, the
purpose, nature of business handled by the parties and other relevant
aspects relating to the business, and the financial position of the
account holders, need to be looked into before opening such
accounts. Care has also to be exercised when the number of account
holders is large.
b. The account payee cheques payable to third parties should not be

collected.
c. Cheques that are “crossed generally” and payable to "order" should

be collected only on proper endorsement by the payee.
d. Care should be exercised in collection of cheques for large amounts.
e. The transactions put through in joint accounts should be scrutinised

by the banks periodically and action taken as may be appropriate in
the matter. Care should be exercised to ensure that the joint
accounts are not used for benami transactions.
The internal control and vigilance machinery should be tightened to cover

the above aspects relating to the opening and operation of joint accounts.
4.14 MONITORING OPERATIONS IN NEW ACCOUNTS
A system of maintaining a close watch over the operations in new accounts

should be introduced. While at branches, primarily the responsibility for
monitoring newly opened accounts would rest with the in-charges of the
concerned Department/Section, the Branch Managers or the Managers of
Deposit Accounts Department at larger branches should at least for the
first six months, from the date of opening of such accounts, keep a close
watch, so as to guard against fraudulent or doubtful transactions taking
place therein. If any transaction of suspicious nature is revealed, banks
should enquire about the transaction from the account holder, and if no
convincing explanation is forthcoming, they should consider reporting such
transactions to the appropriate investigating agencies.
! !49
CURRENT ACCOUNT
Caution should be exercised whenever cheques/drafts for large amounts

are presented for collection, or Telegraphic Transfers (TTs)/Mail Transfers
(MTs) are received for credit of new accounts immediately/within a short
period after opening of account. In such cases, genuineness of the
instruments and the account holder should be thoroughly verified. If
necessary the paying bank should check with the collecting bank about the
genuineness of any large value cheques/drafts issued. Demand Drafts
(DDs)/Cheques for large amounts presented for collection should be
verified under ultra violet lamps to safe guard against chemical alterations.
4.15 MONITORING OPERATIONS IN ALL ACCOUNTS
A system of close monitoring of cash withdrawal for large amounts should

be put in place. Where third party cheques, drafts, etc., are deposited in
the existing and newly opened accounts followed by cash withdrawals for
large amounts, the banks should keep a proper vigil over the requests of
their clients for such cash withdrawals for large amounts.
The banks should introduce a system of closely monitoring cash deposits

and withdrawals for ` 5 lakh and above not only in deposit accounts but
also in all other accounts like cash credit/overdraft, etc. The banks/
branches should also maintain a separate register to record details of
individual cash deposits and withdrawals for ` 5 lakh and above. The
details recorded should include, in the case of deposits, the name of the
account holder, account number, amount deposited and in the case of
withdrawals, the name of the account holder, account number, amount of
withdrawal and name of the beneficiary of the cheque. Further, any cash
deposits or withdrawals of ` 5 lakh and above should be reported by the
Branch Manager to the Head Office on a fortnightly basis along with full
particulars, such as name of the account holder, account number, date of
opening the account, etc. On receipt of these statements from branches,
the Head Office should immediately scrutinise the details thereof and have
the transactions looked into by deputing officials, if the transactions prima
facie appear to be dubious or giving rise to suspicion. The inspecting
officials from the Reserve Bank during the course of their inspections will
also be looking into the statements submitted by the branches.
The other important areas in the payment of cheques wherein due caution
need to be exercised are verification of drawer’s signature, custody of
specimen signature cards, supervision over issue of cheque books and
! !50
CURRENT ACCOUNT
control over custody of blank cheque books/leaves. While need for

examining cheques for large amounts under Ultra Violet Ray Lamps is
recognised by all banks, in practice it is rarely done as there is often a
tendency to be lax in the matter resulting in avoidable loss. In addition,
due care should be exercised in regard to issue and custody of tokens,
movement of cheques tendered across the counter and custody of all
instruments after they are paid by the banks. Depositors/Customers should
be asked to surrender unused cheque books before closing/transferring the
accounts. Also safe custody of specimen signature cards is of utmost
importance, especially when operating instructions are changed, the
change should be duly verified by a senior official in the branch.
4.16 INACTIVE AND DORMANT ACCOUNTS
• If there has been no customer initiated transaction for one year, the
account is classified as an inactive account.
• If there has been no customer initiated transaction in the account for two
years, the account will be designated a dormant account. Many banks
designate accounts as dormant if there are no customer-generated
transactions for six months.
• These accounts are subject to greater checks, as they are susceptible to

fraud.
• These are of two types – with very little balance and with a substantial
balance. It is the latter that is susceptible to fraud. Where the balance is
minimal, the amount automatically gets wiped out by the bank levying
charges for non-maintenance of the required balance.
• Banks have a right to freeze these accounts.
4.17 CHARGES
• Banks often insist on a minimum average monthly/quarterly balance to

be maintained in the account. If the balance is not maintained a service
charge is levied.
• Clients must be advised of any changes in charges.
! !51
CURRENT ACCOUNT
4.18 DECEASED DEPOSITOR
4.19 CLOSING AN ACCOUNT
• To close an account all the account holders should write to the bank
stating their intent to close the account. They must also submit all
unused cheques to the bank. Incorporated entities and associations
should also submit a copy of the resolution wherein it was agreed that
the bank account be closed.
• The bank usually asks the account holder/s to sign one cheque in blank.
This is the demand by the account holder for the balance in his account.
• All unused cheque leaves should be cancelled and returned to the bank.
• The bank may also request the customer to close his account if:
- The customer is no longer a desirable person.

- The account has not been operated for a long time.
• If a customer cannot be traced, the balance is placed in an unclaimed

deposits account.
• If a statement or correspondence sent to the customer is returned, the

balance should be transferred to a dormant account (to keep a check on
the account) or in some other “watch” account.
4.20 PROHIBITIONS
4.21 PASSBOOK/STATEMENT
• Banks either give customers a passbook which details their account or at

the end of a month send their customers a statement of their account
with the bank.
! !52
CURRENT ACCOUNT
• The Reserve Bank has stated that entries in passbooks should not be
inscrutable and that brief intelligible particulars must be entered.
• The statement must include the full address and telephone number of
the branch.
• To improve service the Reserve Bank has asked banks to ensure that the
full address and telephone number of the branch is mentioned on the
passbooks/ statements of account issued to account holders.
1. What is a Current Account?
2. Who opens a current account and why?
3. What is the credit discipline the RBI expects banks to adhere to when
opening a current account?
4. Is an acknowledgement required when a deposit is made into a Current

Account at the bank counter? Where else can a customer make a
deposit?
5. Under what circumstances should a bank refuse to issue a cheque book?
6. When are operations in an account stopped
7. What does countervailing interest mean?
8. When does an account become dormant?
! !53
CURRENT ACCOUNT
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !54
SAVINGS ACCOUNT
Chapter 5
Savings Account
Objectives
This chapter will explain to you everything you need to know about savings
accounts.
Structure
5.1 Definition
5.2 Those Who Opens Savings Accounts
5.3 Savings Accounts Operation
5.4 Addition/Deletion of Name of Joint Account Holders
5.5 Cheque Book
5.6 Passbook/Statement
5.7 Interest
5.11 Payment of Interest on Accounts Frozen by Banks
5.12 Inactive and Dormant Accounts
5.13 Charges
5.14 Nomination
5.16 Transfer
5.17 Stopping Operations
5.18 Closing an Account
5.19 Prohibitions
5.20 Organizations that can have Savings Account
5.21 Financial Inclusion
! !55
SAVINGS ACCOUNT
5.1 DEFINITION
• Savings accounts have been defined as “a deposit account …..which is

subject to the restrictions as to the number of withdrawals as also the
amounts of withdrawals permitted by the bank during any specified
period.”
• A savings account is meant to encourage savings and is focused on

individuals.
• By opening an account an individual begins a relationship with the bank.
5.2 THOSE WHO OPENS SAVINGS ACCOUNTS
• Individuals open savings accounts.
• With regard to those who intend to keep balances not exceeding `

50,000 in all their accounts taken together and the total credit in all
advances taken is not expected to exceed ` 1,00,000, banks can open
accounts with:
- Introduction from another account holder who has been subject to full
KYC procedure. The introducer’s account must be at least six months
old and satisfactorily operated.
- Photograph of the person opening the account and his address must be
certified by the introducer or there must be some other acceptable
evidence of identity and address.
- The customer must be made aware that if his balances exceed `

50,000 or his advances exceed ` 1,00,000 no further transactions will
be permitted till full KYC procedures are completed. The customer
should be made aware when either balance touches 80 percent of the
amount permitted.
- At the time of opening the account customer should be advised in a

transparent manner the requirement of maintaining minimum balance
and levying of charges if minimum balance is not maintained. Any
charge levied subsequently should be transparently made known to all
depositors in advance with one month’s notice.
! !56
SAVINGS ACCOUNT
• In times of calamity like the floods in Maharashtra, the RBI permitted

banks to open accounts with:
- Introduction from another account holder.

- Documents of identity along with document of address (electricity bill
or ration book).
- Introduction by two neighbors who have documents of identity.
• Savings accounts cannot be opened in the name of government

departments except in the case of certain specified institutions such as
primary co-operative credit societies financed by the government, Khadi
and Village Industries Board and Societies registered under the Societies
Registration Act 1860.
• The RBI has also asked banks to make available a “basic no frills
account” either with nil or very low minimum balances that would make
such accounts accessible to vast sections of the population. Banks have
been asked to give wide publicity to this. The nature and number of
transactions in these accounts can be restricted.
• Banks must increase banking outreach with affordable infrastructure and

low operational costs with use of appropriate technology.
• Banks may open savings bank accounts in the names of State

Government departments/bodies/agencies in respects of grants/subsidies
released for implementation of various programmes/schemes sponsored
by State Governments on production of an authorization to the bank by
the State Government certifying that the department/body has been
permitted to open a savings account.
• Savings Bank rules must be annexed as a tear off portion to the account
opening form.
5.3 SAVINGS ACCOUNTS OPERATION
• An individual has cash/cheques which he wishes to deposit into his

account. To do so the details are entered in a paying in book/slip and
then the book/slip along with the cheques/cash is handed over to the
teller.
! !57
SAVINGS ACCOUNT
• The teller verifies the amount and stamps the customer’s copy confirming
receipt.
• The Reserve Bank has stated that no bank should refuse an

acknowledgement if the customer makes a deposit at the counters of the
bank.
- Customers can also deposit cheques/cash in drop boxes/ATMs but they

do so at their risk as they would not receive a confirmation of the
deposit.
- Both the drop box facility and the facility for acknowledgement of
cheques at regular collection counters should be available to
customers.
- The customer has to be made aware that he has the option of dropping
cheques in the drop box or tendering them at the counters. The
customer cannot be compelled to drop cheques in a drop box. Banks
have to display on the drop box a sign stating “Customers can also
tender the cheques at the counter and obtain acknowledgement on the
pay in slips.” This should be in English, Hindi and the regional
language.
• There is no restriction on the amount that may be deposited in a savings

account.
• Third party cheques may not be deposited in savings accounts.
• Customers make withdrawals from the account by drawing cheques (or

withdrawal slips if they do not have a cheque book).
• Customers may write cheques in English, Hindi or the local regional

language.
• The banker will compare the signature on the cheque, the amount,
whether the customer has sufficient balance and the date. If all are in
order payment will be made.
• With regard to customers who are too ill to sign a cheque or cannot be
physically present they can put their thumb impression or a mark on the
! !58
SAVINGS ACCOUNT
cheque and this must be identified by two independent witnesses known

to the bank.
• There are restrictions on the number of withdrawals that may be made in

a period. This number varies from bank to bank.
• If the number of transactions is more than that permitted, a service

charge is levied for every transaction that exceeds the permitted number.
• The Indian Banks Association states that no overdraft on a regular basis

should be permitted in a Savings bank account.
5.4 ADDITION/DELETION OF NAME OF JOINT ACCOUNT

HOLDERS
• Banks will allow, at the request of all joint account holders, the addition
or deletion of name/s of joint account holders or allow an individual
depositor to add the name of another person as a joint account holder.
5.5 CHEQUE BOOK
• When a cheque book is exhausted, the customer should fill in a cheque

requisition form (contained in the cheque book) and hand it to the bank.
• Banks may issue cheque books with 20/25 leaves if a customer so

demands. There should be enough stock of cheque books.
• All cheque forms should be printed in English and Hindi.
• Normally banks send new cheque books to customers by courier. The RBI
has stated that cheque books should be handed over to customers/their
representatives at the branch of the bank where they bank if they want it
given to them at the bank.
• It should be noted that insisting on dispatching cheque book by courier

after forcibly obtaining a declaration from the depositor that dispatch by
courier is at the depositor’s risk is an unfair practice. Banks must refrain
from taking such a declaration.
! !59
SAVINGS ACCOUNT
• Banks must have a condition that in the event of dishonor of cheques of

` 1 crore or more, four times in a financial year for want of sufficient
funds in the account, that no cheque book would be issued. Customers
should be advised of this at the time of reissue of cheque books.
• If a cheque is dishonored for the third time during a financial year. The
bank should issue a cautionary advice to the customer and tell him of the
stoppage of cheque facility if a cheque is dishonored for the fourth time
in the same account during the financial year. A similar advice should be
given if the bank intends to close the account.
• Fresh cheque books should be issued only against production of duly

signed requisition slips from previous cheque book issued to the party. In
case the cheque book is issued against a requisition letter, the drawer
should be asked to come personally to the bank or cheque book should
be sent to him under registered post directly without being delivered to
the bearer. Loose cheques should be issued to account holder only when
they come personally with a requisition letter and on production of
passbooks.
5.6 PASSBOOK/STATEMENT
• Banks either give customers a passbook which details their account or at

the end of a month send their customers a statement of their account
with the bank.
• The Reserve Bank has stated that entries on statements/passbooks

should not be inscrutable and that brief, intelligible particulars must be
entered.
• The passbook/statement must have the full address of the branch and
telephone number.
• Banks must offer pass book facility to all its customers. In case
statements are offered and the customer chooses statements, then
statements must be issued monthly.
• The cost of providing passbooks statements must be borne by the bank.
! !60
SAVINGS ACCOUNT
• Whenever passbooks are held back for updation, a paper token indicating
date of receipt and date to be collected should be given. They should be
returned only against the tokens. Passbooks remaining n he branch
should be in the custody of named responsible officials. While in the
branch, they should be under lock and key overnight.
• Banks should accept passbooks and return them against tokens.
• Passbooks in branches should be in the custody of a responsible official.

They must be kept under lock and key overnight.
• Whenever passbooks are given for updation after a long period of time, a
printed slip requesting the depositor to tender it periodically should be
given.
• Banks must ensure entries in passbooks/statements are correct and

legible.
5.7 INTEREST
• Interest is paid on these accounts as it is intended to encourage savings.
• Banks calculate interest on savings accounts “on a daily product basis.”

This means that it would be calculated on the daily balance.
• The Reserve Bank stipulates the interest that may be paid on these
accounts. It is currently 3½% per annum.
• Interest is normally payable at quarterly or longer rests. Interest should

be rounded to the nearest rupee.
• Interest is credited only if it is one rupee or more.
• Scheduled banks with deposits of less than ` 25 crores are permitted to

give, at their discretion, an additional ½%.
• Banks are permitted to pay their employees an additional 1% interest.

This is subject to a declaration from the employee that the money
belongs to him. If the account is in the name of the employee’s child, the
additional interest cannot be paid as the money is that of the child and
! !61
SAVINGS ACCOUNT
does not belong to the employee. Furthermore, additional interest

admissible to bank’s staff cannot be paid on the compensation awarded
by the court to a minor child and deposited in the joint names of the
minor child and parent (as the money belongs to the minor child).
• Additional interest of 1% is also payable to retired employees (but not

those who have resigned) and the spouse of a deceased retired
employee.
• Additional interest of 1% per annum may be paid to an association or

fund whose members are employees of the bank.
• Additional interest of 1% per annum may also be paid to the chairman

and executive director of the bank during their tenure.
• All transactions including the payment of interest should be rounded-off

to the nearest rupee.
• If interest over ` 10,000 is paid, tax must be deducted at source. Tax

need not deducted if the depositor files form 15H or 15G or a certificate
under Section 197(1) of the Income Tax Act, 1961.
• Regional rural banks/local area banks may allow additional interest of ½

% per annum on saving deposits. The RBI does not, however, encourage
the practice of paying more interest than that paid by commercial banks.
• Interest should be credited regularly whether the account is operated or

not.
operations thereon:

joint account, it is incumbent upon the banks to examine, every request
for opening joint accounts very carefully. In particular, the purpose,
nature of business handled by the parties and other relevant aspects
relating to the business, and the financial position of the account
! !62
SAVINGS ACCOUNT
holders, need to be looked into before opening such accounts. Care has
also to be exercised when the number of account holders is large.
b. The account payee cheques payable to third parties should not be

collected.
c. Cheques that are “crossed generally” and payable to “order” should be

collected only on proper endorsement by the payee.
d. Care should be exercised in collection of cheques for large amounts.
e. The transactions put through in joint accounts should be scrutinised by

the banks periodically and action taken as may be appropriate in the
matter. Care should be exercised to ensure that the joint accounts are
not used for benami transactions.


Caution should be exercised whenever cheques/drafts for large amounts

necessary the paying bank should check with the collecting bank about the
genuineness of any large value cheques/drafts issued. Demand Drafts
! !63
SAVINGS ACCOUNT
(DDs)/Cheques for large amounts presented for collection should be

verified under ultra violet lamps to safe guard against chemical alterations.


and withdrawals for ` 5 lakh and above not only in deposit accounts but
also in all other accounts like cash credit/overdraft, etc. The banks/
branches should also maintain a separate register to record details of
individual cash deposits and withdrawals for ` 5 lakh and above. The
details recorded should include, in the case of deposits, the name of the
account holder, account number, amount deposited and in the case of
withdrawal and name of the beneficiary of the cheque. Further, any cash
deposits or withdrawals of ` 5 lakh and above should be reported by the
Branch Manager to the Head Office on a fortnightly basis along with full
particulars, such as name of the account holder, account number, date of
opening the account, etc. On receipt of these statements from branches,
the Head Office should immediately scrutinise the details thereof and have
the transactions looked into by deputing officials, if the transactions prima
facie appear to be dubious or giving rise to suspicion. The inspecting
officials from the Reserve Bank during the course of their inspections will
also be looking into the statements submitted by the branches.
The other important areas in the payment of cheques wherein due caution
need to be exercised are verification of drawer’s signature, custody of
specimen signature cards, supervision over issue of cheque books and
control over custody of blank cheque books/leaves. While need for
examining cheques for large amounts under Ultra Violet Ray Lamps is
recognised by all banks, in practice it is rarely done as there is often a
tendency to be lax in the matter resulting in avoidable loss. In addition,
due care should be exercised in regard to issue and custody of tokens,
instruments after they are paid by the banks. Depositors/Customers should
! !64
SAVINGS ACCOUNT
be asked to surrender unused cheque books before closing/transferring the

accounts. Also safe custody of specimen signature cards is of utmost
importance, especially when operating instructions are changed, the
change should be duly verified by a senior official in the branch.
5.11 PAYMENT OF INTEREST ON ACCOUNTS FROZEN BY

BANKS
• With regard to the savings bank accounts frozen by the enforcement

authorities, banks may continue to credit the interest to the account on a
regular basis.
5.12 INACTIVE AND DORMANT ACCOUNTS
• If there has been no customer initiated transaction for one year, the
account is classified as an inactive account.
• If there has been no customer initiated transaction in the account for two
years the account will be designated a dormant account. In some banks
an account is designated dormant if there are no customer generated
transactions for six months.
• These accounts are subject to greater checks as they are susceptible to

fraud.
• These are of two types – with very little balance and with a substantial
balance. It is the latter that is susceptible to fraud. Where the balance is
minimal, the amount automatically gets wiped out by the bank levying
charges for non-maintenance of the required balance.
• Banks have a right to freeze these accounts. These are unfrozen only
after the account holder asks for it to be activated.
• The RBI has clarified that if fixed deposit interest is credited to savings
account as per the mandate of a client, it should be treated as a
customer induced transaction. The account would be treated as
inoperative only after two years from the last credit entry.
! !65
SAVINGS ACCOUNT
5.13 CHARGES
• Banks often insist on a minimum average quarterly balance to be

maintained in the account. If the balance is not maintained a service
charge is levied.
• At the time of opening account, banks must advise customers of the

requirement of maintaining minimum balance and levying of charges if
the minimum balance is not maintained.
• Clients must be advised of any changes in charges at least a month in

advance.
5.14 NOMINATION
• See separate Chapter. 8.
5.16 TRANSFER
• Depositors of senior citizens saving schemes may transfer the account

from one deposit office to another on payment of a transfer fee (` 5 per
lakh for first transfer and ` 10 per lakh for second transfer). The fee
received is to be credited to government.
5.17 STOPPING OPERATIONS
• Operations in an account will be stopped:
- On receipt of notice of death of a customer;

- On receipt of notice of the insanity of a customer;
- On being advised that the customer is insolvent;
- On receipt of a garnishee order from the court;
- On receipt of notice of assignment of the credit balance in the account
of a customer to a third party.
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SAVINGS ACCOUNT
5.18 CLOSING AN ACCOUNT
unused cheques to the bank.


deposits account.

5.19 PROHIBITIONS
5 . 2 0 O R G A N I Z AT I O N S T H AT C A N H AV E S AV I N G S
ACCOUNT
1. Primary Co-operative Credit Society financed by bank.
2. Khadi and Village Industries Boards.
3. Agriculture Produce Market Committees.
4. Societies registered under the Societies Registration Act, 1860 or any

other corresponding law in force in State or a Union Territory.
5. Companies governed by the Companies Act, 1956 which have been

licensed by the Central Government under Section 25 of the Act or
! !67
SAVINGS ACCOUNT
under the corresponding provision in the Indian Companies Act, 1913

and permitted not to add to their names the words “Limited” or the
words Private Ltd.
6. Institutions whose entire income is exempt from payment of income

tax.
7. Government departments/bodies/agencies in respect of grants subsidies

released.
8. Organizations involved in the development of women and children in

rural areas.
9. Self Help Groups engaged in promoting savings habits among their

members.
10.Farmers clubs – Vikas Volunteer Vahini.
5.21 FINANCIAL INCLUSION
Banks are advised to offer a ‘Basic Savings Bank Deposit Account’ which
will offer following minimum common facilities to all their customers:
i. The ‘Basic Savings Bank Deposit Account’ should be considered a

normal banking service available to all.
ii. This account shall not have the requirement of any minimum balance.
iii. The services available in the account will include deposit and withdrawal
of cash at bank branch as well as ATMs; receipt/credit of money through
electronic payment channel or by means of deposit/collection of cheques
drawn by Central/State Government agencies and departments;
iv. While there will be no limit on the number of deposits that can be made
in a month, account holders will be allowed a maximum of four
withdrawals in a month, including ATM withdrawals; and
v. Facility of ATM card or ATM-cum Debit Card.
! !68
SAVINGS ACCOUNT
The above facilities will be provided without any charges. Further, no

charge will be levied for non-operation/activation of in-operative ‘Basic
Savings Bank Deposit Account’.
The UCBs would be free to evolve other requirements including pricing

structure for additional value-added services beyond the stipulated basic
minimum services on reasonable and transparent basis and applied in a
non-discriminatory manner.
The ‘Basic Savings Bank Deposit Account’ would be subject to RBI

instructions on Know Your Customer (KYC)/Anti Money Laundering (AML)
for opening of bank accounts issued from time to time. If such account is
opened on the basis of simplified KYC norms, the account would
additionally be treated as a ‘Small Account’ and would be subject to
conditions stipulated for such accounts on KYC Norms/AML Measures/CFT/
Obligations of banks under PMLA, 2002.
Holders of ‘Basic Savings Bank Deposit Account’ will not be eligible for
opening any other savings bank deposit account in that bank. If a
customer has any other existing savings bank deposit account in that bank,
he/she will be required to close it within 30 days from the date of opening
a ‘Basic Savings Bank Deposit Account’.
The existing basic banking ‘no-frills’ accounts should be converted to ‘Basic

Savings Bank Deposit account’. However, financial inclusion objectives
would not be fully met if the banks do not increase the banking outreach to
the remote corners of the country. This has to be done with affordable
infrastructure and low operational costs with the use of appropriate
technology. This would enable banks to lower the transaction costs to make
small ticket transactions viable. Banks are, therefore, urged to scale up
their financial inclusion efforts by utilising appropriate technology. Care
must be taken to ensure that the solutions developed are highly secure,
amenable to audit and follow widely accepted open standards to allow
inter-operability among the different systems adopted by different banks.
! !69
SAVINGS ACCOUNT
1. What is a Savings Account?
2. Can a customer maintain a nil or very low balance in his Savings

Account?
3. How is interest calculated on Savings Accounts?
4. Is interest paid into Savings Accounts that have been frozen?
5. When is a Savings Account termed inactive or dormant?
6. When are operations in a Savings Account stopped?
! !70
SAVINGS ACCOUNT
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !71
FIXED DEPOSIT ACCOUNT
Chapter 6
Fixed Deposit Account
Objectives
This chapter will explain to you everything you need to know about savings
accounts.
Structure
6.1 Definition
6.2 Who Opens Fixed Deposits Accounts
6.3 Issue of Receipt
6.4 Interest
6.5 Payment of Interest on Accounts Frozen by Banks
6.6 Transferability
6.7 Tax Deduction
6.8 Nomination
6.9 Disposal of Deposit
6.10 Early or Premature Withdrawal
6.11 Renewal
6.12 Maturity
6.13 Renewal of Overdue Deposits
6.14 Advance on Fixed Deposits
6.15 Joint Holdings
6.16 Addition/Deletion of Name of Joint Account Holders
6.20 Splitting
6.21 Loss of Fixed Deposit Receipt
6.22 Repayment
6.24 Conversion of Term Deposit
6.25 Recurring Deposit
6.26 Reinvestment Deposit
6.27 Deposit Schemes With Lock-In Period
6.28 General
6.29 Senior Citizens Savings Scheme, 2004
! !72
6.1 DEFINITION
A fixed or time deposit is defined as “a deposit received by a bank for a

fixed period and which is withdrawable only after the expiry of the said
fixed period and shall also include deposits such as recurring, cumulative,
annuity, reinvestment deposits, cash certificates and so on.”
• In short, fixed deposits are:
- Placed with the bank for a fixed period.

- It is repayable on the expiry of that period.
- The rates offered on these are higher than on savings accounts as the
banker knows in advance when repayment has to be made.
- A variation is the “notice deposit” which is a term deposit for a specific
period but withdrawable on giving at least one complete day’s notice.
This is also called a ‘call deposit’.
• Pre-liberalization (prior to 1992) the Reserve Bank stipulated the rates

banks may offer customers. Now banks are permitted to fix their own
rates on fixed deposits of different maturities.
• Changes in rates are to be decided by the board of directors or a body/

group authorized by the board.
• Banks must disclose in advance the schedule of interest rates that they
offer on deposits.
• The minimum period a fixed deposit may be placed is 7 days.
• The maximum period a deposit may be placed is 120 months (IBA Code
for Banking Practices). Banks can accept deposits for a longer period if
ordered to do so by the courts (such as in the case of minors who have
more than 10 years to become majors). It is unusual for deposits to be
placed for more than 5 years.
• Banks should not offer deposit accounts with lock-in period where
premature withdrawal is not permitted and/or rates of interest that are
not in conformity with rates of interest on normal deposits.
! !73
- Banks have been permitted to formulate fixed deposit schemes for

resident Indian senior citizens offering higher and fixed rates of interest
as compared to normal deposits of any size. These schemes should
incorporate simplified procedures for automatic transfer of deposits to
nominees in the event of death.
- Changes in interest rates should be made known to customers as well

as branches expeditiously.
6.2 WHO OPENS FIXED DEPOSITS ACCOUNTS
• Those who have funds in hand open fixed deposits. These include:
- Individuals;
- Partnerships (including Limited Liability Partnerships);
- Trusts;
6.3 ISSUE OF RECEIPT
• Banks should issue term deposit receipts indicating therein full details
such as:
- The date of issue;

- The due date;
- The amount;
- The rate of interest;
- The period of the deposit; and
- The amount at maturity.
6.4 INTEREST
• Interest is paid on fixed deposits placed with banks.
! !74
• Banks are free to determine the rate of interest that may be paid on
fixed deposits. The rates must be approved by the board or a body to
whom the board has delegated this responsibility to.
• Banks are free to offer varying rates of interest for different sizes of
deposits above a cut-off point.
• Banks may offer deposits on a floating rate. These must be clearly linked
to an anchor rate. RBI stipulates that to offer transparency banks should
not use internal or derived rates while offering floating rate deposit
products. Only market based rupee bench mark rates which are directly
observable and transparent to the customer should be used by banks for
pricing their floating rate deposits.
• Interest should be paid at quarterly or longer rests. Interest is normally

paid on the maturity of the deposit.
• Interest can be paid monthly by discounting the quarterly interest. This is

done in the case of monthly deposit schemes.
• Interest is calculated on the daily balance.
• On deposits of less than 3 months or where the quarter is incomplete,

interest should be paid on the actual number of days reckoning the year
at 365 days.
• In leap years some banks have calculated interest on 366 days. The
Reserve Bank, in this instance, leaves it to the bank to determine how
interest is to be calculated.
• Banks should provide information to depositors on the method of

calculation of interest while accepting deposits and display this at their
branches.
• Interest is credited only if it is one rupee or more.
• Interest should be rounded-off to the nearest rupee.
• No bank can discriminate in the matter of interest paid on deposits

between one deposit and another, accepted on the same date and for the
! !75
same maturity, whether such deposits are accepted at the same office or
at different offices of the bank except in respect of fixed deposit schemes
specifically for resident Indian senior citizens or single deposits of ` 15
lakhs and above on which varying rates of interest may be permitted on
the basis of the size of the deposit.
• Differential rate of interest can be paid on a single term deposit of ` 15

lakhs and above but not on the aggregate of individual deposits where
the total exceeds ` 15 lakhs.
• Scheduled banks with deposits of less than ` 25 crores are permitted to

give, at their discretion, an additional ½%.
• Banks are permitted to pay their employees an additional 1% interest.

This is subject to a declaration from the employee that the money
belongs to him. If the deposit is in the name of a child of the employee
additional interest cannot be paid on that deposit as it is not the money
of the employee. Furthermore, additional interest admissible to bank’s
staff cannot be paid on the compensation awarded by the court to a
minor child and deposited in the joint names of the minor child and
parent (as the money belongs to the minor child).
• Additional interest of 1% is also payable to retired employees (but not

those who have resigned) and the spouse of a deceased retired
employee. Senior citizens who retired from the bank can receive the
senior citizen rate plus 1%. The NRE deposits of retired members of staff
should not exceed the ceiling stipulated by the RBI.
• Additional interest of 1% per annum may be paid to an association or

fund whose members are employees of the bank.
• Additional 1% interest may be given to employees taken on deputation

from another bank. If the deputation is for a fixed period, benefit will
cease on the expiry of the term of deputation.
• Bank employees’ federation in which employees are not direct members

is not eligible to an additional 1% interest.
• Additional interest of 1% per annum may also be paid to the chairman

and executive director of the bank during their tenure.
! !76
• The Reserve Bank permits banks to offer senior citizens a higher rate of
interest on their deposits.
• In the case of reinvestment and recurring deposits the bank should pay
interest for the intervening Sunday/holiday/non-business day on maturity
value. On ordinary term deposits interest for the intervening period
should be on the original principal amount.
• If the deposit matures on a Sunday/holiday/non-working day, the bank

should pay interest at the originally contracted rate on the deposit
amount for the Sunday/holiday/non-business day. The deposit would be
paid on the succeeding working day.
• Public sector banks may pay additional interest of 1.28% per annum over
the normal rate of interest on deposits over 2 years to Army Group
Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and
Air Force Group Insurance Society (AFGIS) if these deposits are not
linked with payment of insurance premia by the banks.
• Regional rural banks/local area banks can pay an additional ½% per

annum interest.
• Banks may formulate with board approval fixed deposit schemes

specifically for resident Indian senior citizens offering higher and fixed
rates of interest as compared to normal deposits. These schemes must
also incorporate for automatic transfer of deposits to nominees in the
event of death.
6.5 PAYMENT OF INTEREST ON ACCOUNTS FROZEN BY

BANKS
• With regard to term deposit accounts frozen by the enforcement

authorities a request letter may be obtained from the customer for
renewal. If the depositor does not indicate the term he requires then it
should be renewed for a term equal to the original term, on maturity.
• However, no new receipt is required to be issued. A suitable note may be

made regarding renewal in the deposit ledger.
! !77
• The renewal of deposit may be advised by registered letter/speed post/

courier service to the concerned Government department under advice to
the depositor. In the advice to the depositor, the rate of interest at which
the deposit is renewed should also be mentioned.
• If overdue period does not exceed 14 days on the date of receipt of the
request letter, renewal may be done from the date of maturity. If it
exceeds 14 days, banks may pay interest for the overdue period as per
the policy adopted by them, and keep it in a separate interest free sub-
account which should be released when the original fixed deposit is
released.
6.6 TRANSFERABILITY
• Term deposits are freely transferable from one office to another.
6.7 TAX DEDUCTION
• Banks are to deduct tax at source on interest paid in excess of ` 10,000

per annum to any depositor. This is not per deposit but per individual.
Therefore if an individual has 5 deposits and the aggregate interest
earned on these is ` 15,000 though in each individual deposit, interest
does not exceed ` 10,000, tax must be deducted at source.
• Tax need not be deducted if the depositor files Form 15H or 15G or a
certificate under Section 197(1) of the Income Tax Act, 1961.
6.8 NOMINATION
6.9 DISPOSAL OF DEPOSIT
• Banks should endeavor to get advance instructions in the application

form from depositors for disposal on maturity.
• When not obtained, banks should ensure sending intimation of impending

due date of maturity well in advance as a rule.
! !78
6.10 EARLY OR PREMATURE WITHDRAWAL
• Sometimes a customer may want to encash his deposit before maturity.
• In that case, the customer would have to request the bank to do so.
• Banks should permit early withdrawal. Banks will have freedom to

determine its own penal interest for premature withdrawal. Banks must
ensure depositors are aware of the applicable penal rate along with the
deposit rate.
• The Reserve Bank states that penal interest should not be charged if the
deposit is reinvested in a fresh deposit immediately.
• The rate of interest that will be paid is the rate for the period the deposit
has been with the bank.
• No interest is payable where premature withdrawal of deposit takes place

before completion of minimum period prescribed.
• Banks may, at their discretion, disallow premature withdrawal of large

deposits held by entities other than individuals and HUFs if such
depositors have been so advised at the time the account was opened.
• Conversion of NRE deposit to FCNR (B) and vice versa and NRSR/NRNR
deposit to NRO deposit before maturity will be subject to penal provisions
relating to premature withdrawal.
6.11 RENEWAL
• Deposits are renewed on maturity on the request of the depositor.
• Deposits may be renewed before maturity provided:
- It is renewed before the date of maturity; and

- The period of renewal is longer than the remaining period of the
original deposit.
• Interest on renewal will be:
! !79
- On the original deposit at the rate applicable to the period for which the
deposit has actually run.
- Interest for the period from the date of renewal will be allowed at the
rate prevailing on the date of renewal.
6.12 MATURITY
• The deposit matures at the end of the period it has been placed for.
• On maturity, the depositor must instruct the bank to renew the deposit.
The bank cannot do so on its own.
• The depositor if he does not want to renew the deposit can ask for it to
be paid to him either by a cheque/draft or credited to an account he has.
This instruction would normally be in the account opening instructions.
• On maturity, with regard to an either or survivor deposit either party can,

on surrendering the deposit receipt ask for payment (DV Sheth vs.
Cosmos Co-operative Bank).
• If the depositor does not renew or claim the deposit on maturity, the
deposit will be designated as an overdue deposit in the books of the
bank.
• The bank cannot close the deposit and repay the depositor if the
depositor does not make a demand.
• If the deposit matures on a Sunday/holiday/non-working day, the bank

should pay interest at the originally contracted rate on the deposit
amount for the Sunday/ holiday/non-business day. The deposit would be
paid on the succeeding working day.
• If a fixed deposit matures and proceeds are unpaid, the amount left
unclaimed with the bank will attract savings bank rate of interest.
6.13 RENEWAL OF OVERDUE DEPOSITS
• All aspects concerning renewal of overdue deposits may be decided by

banks laying down a transparent policy which is non-discretionary and
! !80
non-discriminatory. This should be notified to customer at time of

opening account.
• Banks may renew deposits at an interest rate prevailing on the date of

maturity provided the depositor approaches the bank within 14 days
from the date of maturity of the deposit.
• If the application for renewal is made after 14 days the rate of interest
should be the rate prevailing on the date of renewal of deposit.
• Banks are free to determine the rate of interest between the date of
maturity and the date of renewal.
• The policy on all aspects of renewal of over due interest are to be

decided by the respective boards of banks. This policy must be non-
discretionary and non-discriminatory.
• Renewal of overdue domestic term receipt shall be for a period of at least

15 days from the actual date of renewal. If the deposit is submitted
before the expiry of 15 days for cancellation then no interest is payable.
6.14 ADVANCE ON FIXED DEPOSITS
• Banks may grant loans on the security of the fixed deposit.
• The decision in regard to margin is left to the discretion of individual

bank.
• Banks are free to charge a rate of interest without reference to its base
rate if the advance is given and the deposit is in the name of the
borrower (singly or jointly), one of the partners of a firm and the loan is
to the firm, the proprietor of a proprietary concern, a ward whose
guardian is borrowing on behalf of the ward. If the term deposit is
withdrawn before completion of the prescribed minimum maturity period
it should not be treated as an advance against the term deposit and
interest should be charged at the rates prescribed by the RBI.
• On advances given on the security of fixed deposits to third parties upto

` 2 lakhs banks can charge interest without reference to its base rate. If
it exceeds ` 2 lakhs it should be at the rates prescribed by the RBI.
! !81
Banks should not apply this for advances up to ` 3 lakhs to a bank’s

staff/retired member of staff.
• All transactions should be rounded to the nearest rupee. Fractions of 50

paise and above are to be rounded-up and fractions below 50 paise
should be rounded-down.
• Cheques issued by customers containing fractions of a rupee should not

be rejected or dishonored.
6.15 JOINT HOLDINGS
• Fixed deposits may be in the joint names of two or more persons.
• If one of the joint depositors requests for premature withdrawal, it should

be done only after getting the consent of the other depositors.
• If one joint depositor wants a loan against a fixed deposit, it should be

given only after all the other joint holders have signed the request.
• No one joint depositor’s request should be entertained. All the joint

holders must sign all requests.
• The question arose on whether, on the maturity of a fixed deposit, a joint

holder can ask for the proceeds to be given to him if he submits all the
deposit receipts. The Maharashtra State Consumer Disputes Redressal
Commission held that the bank in question (Cosmos Co-operative Bank)
has “no right to withhold payment when the complainant had produced
all the original fixed deposit receipts.” It was also noted that when fixed
deposits are issued with either or survivor clause instructions given by
one of the joint holders will not hold good. “The bank is not concerned
with the disputes between the joint holders. It has to make payment on
maturity of the FDR to the person tendering it with a valid signature.” In
this case the FD had matured in 1997 but the complaint was lodged in
2002. The commission ordered the bank to pay the aggrieved party
interest at 14% for the intervening period.
• NRE deposits should be held jointly with NRE holders only. NRO accounts
may be held by non-residents jointly with residents.
! !82
• If fixed/term deposit accounts are opened with operating instructions

‘Either or Survivor’, the signatures of both the depositors need not be
obtained for payment of the amount of the deposits on maturity.
However, the signatures of both the depositors may have to be obtained,
in case the deposit is to be paid before maturity. If the operating
instruction is ‘Either or Survivor’ and one of the depositors expires before
the maturity, no pre-payment of the fixed/term deposit may be allowed
without the concurrence of the legal heirs of the deceased joint holder.
This, however, would not stand in the way of making payment to the
survivor on maturity.
• In case the mandate is ‘Former or Survivor’, the ‘Former’ alone can

operate/withdraw the matured amount of the fixed term deposit, when
both the depositors are alive. However, the signature of both the
depositors may have to be obtained, in case the deposit is to be paid
before maturity. If the former expires before the maturity of the fixed/
term deposit, the ‘Survivor’ can withdraw the deposit on maturity.
Premature withdrawal would, however, require the consent of both the
parties, when both of them are alive, and that of the surviving depositor
and the legal heirs of the deceased in case of death of one of the
depositors.
• If the joint depositors prefer to allow premature withdrawals of fixed/

term deposits also in accordance with the mandate of ‘Either or Survivor’
or ‘Former or Survivor’, as the case may be, it would be open to banks to
do so, provided they have taken a specific joint mandate from the
depositors for the said purpose.
6.16 ADDITION/DELETION OF NAME OF JOINT ACCOUNT

HOLDERS
• Banks may at the request of all the account holders allow addition/
deletion of names of joint account holders or allow an individual
depositor to add name of another person as a joint account holder.
• In no case should the amount or the duration of the original deposit

undergo a change in any manner.
! !83
operations thereon:

joint account, it is incumbent upon the banks to examine, every request
for opening joint accounts very carefully. In particular, the purpose,
nature of business handled by the parties and other relevant aspects
relating to the business, and the financial position of the account
holders, need to be looked into before opening such accounts. Care has
also to be exercised when the number of account holders is large.



! !84

and withdrawals for ` 5 lakh and above. The banks/branches should also
maintain a separate register to record details of individual cash deposits
and withdrawals for ` 5 lakh and above. The details recorded should
include, in the case of deposits, the name of the account holder, account
number, amount deposited and in the case of withdrawals, the name of the
account holder, account number, amount of withdrawal and name of the
beneficiary of the cheque. Further, any cash deposits or withdrawals of ` 5
lakh and above should be reported by the Branch Manager to the Head
Office on a fortnightly basis along with full particulars, such as name of the
account holder, account number, date of opening the account, etc. On
receipt of these statements from branches, the Head Office should
immediately scrutinise the details thereof and have the transactions looked
into by deputing officials, if the transactions prima facie appear to be
dubious or giving rise to suspicion. The inspecting officials from the
Reserve Bank during the course of their inspections will also be looking into
the statements submitted by the branches.
6.20 SPLITTING
A bank can, at its discretion and at the request of all joint account holders,
allow the splitting of a joint deposit, in the name of the joint account
holders provided the period and the aggregate amount of the deposit does
not undergo any change.
6.21 LOSS OF FIXED DEPOSIT RECEIPT
• A fixed deposit receipt is not negotiable nor is it transferable.
• If the receipt is lost, customers will ask for a duplicate. This is because
banks insist on fixed deposit receipts to be discharged and surrendered
before payment is affected.
• For a duplicate receipt, all the holders should request for one in writing
and execute a letter of indemnity. A note must also be made in the
bank’s records that a duplicate has been issued.
! !85
6.22 REPAYMENT
• Repayment must be made by an account payee cheque if the deposit

with interest is ` 20,000 or more. Repayment can also be made by
crediting the current/savings account of the depositor.
• Repayment of interest or principal must not be made to the account of

another person.
• Repayment is usually made in the name of the first named person.
6.24 CONVERSION OF TERM DEPOSIT
• Banks should allow conversion of a term deposit, a deposit in the form of

a daily deposit or recurring deposit to allow depositor to immediately
reinvest to amount lying in the deposit with the same bank in another
term deposit.
• Interest should be paid on the term deposit without reducing the interest
by any penalty provided the deposit remains with the bank after
reinvestment for a period longer than the remaining period of the original
contract.
6.25 RECURRING DEPOSIT
• A variant is the recurring deposit or cumulative deposit.
• Its intent is to inculcate the habit of saving.
• Depositors can save a recurring amount every month for the period
selected.
• If the depositor closes his account within three months no interest is

paid.
! !86
6.26 REINVESTMENT DEPOSIT
• Deposits where interest (as and when due) is reinvested at the same
contracted rate till maturity. This interest is withdrawable with the
principal amount on maturity.
6.27 DEPOSIT SCHEMES WITH LOCK-IN PERIOD
Some banks are offering special term deposit products to customers, in

addition to regular term deposits, ranging from 300 days to five years, with
the following features:
i. Lock-in periods ranging from 6 to 12 months;
ii. Premature withdrawal is not permitted during the lock-in period. In

case premature withdrawal is allowed during the lock-in period, no
interest is paid;
iii. Rates of interest offered on these deposits are not in tune with the
rates of interest on normal deposits and
iv. Part pre-payment is allowed by some banks subject to certain

conditions.
Before launching new domestic deposit mobilisation schemes with the

approval of their respective Boards, Banks should ensure that the
provisions of Reserve Bank’s directives on interest rates on deposits,
premature withdrawal of term deposits, sanction of loans/advances against
term deposits, etc., issued from time to time, are strictly adhered to. Any
violation in this regard will be viewed seriously and may attract penalty
under the Banking Regulation Act, 1949. It is clarified that the special
schemes, with lock-in periods and other features referred to above, which
have been floated by some banks, are not in conformity with Reserve
Bank’s instructions. Banks that have floated such deposit schemes should
discontinue the schemes with immediate effect and report compliance to
Regional Office concerned of Reserve Bank.
! !87
6.28 GENERAL
• Term deposit receipt received for collection from another bank should not
be renewed by the deposit issuing bank and delivered to the customer.
The receipt issuing bank can either pay the collecting bank or return the
instrument if there are valid reasons not to pay.
• Maturity value certificates (MCV) should not be issued.
6.29 SENIOR CITIZENS SAVINGS SCHEME, 2004
Eligibility
• The senior citizen scheme is for senior citizens. Minimum eligible age for
investment is 60 years (55 years for those who have retired on
superannuation or under a voluntary or special voluntary scheme). The
retired personnel of Defence Services (excluding Civilian Defence
Employees) shall be eligible to subscribe under the scheme irrespective
of the age limit of 60 years subject to the fulfillment of other specified
conditions.
• “Retirement benefits” for the purpose of SCSS Rules have been defined
as ‘any payment due to the depositor on account of retirement whether
on superannuation or otherwise and includes Provident Fund dues,
retirement/superannuation gratuity, commuted value of pension, cash
equivalent of leave, savings element of Group Savings linked Insurance
scheme payable by employer to the employee on retirement, retirement-
cum-withdrawal benefit under the Employees’ Family Pension Scheme
and ex-gratia payments under a voluntary retirement scheme’ (Rule 2
(a) of the Senior Citizens Savings Scheme (Amendment) Rules, 2004
notified on October 27, 2004).
• In case an investor has attained the age of 60 years and above, the
source of amount being invested is immaterial. However, if the investor is
55 years or above but below 60 years and has retired under a voluntary
scheme or a special voluntary scheme or has retired from the defence
services, only the retirement benefits can be invested in the SCSS.
! !88
• If the investor is 60 years and above, there is no time period prescribed

for opening the SCSS account(s). However, for those below 60 years, the
time period prescribed are:
- persons who have attained the age of 55 years or more but less than
60 years and who retired under a voluntary retirement scheme or a
special voluntary retirement scheme on the date of opening of an
account under these rules, subject to the condition that the account is
opened by such individual within three months of the date of
retirement.
- persons who have retired at any time before the commencement of

these rules and attained the age of 55 years or more on the date of
opening of an account under these rules, shall also be eligible to
subscribe under the scheme within a period of one month of the date of
this notification (27th October 2004), subject to fulfillment of other
conditions.
- the retired personnel of Defence Services (excluding Civilian Defence

Employees) shall be eligible to subscribe under the scheme irrespective
of the above age limits subject to the fulfillment of other specified
conditions.
• Non Resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu
Undivided Family (HUF) are not eligible to invest in the accounts under
the SCSS, 2004. If a depositor becomes a Non-resident Indian
subsequent to his opening the account and during the currency of the
account under the SCSS Rules, the account may be allowed to continue
till maturity, on a non-repatriation basis and the account shall be marked
as a Non-Resident account.
Tenure
• The tenure of the scheme is 5 years which can be extended by 3 more

years.
• The deposit can be prematurely withdrawn after one year of holding but
with penalty.
! !89
Interest and Tax
• The frequency of computing interest is quarterly
• Interest is fully taxable. Tax is deductible at source if interest exceeds `

10,000. To avoid this a declaration in Form 15H (person above the age of
65) or Form 15G (a person below the age of 65) or a certificate from the
assessing officer under section 197(1) of the Income Tax Act. would need
to be filed stating no tax is payable.
• The Finance Act 2008 has added deposits to this scheme in the basket of
tax saving instruments under Section 80C of the Income Tax Act.
Investment
• The investment has to be in multiples of ` 1,000.
• The maximum investment limit is ` 15 lakh.
Other Features
• The deposit (as it is specifically for senior citizens) is not transferable to

others
• Accounts can be held both in single and joint holding modes. Joint
holding is allowed but only with spouse. The spouse need not be a senior
citizen.
• The whole amount of investment in an account under the scheme is

attributed to the first applicant/depositor only. Therefore, the question of
any share of the second applicant/joint account holder (i.e., spouse) in
the deposit in the account, does not arise.
• If the spouses are senior citizens both the spouses can open individual
and/or joint accounts with each other with the maximum deposits upto `
15 lakh each, provided both are individually eligible to invest under
relevant provisions of the Rules governing the scheme.
! !90
• A senior citizen can get application forms from post offices and
designated branches of 24 nationalised banks and one private sector
bank.
• Transfer of account from one deposit office to another in case of change

of residence is permitted. If the deposit amount is rupees one lakh or
above, a transfer fee of rupees five per lakh of deposit for the first
transfer and rupees ten per lakh of deposit for the second and
subsequent transfers is payable.
• The rule that a depositor cannot open more than one account in the
same month at the same office has been removed. In May 2007, the
Government regularized multiple accounts opened at the same branch by
merging the accounts subject to the proviso that deposits under the
merged accounts shall not earn any interest for the period from the
opening of the first account to the date of opening of the second/
subsequent irregular account which would have been merged with the
first account.
• NRIs and persons having dual citizenship (Indian and other) can be
nominees under the scheme. However, if the depositor dies, they can
neither continue the account nor can they repatriate the proceeds of the
account.
Nomination
• Nomination facility is available on these deposits.
• The depositor may, at the time of opening of the account, nominate a

person or persons who, in the event of death of the depositor, shall be
entitled to payment due on the account.
• Nomination may be made by the depositor at any time after the opening
of the account but before its closure.
• The nomination made by the depositor may be cancelled or varied by

submitting a fresh nomination at the deposit office where the account is
being maintained.
! !91
• Nomination can be made in joint account also. In such a case, the joint
holder will be the first person entitled to receive the amount payable in
the event of death of the depositor. The nominee’s claim shall arise only
after the death of both the joint holders.
• A person holding the Power of Attorney cannot sign for the nominee in
the nomination form.
• No fee has been prescribed for nomination and/or change/cancellation of

nomination(s) in the accounts under the SCSS, 2004.
• Nominee may produce 15-G at time of payment after the death of

depositor to avoid tax on interest being deducted.
Death of Account Holder
• In case of a joint account, if the first holder/depositor expires before the

maturity of the account, the spouse may continue the account on the
same terms and conditions as specified under the SCSS Rules. However,
if the second holder, i.e., spouse has his/her own individual account, the
aggregate of his/her individual account and the deposit amount in the
joint account of the deceased spouse should not be more than the
prescribed maximum limit. In case the maximum limit is breached, then
the remaining amount shall be refunded, so that the aggregate of the
individual account and deceased spouse’s joint account is maintained at
the maximum limit.
• If both the spouses have opened separate accounts under the scheme
and either of the spouses dies during the currency of the account(s), the
account(s) standing in the name of the of the deceased depositor/spouse
shall not be continued and such account(s) shall be closed.
Loans
• The facility of pledging the deposit/account under the SCSS, 2004 for
obtaining loans, has not been permitted since the account holder will not
be able to withdraw the interest amount periodically, defeating the very
purpose of the scheme.
! !92
Premature Withdrawal
• Premature withdrawal/closure of the deposits from the accounts under

the SCSS, 2004 has been permitted after completion of one year from
the date of opening of the account after deducting the penalty amount as
given below:
- If the account is closed after one year but before expiry of two years
from the date of opening of the account, an amount equal to one and
half per cent of the deposit amount shall be deducted.
- If the account is closed on or after the expiry of one year from the date
of opening of the account, an amount equal to one per cent of the
deposit shall be deducted.
- However, if the depositor is availing the facility under Rule 4(3), then
he can withdraw the deposit and close the account at any time after
the expiry of one year from the date of extension of the account
without any deduction.
- Under Rule 9(1)(a)(b) penalty amount has to be deducted from the

amount of the deposit at the time of premature withdrawal. This is
deducted from the principal amount. Interest at the rate of 9% has to
be calculated on the total amount of the deposit till the date of
premature closure.
- If the depositor dies before the maturity of the deposit and the
nominee/legal heir approaches the bank for closure of the deposit, the
nominee/legal heir is entitled to the savings bank rate from the date of
death of the depositor to the closure of the account.
Account Opened in Contravention of the SCSS Rules
• If an account has been opened in contravention of the SCSS Rules, the

account shall be closed immediately and the deposit in the account, after
deduction of the interest, if any, paid on such deposit, shall be refunded
to the depositor.
! !93
1. What is a Fixed or Time Deposit?
2. What is the interest on fixed deposits and who determines this interest?
3. In a leap year how many days is interest to be paid for?
4. If the deposit matures on a Sunday/holiday/non-working day how is the

interest calculated?
5. Does tax have to be deducted at source on interest paid?
6. Can a bank advance a loan against a Fixed Deposit?
7. Let us assume that Ravi and Raman have a joined fixed deposit for `
1,00,000 maturing on October 3 20XX. On July 1, they ask you to split
the deposit in two – one in the name of Ravi for ` 60,000 and the
balance in the name of Raman. What would you do?
! !94
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !95
CERTIFICATES OF DEPOSIT
Chapter 7
Certificates of Deposit
Objectives
This chapter introduces you to certificate of deposit.
Structure
7.1 Definition
7.2 Eligibility
7.3 Aggregate Amount
7.4 Minimum Size of Issue and Denominations
7.5 Investors
7.6 Maturity
7.7 Discount/Coupon Rate
7.8 Reserve Requirements
7.9 Transferability
7.10 Trades in CDs
7.11 Settlement
7.12 Loans/Buy-Backs
7.13 Format of CDs
7.14 Payment of CDs
7.15 Security Aspect
7.16 Payment of Certificate
7.17 Issue of Duplicate Certificates
7.18 Standardised Market Practices and Documentation
! !96
7.1 DEFINITION
Certificate of Deposit (CD) is a negotiable money market instrument and

issued in dematerialised form or as a Usance Promissory Note against
funds deposited at a bank or other eligible financial institution for a
specified time period. Guidelines for issue of CDs are presently governed
by various directives issued by the Reserve Bank of India (RBI), as
amended from time to time.
7.2 ELIGIBILITY
CDs can be issued by (i) scheduled commercial banks {excluding Regional

Rural Banks and Local Area Banks}; and (ii) select All-India Financial
Institutions (FIs) that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.
7.3 AGGREGATE AMOUNT
Banks have the freedom to issue CDs depending on their funding

requirements.
7.4 MINIMUM SIZE OF ISSUE AND DENOMINATIONS
Minimum amount of a CD should be ` 1 lakh, i.e., the minimum deposit

that could be accepted from a single subscriber should not be less than ` 1
lakh, and in multiples of ` 1 lakh thereafter.
7.5 INVESTORS
CDs can be issued to individuals, corporations, companies (including banks

and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs)
may also subscribe to CDs, but only on non-repatriable basis, which should
be clearly stated on the Certificate. Such CDs cannot be endorsed to
another NRI in the secondary market.
! !97
7.6 MATURITY
The maturity period of CDs issued by banks should not be less than 7 days
and not more than one year, from the date of issue.
7.7 DISCOUNT/COUPON RATE
CDs may be issued at a discount on face value. Banks/FIs are also allowed
to issue CDs on floating rate basis provided the methodology of compiling
the floating rate is objective, transparent and market-based. The issuing
bank/FI is free to determine the discount/coupon rate. The interest rate on
floating rate CDs would have to be reset periodically in accordance with a
pre-determined formula that indicates the spread over a transparent
benchmark. The investor should be clearly informed of the same.
7.8 RESERVE REQUIREMENTS
Banks have to maintain appropriate reserve requirements, i.e., Cash

Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), on the issue price
of the CDs.
7.9 TRANSFERABILITY
CDs in physical form are freely transferable by endorsement and delivery.

CDs in demat form can be transferred as per the procedure applicable to
other demat securities. There is no lock-in period for the CDs.
7.10 TRADES IN CDs
All OTC trades in CDs shall be reported within 15 minutes of the trade on
the FIMMDA reporting platform.
7.11 SETTLEMENT
All OTC trades in CDs shall necessarily be cleared and settled under DVP I
mechanism through the authorised clearing houses {National Securities
Clearing Corporation Limited (NSCCL), Indian Clearing Corporation Limited
! !98
(ICCL) and MCX Stock Exchange Clearing Corporation Limited (CCL)} of

the stock exchanges.
7.12 LOANS/BUY-BACKS
Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-
back their own CDs before maturity. However, the RBI may relax these
restrictions for temporary periods through a separate notification.
7.13 FORMAT OF CDs
Banks/FIs should issue CDs only in dematerialised form. However,

according to the Depositories Act, 1996, investors have the option to seek
certificate in physical form. Accordingly, if an investor insists on physical
certificate, the bank/FI may inform the Chief General Manager, Financial
Markets Department, Reserve Bank of India, Central Office, Fort,
Mumbai-400 001 about such instances separately. Further, issuance of CDs
will attract stamp duty.
7.14 PAYMENT OF CDs
There will be no grace period for repayment of CDs. If the maturity date
happens to be a holiday, the issuing bank/FI should make payment on the
immediate preceding working day. Banks/FIs, therefore, should fix the
period of deposit in such a manner that the maturity date does not coincide
with a holiday to avoid loss of discount/interest rate.
7.15 SECURITY ASPECT
Since CDs in physical form are freely transferable by endorsement and

delivery, it will be necessary for banks/FIs to see that the certificates are
printed on good quality security paper and necessary precautions are taken
to guard against tampering with the document. They should be signed by
two or more authorised signatories.
! !99
7.16 PAYMENT OF CERTIFICATE
Since CDs are transferable, the physical certificates may be presented for
payment by the last holder. The question of liability on account of any
defect in the chain of endorsements may arise. It is, therefore, desirable
that banks take necessary precautions and make payment only by a
crossed cheque. Those who deal in these CDs may also be suitably
cautioned.
The holders of dematted CDs will approach their respective depository

participants (DPs) and give transfer/delivery instructions to transfer the
security represented by the specific International Securities Identification
Number (ISIN) to the ‘CD Redemption Account’ maintained by the issuer.
The holders should also communicate to the issuer by a letter/fax enclosing
the copy of the delivery instruction they had given to their respective DP
and intimate the place at which the payment is requested to facilitate
prompt payment. Upon receipt of the demat credit of CDs in the “CD
Redemption Account”, the issuer, on maturity date, would arrange to repay
to holders/transferors by way of Banker’s cheque/high value cheque, etc.
7.17 ISSUE OF DUPLICATE CERTIFICATES
In case of loss of physical certificates, duplicate certificates can be issued

after compliance with the following:
(a) Notice is required to be given in at least one local newspaper;
(b) Lapse of a reasonable period (say 15 days) from the date of the
notice in the newspaper; and
(c) Execution of an indemnity bond by the investor to the satisfaction of

the issuer of CDs.
The duplicate certificate should be issued only in physical form. No fresh

stamping is required as a duplicate certificate is issued against the original
lost CD. The duplicate CD should clearly state that the CD is a Duplicate
one stating the original value date, due date, and the date of issue (as
“Duplicate issued on ________”).
! !100
7 . 1 8 S TA N D A R D I S E D M A R K E T P R A C T I C E S A N D
DOCUMENTATION
Fixed Income Money Market and Derivatives Association of India (FIMMDA)

may prescribe, in consultation with the RBI, for operational flexibility and
smooth functioning of the CD market, any standardised procedure and
documentation that are to be followed by the participants, in consonance
with the international best practices.
1. Define a Certificate of Deposit.
2. What is the minimum amount of CDs that can be accepted from a single
subscriber.
3. Can an NRI subscribe to a Certificate of Deposit?
4. Can loan be taken against CDs?
5. What is the grace period for repayment of CDs?
6. What is the maximum period of Certificate of Deposits can be issued

for?
7. Can duplicate CDs be issued?
! !101
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !102
NOMINATION
Chapter 8
Nomination
Objectives
This chapter will explain on how account holders may nominate persons.
Structure
8.1 Nomination Facility

8.2 Operations
8.1 NOMINATION FACILITY
• The Banking Laws (Amendment) Act, 1983 inserted Section 45ZA to

permit the facility of nomination. These sections enable a bank to:
- Make payment to the nominee of a deceased depositor, the amount

standing to the credit of the depositor.
- Return the articles left by a deceased person in safe custody to its

nominee after making an inventory of the articles.
- Release contents of the safe deposit locker to the nominee of the hirer
in the event of the death of the hirer after making an inventory.
• Nomination facility is intended for individuals including a sole proprietary

concern.
• Nomination can only be made in favour of individuals. It cannot be in the

name of Associations, Trusts or Societies.
• There cannot be more than one nominee in respect of a joint account.
• A single depositor can, in the event of his death, nominate the person
who should be paid the balance lying to his credit in his account.
! !103
NOMINATION
• With regard to a joint account all the depositors together may nominate
a person to whom in the event of their death the amount to their credit
in the joint account may be paid.
• Nomination must be made in favor of individuals only and not

associations, societies, trusts or any organization or their office bearers.
• Nomination confers upon the nominee the right to receive the deposit
from the bank.
• If the nominee is a minor the depositor/s may appoint a person to

receive the amount during the minority of the nominee.
• Nominations may be varied or cancelled at any time.
• A nomination or cancellation of nomination or variation of nomination

shall not cease to be in force merely by reason of the renewal of the
deposit.
• On making payment to the nominee the bank is fully discharged from its
liability regarding the deposit.
• Following an Allahabad High Court decision the RBI has stated that banks
should insist that the person opening an account in single name makes a
nomination. If he declines to do so the bank should explain the
advantages. If he still does not want to make a nomination the bank
should ask him to give a letter stating that he does not want to make a
nomination. If he declines to give a letter, the bank should record the
fact on the account opening form and open the account (if found
eligible). Under no circumstances should a bank refuse to open an
account solely on the ground that the person refused to make a
nomination.
• A bank must register in its books the nomination, cancellation and

variation of nominations.
• Nomination facility is available for Savings Bank account opened for

credit of pension. Banking Companies (Nomination) Rules, 1985 are
distinct from Arrears of Pension (Nomination) Rules, 1983 and the
nomination exercised by the pensioner under the latter rules for receipt
! !104
NOMINATION
of arrears of pension will not be valid for deposit accounts held by

pensioners with banks for which a separate nomination is required.
• Banks may allow variation/cancellation of a subsisting nomination by all

the surviving depositors acting together. This is also applicable to
deposits having operating instructions “either or survivor.”
• In case of a joint deposit account the nominee’s right arises only after
the death of all the depositors.
• Rules 2(9), 3(8) and 4(9) of the Banking Companies (Rules) 1985
requires banks to acknowledge in writing to depositors the filing of the
relevant duly completed form of nomination, cancellation and/or variation
of the nomination.
• The acknowledgement must be given to all customers irrespective of
whether it was asked for or not.
• Banks should introduce the practice of recording on the face of

passbooks/FDRs the position regarding availment of nomination facility
with the legend “Nomination Registered”. In addition the name of the
nominee should also be stated if the customer is agreeable. This will be
of help on the demise of the account holder to his family/relatives.
8.2 OPERATIONS
• Nomination facility should be made available to all types of deposit

accounts, irrespective of the nomenclature used by different banks.
• Unless the customer prefers not to nominate, (this may be recorded,

without giving scope for conjecture of non-compliance) nomination
should be a rule, to cover all existing and new accounts.
• Nomination facility is available for saving bank accounts opened for credit
of pension.
• Banks are advised to generally insist that the person opening a deposit
account makes a nomination. In case the person opening an account
declines to fill in nomination, the banks should explain the advantages of
nomination facility. If the person opening the account still does not want
to nominate, the banks should ask him to give a specific letter to the
effect that he does not want to make nomination. In case the person
! !105
NOMINATION
opening the account declines to give such a letter, the bank should
record the fact on the account opening form and proceed with opening of
the account if otherwise found eligible. Under no circumstances, a bank
should refuse to open an account solely on the ground that the person
opening the account refused to nominate. This procedure should be
adopted in respect of deposit accounts in the name of Sole Proprietary
Concerns also.
• It is clarified that the various nomination forms (DA1, DA2, and DA3 for
Bank Deposits, Forms SC1, SC2 and SC3 for articles in safe custody and
Forms SL1, SL1A, SL2, SL3 and SL3A for Safety Lockers) prescribed
under the Nomination Rules, 1985, only Thumb-impression(s) shall be
attested by two witnesses. The signatures of the account holders need
not be attested by witnesses. Banks are advised to ensure strict
compliance of the said instructions.
1. What purpose does a Nomination serve?
2. Who is the facility of Nomination for?
3. How many Nominations are permitted on a joint account?
4. Does the Nomination or cancellation of a Nomination cease on the

renewal of a deposit?
5. What must a bank do if the customer refuses to make a Nomination?
! !106
NOMINATION
REFERENCE MATERIAL
chapter
Summary
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MCQ
Video Lecture 
! !107
UNCLAIMED DEPOSITS
Chapter 9
Unclaimed Deposits
Objectives
This chapter discusses and explains on unclaimed deposits.
Structure
9.1 Unclaimed Deposits

In view of the increase in the amount of unclaimed deposits with banks

year after year and the inherent risk associated with such deposits, the
Reserve Bank has stated that banks should play a more pro-active role in
finding the whereabouts of the account holders whose accounts have
remained inoperative. Moreover, there is a feeling that banks are
undeservedly enjoying the unclaimed deposits, while paying no interest on
it.
9.1 UNCLAIMED DEPOSITS
• Within 30 days from the close of a calendar year banks should submit, a
return to the RBI, a list of all accounts that have not been operated for
10 years.
• Operations in this context mean no credit or debit other than crediting

periodic interest or debiting of service charges for more than one year.
• Banks must conduct an annual review of accounts in which there are no

operations for more than one year.
• Banks can write to customers informing them that there has been no
operation and ascertain the reasons for this. If non-operation was due to
shifting from the locality, customers could be asked to provide details of
new accounts to which balances can be transferred.
! !108
UNCLAIMED DEPOSITS
• If letters are returned unanswered, there should be an enquiry to find

out whereabouts of customers or their legal heirs in case they are
deceased.
• If whereabouts of customers are not traceable, introducers/the

individual’s employers or any other person known to the bank should be
contacted. Banks should also try contacting customers telephonically if
the telephone numbers are with the bank. Non-residents could also be
contacted by email.
• If a customer replies giving reasons for not operating an account, banks

should classify it as an operative account for one more year within which
the customer should be asked to operate the account. If, in spite of this,
the account is not operated, then it should be classified as inoperative.
• For the purpose of classifying an account as inoperative both debit ands

credit transactions induced by the customer as well as third party should
be considered. Service charges levied by the bank should not be
considered.
• The RBI has clarified that if FD interest is credited to a savings account/

current account as per the mandate of a client it should be treated as a
customer induced transaction. The account should be treated inoperative
only after 2 years from the date of the last credit entry.
• A savings account as well as a current account should be treated as

inoperative/dormant if there are no transactions in the account for over a
period of two years. These should be segregated and placed in a
separate ledger.
• Operation in these accounts may be allowed after due diligence as per

risk category of customer.
• There should not be any charge for activation of inoperative account.
• Banks must ensure that amounts lying in inoperative accounts are

properly audited by internal/external auditors.
• Interest on savings accounts should be credited regularly.
! !109
UNCLAIMED DEPOSITS
• Regarding matured fixed deposits, the amount unclaimed with the bank
will attract savings bank rate of interest.
• Banks can consider special drive for finding whereabouts of customers/

legal heirs of accounts which have already been transferred to
‘inoperative accounts’.
1. What should a bank do if there have been no operations on a account

for 10 years?
2. What does the term “operations” mean with context to unclaimed

deposits?
3. If the only transaction in an account is FD interest being credited to a

savings account/current account as per the mandate of a client should
the account be treated inoperative?
! !110
UNCLAIMED DEPOSITS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !111
DECEASED DEPOSITORS
Chapter 10
Deceased Depositors
Objectives
This chapter explains how accounts are to be handled on the death of

account holders.
Structure
10.1 Account with Survivor/Nominee Clause

10.2 Accounts without Survivor/Nominee Clause
10.3 Premature Termination of Term Deposits
10.4 Income Flows (Receipts) in the Name of the Deceased Depositor
10.5 Payment of Interest
10.6 Settlement of Claims
10.7 Access to the Safe Deposit Lockers/Safe Custody Articles of Deceased
Account Holders
To avoid difficulties to the heirs/nominees of deceased depositors the RBI

has issued instructions in this regard.
10.1 ACCOUNT WITH SURVIVOR/NOMINEE CLAUSE
• Where a depositor has utilized nomination facility and made a valid

nomination or where the account was opened with the survivorship
clause (either or survivor, or anyone or survivor or former or survivor or
latter or survivor), payment of the balance in the deposit account to the
survivor(s)/nominee of a deceased deposit account holder represents a
valid discharge if:
- The bank has exercised due care and caution in establishing identity of
survivor/nominee and death of account holder (through documentary
evidence).
- There is no court order restraining the bank from making the payment.
! !112
DECEASED DEPOSITORS
- It is made clear to the survivor(s) that he would be receiving payment

as a trustee of the legal heirs of the deceased depositor.
- The RBI has stated that in these cases insistence on production of legal
representation is superfluous and unwarranted. Banks should not ask
for succession certificates, letter of administration or probate. Banks
should not seek to obtain any bond or indemnity.
10.2 ACCOUNTS WITHOUT SURVIVOR/NOMINEE CLAUSE
• Where the deceased depositor has not made any nomination or the
account does not have a survivor clause banks are expected to follow a
simplified procedure for repayment to legal heirs without inconveniencing
them.
10.3 PREMATURE TERMINATION OF TERM DEPOSITS
• Banks should incorporate a clause in the account opening form stating

that in the event of the death of the depositor, premature termination
would be allowed.
• The conditions pertaining to this should be specified in the account

opening form.
• There will be no penal charge for such premature withdrawal.
• If the death takes place before maturity and the deposit is claimed after
the maturity, interest is to be paid at the contracted rate upto maturity
and then at the savings account rate. The Ministry of Finance has
reiterated that in cases where the depositor has expired before the
maturity of the deposit and the nominee/legal heir approaches the
banker for closure of the deposit account, the nominee/legal heir is
entitled to the savings bank rate commencing from the date of death of
the depositor to the date of closure of the account.
• If the bank agrees to split the deposit and issue two or more receipts it
should not be construed as early withdrawal of the deposit if the period
and aggregate amount is unchanged.
! !113
DECEASED DEPOSITORS
• With regard to premature withdrawal of deposits placed with all India

financial institutions for medical exigencies, educational expenses and
other such reasons the Reserve Bank states that no interest is payable if
withdrawn before the expiry of 6 months. If the withdrawal is between 6
and 12 months interest not exceeding the savings account bank rate is to
be paid.
10.4 INCOME FLOWS (RECEIPTS) IN THE NAME OF THE

DECEASED DEPOSITOR
• Deceased depositors may receive monies in their name. To avoid

hardships banks should either open an account styled “Estate of Shri
…………..., (the deceased)” where all amounts received are deposited or
the survivor/nominee can authorize the bank to return the monies
received with the remark “Account holder deceased”. The survivor/
nominee can then approach the remitter to effect payment to them.
10.5 PAYMENT OF INTEREST
• In the case of a term deposit in the name of a deceased depositor or two

or more persons where one of the depositors has died, the criterion for
payment of interest on matured deposits in the event of death will be left
to the bank subject to the board laying a transparent policy.
• In the case of balances lying in the current account of a deceased

individual depositor including sole proprietorship, interest should be paid
from the date of death of the depositor till the date of repayment to the
claimants at the rate applicable to savings deposits.
• In the case of NRE deposits, when the claimants are residents, the
deposit on maturity should be treated as a domestic rupee deposit and
interest should be paid for the subsequent period at a rate applicable to a
domestic deposit of similar maturity.
10.6 SETTLEMENT OF CLAIMS
• Banks should settle claims and release payment within 15 days from
receiving claim along with documents such as proof of death of depositor.
! !114
DECEASED DEPOSITORS
• The documents that should be submitted along with the claim form are:
- Proof of death of depositor(s) or hirer(s);

- Proof of identification of nominee(s) wherever applicable such as Ration
Card, Election ID Card, PAN Card or Passport or any other satisfactory
proof of identification acceptable to the bank or proof of authority of
legal heir(s) wherever applicable.
10.7 ACCESS TO THE SAFE DEPOSIT LOCKERS/SAFE

CUSTODY ARTICLES OF DECEASED ACCOUNT HOLDERS
For dealing with the requests from the nominee(s) of the deceased locker-
hirer/ depositors of the safe-custody articles (where such a nomination had
been made) or by the survivor(s) of the deceased (where the locker/safe
custody article was accessible under the survivorship clause), for access to
the contents of the locker/safe custody article on the death of a locker
hirer/depositor of the article, the banks are advised to adopt generally the
foregoing approach, mutatis mutandis, as indicated for the deposit
accounts.
! !115
DECEASED DEPOSITORS
1. Should a succession certificate or probate be asked for if a depositor has

utilized the nomination facility and made a valid nomination or where
the account was opened with the survivorship clause?
2. What is the penal charge of premature termination of an account on the

demise of the account holder?
3. If the bank agrees to split the deposit and issue two or more receipts
should it be construed as early withdrawal of the deposit if the period
and aggregate amount is unchanged?
4. In the case of a term deposit in the name of a deceased depositor or

two or more persons where one of the depositors has died what is the
criterion for payment of interest on matured deposits?
5. What documents must be submitted to settle claims and release

payment? In the case of a term deposit in the name of a deceased
depositor or two or more persons where one of the depositors has died,
the criterion for payment of interest on matured deposits in the event of
death will be left to the bank subject to the board laying a transparent
policy.
! !116
DECEASED DEPOSITORS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !117
SETTLEMENT OF CLAIMS IN RESPECT OF MISSING PERSONS
Chapter 11
Settlement of Claims in Respect of Missing
Persons
Objectives
This chapter explains how claims of missing persons are to be settled.
Structure
11.1 How Claims are to be Settled

11.1 HOW CLAIMS ARE TO BE SETTLED
• The Reserve Bank has stated that the settlement of claims in respect of
missing persons would be governed by the provisions of Section 107/108
of the Indian Evidence Act, 1872:
- Section 107 deals with presumption of continuance; and

- Section 108 deals with presumption of death. As per the provisions of
Section 108 of the Indian Evidence Act, presumption of death can be
raised only after a lapse of seven years from the date of the person
being reported missing.
• The nominee/legal heirs have to raise an express presumption of death

of the subscriber under Section 107/108 of the Indian Evidence Act
before a competent court. If the court presumes that the individual is
dead, then the claim in respect of a missing person can be settled.
• The Reserve Bank has asked banks to formulate a policy which would
enable them to settle the claims of a missing person after considering the
legal opinion and taking into account the facts and circumstances of each
case. Further, keeping in view the imperative need to avoid
inconvenience and undue hardship to the common person, banks are
advised that keeping in view their risk management systems, they may
fix a threshold limit, up to which claims in respect of missing persons
! !118
could be settled without insisting on production of any documentation

other than (i) FIR and the non-traceable report issued by police
authorities and (ii) letter of indemnity.
1. Which Act should one follow regarding the Settlement of Claims?
2. What must the nominee provide to the bank for the claim to be settled?
! !119
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !120
GENERAL ACCOUNT MONITORING AND OPERATIONS
Chapter 12
General Account Monitoring and Operations
Objectives
This chapter discusses how accounts should be monitored.
Structure

12.3 Issue of Cheque Books
12.4 Dormant Accounts
12.5 Transfer of Account and Switching Banks
12.6 Operation of Banks Accounts by Old/Sick/Incapacitated Customers
12.7 Account Closure
12.8 Customer Guidance and Publicity
12.9 Acceptance of Deposits by Unincorporated Bodies/Private Ltd.,
Companies with “Bank Guarantee”
12.10 Deposit Collection Schemes Floated by Private Organisations
12.11 Register for Unclaimed Deposits
12.12 Co-ordination with Officers of the Central Board of Direct Taxes
12.13 Deposit Collection Agents
12.14 Joint Accounts
12.15 Joint Term Deposit Account – Premature/Payment or Loan on Death
of One of the Account Holders
12.16 Receipt of Foreign Contributions by Various Associations/
Organisations in India Under Foreign Contribution (Regulation) Act,
1976
! !121
• Banks must have a system of maintaining a close watch over the

operations in new accounts. At branches, the primary responsibility for
concerned Department/Section. Branch Managers or the Managers of
place therein.
• If any transaction of suspicious nature is revealed, banks should enquire

about the transaction from the account holder, and if no convincing
explanation is forthcoming, they should consider reporting such
• Caution should be exercised whenever cheques/drafts for large amounts

necessary the paying bank should check with the collecting bank about
the genuineness of any large value cheques/drafts issued. Demand
Drafts (DDs)/Cheques for large amounts presented for collection should
be verified under ultra violet lamps to safe guard against chemical
alterations.
• A system of close monitoring of cash withdrawal for large amounts

should be in place. Where third party cheques, drafts, etc., are deposited
in the existing and newly opened accounts followed by cash withdrawals
for large amounts, the banks should keep a proper vigil over the requests
of their clients for such cash withdrawals for large amounts.
• The banks should have a system of closely monitoring cash deposits and
withdrawals for ` 5 lakh and above not only in deposit accounts but also
in all other accounts like cash credit/overdraft, etc. The banks/branches
should also maintain a separate register to record details of individual
cash deposits and withdrawals for ` 5 lakh and above. The details
! !122
recorded should include, in the case of deposits, the name of the account
holder, account number, amount deposited and in the case of
withdrawal and name of the beneficiary of the cheque.
• Further, any cash deposits or withdrawals of ` 5 lakh and above should

be reported by the Branch Manager to the Head Office on a fortnightly
basis along with full particulars, such as name of the account holder,
account number, date of opening the account, etc. On receipt of these
statements from branches, the Head Office should immediately scrutinise
the details thereof and have the transactions looked into by deputing
officials, if the transactions prima facie appear to be dubious or giving
rise to suspicion. The inspecting officials from the Reserve Bank of India
during the course of their inspections will also be looking into the
statements submitted by the branches.
• In the payment of cheques due caution should be exercised for the

verification of drawer’s signature, custody of specimen signature cards,
supervision over issue of cheque books and control over custody of blank
cheque books/leaves. While need for examining cheques for large
amounts under Ultra Violet Ray Lamps is recognised by all banks, in
practice it is rarely done as there is often a tendency to be lax in the
matter resulting in avoidable loss.
• Due care should be exercised in regard to issue and custody of tokens,

instruments after they are paid by the banks.
• Depositors/Customers should be asked to surrender unused cheque

books before closing/transferring accounts.
• Safe custody of specimen signature cards is of utmost importance,

especially when operating instructions are changed, the change should
be duly verified by a senior official in the branch.
12.3 ISSUE OF CHEQUE BOOKS
• Fresh cheque books should be issued only against production of duly

signed requisition slips from previous cheque book issued to the party.
! !123
• In case the cheque book is issued against a requisition letter, the drawer
should be asked to come personally to the bank or cheque book should
be sent to him under registered post directly without being delivered to
the bearer.
• Loose cheques should be issued to account holder only when the account
holder comes personally with a requisition letter and on production of
passbooks.
12.4 DORMANT ACCOUNTS
• The accounts which have not been operated upon over a period two
years should be segregated and maintained in separate ledgers. The
relative ledger(s) and the specimen signature cards should be held under
the custody of the Manager or one of the senior officials. The first
withdrawal in such segregated accounts should be allowed only with the
approval of the Manager.
12.5 TRANSFER OF ACCOUNT AND SWITCHING BANKS
• Instructions of a customer for transfer of a customer’s account to another

office should be carried out immediately on receipt of his instructions. It
must be ensured that along with the balance of the account, the relative
account opening form, specimen signatures, standing instructions, etc.,
are also simultaneously transferred under advice to the customer.
• The account transfer form with enclosures may be handed over to the
customer in a sealed cover if he desires for delivery to the transferee
office/branch. However, the transferee office/branch should also be
separately supplied with a copy of the account transfer letter.
• When an office receives an enquiry regarding transfer of an account from

another office, it should take up the matter with the transferor office by
electronic means in case it has not received the balance and/or other
related papers.
• Banks should ensure that depositors dissatisfied with customer service

have the facility to switch banks and thwarting depositors from such
switches would invite serious adverse action.
! !124
12.6 OPERATION OF BANKS ACCOUNTS BY OLD/SICK/

INCAPACITATED CUSTOMERS
• Sick/old/incapacitated account holders fall into the following categories:
- An account holder who is too ill to sign a cheque/cannot be physically

present in the bank to withdraw money from his bank account but can
put his/her thumb impression on the cheque/withdrawal form, and
- An account holder who is not only unable to be physically present in

the bank but is also not even able to put his/her thumb impression on
the cheque/withdrawal form due to certain physical defect/incapacity.
• Banks may follow the procedure as under:
- Wherever thumb or toe impression of the sick/old/incapacitated

account holder is obtained, it should be identified by two independent
witnesses known to the bank, one of whom should be a responsible
bank official.
- Where the customer cannot even put his/her thumb impression and
also would not be able to be physically present in the bank, a mark
obtained on the cheque/withdrawal form which should be identified by
two independent witnesses, one of whom should be a responsible bank
official. In such cases, the customer may be asked to indicate to the
bank as to who would withdraw the amount from the bank on the basis
of cheque/withdrawal form as obtained above and that person should
be identified by two independent witnesses. The person who would be
actually drawing the money from the bank should be asked to furnish
his signature to the bank.
- In this context, according to an opinion obtained by the Indian Banks’

Association from their consultant on the question of opening of a bank
account of a person who had lost both his hands and could not sign the
cheque/withdrawal form, there must be physical contact between the
person who is to sign and the signature or the mark put on the
document. Therefore, in the case of the person who has lost both his
hands, the signature can be by means of a mark. This mark can be
placed by the person in any manner. It could be the toe impression, as
suggested. It can be by means of mark which anybody can put on
! !125
behalf of the person who has to sign, the mark being put by an
instrument which has had a physical contact with the person who has
to sign.
12.7 ACCOUNT CLOSURE
unused cheques to the bank. Incorporated entities and associations
should also submit a copy of the resolution wherein it was agreed that
the bank account be closed.
• All unused cheque leaves should be cancelled and returned to the bank.


deposits account.

12.8 CUSTOMER GUIDANCE AND PUBLICITY
• Banks are advised to give wide publicity and provide guidance to deposit
account holders on the benefits of the nomination facility and the
survivorship clause. Illustratively, it should be highlighted in the publicity
material that in the event of the death of one of the joint account
holders, the right to the deposit proceeds does not automatically devolve
on the surviving joint deposit account holder, unless there is a
survivorship clause.
! !126
12.9 ACCEPTANCE OF DEPOSITS BY UNINCORPORATED

B O D I E S / P R I V AT E LT D ., C O M P A N I E S W I T H “ B A N K
GUARANTEE”
• Banks should not accept deposits at the instance of private financiers or

unincorporated bodies under any arrangement, which provides for either
the issue of deposit receipts favouring the clients of private financiers or
giving of an authority by power of attorney, nomination otherwise for
such clients receiving such deposits at maturity.
12.10 DEPOSIT COLLECTION SCHEMES FLOATED BY

PRIVATE ORGANISATIONS
• It may be noted that the Prize Chits and Money Circulation Schemes
(Banning) Act, 1978 (No. 43 of 1978) imposes a total ban on the
promotion and conduct of prize chit scheme except by charitable and
educational institutions notified in that behalf by the State Governments
concerned. The lottery falls within the expression “prize chit” under the
Act referred to above. Further, sale of lottery tickets on bank counters
could be open to abuse and avoidable complaints from members of
public. Therefore, the banks should not associate themselves directly or
indirectly with lottery schemes of organisations of any description.
12.11 REGISTER FOR UNCLAIMED DEPOSITS
• Banks are required to submit to the Reserve Bank, a return in Form VIII
showing unclaimed deposit accounts in India which have not been
operated upon for 10 years or more, as at the end of each calendar year.
In order to ensure accuracy and timely reporting, it is desirable to
maintain a separate register for this purpose at all the branches of each
bank.
• The banks should, therefore, advise their branches to maintain a register

for unclaimed deposits in a separate register.
• The branches may also be advised that entries therein may be made in
respect of deposit accounts not operated upon for 10 year. A separate
! !127
folio may be opened in the register for different types of deposit

accounts.
• The branches should ensure to note in the folio in which the

relative unclaimed deposit account is maintained, that the unclaimed
deposits register should be referred to before allowing operations in the
account, so as to caution the bank not to allow operations on such
accounts in the usual course but to do so after obtaining the
authorisation of a higher official.
12.12 CO-ORDINATION WITH OFFICERS OF THE CENTRAL

BOARD OF DIRECT TAXES
• Banks must help income-tax officials when required.
12.13 DEPOSIT COLLECTION AGENTS
Banks are prohibited from paying brokerage on deposits in any form to

any individual, firm, company, association, institution or any other person.
Banks should not employ/engage outside persons even through firms/

companies for collection of deposits including Non-Resident deposits or for
selling any other deposit linked products on payment of fees/commission in
any form or manner, except to the extent permitted vide Reserve Bank’s
Interest Rate Directives.
12.14 JOINT ACCOUNTS
There is some confusion and misunderstanding about the procedure to be

followed in respect of such accounts and the legal implications of the
expressions ‘Either or Survivor’, ‘Latter of Survivor’, ‘Former or Survivor’,
etc.
Joint Accounts
In the case of joint accounts (Current, Savings or Deposits) in the names

of two or more persons, the terms relating to which do not provide for
payment of the amount due under the account to the Survivor(s) in the
event of death of one of them, for the banks to obtain a valid discharge
! !128
payment should be made jointly to Survivor(s) and the legal heirs of the
deceased joint account holder. In such a case, in view of the difficulty in
ascertaining with certainty as to who the legal heirs of the deceased are, it
is the practice of the banks to insist on the production of legal
representation (to the estate of the deceased) before settling the claim. As
obtaining a grant of legal representation would entail delay and expenses,
banks should encourage the opening of joint accounts on terms such as,
payable to (a) Either or Survivor, (b) Former/Latter or Survivor, (c) Anyone
or Survivors, or Survivor, etc. This point has been emphasised in the
Recommendation No. 6 of the Working Group on Customer Service in
banks.
Benefits of Survivorship
If the benefit of survivorship is provided, the survivor can give a valid

discharge to the bank. Even though payment to the survivor will confer a
valid discharge to the bank, the survivor will, however, hold the money
only as trustee for the legal heirs (who may include the survivor as well)
unless he is the sole beneficial owner of the balance in the account or the
sole legal heir of the deceased. Thus, the survivor’s right unless he is the
sole owner of the balance in the account/sole legal heir of the deceased, is
only in the nature of a mere right to collect the money from the bank. If
the legal heirs of the deceased lay a claim to the amount in the bank, they
should be advised that in terms of the contract applicable to the account,
the survivor is the person entitled to payment by the bank and that, unless
the bank is restrained by an order of a competent court, the bank would be
within its rights to make the payment to the survivors) named in the
account. The position, briefly, is that a payment to survivor can be made if
there are no orders from a competent court restraining the bank from
making such payments.
Joint Savings Bank Account – Either or Survivor/Any One or

Survivors or Survivor
As stated above, the survivor can give a valid discharge to the bank. If the
legal heirs claim the amount, the bank can inform them that unless they
obtain and have served on the bank an order of competent court
restraining the bank from effecting payment to the survivor, the bank will
be within its rights to do so.
! !129
12.15 JOINT TERM DEPOSIT ACCOUNT – PREMATURE/

PAYMENT OR LOAN ON DEATH OF ONE OF THE ACCOUNT
HOLDERS
Account in the Style of Either or Survivor or ‘Anyone or Survivors or

Survivor’
In a joint term deposit account which has been opened in the style of
either or survivor/any one or survivors or survivor, the bank often receives
a request, on the death of one of the joint account holders, from the
surviving depositors) to allow premature encashment or the grant of a loan
against the term deposit receipt. It would be in order to accede to the
request of the surviving depositors) for premature payment if (i) there is
an option included in the contract of deposit to repay before maturity and
(ii) “either/any one or survivorship” mandate has been obtained from
original depositors. Requests for loans from surviving depositor(s) could
also be considered in special cases, though in the case of such loans, the
bank may face a possible risk if the legal representatives of the deceased
depositor lay an effective claim to the deposit before it is paid on maturity.
In such an event, the bank will have to look to the borrower(s) for
repayment. This position for premature payment or grant of loan is
applicable also in respect of a joint account (in the style of either or
survivor/any one or survivors or survivor), where all the account holders
are alive.
As a measure of operational prudence, a clause to the effect that loan/

premature payment can be permitted to either/any one of the depositors
any time during the deposit period can, however, be included in the term
deposit contract, i.e., the account opening or application form itself, in the
manner indicated in paragraph 6 below.
Joint Term Deposit – Former or Survivor/Latter or Survivor, etc.
In the case of these term deposits, the intention of the owner depositor
(former/latter) is to facilitate repayment of the term deposit to the survivor
only in the event of his death. He (the owner depositor) is in a position to
retain with him at all times, the right to dispose of the monies until his
death or maturity of the deposit receipt, whichever is earlier. There should,
therefore, be no objection to the bank permitting premature payment of
! !130
such deposits or granting advances against them at the request of the

former/latter without insisting on the production of a consent letter from
the other party/parties to the term deposit receipt. Here also it is
preferable to make this position explicit to the joint depositors, by
incorporating suitable clause in the term deposit account opening or
application form.
Special Clause in the Application/Account Opening form for Term

Deposit Receipt
Banks may consider incorporating a clause to the following effect in the

account opening form/application form establishing the contract of term
deposit:
“The Bank may, on receipt of written application from Shri ------------------

the former/the latter/the first name the second name etc. of us or Either or
Survivor of us, in its Any one or Survivors of Survivor of us, absolute
discretion and subject to such terms and conditions as the Bank may
stipulate, (a) grant a loan/advance against the security of the term deposit
receipt to be issued in our joint names or (b) make premature payment of
the proceeds of the deposit to the former/the latter/the first named of us/
either the second or survivor of us, etc., named of us/any one of us or
survivors or survivor of us”.
12.16 RECEIPT OF FOREIGN CONTRIBUTIONS BY VARIOUS

ASS O C I AT I O N S / O R G A N I SAT I O N S I N I N D I A U N D E R
FOREIGN CONTRIBUTION (REGULATION) ACT, 1976
The Foreign Contribution (Regulation) Act, requires that the associations

having a definite cultural, economic, educational, religious and social
programme and receiving foreign contribution should get themselves
registered with the Ministry of Home Affairs, Government of India and
receive foreign contribution only through such one of the branches of a
bank, as an association may specify in its application for registration with
the Ministry of Home Affairs.
Further, the said Act provides that every association referred to in sub-
section (1) of Section (6) may, if it is not registered with the Central
! !131
Government, accept any foreign contribution only after obtaining prior

permission of the Central Government.
There are also certain organisations of a political nature, not being political
parties (including their branches/units) specified by the Central
Government under Section 5(l) of the Act. These organisations require
prior Permission of the Central Government for accepting any foreign
contribution. In this regard, the banks should take the following
precautions:
i. To afford credit of the proceeds of cheques/drafts representing foreign

contribution only if the association is registered with the Ministry of
Home Affairs, Government of India.
ii. To insist on production of a communication from the Ministry of Home

Affairs conveying prior permission of the Central Government for
acceptance of specific amount of foreign contribution in case the
association is not registered under the Foreign Contribution
(Regulation) Act, 1976.
iii. Not to afford credit to the account of such associations as are not
registered with the Ministry of Home Affairs separately for the purpose
of accepting foreign contribution under the Foreign Contribution
(Regulation) Act, 1976.
iv. Not to afford credit to the account of such associations as have been
directed to receive foreign contributions only after obtaining prior
permission of the Central Government.
v. Not to allow the credit of the proceeds of the cheques/demand drafts,

etc., to the organisations of a political nature, not being political
parties (including their branches and units) unless a letter containing
the prior permission of the Central Government under the Foreign
Contribution (Regulation) Act, 1976 is produced by such organisations.
vi. To note the registration number as conveyed by the Ministry of Home

Affairs to the various associations in the relevant records particularly
the pages of the ledgers in which the foreign contribution accounts of
associations are maintained to ensure that no unwanted harassment is
caused to such associations.
! !132
vii. In case any cheque/demand draft has been tendered to the bank for
realisation of its proceeds and credit to the account of the association/
organisation by an association or organisation which is not registered
or which requires prior permission, as the case may be, the concerned
branch of the bank may approach the Ministry of Home Affairs for
further instructions. In no case the banks should credit the account of
association/organisation of a political nature, not being a political
party, as specified by the Central Government and of an unregistered
association, unless the association/organisation produces a letter of
the Ministry of Home Affairs conveying permission of the Central
Government to accept the foreign contribution.
viii. Where prior permission has been granted such permission is to accept
only the specific amount of the foreign contribution which would be
mentioned in the relevant letter. The Ministry of Home Affairs is
invariably endorsing a copy of the order of registration or prior
permission for each association/organisation to the concerned branch
of the bank through which the foreign contributions are to be received
for credit to the Associations/Organisations deposit account.
For the above purpose, appropriate systems should be devised within the
bank to ensure meticulous compliance with these instructions and
completely eliminate instances of non-compliance. The system so devised
may be intimated to all the branches of the bank for proper
implementation and strict compliance and the same should be effectively
monitored at Head Office level.
! !133
1. In a bank who would be in charge of monitoring new accounts?
2. When should the bank exercise caution in regard to the operations of a

new account?
3. Should cash withdrawals of over ` 5 lakhs be reported and if so to

whom?
4. What procedure must be followed for sick or incapacitated account

holders?
5. What procedure must be followed when closing an account?
! !134
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !135
PROHIBITIONS
Chapter 13
Prohibitions
Objectives
This chapter explains matters banks are prohibited from doing with respect
to deposit accounts.
Structure
13.1 Prohibitions
13.1 PROHIBITIONS
No bank:
• May pay a rate of interest higher than that stipulated from time to time
by the Reserve Bank of India (savings and fixed deposits).
• May pay interest on current account other than by sponsor banks to

accounts maintained by regional rural banks sponsored by them and on
accounts of deceased depositors.
• May pay countervailing interest on any current account maintained with

it.
• May pay interest on margin money.
• May discriminate in the matter of interest paid between one deposit and
another accepted on the same date and for same maturity except for
schemes specifically for resident Indian senior citizens offering higher
and fixed rates of interest as compared to normal deposits of any size,
and single term deposits of ` 15 lakhs and above on which varying rates
based on size of deposits may be permitted. The permission to offer
varying rates of interest will be subject to the following conditions:
- Permission to offer varying rates of interest for deposits of the same

maturity will apply to single term deposits of ` 15 lakhs and above.
! !136
PROHIBITIONS
Banks may offer the same rate of interest or different rates of interest
for deposits of ` 15 lakhs and above. For deposits below ` 15 lakhs of
the same maturity the same rate will apply.
- Banks should disclose in advance the schedule of interest rates payable

on deposits on which differential interest will be paid. Rates should not
be subject to negotiation between the depositor and the bank.
• May pay brokerage or gifts to agents/others for deposits placed at the

bank.
• May employ/engage any individual, firm, company, association,

institution on payment of fees or remuneration or fees or commission in
any form except commission paid to agents employed to collect door-to-
door deposits under a special scheme. Banks may use the services of
Non-Governmental Organisations (NGOs)/Self Help Groups (SHGs)/Micro
Finance Institutions (MFIs) and other Civil Society Organizations (CSOs)
as intermediaries in providing financial and banking services including
collection of deposits through the use of business facilitator and business
correspondent models and pay reasonable commission and fees.
• May open a savings deposit account in the name of Government

departments/ bodies depending upon budgetary allocations for
performance of their functions, Municipal Corporations or Municipal
Committees/Panchayat Samitis/State Housing Boards, etc., or any
political party or any trading/business or professional concern whether
such concern is a proprietary or a partnership firm or a company or an
association.
• Should resort to unethical practice of raising resources (deposits)

through agents/third parties to meet credit needs of existing/prospective
borrowers or to grant loans to the intermediaries based on the
consideration of deposit mobilization.
• Should issue any advertisement/literature soliciting deposits highlighting

only the compounded yield without indicating the actual rate of simple
interest.
• Should pay brokerage in the form of commission or gifts to collect

deposits.
! !137
PROHIBITIONS
• Should employ anyone to collect deposits on payment of commission.
• Should give any incentive as prize for deposit mobilization schemes.
• Should not give an advance on fixed deposits of other banks.
• Should accept interest free deposit other than in current account or pay
compensation indirectly.
• Should pay interest on deposit on call receipts issued by the bank to

contractors for submission to government departments against money
held in current account.
• Should launch schemes giving prize/lottery/free trips to attract deposits.
• Can prematurely repay the term deposits of their customers on their own
at their option as it is a contract between the bank and the customer.
However, a term deposit can be paid prematurely at the request of the
customer subject to the terms of the contract, including penalty if any.
• Should pay interest on “deposit on call:” receipts issued to tenderers for

submission to Government departments, local bodies, etc., against
money held in current account.
• Should accept deposits from/at the instance of private financiers or

unincorporated bodies under any arrangement which provides for either
issue of deposit receipts favoring clients of private financiers or giving of
an authority by power of attorney, nomination or otherwise, for such
clients receiving such deposits on maturity.
However:
• Commission may be paid to agents employed to collect door to door

deposits under a special scheme.
• Incentives may be granted to staff members as approved by the RBI.
• Inexpensive gifts costing not more than ` 250/- may be given.
! !138
PROHIBITIONS
1. Mention three instances where the bank may not pay interest.
2. May a bank pay brokerage to collect deposits?
3. Can a term deposit be paid prematurely at the request of the customer?
4. Mention instances where incentives/commission/gifts may be given?
! !139
PROHIBITIONS
REFERENCE MATERIAL
chapter
Summary
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Video Lecture 
! !140
DEPOSIT INSURANCE
Chapter 14
Deposit Insurance
Objectives
This chapter explains the manner and extent deposits are insured.
Structure
14.1 Introduction
14.2 Insurance Under DICGC
14.3 Bank Dues
14.4 Cost of Deposit Insurance
14.5 When DICGC Pays
14.6 DICGC and Depositors of Failed Banks
14.7 Bank Withdrawal from DICGC Coverage
14.8 DICGC Withdrawal of Deposit Insurance Cover from Any Bank
14.9 Corporation’s Liability on De-registration of Banks
14.10 Limitation
14.1 INTRODUCTION
• The deposit insurance system in India is subject to the Provisions of

Deposit Insurance Act (enacted in 1961). Deposit Insurance and Credit
Guarantee Corporation (DICGC) is the body that operates the deposit
insurance system.
• The banks that are covered are:
- Commercial Banks: All commercial banks including branches of foreign

banks functioning in India, local area banks and regional rural banks
are insured by the DICGC.
- Co-operative Banks: All State, Central and Primary co-operative banks,

also called urban co-operative banks, functioning in States/Union
Territories which have amended the local Co-operative Societies Act
empowering the Reserve Bank of India (RBI) to order the Registrar of
Co-operative Societies of the State/Union Territory to wind up a
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DEPOSIT INSURANCE
cooperative bank or to supersede its committee of management and

requiring the Registrar not to take any action regarding winding up,
amalgamation or reconstruction of a co-operative bank without prior
sanction in writing from the Reserve Bank are covered under the
Deposit Insurance Scheme. At present all co-operative banks other
than those from the States of Meghalaya, Mizoram, Nagaland, and the
Union Territories of Chandigarh, Lakshadweep and Dadra & Nagar
Haveli are covered under the deposit insurance scheme of DICGC.
• Primary co-operative societies are not insured by the DICGC.
14.2 INSURANCE UNDER DICGC
• In the event of a bank failure, DICGC protects bank deposits that are
payable in India.
• The DICGC insures all deposits such as savings, fixed, current, recurring,
etc., except the following types of deposits (i) Deposits of foreign
Governments; (ii) Deposits of Central/State Governments; (iii) Inter-
bank deposits; (iv) Deposits of the State Land Development Banks with
the State co-operative bank; (v) Any amount due on account of deposit
received outside India; (vi) Any amount, which has been specifically
exempted by the Corporation with the previous approval of Reserve Bank
of India.
• Presently, deposits of each depositor in a bank is insured upto a

maximum of ` 1,00,000 (Rupees One Lakh) for both principal and
interest amount held by him “in the same right and same capacity” as on
the date of liquidation/cancellation of bank’s licence or the date on which
the scheme of amalgamation/merger/ reconstruction comes into force.
• The deposits kept by one person in different branches of a bank are

aggregated for the purpose of insurance cover and presently a maximum
amount upto Rupees one lakh is paid.
• The DICGC insures principal and interest upto a maximum amount of `

One lakh. For example, if an individual had deposit(s) with principal
amount of ` 95,000 plus accrued interest of ` 4,000, the total amount
insured by the DICGC would be ` 99,000. If, however, the principal
amount is ` One lakh, the accrued interest would not be insured, not
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DEPOSIT INSURANCE
because it was interest but because the amount was over the insurance
limit.
• All funds held in the same type of ownership at the same bank are added
together before deposit insurance is determined. If the funds are in
different types of ownership or are deposited into separate banks they
would then be separately insured.
• The insurance cannot be increased by paying an additional amount.
• In this connection it should be noted that a single (or individual)

ownership account is an account owned by one person. Such accounts
include those in the owner’s name; those established for the benefit of
the owner by agents, nominees, guardians, custodians, or conservators;
and those established by a business that is a sole proprietorship.
• If there are deposits with more than one bank, deposit insurance
coverage limit is applied separately to the deposits in each bank.
Therefore funds from each bank would be insured separately, regardless
of the date of closure.
• If a person opens in his name more than one account in a bank, for
example Mr. K.A. Iyer opens one savings account and one or more fixed
deposit accounts, all the accounts are considered in the same right and
same capacity and insurance coverage is limited to a maximum of
Rupees one lakh. But if Mr. K.A. Iyer opens a joint account, the joint
account is considered in a different right and different capacity and
insurance coverage is provided separately. Each joint account is insured
separately from any deposits individually owned by the joint depositors.
Deposits held in two separate joint accounts in combination of say “A”
and “B” and “B” and “A” will be treated as two separate accounts and
each category of the joint account will be entitled to claim upto ` 1 lakh.
Similarly a joint account of “X”, “Y” and “Z” will be treated as different
from the joint account of “Y, “Z” and “X” and “Z”. “X” and “Y” for the
settlement of claims and claims in each category will be paid upto ` 1
lakh.
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DEPOSIT INSURANCE
14.3 BANK DUES
• Banks have the right to set off their dues from the amount of deposits.
The deposit insurance is available after netting of such dues.
14.4 COST OF DEPOSIT INSURANCE
• Deposit insurance premium is borne entirely by the insured bank.
14.5 WHEN DICGC PAYS
• If a bank goes into liquidation: The DICGC is liable to pay to each

depositor through the liquidator, the amount of his deposit upto Rupees
one lakh within two months from the date of receipt of claim list from the
liquidator.
• If a bank is reconstructed or amalgamated/merged with another bank.

Where in respect of an insured bank a scheme of compromise or
arrangement or of reconstruction or amalgamation has been sanctioned
by any competent authority and the said scheme provides for each
depositor being paid or credited with, on the date on which the scheme
comes into force, an amount which is less than the original amount and
also the specified amount, the Corporation shall be liable to pay to every
such depositor in accordance with the provisions of Section 18 of DICGC
Act an amount equivalent to the difference between the amount so paid
or credited and the original amount, or the difference between the
amount so paid or credited and the specified amount, whichever is less.
Provided that where any such scheme also provides that any payment
made to a depositor before the coming into force of the scheme shall be
reckoned towards the payment due to him under that scheme, then the
scheme shall be deemed to have provided for that payment being made
on the date of its coming into force.
14.6 DICGC AND DEPOSITORS OF FAILED BANKS
• DICGC does not deal directly with depositors of failed banks.
• In the event of a bank’s liquidation, the liquidator prepares depositor

wise claim list and sends it to the DICGC. After scrutiny the DICGC pays
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DEPOSIT INSURANCE
the money to the liquidator who is liable to pay to the depositors. In the
case of amalgamation/merger of banks, the amount due to each
depositor is paid to the transferee bank.
14.7 BANK WITHDRAWAL FROM DICGC COVERAGE
• The deposit insurance scheme is compulsory and no bank can withdraw

from it.
14.8 DICGC WITHDRAWAL OF DEPOSIT INSURANCE

COVER FROM ANY BANK
• The Corporation may cancel the registration of an insured bank if it fails

to pay the premium for three consecutive half year periods. In the event
of the DICGC withdrawing its cover from any bank for default in the
payment of premium the public will be notified through newspapers.
• Registration of an insured bank stands cancelled if the bank is prohibited

from accepting fresh deposits; or its license is cancelled or a license is
refused to it by the Reserve Bank; or it is wound up either voluntarily or
compulsorily; or it ceases to be a banking company or a co-operative
bank within the meaning of Section 36A(2) of the Banking Regulation
Act, 1949; or it has transferred all its deposit liabilities to any other
institution; or it is amalgamated with any other bank or a scheme of
compromise or arrangement or of reconstruction has been sanctioned by
a competent authority and the said scheme does not permit acceptance
of fresh deposits. In the event of the cancellation of registration of a
bank, deposits of the bank remain covered by the insurance till the date
of the cancellation.
14.9 CORPORATION’S LIABILITY ON DE-REGISTRATION OF

BANKS
• The Corporation has deposit insurance liability on liquidation etc. of

“insured banks” i.e., banks which have been de-registered (a) on account
of prohibition on acceptance of fresh deposits or (b) on cancellation of
license or where it is found that license can not be granted. The liability
of the Corporation in these cases is limited to the extent of deposits as
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DEPOSIT INSURANCE
on the date of cancellation of registration of bank as an insured bank

subject to the monetary ceilings applicable.
• On liquidation, etc., of other de-registered banks, i.e., banks which have

been de-registered on other grounds such as non payment of premium or
their ceasing to be eligible cooperative banks under Section 2(gg) of the
DICGC Act, 1961, the Corporation has no liability.
14.10 LIMITATION
• The DICGC pays only if the bank goes into liquidation. If RBI tries to
prevent winding up and tries to revive it, DICGC will not pay.
• The National Consumer Redressal Commision held in July 2008 in

Reserve Bank of India vs. Eshwarappa that if a bank cannot be revived in
a reasonable time, the banking licence should be cancelled and the bank
should be ordered to be wound up. In that case the DICGC must pay the
amount covered by the insurance as soon as such liquidation order is
passed without waiting for further orders from the liquidator. It also held
that if the bank revived later, the amount paid by the DICGC may be
recovered from the bank.
1. Which Act is the Deposit Insurance system in India is subject to?
2. Which Banks are covered by the Deposit Insurance system?
3. Which body operates the Deposit Insurance system?
4. If there are deposits with more than one bank how is the Deposit
Insurance coverage determined?
5. If a bank goes into liquidation what is the amount DICGC is liable to pay
to each depositor?
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DEPOSIT INSURANCE
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !147
RETAIL LOANS
Chapter 15
Retail Loans
Objectives
This chapter will introduce you to retail loans.
Structure
15.1 Introduction
15.2 Secured Loans
15.3 Unsecured loans
15.1 INTRODUCTION
Retail loans are those that are given to individuals to meet their needs as
opposed to corporates to meet business or commercial imperatives.
These may be secured or unsecured.
15.2 SECURED LOANS
A secured loan is one that is given on the security of some asset. The
security for a housing loan would be the mortgage of the house; the
security for a loan to buy a car would be the hypothecation of the car. A
fixed deposit receipt is pledged when a loan is given against the security of
a fixed deposit. The retail loans that are usually secured are:
• Educational loans;
• Loans to professionals and self employed persons;
• Loans against shares and debentures;
• Vehicle loans;
• Housing loans.
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RETAIL LOANS
15.3 UNSECURED LOANS
Unsecured loans are those given to customers without taking any security.
This may be because of the reputation of the person or because of the
nature of the loan. Loans given to individuals to meet medical expenses or
holiday expenses are usually unsecured. Unsecured retail loans include:
• Personal loans;
• Some loans to professionals and self employed persons;
• Some educational loans.
The Reserve Bank has not stipulated (apart from housing, loans against
shares and education loans) on aspects of these loans. The general
features of these loans are detailed in the next few chapters. These may, of
course vary from bank to bank in some degree.
1. What is a Retail Loan?
2. What are Secured Loans?
3. Enumerate some Unsecured Loans?
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RETAIL LOANS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !150
PERSONAL LOANS
Chapter 16
Personal Loans
Objectives
This chapter will explain to whom personal loans are given and the manner
the loans are given.
Structure
16.1 Reasons for Advancing Loan

16.2 Eligibility
16.3 Types to Whom Loans Advanced
16.4 Quantum of Loan
16.5 Period of the Loan
16.6 Rate of Interest
16.7 Security
16.1 REASONS FOR ADVANCING LOAN
• Personal loans are loans advanced to individuals for a need. These could
be to meet marriage expenses, hospitalization/medical costs, costs for a
holiday or for some other need.
16.2 ELIGIBILITY
• These loans are advances to persons over the age of 18/21 who have
sufficient disposable income to repay the loan in monthly installments.
• Usually these loans are not advanced to individuals who are likely to
retire in one to two years.
• A certain minimum annual income is also expected – the quantum varies

from bank to bank.
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PERSONAL LOANS
16.3 TYPES TO WHOM LOANS ADVANCED
1. Permanent confirmed employees (minimum 1 year service) of:
• Central/state government/autonomous bodies/public/joint sector

undertakings.
• Reputed limited companies/MNCs and educational institutions.
2. Self employed professionals:
• Doctors, architects, interior designers, engineers, chartered

accountants, technical/management consultants and practising
company secretaries only, with a stable business (minimum – 1 year).
3. Insurance agents subject to:
• The agent is doing insurance business for the last 5 years.
• The agent has regular and stable income and maintaining SB account
with the bank for crediting commission cheques received from their
principals.
These will vary from organization to organization.
16.4 QUANTUM OF LOAN
• The amount that is advanced is usually based on the nature of the loan,
the take home and disposable income of the person seeking the loan.
These loans are between ` 50,000 to ` 2,00,000. The amount does vary
from bank to bank.
16.5 PERIOD OF THE LOAN
• The loan is usually repayable between twelve to twenty-four months.
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PERSONAL LOANS
16.6 RATE OF INTEREST
• The rate of interest would vary from bank to bank.
16.7 SECURITY
• These loans are usually unsecured.
1. What are Personal Loans and why are they given?
2. Who is eligible for a Personal Loan?
3. Who is not eligible for a Personal Loan?
4. What is the period of the loan?
5. How much interest is charged on Personal Loans?
6. Are these loans normally secured?
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PERSONAL LOANS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !154
CONSUMER DURABLE LOANS
Chapter 17
Consumer Durable Loans
Objectives
This chapter will explain the nature of consumer loans.
Structure
17.1 Consumer Durable Loans

17.2 Eligibility
17.5 Interest
17.6 Security
17.1 CONSUMER DURABLE LOANS
Consumer durable loans are for the purchase of consumer durables such as
washing machines, dish washers, mobile phones, refrigerators, cooking
ranges, music systems, televisions and the like.
17.2 ELIGIBILITY
• These loans are normally extended to persons over the age of 18 who
have sufficient disposable income to repay the loan in monthly
installments.
• These loans are not large and are usually below ` 1,00,000.
• They may be for an amount as low, in some cases, as ` 5,000.
• As the amounts are usually not large, normally 90% of the value (and in
cases 100%) is advanced.
! !155
• The loan is usually repayable in a period between 12 months to 36

months.
17.5 INTEREST
• The rate of interest varies from bank to bank.
17.6 SECURITY
• These are usually unsecured though at times certain equipment such as

computers may be hypothecated.
1. What is a Consumer Durable Loan?
2. What is the amount of a Consumer Durable Loan given by a bank?
3. When must the customer repay the loan?
4. Are these type of loans secured?
! !156
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !157
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
Chapter 18
Loans to Professionals and Self Employed
Persons
Objectives
This chapter will tell you of the loans granted to professionals and self
employed persons.
Structure
18.1 Nature and Eligibility

18.2 Quantum
18.5 Security
18.1 NATURE AND ELIGIBILITY
Loans to professional and self-employed persons include:
• Loans for the purpose of purchasing equipment, repairing or renovating

existing equipment and/or acquiring and repairing business premises or
for purchasing tools and/or for working capital requirements to medical
practitioners including dentists, chartered accountants, cost accountants,
practicing company secretaries, lawyers or solicitors, engineers,
architects, surveyors, construction contractors or management
consultants or to a person trained in any other art or craft who holds
either a degree or diploma from any institution established, aided, or
recognized by Government or to a person who is considered by the bank
as technically qualified or skilled in the field in which he is employed.
• Advances to accredited journalists and cameramen who are freelancers,

i.e., not employed by a particular newspaper/magazine for acquisition of
equipment by such borrowers for their professional use.
! !158
• Credits for the purpose of purchasing equipment, acquisition of premises

(strictly for business) and tools to practicing company secretaries who
are not in the regular employment of any employer.
• Financial assistance for running a health centre by an individual who is

not a doctor, but has received some formal training about the use of
various instruments of physical exercises.
• Advances for setting up beauty parlors where the borrower holds

qualification in the particular profession and undertakes the activity as
the sole means of living/earning his/her livelihood.
• Preference may be given by banks to financing professionals like doctors,

etc., who are carrying on their profession in rural or semi-urban areas.
The term also includes firms and joint ventures of such professional and
self-employed persons. This category will include all advances granted by
the bank under special schemes, if any, introduced for the purpose.
• Only such professional and self-employed persons whose borrowings

(limits) do not exceed ` 10 lakhs of which not more than ` 2 lakhs are
for working capital requirements, should be covered under this category.
However, in the case of professionally qualified medical practitioners,
setting up of practice in semi-urban and rural areas, the borrowing limits
should not exceed ` 15 lakhs with a sub-ceiling of ` 3 lakhs for working
capital requirements. Advances granted for purchase of one motor
vehicle to professional and self-employed persons other than qualified
medical practitioners will not be included under the priority sector.
• Advances granted by banks to professional and self-employed persons for

acquiring personal computers for their professional use, may be classified
in this category, provided the ceiling of total borrowings of ` 10 lakhs of
which working capital should not be more than ` 2 lakhs per borrower, is
complied with in each case for the entire credit inclusive of credit
provided for purchase of personal computer. However, home computers
should not be treated on par with personal computers and excluded from
priority sector lending.
! !159
18.2 QUANTUM
• The amount advanced will depend on the amount required, the nature of
the expense and the earnings of the professional.
• To qualify within this category it should not exceed ` 10 lakhs of which

working capital finance should not exceed ` 2 lakhs.
• The period is usually between 36 months and 60 months.
• The rate will vary from bank to bank.
18.5 SECURITY
• These loans are secured by the asset purchased with these loans.
1. Name some of the reasons that loans are advanced to Professionals and
Self-employed Individuals?
2. What is the quantum of the loan that a bank advances to a Professional

or Self-employed Individual?
3. What is the term of these loans?
4. Are these loans secured?
5. How much is advanced?
! !160
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !161
EDUCATION LOANS
Chapter 19
Education Loans
Objectives
This chapter will tell you of educational loans.
Structure
19.1 Scope
19.2 Eligibility Criteria
19.3 Expenses Considered for Loan
19.4 Quantum of Finance
19.5 Margin
19.6 Security
19.7 Documentation
19.9 Appraisal/Sanction/Disbursement
19.10 Repayment
19.11 Insurance
19.12 Follow-up Monitoring
19.13 Processing Charge
19.14 Capability Certificate
19.15 Sanction of Loan to More Than One Child from the Same Family
19.16 Minimum Age
19.17 Top-up Loans
19.18 Joint Borrower
19.19 Other Conditions
19.20 Disposal of Loan Application
19.21 Priority Sector Advance
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EDUCATION LOANS
19.1 SCOPE
The Indian Banks Association has suggested a model scheme and the
Reserve Bank has suggested that banks adhere to it as much as possible
while developing their own scheme.
The Reserve Bank suggests that the main emphasis should be to ensure
that every meritorious student though poor is provided with an opportunity
to pursue education with financial support from the banking system with
affordable terms and conditions and that no deserving student be denied
an opportunity to pursue higher education for want of financial support.
19.2 ELIGIBILITY CRITERIA
Those eligible for loans are Indian nationals who have secured admission to
professional/technical courses in India or abroad through entrance test/
merit based selection process. These institutions should be accredited by
the country of delivery. In India, institutes should be AICTE or UGC
recognized. There is no need to have secured a minimum qualifying mark.
There is no minimum age for a student to be eligible.
The courses that are eligible in India and abroad for a loan are:
Eligibility Criteria:
Student eligibility:
• The student should be an Indian National.
• Should have secured admission to a higher education course in

recognized institutions in India or Abroad through Entrance Test/Merit
Based Selection process after completion of HSC (10 plus 2 or
equivalent). However, entrance test or selection purely based on marks
obtained in qualifying examination may not be the criterion for admission
to some of the post graduate courses or research programmes. In such
cases, banks will have to adopt appropriate criteria based on
employability and reputation of the institution concerned. 
 
Note: It would be in order for banks to consider a meritorious student
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EDUCATION LOANS
(who qualifies for a seat under merit quota) eligible for loan under this
scheme even if the student chooses to pursue a course under
Management Quota.
Courses eligible:
a. Studies in India: (Indicative list)
• Approved courses leading to graduate/post graduate degree and PG

diplomas conducted by recognized colleges/universities recognized by
UGC/Govt./AICTE/ AIBMS/ICMR, etc.
• Courses like ICWA, CA, CFA, etc.
• Courses conducted by IIMs, IITs, IISc, XLRI. NIFT, NID, etc.
• Regular Degree/Diploma courses like Aeronautical, pilot training,

shipping, degree/diploma in nursing or any other discipline approved by
Director General of Civil Aviation/Shipping/Indian Nursing Council or
any other regulatory body as the case may be, if the course is pursued
in India.
• Approved courses offered in India by reputed foreign universities.
• The Madras High Court (Justice K. Suguna) directed the ICICI Bank to
extend an educational loan to S. Yoganathan a scheduled caste student
who had obtained admission in an MBA course in a private college
stating, “Educational loans are welfare measures to enable poor
students to pursue higher studies with the assistance of loan facilities
provided by banks.” In this instance the student had fulfilled all the
requirements laid down by the RBI. ICICI Bank could therefore not
deny him loan saying that he is not a meritorious student as that is not
an RBI requirement.  
 
Notes:
1. The above list is indicative in nature. Banks may approve other job
oriented courses leading to technical/professional degrees, post
graduate degrees/ diplomas offered by recognized institutions
under this scheme.
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EDUCATION LOANS
2. Courses other than the above offered by reputed institutions may

also be considered on the basis of employability.
3. Banks must consider meritorious students pursuing courses

offered under management quota.
Studies abroad:
• Graduation: For job oriented professional/technical courses offered by

reputed universities.
• Post graduation: MCA, MBA, MS, etc.
• Courses conducted by CIMA-London, CPA in USA, etc.
• Degree/diploma courses like aeronautical, pilot training, shipping etc

provided these are recognized by competent regulatory bodies in India/
abroad for the purpose of employment in India/abroad.
19.3 EXPENSES CONSIDERED FOR LOAN
(i) Fee payable to college++/school/hostel*
(ii) Examination/Library/Laboratory fee
(iii) Travel expenses/passage money for studies abroad
(iv) Insurance premium for student borrower, if applicable
(v) Caution deposit, Building fund/refundable deposit supported by

Institution bills/ receipts.**
(vi) Purchase of books/equipments/instruments/uniforms.***
(vii) Purchase of computer at reasonable cost, if required for completion of

the course.***
(viii)Any other expense required to complete the course - like study tours,
project work, thesis, etc.***
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EDUCATION LOANS
(ix) While computing loan required, scholarships, fee waiver, etc., if any
available to the student borrower may be taken into account.
Notes:
++ For courses under Management quota seats considered under the

scheme, fees as approved by the State Government/Government approved
regulatory body for payment seats will be taken, subject to viability of
repayment.
* Reasonable lodging and boarding charges will be considered in case

the student chooses/is required to opt for outside accommodation.
** These expenses could be considered subject to the condition that the

amount does not exceed 10% of the total tuition fees for the entire course.
*** It is likely that expenditure under Item Nos. vi, vii & viii above may
not be available in the schedule of fees and charges prescribed by the
college authorities. Therefore, a realistic assessment may be made of the
requirement under these heads. However, the maximum expenses included
under vi, vii & viii may be capped at 20% of the total tuition fees payable
for completion of the course.
19.4 QUANTUM OF FINANCE
Need based finance to meet the expenses that are eligible will be
considered taking in to account margins mentioned subject to the following
ceilings:
• Studies in India – Maximum upto ` 10 lakhs.

• Studies Abroad – Maximum upto ` 20 lakhs.
Note:
The ceilings fixed for studies in India and Abroad correspond to the limits
fixed by the RBI for treatment as priority sector lending. Banks may
consider higher quantum of loan on course to course basis, (e.g., courses
in IIMs, ISB, etc). It may also be noted that even loans in excess of `
10 lakhs qualify for interest subsidy under Central Sector Interest Subsidy
Scheme for loans up to ` 10 lakhs.
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EDUCATION LOANS
19.5 MARGIN
Upto – ` 4 lakhs Nil

Above – ` 4 lakhs Studies in India 5%
Studies Abroad 15%
• Scholarship/assistantship to be included in margin.
• Margin may be brought-in on year-to-year basis as and when

disbursements are made on a pro-rata basis.
19.6 SECURITY
Upto ` 4 lakhs Parents to be joint borrower(s).

Above ` 4 lakhs No security
and upto ` 7.5 lakhs Besides the parent(s) executing the documents as
joint borrower(s), collateral security in the form of
suitable third party guarantee will be taken. The
bank may, at its discretion, in exceptional cases,
waive third party guarantee if satisfied with the
net-worth/means of parent/s who would be
executing the document as joint borrower(s).
Above ` 7.5 lakhs Parent(s) to be joint borrower(s) Tangible
collateral security of suitable value acceptable to
bank, along with the assignment of future income
of the student for payment of instalments.
19.7 DOCUMENTATION
• The loan documents should be executed by both the student and the
parent/guardian as joint-borrower.
• The security can be in the form of land/building/Government securities/

Public Sector Bonds/Units of UTI, NSC, KVP, life policy, gold, shares/
mutual fund units/ debentures, bank deposit in the name of student/
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EDUCATION LOANS
parent/guardian/any other third party or any other tangible security

acceptable to the bank with suitable margin.
• Wherever the land/building is already mortgaged, the unencumbered

portion can be taken as security on second charge basis provided it
covers the required loan amount.
Interest to be charged at rates linked to the Base rate as decided by

individual banks.
• Simple interest to be charged during the study period and up to

commencement of repayment. 
 
Note: Servicing of interest during study period and the moratorium
period till commencement of repayment is optional for students. Accrued
interest will be added to the principal amount borrowed while fixing EMI
for repayment.
19.9 APPRAISAL/SANCTION/DISBURSEMENT
• Applications will be received either directly at bank branches or through

on-line mode. Upon receipt of application, standard acknowledgement
giving a reference number will be issued. The acknowledgement will
contain contact details of the bank official who, could be contacted in
case of delay in disposal of application.
• Normally, sanction/rejection will be communicated within 15 days of

receipt duly completed application with supporting documents.
• In the normal course, while appraising the loan, the future income
prospect of the student only will be looked into.
• Rejection of loan application, if any, shall be done with the concurrence of

the controlling authority of the branch concerned and conveyed to the
student stating reason for rejection.
• Students may submit their loan applications either at the bank branches
near to the residence of parents or to the educational institution.
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EDUCATION LOANS
However, after the loan is sanctioned, the cases be transferred to the

bank branch near to the institution for follow up with student/institution.
The KYC compliance for the purpose has to be done by the branch
nearest to the residence of parents.
• The loan to be disbursed in stages as per the requirement/demand

directly to the Institutions/Vendors of equipments/instruments to the
extent possible.
19.10 REPAYMENT
Repayment holiday/Moratorium Course period + 1 year or 6 months after

getting job, whichever is earlier.
If the student is not able to complete the course within the scheduled time,
extension of time for completion of course may be permitted for a
maximum period of 2 years. If the student is not able to complete the
course for reasons beyond his control, sanctioning authority may at his
discretion consider such extensions as may be deemed necessary to
complete the course. In case the student discontinues the course midway,
appropriate repayment schedule will be worked out by the bank in
consultation with the student/parent.
• The accrued interest during the repayment holiday period to be added to

the principal and repayment in Equated Monthly Instalments (EMI) fixed.
• 1% interest concession may be provided by the bank, if interest is

serviced during the study period and subsequent moratorium period prior
to commencement of repayment. Repayment of the loan will be in
equated monthly instalments for periods as under: 
 
For loans upto ` 7.5 lakhs – upto 10 years  
For loans above ` 7.5 lakhs – upto 15 years
• While EMI based repayment is the generally accepted practice, many

times the salary levels at the start of the career may not facilitate
comfortable payment of EMI in certain cases, (e.g., professionals like
Doctors). Telescoping of repayment with stepped up instalments with
passage of time may be considered in such cases. 
! !169
EDUCATION LOANS
Note: No prepayment penalty will be levied for prepayment of loan any

time during the repayment period.
19.11 INSURANCE
Banks may, with the consent of the student, arrange for life insurance
policy on the students availing Education Loan. Individual Banks may work
out the modalities with insurance companies.
19.12 FOLLOW-UP MONITORING
Banks to contact college/university authorities to obtain progress report on

the student at regular intervals in respect of those who have availed loans.
In case of studies abroad, bank may obtain the SSN/Unique Identification
Number (UIN)/Identity Card and note the same in the bank’s records. The
UID number issued by UIDIA may also be captured in bank’s system as
and when available. Banks to enter into Memorandum of Understanding
(MoU) with the educational institutions to provide the educational loans to
the students. There should be an annual review of the asset quality of
educational loans between banks and educational institution.
19.13 PROCESSING CHARGE
No processing/upfront charges may be levied on loans sanctioned under

the scheme. (Banks may charge processing fee for considering loans for
studies abroad. The fee would, however, be refunded upon the student
taking up the course)
19.14 CAPABILITY CERTIFICATE
Banks can also issue the capability certificate for students going abroad for
higher studies. For this purpose financial and other supporting documents
may be obtained from applicant, if required.
(Some of the foreign universities require the students to submit a

certificate from their bankers about the sponsors' solvency/financial
capability, with a view to ensure that the sponsors of the students going
abroad for higher studies are capable of meeting the expenses till
completion of studies.)
! !170
EDUCATION LOANS
19.15 SANCTION OF LOAN TO MORE THAN ONE CHILD

FROM THE SAME FAMILY
Existence of an earlier education loan to the brother(s) and/or sister(s) will

not affect the eligibility of another meritorious student from the same
family obtaining education loan as per this scheme from the bank.
19.16 MINIMUM AGE
There is no specific restriction with regard to the age of the student to be

eligible for education loan. However, if the student was a minor while the
parent executed documents for the loan, the bank will obtain a letter of
ratification from him/her upon attaining majority.
19.17 TOP-UP LOANS
Banks may consider top-up loans to students pursuing further studies

within the overall eligibility limit, if such further studies are commenced
during the moratorium period of the first loan. The repayment of the loan
will commence after the completion of the second course and further
moratorium period, as provided under the scheme.
19.18 JOINT BORROWER
The joint borrower should normally be parent(s)/guardian of the student

borrower. In case of a married person, joint borrower can be either spouse
or the parent(s)/parents-in-law.
19.19 OTHER CONDITIONS
• Banks should not pass on loan applications to other banks for reasons
such as applicant not falling within the area of a particular bank.
• Banks wishing to support exceptionally meritorious/deserving students

without security may delegate such powers to a fairly higher level
authority.
! !171
EDUCATION LOANS
• In case of receipt of application for more than one loan for a student
borrower from a family, the family as a unit has to be taken into account
for considering the loan and security in relation to the quantum of
finance disbursed subject to repayment capacity of the parent/student.
• Banks may consider top up loans to students pursuing further studies

within the overall eligibility limit subject to taking required security.
• The co-obligator should be the parent/guardian of the student borrower.

In case of a married person, co-obligator can be either spouse or the
parents/parents in law.
• No Due Certificate (NDC) need not be insisted upon as a pre-condition

for considering an education loan. However, banks may obtain a
declaration/an affidavit confirming that no loans are availed from other
banks.
• Loan applications have to be disposed off within a period of 15 days to 1

month, but not exceeding the time norms stipulated for disposing of loan
applications under priority sector lending.
• In order to bring flexibility in terms like eligibility, margin, security

norms, banks may consider relaxation in the norms on a case to case
basis delegating the powers to a fairly higher level authority.
• The Reserve Bank has stated that banks should not refuse to process a
loan because the applicant is not within the area of operation of a
particular branch or if the domicile of the applicant falls under the service
area of another bank or if the applicant is overage, etc.
19.20 DISPOSAL OF LOAN APPLICATION
Loan applications have to be disposed of in the normal course within a

period of 15 days to 1 month, but not exceeding the time norms stipulated
for disposing of loan applications under priority sector lending.
19.21 PRIORITY SECTOR ADVANCE
• Education loans upto the limits stipulated will be considered priority

sector advances.
! !172
EDUCATION LOANS
1. Who are eligible for Educational Loans?
2. Mention some of the courses eligible for Educational Loans.
3. What is the maximum amount available on an Educational Loan?
4. What security is required against Educational Loans?
5. What is the rate of interest charge and is there any penal interest?
! !173
EDUCATION LOANS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !174
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
Chapter 20
Loan for Vocational Education and Training
Objectives
These Educational Loans for Vocational Courses aims at providing financial

support from the banking system to those who, have the minimum
educational qualification, as required by the institution/organization
running the course eligible under the scheme.
Structure
20.1 Eligibility
20.2 Courses Eligible
20.3 Minimum Age
20.4 Quantum of Finance
20.5 Expenses Considered for Loan
20.6 Margin
20.8 Processing Charges
20.9 Security
20.10 Moratorium Period
20.11 Repayment
20.12 Insurance
20.13 Prepayment
20.14 Other Terms and Conditions
! !175
20.1 ELIGIBILIY
• The student should be an Indian National.
• Has secured admission in a course run or supported by a Ministry/Dept./

Organisation of the Government or a company/society/organization
supported by National Skill Development Corporation or State Skill
Missions/State Skill Corporations, preferably leading to a certificate/
diploma/degree, etc., issued by a Government organization or an
organization recognized/authorized by the Government to do so.
20.2 COURSES ELIGIBLE
Vocational/Skill development courses of duration from 2 months to 3 years

run or supported by a Ministry/Dept./Organisation of the Government or a
company/society/ organization supported by National Skill Development
Corporation or State Skill Missions/State Skill Corporations, preferably
leading to a certificate/diploma/degree, etc., issued by a Government
organization or an organization recognized/authorized by the Government
to do so. State Level Bankers Committee (SLBC)/State Level Coordination
Committee (SLCC) may add other skill development courses/programmes,
having good employability.
20.3 MINIMUM AGE
There is no specific restriction with regard to the age of the student to be

eligible for education loan. However, if the student was a minor, while the
parent executes documents for the loan, the bank will obtain a letter of
ratification from him/her upon attaining majority.
20.4 QUANTUM OF FINANCE
Need-based finance to meet expenses as worked out under para 6 below

will be considered subject to the following ceilings:
• For courses of duration upto 3 months ` 10,000/-

• For courses of duration from 3 to 6 months ` 25,000/-
! !176
• For courses of duration upto 1 year ` 50,000/-

• For courses of duration above 1 year ` 1,50,000/-
Banks may, at their discretion, consider limits upto ` 75,000/- for courses
with duration upto 1 year and limits upto ` 2 lakhs courses with duration
above one year for specific courses offered by reputed institutions having
regard to the nature of such courses and employability (ability to repay out
of job earnings).
20.5 EXPENSES CONSIDERED FOR LOAN
1. Tuition/course fee.
2. Examination/Library/Laboratory fee.
3. Caution deposit.
4. Purchase of books, equipments and instruments.
5. Any other reasonable expenditure found necessary for completion of the
course. (As such courses are localized boarding, lodging may not be
necessary. However, wherever it has been found necessary, the same
could be considered on merits).
20.6 MARGIN
Nil
Interest rate to be charged linked to the base rate of banks as decided by

the individual banks or at reduced rate, if an interest subsidy is provided
by the Central/State Government to all or a class of beneficiaries proposed
to be targeted. Simple Interest will be charged during the study period and
upto commencement of repayment.
Notes:
• Servicing of interest during study period and the moratorium period till
commencement of repayment is optional for students.
! !177
• 1% interest concession may be provided by the bank, if interest is

serviced during the study period and subsequent moratorium period prior
to commencement of repayment.
20.8 PROCESSING CHARGES
Nil
20.9 SECURITY
No collateral or third party guarantee will be taken. However, the parent

will execute loan document alongwith the student borrower as joint
borrower.
20.10 MORATORIUM PERIOD
Upon completion of the course, repayment will start after a moratorium

period as indicated below:
• for courses of duration upto 1 – 6 months from the completion of the

year course.
• for courses of duration above 1 – 12 months from the completion of the
year course.
20.11 REPAYMENT
The loan will be repaid after the moratorium period in Equated Monthly
Instalments (EMIs) as follows:
• Loans upto ` 50,000 - Upto 2 years

• Loans between ` 50,000 to ` 1 lakh - 2 to 5 years
• Loans above ` 1 lakh - 3 to 7 years
! !178
20.12 INSURANCE
Optional at the requirement of the borrower.
20.13 PREPAYMENT
The borrower can repay the loan any time after commencement of
repayment without having to pay any prepayment charges.
20.14 OTHER TERMS AND CONDITIONS
Other terms and conditions as applicable to the Educational Loan Scheme

for pursuing higher education in “ndia & Abroad” will be applicable to this
scheme also.
1. Who are eligible?
2. What courses are eligible for loan?
3. What is the minimum age required.
4. What are the quantum of finance?
5. What is the period?
! !179
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !180
VEHICLE LOANS
Chapter 21
Vehicle Loans
Objectives
This chapter will tell you of vehicle loans.
Structure
21.1 Vehicle Loans

21.2 Eligibility
21.5 Repayment
21.6 Security
21.7 Insurance
21.8 Guarantor
21.9 Seizure on Non-payment of Installments
21.1 VEHICLE LOANS
Vehicle loans are advanced to enable individuals:
• Purchase new two-wheeler/motorcar of any make for private use or

professional or business use.
• Purchase second hand/used two-wheeler/motorcar not more than 5

years old.
21.2 ELIGIBILITY
• Most banks expect the applicant to be at least 21 years of age and not
more than 60 years old.
• As a safety criteria to satisfy themselves that the person has the ability
to repay other aspects may be looked at such as for how long the person
has been employed, other assets and the like.
! !181
VEHICLE LOANS
• In addition the net take home pay/disposable income will be checked to

determine whether the applicant can repay the loan.
• With regard to professionals & self employed persons such as doctors,

engineers, architects, chartered accountants, lawyers, consultants,
agriculturists, businessmen etc. their income should be adequate to pay
the monthly installments.
• While this may vary, usually the loan is up to 80% (in case of both new
and old vehicles; but not older than 5 years) of the cost/invoice value of
the vehicle including accessories and registration expenses in the case of
new vehicles.
• The rate of interest will vary from bank to bank.
21.5 REPAYMENT
• Entire loan with interest is required to be paid in 36 to 60 equated

monthly installments.
21.6 SECURITY
• Hypothecation of vehicles purchased out of bank finance.
• Hire purchase is to be noted in the registration book issued by the

Regional Transportation Officer.
21.7 INSURANCE
• The vehicle purchased must be comprehensively insured to its full value

with a clause stating that if it is damaged beyond repair, the insurance
money be paid to the bank.
! !182
VEHICLE LOANS
21.8 GUARANTOR
• As an additional security, at times a guarantor acceptable to the bank is

taken as guarantor.
21.9 SEIZURE ON NON-PAYMENT OF INSTALLMENTS
• The Kolkata High Court has held that an owner’s right to a vehicle is lost
if he defaults on EMIs and that financiers are not guilty of flouting right
to property if they repossess the vehicles. (GE Transportation Financial
Services Ltd).
• The Finance Ministry along with the RBI is finalising a proposal which
allow lenders to re possess vehicle in case of repayment defaults. Cars
and two wheelers may be brought under the ambit of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act.
• In a circular to NBFCs the RBI stated that to ensure transparency, the

terms and conditions of the contract/loan agreement should also contain
provisions regarding: (a) notice period before taking possession; (b)
circumstances under which the notice period can be waived; (c) the
procedure for taking possession of the security; (d) a provision regarding
final chance to be given to the borrower for repayment of loan before the
sale/auction of the property; (e) the procedure for giving repossession to
the borrower and (f) the procedure for sale/auction of the property. A
copy of such terms and conditions must be made available to the
borrowers. Banks should furnish a copy of the loan agreement along with
a copy each of all enclosures quoted in the loan agreement to all the
borrowers at the time of sanction/ disbursement of loans, which may
form a key component of such contracts/loan agreements.
• The circular mentioned above distinguishes between recovery and

repossession agents. The former is behind the defaulter whereas the
latter is behind the underlying security.
! !183
VEHICLE LOANS
1. Who is eligible for a Vehicle Loan?
2. What is the quantum of a Vehicle Loan?
3. What security is expected on a Vehicle Loan?
4. Why is insurance required?
! !184
VEHICLE LOANS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !185
LOANS AGAINST SHARES AND DEBENTURES
Chapter 22
Loans Against Shares and Debentures
Objectives
This chapter will tell you how loans can be advanced for the purchase of
shares and debentures.
Structure
22.1 Introduction
22.2 Advances to Individuals
22.3 Advances against Units of Mutual Funds
22.4 General Guidelines
22.5 Interest
22.6 Prohibitions
22.7 Ceiling
22.1 INTRODUCTION
• Advances against security of shares/debentures/bonds may be given to

individuals, share and stock-brokers and market makers.
22.2 ADVANCES TO INDIVIDUALS
• Banks may grant advances against the security of shares, debentures or

bonds to individuals subject to the following conditions:
(i) Loans against shares, debentures and bonds of public sector

undertakings (PSUs) may be granted to individuals to meet
contingencies and personal needs or for subscribing to rights or new
issues of shares/debentures/bonds or for purchase in the secondary
market, against the security of shares/debentures/ bonds held by
the individual.
(ii) Loans against the security of shares, debentures and PSU bonds
should not exceed the limit of ` 10 lakhs per borrower if the
! !186
securities are in physical form and ` 20 lakhs per borrower if the

securities are in dematerialized form.
(iii) Loans against shares should not be given to partnerships/

proprietory concerns.
(iv) Banks can grant advances to employees for purchasing shares of

their own companies under Employee Stock Option Plans to the
extent of 90% of the purchase price or ` 20 lakhs whichever is
lower.
(v) Banks should maintain a minimum margin of 50 percent of the

market value of equity shares/convertible debentures held in
physical and dematerialized form. These are minimum margin
stipulations and banks may stipulate higher margins for shares
whether held in physical form or dematerialized form. The margin
requirements for advances against preference shares/non-
convertible debentures and bonds may be determined by the banks
themselves.
(vi) Each bank should formulate with the approval of the board a lending
policy for grant of advances to individuals against shares/
debentures/bonds keeping in view the general guidelines given by
the Reserve Bank. Banks should obtain a declaration from the
borrower indicating the extent of loans availed of by him from other
banks as input for credit evaluation. It would also be necessary to
ensure that such accommodation from different banks is not
obtained against shares of a single company or a group of
companies. As a prudential measure, each bank may also consider
laying down an aggregate limit of such advances.
22.3 ADVANCES AGAINST UNITS OF MUTUAL FUNDS
• While granting advances against units of mutual funds, banks should

follow the guidelines given below:
(i) The units should be listed in the stock exchanges or repurchase

facility for the units of mutual funds should be available at the time
of lending.
! !187
(ii) The units should have completed the minimum lock-in-period

stipulated in the relevant scheme.
(iii) The amount of advances should be linked to the net asset value
(NAV)/repurchase price or the market value, whichever is less and
not to the face value.
(iv) The advance would attract the quantum and margin requirements
as applicable to advance against shares and debentures wherever
stipulated. The margin should be calculated on the NAV/repurchase
price or market value, whichever is less.
(v) The advances should be purpose-oriented, taking into account the

credit requirement of the investor. Advances should not be granted
for subscribing to or boosting up the sales of another scheme of the
mutual funds or for the purchase of shares/debentures/bonds.
22.4 GENERAL GUIDELINES
(i) Statutory provisions regarding the grant of advances against shares

contained in Sections 19 (2) and (3) and 20 (1) (a) of the Banking
Regulation Act 1949 should be strictly observed.
(ii) Banks should be concerned with what the advances are for, rather than
what the advances are against. While considering grant of advances
against shares/ debentures banks must follow the normal procedures
for the sanction, appraisal and post sanction follow-up.
(iii) Advances against the primary security of shares/debentures/bonds

should be kept distinct and separate and not combined with any other
advance.
(iv) Banks should satisfy themselves about the marketability of the shares/
debentures and the net worth and working of the company whose
shares/debentures/bonds are offered as security.
(v) Shares/debentures/bonds should be valued at prevailing market prices

when they are lodged as security for advances.
! !188
22.5 INTEREST
• Banks are free to determine the rate of interest without reference to the
Bank’s base rate.
22.6 PROHIBITIONS
• Banks cannot sanction loans to trusts and endowments against the

security of shares and debentures.
• Banks cannot sanction loans against the equity shares of the banking
company to its directors.
• Banks cannot advance loans to their employees through employee trusts

set up by them under ESOP/IPO or from the secondary market.
22.7 CEILING
• A bank’s total exposure including both fund based and non-fund based to
the capital market in all forms (including advances to individuals) must
not exceed 5% of its total advances as on March 31 of the previous year.
• Within this ceiling the bank’s direct investment should not exceed 20% of
its net worth.
1. What is the extent of the loan that can be granted against Shares,
Debentures and bonds of public sector undertakings?
2. What is the extent of the loan that can be granted to employees to

purchase shares under Employee Stock Option Plans?
3. What are the guidelines that a bank must follow when granting loans
against units of mutual funds?
4. Against what instruments may a bank not advance loans?
! !189
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !190
HOUSING FINANCE
Chapter 23
Housing Finance
Objectives
This chapter will tell you how loans are advanced to purchase houses.
Structure
23.1 Housing Finance

23.2 Types of Direct Housing Finance
23.3 Supplementary Finance
23.4 Indirect Housing Finance
23.5 Housing Loans
23.6 Housing Loan for Building Construction
23.7 Housing Loan for Purchase of Constructed Property/Built-up Property
23.8 Unauthorised Colonies
23.9 Commercial Property
23.10 Eligibility
23.11 Quantum
23.12 Loan to Value (LTV) Ratio
23.13 Term of the Loan
23.15 Repayment
23.16 Security
! !191
HOUSING FINANCE
23.1 HOUSING FINANCE
Direct housing finance refers to finance provided to individuals or groups of

individuals including co-operative societies.
The Reserve Bank has stated that banks are free to evolve their own
guidelines with the approval of their boards on aspects such as security,
margin, age of dwelling units, repayment schedule, etc.
23.2 TYPES OF DIRECT HOUSING FINANCE
The following types of bank finance are considered direct housing finance:
• Bank finance extended to a person who already owns a house in a town/

village where he resides, for buying/constructing a second house in the
same or other town/village for the purpose of self-occupation.
• Bank finance extended for the purchase of a house by a borrower who

proposes to let it out on a rental basis on account of his posting outside
the headquarters or because he has been provided accommodation by
his employer.
• Bank finance extended to a person who proposes to buy an old house

where he is presently residing as a tenant.
• Bank finance granted only for purchase of a plot, provided a declaration

is obtained from the borrower that he intends to construct a house on
the said plot, with the help of bank finance or otherwise, within such
period as may be laid down by the banks themselves.
23.3 SUPPLEMENTARY FINANCE
• Banks may consider requests for additional finance within the overall
ceiling for carrying out alterations/additions/repairs to the house/flat
already financed by them.
• In the case of individuals who might have raised funds for construction/
acquisition of accommodation from other sources and need
supplementary finance, banks may extend such finance after obtaining
! !192
HOUSING FINANCE
pari passu or second mortgage charge over the property mortgaged in

favor of other lenders and/or against such other security, as they may
deem appropriate.
23.4 INDIRECT HOUSING FINANCE
• Banks must ensure that their indirect housing finance is channeled by

way of term loans to housing finance institutions, housing boards, other
public housing agencies, etc., primarily for augmenting the supply of
serviced land and constructed units. It should also be ensured that the
supply of plots/houses is time bound and public agencies do not utilize
the bank loans merely for acquisition of land. Similarly, serviced plots
should be sold by these agencies to co-operative societies, professional
developers and individuals with a stipulation that the houses should be
constructed thereon within a reasonable time, not exceeding three years.
For this purpose, the banks may take advantage of various guidelines
issued by NHB for augmenting the supply of serviced land and
constructed units.
23.5 HOUSING LOANS
Housing Loans are advanced for:
• The purchase of a house/flat or the purchase of a plot of land for the

construction of a house.
• The renovation/repair of an existing house/flat.
• Extending an existing house.
• Short-term bridge finance while purchasing another house/flat.
23.6 HOUSING LOAN FOR BUILDING CONSTRUCTION
This is extended when the applicant owns land and approaches the bank
for a loan to construct a house. The bank should:
Ask for a copy of the sanctioned plan;
! !193
HOUSING FINANCE
• Obtain an Affidavit-cum-undertaking from the applicant that he’d not

violate the sanctioned plan and that he will obtain completion certificate
within three months of completion of construction failing which the bank
can recall the entire loan with interest and other costs/charges;
• Have the construction at its various stages certified by the bank’s own
architects (appointed by the bank).
23.7 HOUSING LOAN FOR PURCHASE OF CONSTRUCTED

PROPERTY/BUILT-UP PROPERTY
(i) In cases where the applicant approaches the Bank/FIs for a credit
facility to purchase the built up house/flat, it should be mandatory for
him to declare by way of an affidavit-cum-undertaking that the built up
property has been constructed as per the sanctioned plan and/or
building bye-laws and as far as possible has a completion certificate
also.
(ii) An Architect appointed by the bank must also certify before

disbursement of the loan that the built up property is strictly as per
sanctioned plan and/or building bye-laws.
23.8 UNAUTHORISED COLONIES
• No loan should be given until they have been regularized.
23.9 COMMERCIAL PROPERTY
• No loan should be given for properties meant for residential use but
which applicant intends to use for commercial purposes and declares so
while applying for the loan.
23.10 ELIGIBILITY
• Those eligible are all individuals above the age of 18 years with adequate
income to repay the loan in equated monthly installments.
! !194
HOUSING FINANCE
• Housing loans are not normally extended to individuals who are above 58
years of age as they would retire in a short while.
23.11 QUANTUM
• The quantum will vary from bank to bank. Banks would normally
stipulate a minimum of ` 1,00,000. The maximum would depend on the
bank and could vary from `10 lakhs to ` 2 crores or more.
• The loan amount for repairs would normally be less – usually around `
10 lakhs.
• The amount advanced will be based on the individual’s gross pay or take
home pay or net disposable income – the criteria differs from one bank
to another.
23.12 LOAN TO VALUE (LTV) RATIO
Earlier the LTV ratio in respect of housing loans was not exceed 80 per
cent. However, for small value housing loans, i.e., housing loans up to ` 20
lakh (which get categorized as priority sector advances), the LTV ratio was
not to exceed 90 per cent.
With effect from June 21, 2013 these norms have been revised and the
following LTV ratios have to be maintained by banks in respect of individual
housing loans.
Category of Loan LTV Ratio (%)
(a) Individual Housing Loans
Upto ` 20 lakh 90
Above ` 20 lakh & upto ` 75 lakh 80
Above ` 75 lakh 75
(b) CRE – RH NA
! !195
HOUSING FINANCE
The LTV ratio should not exceed the prescribed ceiling in all fresh cases of
sanction. In case the LTV ratio is currently above the ceiling prescribed for
any reasons, efforts should be made to bring it within limits.
The RBI has noticed that banks adopt different practices for deciding the
value of the house property while sanctioning housing loans. Some banks
include stamp duty, registration and other documentation charges in the
cost of the house property. As this overstates the realisable value of the
property as stamp duty, registration and other documentation charges are
not realizable, the margin stipulated gets diluted. Accordingly, RBI has
stated banks should not include these charges in the cost of the housing
property they finance so that the effectiveness of LTV norms is not diluted.
23.13 TERM OF THE LOAN
• The term is dependant on the age of the buyer – the intent being that it
should be repaid before the person retires.
• Most loans are for 15 to 25 years. Loans to self-employed people are

sometimes for a shorter duration.
• Interest may be fixed or floating.
23.15 REPAYMENT
• Repayment is made in Equated Monthly Installments (EMI) which

comprises of both interest an principal repayment.
23.16 SECURITY
• The property purchased is usually the security and a mortgage is taken

on the property.
• As an additional security guarantees may be taken.
! !196
HOUSING FINANCE
1. What are the different types of direct Housing Finance provided by

banks?
2. In what ways does a bank provide indirect Housing Finance?
3. What is a Housing loan?
4. Who is usually not eligible for a Housing Loan?
5. How much is advanced as a loan?
6. What is required by the bank as security for the loan?
! !197
HOUSING FINANCE
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !198
REVERSE MORTGAGE LOANS
Chapter 24
Reverse Mortgage Loans
Objectives
This chapter will tell you of the factors that should be considered while
reverse mortgage loans.
Structure
24.1 Introduction
24.2 Purpose
24.3 Eligibility
24.4 Maximum Amount
24.5 Margin
24.6 Option to Adjust Payments
24.7 Maintenance
24.8 Repayment of Loan
24.10 Security
24.11 Tenure
24.12 Insurance
24.1 INTRODUCTION
Reverse Mortgage is a home loan product designed for senior citizens by

converting their fixed asset – their home (equity in any house property)
into an income channel without having to encash their rights for any
requirement.
24.2 PURPOSE
To supplement the cash flow stream of senior citizens in order to address

their financial needs.
! !199
24.3 ELIGIBILITY
• Should be Senior Citizen of India, above 60 years of age.
• Married couples will be eligible as joint borrowers provided one of them is

above 60 years of age and age of spouse is not below 55 years at the
time of application.
• Should be the owner of a residential property (house or flat) located in

India in his/her own name.
Residential property should be used as permanent primary residence (fully

self occupied property).
Commercial property will not be taken as a security under the product.
24.4 MAXIMUM AMOUNT
Although no maximum has been stipulated, most banks would give a

maximum loan amount of ` 1 crore inclusive of interest for the entire
tenure of the loan (subject to value of the property).
24.5 MARGIN
The margin kept is usually 20%. Therefore for a house of ` 1 crore, the
loan advanced will not exceed ` 80 lakhs.
24.6 OPTION TO ADJUST PAYMENTS
The Bank normally keep the option to revise periodic annuity amount, if
lump-sum payment is taken or at the interval of every 5 years based on
valuation of the property.
24.7 MAINTENANCE
The borrower is expected to maintain the property and pay taxes, etc.
! !200
24.8 REPAYMENT OF LOAN
No repayment is required as long as the borrower/s lives.
The loan becomes due and payable when the last surviving borrower dies
or would like to sell the home/permanently moves out of the home for
aged care to an institution or relatives. The loan will then become due for
recovery and payable.
• Settlement of loan, along with accumulated interest, to be met by the

proceeds received out of sale of residential property.
• The borrower(s) or his/her/their estate shall be provided with the first

right to settle the loan along with accumulated interest, without sale of
property. A reasonable period of 2 months may be provided when
repayment is triggered, for house to be sold.
This could be at Fixed Rate Option (subject to re-set clause after every 3/5
years) or at Floating Rate Option.
24.10 SECURITY
Simple/Equitable mortgage of the Residential property.
24.11 TENURE
This is usually 15 years. The tenure may further be extended till survival of
the borrower/s subject to advance value of the property.
24.12 INSURANCE
The property mortgaged must be insured.
! !201
1. What is a reverse Mortgage Loan?
2. Who is eligible for a reverse Mortgage Loan and what is the maximum
amount of loan that will be granted to him?
3. How is the loan repaid?
4. What is the tenure of the loan?
! !202
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !203
RETAIL CREDIT ANALYSIS
Chapter 25
Retail Credit Analysis
Objectives
This chapter will tell you of the factors that should be considered while
advancing retail loans.
Structure
25.1 Retail Credit Analysis

25.2 Principles of Sound Lending
25.3 Characteristics
25.4 Dangers
25.5 Risk Containment
25.6 Documents to be Checked
25.7 Other Verification
25.8 Safety Indicators
25.1 RETAIL CREDIT ANALYSIS
• Retail credit analysis relates to the determination of the credit worthiness

of an individual before a loan is disbursed. It is different from lending to
companies as the amounts involved are much smaller and are given to
support a lifestyle as opposed to run a business.
• Lending is fraught with risk as the loan may not get repaid.
• The cost of a bad loan is high. If a bank lends ` 1,00,000 and the bank’s
earning (rate of interest charged less cost of funds) on it is 5%, the bank
would need to lend ` 20,00,000 for one year if the loan goes bad.
• Additionally, in retail credit the risk is that the loan is usually given to an
individual and often there is no information on the credit worthiness of
the person easily available. In corporate lending one has balance sheets,
profit and loss accounts and other data.
! !204
25.2 PRINCIPLES OF SOUND LENDING
The factors one should look at are:
• The purpose the loan is being sought for,

• The ability of the borrower to repay,
• The term the loan is sought for,
• The integrity of the borrower. If there is any doubt on this score, the loan
should not be disbursed.
25.3 CHARACTERISTICS
• Loan given to individuals.

• Very often there is no collateral.
• Given often on a gut feeling that the individual will repay.
25.4 DANGERS
• The individual is a risk. The person may not want to repay. As a rule
employed persons are better risks than self-employed/unemployed
persons. Women are better risks than men.
• The class of society the person comes from has an effect on the risk.
Middle-class persons are better risks than affluent/poor people.
• The area a person stays is significant. Certain areas have a higher rate of
default.
• The profession the person pursues is important. Banks have considered

certain professions such as lawyers, government officers etc. as negative
profiles and not creditworthy. The Delhi State Consumer Disputes
Redressal Commission in February 2008 asked banks to stop
discrimination in providing loans and credit cards on the basis of a
person’s profession or designation and fined a bank ` 10 lakhs for
“defaming and demeaning the legal profession” for rejecting a lawyer’s
application because of a negative profile.
• Sales are being done by direct selling agents. The risk in this instance is
that they have a vested interest in the loan being disbursed (as they are
remunerated on the number of loans sourced).
! !205
• The asset may be difficult to repossess.
25.5 RISK CONTAINMENT
• Determine the nature of the work done by the person.

• The individual’s past credit history (if available).
• Do not lend to people in certain professions.
• Check the area the person stays in.
• Check the individual’s take home salary, net disposable income and
spending pattern.
• Ascertain the number of dependants.
• Check whether there are imminent expenditure imperatives like a
daughter’s marriage.
25.6 DOCUMENTS TO BE CHECKED
• Identity.
• PAN card.
• Salary slips if employed or financial statements for atleast two years if
self employed.
• Address.
• Credit card/loan repayment history.
• Bank statements.
• Documents supporting assets owned such as house.
25.7 OTHER VERIFICATION
• Address verification.
• Office verification.
25.8 SAFETY INDICATORS
• House owner.
• Loan will be repaid before retirement.
• Borrower has adequate resources to repay.
• Good loan record.
• Credit card holder with no history of default.
! !206
1. What is Retail Credit Analysis?
2. What are the factors that should be looked at when lending?
3. Mention some of the risks involved in lending?
4. How can a bank minimize the risks?
5. What are some of the safety indicators when considering sanctioning a

loan?
! !207
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !208
FAIR PRACTICES CODE FOR LENDERS
Chapter 26
Fair Practices Code for Lenders
Objectives
This chapter will tell you the fair practices code that banks are required to
adhere to.
Structure
26.1 Introduction
26.2 Applications for Loans and their Processing
26.3 Loan appraisal and Terms/Conditions
26.4 Disbursement of Loans Including Changes in Terms and Conditions
26.5 Post-disbursement Supervision
26.6 General
26.1 INTRODUCTION
• On the basis of the recommendations of the Working Group on Lenders’

Liability Laws constituted by the Government of India, the feasibility of
introducing the Fair Practices Code for Lenders was examined by the
Reserve Bank in consultation with Government, select banks and
financial institutions. The guidelines have since been finalised and the
Reserve Bank expects banks/all India Financial Institutions to adopt the
following broad guidelines and frame the Fair Practices Code duly
approved by their Board of Directors.
26.2 APPLICATIONS FOR LOANS AND THEIR PROCESSING
(a) Loan application forms in respect of all categories of loans irrespective

of the amount of loan sought by the borrower should be
comprehensive. With a view to bringing in fairness and transparency,
banks are advised that they must transparently disclose to the
borrower all information about fees/charges payable for processing the
loan application, the amount of fees refundable if loan amount is not
! !209
sanctioned/disbursed, pre-payment options and charges, if any,

penalty for delayed repayments if any, conversion charges for
switching loan from fixed to floating rates or vice versa, existence of
any interest reset clause and any other matter which affects the
interest of the borrower. Such information should also be displayed on
the website of the banks for all categories of loan products. 
 
Bank should not levy, in addition to a processing fee, certain charges
which are not initially disclosed to the borrower. It may be mentioned
that levying such charges subsequently without disclosing the same to
the borrower is an unfair practice. 
 
Banks/FIs should ensure that all information relating to charges/fees
for processing are invariably disclosed in the loan application forms.
Further, the banks must inform ‘all-in-cost’ to the customer to enable
him to compare the rates charges with other sources of finance. It
should also be ensured that such charges/fees are non-discriminatory.
(b) Banks and financial institutions should devise a system of giving

acknowledgement for receipt of all loan applications. Time frame within
which loan applications up to Rupees two lakhs will be disposed of
should also be indicated in acknowledgement of such applications.
(c) Banks/Financial Institutions should verify the loan applications within a

reasonable period of time. If additional details/documents are
required, they should intimate the borrowers immediately.
(d) In case of all categories of loans irrespective of any threshold limits,

including credit card applications, the lenders should convey in writing,
the main reason/reasons which, in the opinion of the bank after due
consideration, have led to rejection of the loan applications within
stipulated time.
26.3 LOAN APPRAISAL AND TERMS/CONDITIONS
(a) Lenders should ensure that there is proper assessment of credit

application by borrowers. They should not use margin and security
stipulation as a substitute for due diligence on credit worthiness of the
borrower.
! !210
(b) The lender should convey to the borrower the credit limit along with
the terms and conditions thereof and keep the borrower’s acceptance
of these terms and conditions given with his full knowledge on record.
(c) Terms and conditions and other caveats governing credit facilities
given by banks/financial institutions arrived at after negotiation by
lending institution and the borrower should be reduced in writing and
duly certified by the authorised official. A copy of the loan agreement
along with a copy each of all enclosures quoted in the loan agreement
should be furnished to the borrower. It is reiterated that banks should
invariably furnish a copy of the loan agreement along with a copy each
of all enclosures quoted in the loan agreement to all the borrowers at
the time of sanction/disbursement of loans.
(d) As far as possible, the loan agreement should clearly stipulate credit
facilities that are solely at the discretion of lenders. These may include
approval or disallowance of facilities, such as, drawings beyond the
sanctioned limits, honouring cheques issued for the purpose other than
specifically agreed to in the credit sanction, and disallowing drawing on
a borrowal account on its classification as a non-performing asset or
on account of non-compliance with the terms of sanction. It may also
be specifically stated that the lender does not have an obligation to
meet further requirements of the borrowers on account of growth in
business, etc., without proper review of credit limits.
(e) In the case of lending under consortium arrangement, the participating

lenders should evolve procedures to complete appraisal of proposals in
the time bound manner to the extent feasible, and communicate their
decisions on financing or otherwise within a reasonable time.
26.4 DISBURSEMENT OF LOANS INCLUDING CHANGES IN

TERMS AND CONDITIONS
• Lenders should ensure timely disbursement of loans sanctioned in

conformity with the terms and conditions governing such sanction.
Lenders should give notice of any change in the terms and conditions
including interest rates, service charges, etc. Lenders should also ensure
that changes in interest rates and charges are effected only
prospectively.
! !211
26.5 POST-DISBURSEMENT SUPERVISION
(a) Post disbursement supervision by lenders, particularly in respect of

loans up to Rupees two lakh, should be constructive with a view to
taking care of any “lender-related” genuine difficulty that the borrower
may face.
(b) Before taking a decision to recall/accelerate payment or performance

under the agreement or seeking additional securities, lenders should
give notice to borrowers, as specified in the loan agreement or a
reasonable period, if no such condition exits in the loan agreement.
(c) Lenders should release all securities on receiving payment of loan or

realisation of loan subject to any legitimate right or lien for any other
claim lenders may have against borrowers. If such right of set off is to
be exercised, borrowers shall be given notice about the same with full
particulars about the remaining claims and the documents under which
lenders are entitled to retain the securities till the relevant claim is
settled/paid.
26.6 GENERAL
(a) Lenders should restrain from interference in the affairs of the

borrowers except for what is provided in the terms and conditions of
the loan sanction documents (unless new information, not earlier
disclosed by the borrower, has come to the notice of the lender).
(b) Lenders must not discriminate on grounds of sex, caste and religion in
the matter of lending. However, this does not preclude lenders from
participating in credit-linked schemes framed for weaker sections of
the society.
(c) In the matter of recovery of loans, the lenders should not resort to
undue harassment, viz., persistently bothering the borrowers at odd
hours, use of muscle power for recovery of loans, etc.
(d) In case of receipt of request for transfer of borrowal account, either

from the borrower or from a bank/financial institution, which proposes
to take-over the account, the consent or otherwise, i.e., objection of
! !212
the lender, if any, should be conveyed within 21 days from the date of
receipt of request.
Fair Practices Code based on the above should be put in place in respect of
all lending. Banks and financial institutions will have the freedom of
drafting the Fair Practices Code, enhancing the scope of the guidelines but
in no way sacrificing the spirit underlying the above guidelines. For this
purpose, the Boards of banks and financial institutions should lay down a
clear policy.
The Board of Directors should also lay down the appropriate grievance
redressal mechanism within the organization to resolve disputes arising in
this regard. Such a mechanism should ensure that all disputes arising out
of the decisions of lending institutions’ functionaries are heard and
disposed of at least at the next higher level. The Board of Directors should
also provide for periodical review of the compliance of the Fair Practices
Code and the functioning of the grievances redressal mechanism at various
levels of controlling offices. A consolidated report of such reviews may be
submitted to the Board at regular intervals, as may be prescribed by it.
The adoption of the Code, printing of necessary loan application forms and
circulation thereof among the branches and controlling offices should also
be duly completed. The Fair Practices Code, which may be adopted by
banks and financial institutions, should also be put on their website and
given wide publicity. A copy may also be forwarded to the Reserve Bank of
India.
1. In case of the rejection of a loan below ` 2 lakhs what is the bank

required to do?
2. Before recalling/accelerating a loan of below ` 2 lakhs what is the bank

required to do?
3. How are customer grievances handled?
! !213
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !214
RECOVERY AGENTS
Chapter 27
Recovery Agents
Objectives
This chapter will explain all matters relating to recovery agents utilized by
banks.
Structure
27.1 Recovery Agents

27.2 Engagement of Recovery Agents
27.3 Incentives to Recovery Agents
27.4 Methods followed by Recovery Agents
27.5 Training for Recovery Agents
27.6 Taking Possession of Property Mortgaged/Hypothecated to Banks
27.7 Guidelines to be Followed
27.8 Responsibilities of Recovery Agents
27.9 Use of Forum of Lok Adalats
27.10 Utilisation of Credit Counsellors
27.11 Complaints Against the Bank/its Recovery Agents
27.12 Periodical Review
27.1 RECOVERY AGENTS
• To recover monies due on retail loans advanced banks have been using
recovery agents. The methods these agents have been using are
questionable and often intimidating.
• In view of the rise in the number of disputes and litigations against banks
for engaging recovery agents the Reserve Bank has issued guidelines on
recovery agents engaged by banks.
• In view of the rise in the number of disputes and litigations against banks
for engaging recovery agents in the recent past, The RBI felt that the
adverse publicity would result in serious reputational risk for the banking
! !215
RECOVERY AGENTS
sector as a whole. As a consequence the RBI has issued guidelines

regarding engagement of recovery agents by banks in India.
27.2 ENGAGEMENT OF RECOVERY AGENTS
• Banks have been advised to take into account the following specific
considerations while engaging recovery agents (including agencies
engaged by the bank and the agents/employees of the concerned
agencies).
• Banks must have a due diligence process in place for engagement of

recovery agents, which should be so structured to cover, among others,
individuals involved in the recovery process. The due diligence process
should generally conform to the guidelines issued by RBI on outsourcing
of financial services.
• Banks should ensure that the agents engaged by them in the recovery
process carry out verification of the antecedents of their employees,
which may include pre-employment police verification, as a matter of
abundant caution. Banks may decide the periodicity at which re-
verification of antecedents should be resorted to.
• To ensure due notice and appropriate authorization, banks should inform

the borrower the details of recovery agency firms/companies while
forwarding default cases to the recovery agency. Further, since the
borrower might not have received the details about the recovery agency
for whatever reason, the agent should carry a copy of the notice and the
authorization letter from the bank along with the identity card issued to
him by the bank or the agency firm/company. Additionally, where the
recovery agency is changed by the bank during the recovery process, in
addition to the bank notifying the borrower of the change, the new agent
should carry the notice and the authorization letter along with his identity
card.
• The notice and the authorization letter should, among other details, also
include the telephone numbers of the relevant recovery agency. Banks
should ensure that there is a tape recording of the content/text of the
calls made by recovery agents to the customers, and vice-versa. Banks
may take reasonable precaution such as intimating the customer that the
conversation is being recorded, etc.
! !216
RECOVERY AGENTS
• The up to date details of the recovery agency firms/companies engaged

by banks should also be posted on the bank’s website.
• Where a grievance/complaint has been lodged, banks should not forward

cases to recovery agencies till they have finally disposed of any
grievance/complaint lodged by the concerned borrower. However, where
the bank is convinced, with appropriate proof, that the borrower is
continuously making frivolous/vexatious complaints, it may continue with
the recovery proceedings through the recovery agents even if a
grievance/complaint is pending with them. In cases where the subject
matter of the borrower’s dues might be sub judice, banks should exercise
utmost caution, as appropriate, in referring the matter to the recovery
agencies, depending on the circumstances.
Each bank should have a mechanism whereby the borrowers' grievances

with regard to the recovery process can be addressed. The details of the
mechanism should also be furnished to the borrower while advising the
details of the recovery agency.
27.3 INCENTIVES TO RECOVERY AGENTS
• It is understood that some banks set very stiff recovery targets or offer
high incentives to recovery agents. These have, in turn, induced the
recovery agents to use intimidatory and questionable methods for
recovery of dues. Banks are, therefore, advised to ensure that the
contracts with the recovery agents do not induce adoption of uncivilized,
unlawful and questionable behaviour or recovery process.
• The Reserve Bank has stated that banks are advised to ensure that the
contracts with the recovery agents do not induce adoption of uncivilized,
unlawful and questionable behaviour or recovery process.
27.4 METHODS FOLLOWED BY RECOVERY AGENTS
• Banks must not, in the matter of recovery of loans, resort to undue

harassment, viz., persistently bothering the borrowers at odd hours, use
of muscle power for recovery of loans, etc.
! !217
RECOVERY AGENTS
• Bank must ensure that agents engaged by them for debt collection
refrain from action/s that could damage the integrity and reputation of
the bank.
• Agents should not resort to intimidation or harassment of any kind,

either verbal or physical, against any person in their debt collection
efforts, including acts intended to humiliate publicly or intrude into the
privacy of the borrowers’/credit card holders’ family members, referees
and friends, making threatening and anonymous calls or making false
and misleading representations.
• The RBI has also stated Banks are advised to strictly adhere to the
guidelines/code mentioned above during the loan recovery process.
27.5 TRAINING FOR RECOVERY AGENTS
• Banks should ensure that, among others, the recovery agents are
properly trained to handle with care and sensitivity, their responsibilities,
in particular aspects like hours of calling, privacy of customer
information, etc.
• Reserve Bank has requested the Indian Banks’ Association to formulate,

in consultation with Indian Institute of Banking and Finance (IIBF), a
certificate course for Direct Recovery Agents with minimum 100 hours of
training. Once the above course is introduced by IIBF, banks should
ensure that over a period of one year all their Recovery Agents undergo
the above training and obtain the certificate from the above institute.
Further, the service providers engaged by banks should also employ only
such personnel who have undergone the above training and obtained the
certificate from the IIBF. Keeping in view the fact that a large number of
agents throughout the country may have to be trained, other institutes/
bank’s own training colleges may provide the training to the recovery
agents by having a tie-up arrangement with Indian Institute of Banking
and Finance so that there is uniformity in the standards of training.
However, every agent will have to pass the examination conducted by
IIBF all over India.
! !218
RECOVERY AGENTS
27.6 TAKING POSSESSION OF PROPERTY ORTGAGED/

HYPOTHECATED TO BANKS
• In a recent case which came up before the Honourable Supreme Court,

the Honourable Court observed that we are governed by rule of law in
the country and the recovery of loans or seizure of vehicles could be
done only through legal means. In this connection it may be mentioned
that the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the
Security Interest (Enforcement) Rules, 2002 framed thereunder have laid
down well defined procedures not only for enforcing security interest but
also for auctioning the movable and immovable property after enforcing
the security interest. It is, therefore, desirable that banks rely only on
legal remedies available under the relevant statutes while enforcing
security interest without intervention of the Courts.
• Where banks have incorporated a re-possession clause in the contract

with the borrower and rely on such re-possession clause for enforcing
their rights, they should ensure that the re-possession clause is legally
valid, complies with the provisions of the Indian Contract Act in letter and
spirit, and ensure that such repossession clause is clearly brought to the
notice of the borrower at the time of execution of the contract. The terms
and conditions of the contract should be strictly in terms of the Recovery
Policy and should contain provisions regarding (a) notice period before
taking possession (b) circumstances under which the notice period can
be waived (c) the procedure for taking possession of the security (d) a
provision regarding final chance to be given to the borrower for
repayment of loan before the sale/auction of the property (e) the
procedure for giving repossession to the borrower and (f) the procedure
for sale/auction of the property.
27.7 GUIDELINES TO BE FOLLOWED
• Banks should abide by the ‘Code of Bank’s Commitment to

Customers’ (BCSBI Code).
• Banks should also be guided by the guidelines issued by the Reserve

Bank on Fair Practices Code for Lenders, Outsourcing of financial services
and on Credit Card Operations. Further, a reference is also invited to
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RECOVERY AGENTS
paragraph 6 of the ‘Code of Bank’s Commitment to Customers’ (BCSBI

Code) pertaining to collection of dues. Banks are advised to strictly
adhere to the guidelines/code mentioned above during the loan recovery
process.
• The Supreme Court (Justices Tarun Chatterjee and Dalveer Bhandari) has
stated that banks cannot deploy musclemen to recover loans from
defaulters, thus forcing them to end their lives. In this case the bank
involved was asked to pay costs.
27.8 RESPONSIBILITIES OF RECOVERY AGENTS
Code of conduct for Direct Sales Agents formulated by the Indian Banks
Association (IBA) could be used by banks in formulating their own codes
for Recovery Agents. Banks should ensure that Recovery Agents are
properly trained to handle with care and senstivity, their responsibilities
particularly aspects like soliciting customers, hours of calling, privacy of
customer information and conveying the correct terms and conditions of
the products on offer, etc.
Recovery Agents should adhere to extant instructions on Fair Practices

Code for lending as also their own code for collection of dues. If the banks
do not have their own code they should, at the minimum, adopt the Indian
Banks Associations code for collection of dues and repossession of security.
It is essential that the Recovery Agents refrain from action that could
damage the integrity and reputation of the bank and that they observe
strict customer confidentiality.
The bank and their agents should not resort to intimidation or harassment
of any kind either verbal or physical against any person in their debt
collection efforts, including acts intended to humiliate publicly or intrude
the privacy of the debtors’ family members, referees and friends, making
threatening and anonymous calls or making false and misleading
representations.
! !220
RECOVERY AGENTS
27.9 USE OF FORUM OF LOK ADALATS
• Following the Supreme Court suggestion, the Reserve Bank has stated
that defaults/disputes on personal loans, credit card loans and housing
loans with less than` 10 lakh should be referred to Lok Adalats organized
by Civil Courts for recovery of loans.
27.10 UTILISATION OF CREDIT COUNSELLORS
• Banks are encouraged to have in place an appropriate mechanism to

utilise the services of credit counsellors for providing suitable counselling
to the borrowers where it becomes aware that the case of a particular
borrower deserves sympathetic consideration.
27.11 COMPLAINTS AGAINST THE BANK/ITS RECOVERY

AGENTS
• Banks, as principals, are responsible for the actions of their agents.

Hence, they should ensure that their agents engaged for recovery of
their dues should strictly adhere to the above guidelines and instructions,
including the BCSBI Code, while engaged in the process of recovery of
dues.
• Complaints received by Reserve Bank regarding violation of the above

guidelines and adoption of abusive practices followed by banks’ recovery
agents would be viewed seriously. Reserve Bank may consider imposing
a ban on a bank from engaging recovery agents in a particular area,
either jurisdictional or functional, for a limited period. In case of
persistent breach of above guidelines, Reserve Bank may consider
extending the period of ban or the area of ban. Similar supervisory action
could be attracted when the High Courts or the Supreme Court pass
strictures or impose penalties against any bank or its Directors/Officers/
agents with regard to policy, practice and procedure related to the
recovery process.
• It is expected that banks would, in the normal course ensure that their
employees also adhere to the above guidelines during the loan recovery
process.
! !221
RECOVERY AGENTS
27.12 PERIODICAL REVIEW
• Banks engaging recovery agents are advised to undertake a periodical

review of the mechanism to learn from experience, to effect
improvements, and to bring to the notice of the Reserve Bank of India
suggestions for improvement in the guidelines.
1. Under what circumstances may a bank engage a Recovery Agent?
2. What kind of training are Recovery Agents expected to go through?
3. When are banks required to consult Lok Adalats?
4. What are credit councellors?
5. Who is responsible for a complaint against a Recovery Agent and what

action can be taken should the complaint be valid?
! !222
RECOVERY AGENTS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !223
MUTUAL FUNDS
Chapter 28
Mutual Funds
Objectives
This chapter will explain the different types of Mutual Funds.
Structure
28.1 History of Mutual Funds

28.2 Mutual Fund
28.3 Role of Mutual Funds
28.4 Those Eligible to Invest in Mutual Funds
28.5 Advantages
28.6 Disadvantages
28.7 Different Types of Mutual Fund Schemes
28.8 Open-Ended Scheme
28.9 Close-Ended Scheme
28.10 Growth or Equity Fund
28.11 Income Scheme
28.12 Balanced Fund
28.13 Sector Fund
28.14 Money Market Fund
28.15 Gilt Fund
28.16 Bond Fund
28.17 Index Fund
28.18 Price
! !224
MUTUAL FUNDS
28.1 HISTORY OF MUTUAL FUNDS
• The idea of pooling money together for investing purposes started in

Europe in the mid-1800s. The first pooled fund in the United States was
created in 1893 for the faculty and staff of Harvard University.
• On March 21st, 1924 the first official mutual fund was born when three
Boston securities officers pooled their money together. It was called the
Massachusetts Investors Trust. In one year, the Massachusetts Investors
Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with
around 200 shareholders).
28.2 MUTUAL FUND
• A mutual fund in simple terms is made up of money that is pooled

together by a large number of investors who give their money to a fund
manager to invest in stocks and/or bonds.
• These investors buy the units of a fund that best suits their needs.
• The fund then invests the pool of money (called a corpus) in securities –
this could be shares, debentures, money market instruments, etc.,
depending on the constitution and objective of the scheme.
• The income earned through the investments, as well as the capital

appreciation realized by the investments, is allocated amongst the
investors in proportion to the number of units they own.
• These gains are distributed to investors either by way of dividends or

through an increase in the value of their units, or through an allocation of
additional units or a combination of the three.
28.3 ROLE OF MUTUAL FUNDS
• Mutual funds are a financial intermediary. They intermediate between the

source of the saving and the user of those savings and help to mobilize
capital.
! !225
MUTUAL FUNDS
• Mutual funds also impart liquidity to the capital markets, since

collectively they trade much more actively than individual investors. The
frequent buying and selling of mutual funds, based on specific
information, provides the price signals that make capital markets more
efficient.
• Mutual funds help move companies towards higher corporate governance

standards, because their large holdings give them voting clout.
28.4 THOSE ELIGIBLE TO INVEST IN MUTUAL FUNDS
• Adult individuals (or minor, holding through their parents or guardians)

holding singly or jointly.
• Hindu Undivided Families (HUF).
• Companies, corporate bodies, public sector undertakings, financial

institutions, banks, partnerships, associations of persons or bodies of
individuals, religious and charitable trusts and other societies registered
under Societies Registration Act, 1860.
• Non-resident Indians or Person of Indian Origin (PIO) residing abroad on

a full repatriation basis or non-repatriation basis.
• Overseas Corporate Bodies (OCBs) firm or societies which are held

directly or indirectly but ultimately to the extent of at least 60% by NRIs
and trusts in which at least 60% of the beneficial interest is similarly held
irrevocably by such persons on a full repatriation or non-repatriation
basis.
• Foreign Institutional Investors (FIIs) registered with Securities Exchange

Board of India (SEBI) and the Reserve Bank of India, on full repatriation
basis.
28.5 ADVANTAGES
• Mutual funds provide investment products that cater to the needs of

different classes of investors, whereas banks, for instance, offer only a
few standardized products. Mutual Funds occupy the middle ground –
between large financial institutions, which offer standardized financial
! !226
MUTUAL FUNDS
products, and the very small private banks that offer extremely
customized products and services.
• Mutual funds reduce or largely eliminate the burden, paperwork and

hassles small investors experience in managing a diverse portfolio on
their own.
• Mutual funds also provide the investment know-how and trading

capabilities that small or novice investors cannot be expected to possess.
• Mutual funds give an investor a high degree of liquidity as it can be

purchased and sold quickly.
• Mutual funds make it easy for small retail investors to invest in

instruments that are otherwise not available to them. For example, small
investors may not be offered high quality debentures directly. The issuers
choose to place these with large institutions, including mutual funds. For
the borrower, this kind of a bulk placement lowers the cost of raising
funds. When the investor invests in the mutual fund he/she, in effect,
gets access to investments in these debentures. The same is the case
with Government securities. As of now, this is a wholesale market.
However, an investor can invest in Government securities through a Gilt
fund.
• The Government also provides a range of tax benefits to those who

invest in mutual funds.
28.6 DISADVANTAGES
• Unlike saving instruments offered by banks, dividend payouts can vary

and sometimes there may be no dividend declared for a particular period.
• An investor managing his own portfolio can separately sell those shares
that have gone up and buy those whose price has decreased but when he
buys or sells a unit in a mutual fund he, in effect, buys or sells every
share/security in his fund’s portfolio whether he is making a profit or a
loss by trading at that time. Thus individual discrimination is not
available to investors in mutual funds – it is either all or none trading the
fund's portfolio.
! !227
MUTUAL FUNDS
• But again, these disadvantages matter only to investors who are

extremely well informed and experienced in the market. Most investors
are better off investing through a mutual fund.
28.7 DIFFERENT TYPES OF MUTUAL FUND SCHEMES
Mutual funds are classified into the following types of schemes:
• Open-ended schemes;
• Close-ended schemes;
• Equity schemes;
• Income schemes;
• Balanced funds;
• Sector funds;
• Money market funds;
• Gilt funds;
• Bond funds;
• Index Funds.
28.8 OPEN-ENDED SCHEME
• In an open-ended scheme, subscriptions to and redemptions from the

mutual fund scheme are open all through the year excepting the period
of book closing.
• The number of units outstanding in an open-ended scheme vary, as

investors buy and sell units.
• In an open-ended fund, there is no fixed number of units issued.
• Open-ended schemes are not listed on the stock exchanges. Units are
purchased and sold directly through the mutual fund.
• Open-ended schemes can be purchased and sold at close to their Net

Asset Value (plus or minus an entry or exit load).
• They may or may not have a specified redemption period.
! !228
MUTUAL FUNDS
28.9 CLOSE-ENDED SCHEME
• These are open only during a specified period.
• The units of a close-ended scheme have a fixed maturity period. This can
vary from 3 to 15 years. An individual investor can move into and out of
the investment, but the unit remains outstanding.
• After the initial offer, a close-ended fund is listed on a stock exchange

and, thereafter, investors can purchase and sell these units only through
the stock exchange.
• Close-ended schemes generally trade at a discount to the NAV, but the

discount narrows as the date of maturity approaches.
28.10 GROWTH OR EQUITY FUND
• A growth fund’s objective is to provide the maximum returns through

capital appreciation, over the medium to long term, by investing in
equities. An equity fund may be of a diversified nature, or may be sector-
oriented. Equity funds have often given excellent dividends when stock
markets have risen sharply.
28.11 INCOME SCHEME
• This is aimed at maximizing current income (interest and dividend) of

investors. It is a scheme that is typically debt-oriented, which provides
interest at regular intervals and has limited downside. Capital
appreciation in such a scheme is generally less than in a pure equity
fund. Income schemes normally provide higher returns than bank fixed
deposits. Many income schemes invest about 15% of the corpus in
equities, as a result of which they have the potential to provide much
higher returns than a pure bond fund.
28.12 BALANCED FUND
• Balanced funds are funds that invest both in shares and fixed income
securities in the proportion indicated in their offer document. The returns
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MUTUAL FUNDS
to investors provided by these schemes are moderate and at a moderate

risk. A typical equity/debt mix in a balanced fund could be 40:60.
28.13 SECTOR FUND
• A sector fund is one whose portfolio is built around a particular sector or

theme. It could be appropriate for an investor who lacks expertise or
knowledge about a particular sector. Some of the recent sector funds
floated have included those focusing on the information technology and
Fast Moving Consumer Goods (FMCG) sectors. A sector fund is inherently
riskier than a diversified fund because the portfolio is concentrated in one
sector only. However, in good markets, sector funds can provide above
average returns.
28.14 MONEY MARKET FUND
• Money market funds provide easy liquidity, preservation of capital and

moderate income. They are low risk as they invest in safer, short-term
money market instruments such as treasury bills, certificates of deposit,
commercial paper and Inter-bank call money. Returns on these schemes
may fluctuate, depending upon the interest rates prevailing in the
market.
28.15 GILT FUND
• Gilt funds invest much of their corpus in sovereign securities issued by

the Central Government, with a very small portion invested in the inter-
bank call money market. All these instruments carry the highest credit
rating, thus providing the highest level of safety. The default risk in these
instruments is virtually zero. Regulations in force now, permit non-
government provident funds, superannuation funds and gratuity funds to
invest in 100% gilt schemes floated by mutual funds.
28.16 BOND FUND
• A bond fund is a different form of an income fund, with the only

difference being that the entire corpus is invested in bonds. Unlike some
income funds, no portion of the corpus is invested in equities. Thus, the
returns on a bond fund will generally be less than the returns on an
income fund that may have a 10-15% equity component.
! !230
MUTUAL FUNDS
28.17 INDEX FUND
• An index fund is a fund that has the objective of tracking one of the
popular stock market indices. Thus, the returns on an index fund will
approximate the changes in the index that is used as the base. Of all the
investment options, an index fund is one of the more passive avenues.
28.18 PRICE
• When units are purchased in an initial offer, they are priced at par value
─ normally ` 10 per unit. A load factor is usually incorporated if it is an
equity fund or the bulk of investments are in equity.
• When units are purchased at a time other than the initial issue, the
purchase price is the Net Asset Value (NAV) plus (wherever applicable) a
front-end load.
• In the case of a closed-ended fund, the purchase is based on the price

that is being quoted on the stock exchange where it is listed. The quoted
price would usually be at a discount to the NAV.
1. What is a Mutual Fund?
2. Mention some advantages of a Mutual Fund.
3. Are there any disadvantages?
4. What is the difference between an Open-ended and Close-ended Mutual

Fund?
5. What is the difference between a growth and an equity fund?
6. What is a money market fund?
7. What is the difference between a bond fund and an income fund?
8. What are the things that one should take care of before investing in a
Mutual Fund?
! !231
MUTUAL FUNDS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !232
DEMATERIALISATION OF SHARES
Chapter 29
Dematerialisation of Shares
Objectives
This chapter will explain Dematerialization of Shares.
Structure
29.1 Dematerialization
29.2 Meaning of a Depository
29.3 Meaning of a Depository Participant
29.4 Operations of a Depository System
29.5 Benefits of having a Demat Account
29.6 Precautions
29.7 Others
29.1 DEMATERIALIZATION
• Dematerialization (“Demat” in short form) is the method by which a

person can get his physical share certificates converted into electronic
form.
• It is a process by which the physical share certificates of an investor are

taken back by the Company and an equivalent number of securities are
credited in electronic form at the request of the investor. For this an
investor will have to first open an account with a Depository Participant
(DP) and then request for the dematerialization of his share certificates
through the depository participant. The dematerialized holdings are
credited into the account he has with the DP. This is quite similar to
opening a bank account.
• Dematerialization of shares is optional and an investor can still hold

shares in physical form. However, to sell the shares through the stock
exchanges one has to dematerialize it before he sells it and similarly, if
an investor purchases shares, the delivery of the shares will be in the
demat form.
! !233
29.2 MEANING OF A DEPOSITORY
• A Depository (such as NSDL – National Stock Depository Limited & CSDL

– Central Stock Depository Limited) is an organization like a central bank
where at the request of a shareholder his securities are held in the
electronic form through the medium of a Depository Participant.
• The depository is different from a traditional custodial service because a

transfer of beneficial ownership can be done directly by a depository
whereas a custodian cannot do this. The main objective of a depository is
to minimize the paper work involved with the ownership, trading and
transfer of securities.
29.3 MEANING OF A DEPOSITORY PARTICIPANT
• A Depository Participant is one with whom an account has to be opened

to trade in the electronic form. While the depository can be compared to
a bank, a depository participant is like the branch of a bank with which
you can have an account.
• A Depository Participant (DP) is also the account holder’s representative

(agent) in the depository system providing the link between the company
and the account holder.
29.4 OPERATIONS OF A DEPOSITORY SYSTEM
• The Depository System operates in the lines of a banking system. A bank

holds funds in its accounts and transfers funds between accounts
whereas a depository holds securities in accounts and transfers securities
between accounts. In both systems, the transfer of funds or securities
happens without the actual handling of funds or securities. Banks and the
depository are accountable for the safe keeping of funds and securities
respectively.
! !234
29.5 BENEFITS OF HAVING A DEMAT ACCOUNT
(a) Shares of companies can only be traded if they are dematted. SEBI
has made demat mandatory on most of the traded scrips, and
therefore electronic transaction will be the only way everyone can
trade.
(b) In the electronic form transfer of securities has no stamp duty whereas
in the case of transfer of physical shares, stamp duty of 0.5 percent is
payable on the market value of shares being transferred.
(c) In the case of physical certificates, many risks such as delays, loss in
transit, theft, mutilation, bad deliveries, etc., occur whereas in the
electronic form these are eliminated. The depository participant on
specific instructions can keep shares in the “Frozen Mode”.
(d) The concept of an “odd lot” in respect of dematerialized shares stands

abolished, i.e., in the demat mode, market lot becomes one share.
(e) For providing credit facility against securities, dematerialized securities

are preferred by banks and other financial institutions because they
attract lower margin and lower rates of interest compared to physical
securities.
(f) Even in the electronic mode of trading, the payment mechanism

(usually through a broker) between the buyer and seller continues to
be as before. Also the usual brokerage charges would have to be
incurred. However, after the settlement, pay in and pay out is on the
same day for scripless trading which means that there is no delay in
the receipt of cash.
(g) Shares bought are transferred to the buyer’s name on the very next
day of pay out. In case of physical shares, transfer of ownership takes
30 days or sometimes even more.
(h) Courier/postal charges are done away with for sending share
certificates/transfer deeds.
! !235
(i) Dematerialization also has facility for freezing/locking of investor

accounts, which enables the accountholder to make his account non-
operational.
(j) Dematerialization enables a borrower to pledge and hypothecate

securities.
(k) Because of its convenience both brokers and investors prefer shares in
a dematerialized form.
29.6 PRECAUTIONS
• Holdings in those securities that have not yet been admitted for
dematerialization by NSDL cannot be dematerialized. List of securities
admitted for dematerialization should be verified before defacing the
securities.
• Holdings in street name cannot be dematerialized. A new procedure for

transfer and demat to be done together has been conceptualized.
• The combination and sequence of names of holders as printed on the

physical certificate should be identical with the names initiating the
dematerialization request.
• Separate dematerialization requests will have to be filled for locked-in

and free holdings.
• Separate dematerialization requests will have to be filled for holdings

locked-in for different reasons.
• Separate dematerialization requests will have to be filled for fully paid up

and partly paid-up holdings.
• Separate dematerialization requests will have to be filled for holdings in

the different ISINs of a company.
! !236
29.7 OTHERS
• Dematted shares can be converted back into physical shares.
• Dematerialization of shares can be canceled automatically. This takes

place if a company is declared bankrupt in the so-called liquidation path
or if a bankruptcy court dismisses a bankruptcy petition due to there
being insufficient assets to cover the costs of proceedings. In both cases,
share dematerialization is deemed canceled upon the lapse of six months
from the date on which the court decision becomes final and non-
appealable.
• One may open accounts with several DPs.
1. What is the meaning of Dematerialization of Shares?
2. Why is it necessary to Dematerialize Shares?
3. What is a depository?
4. How does a depository system operate?
5. Mention some benefits of having a demat account.
! !237
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !238
BANCASSURANCE
Chapter 30
Bancassurance
Objectives
This chapter will tell you about Bancassurance.
Structure
30.1 Introduction
30.2 Detail
30.3 Reason for Offering this Product
30.1 INTRODUCTION
• Bancassurance in its simplest form is a term which is coined to denote

the combination of banking and insurance business within the same
organization. It is the sale of life pension and investment products
through the branch network of a bank. Bancassurance, is also known as
Allfinanz and it describes a package of financial services that can fulfill
both banking and insurance needs at the same time.
30.2 DETAIL
• Bancassurance has many forms and varies from country to country

depending upon the demography, economic and legislative climate of
that country.
• Banks view this as an avenue of product diversification and a source of

additional fee income. There is no risk as in the case of advances as this
is non-fund based. For insurance companies it is a tool for increasing
their market penetration and premium turnover. The customer sees
bancassurance as a bonanza in terms of reduced price, high quality
product and delivery at doorsteps.
! !239
BANCASSURANCE
30.3 REASON FOR OFFERING THIS PRODUCT
• The most important reason for banks to offer these products is that their
sale improves their ROI (Return On Investment) as it is non-fund based
fee income. Banks that effectively cross-sell financial products can
leverage their distribution and processing capabilities for profitable
operating expense ratios.
• Sale of personal line insurance products through banks meets an

important set of consumer needs. Most large retail banks have a large
customer base, which they can utilize in selling them personal line
insurance products. Another important factor is the personal approach
that banks have towards customers is helpful in the sale of personal
insurance.
• Also another important factor that banks have over traditional insurance
distributors is the lower cost per sales lead made possible by their sizable
customer base. Banks also enjoy significant brand awareness within their
geographic regions. This results in a lower per-lead cost when advertising
through print, radio and/or television.
• Banks have excellent marketing and processing capabilities. They utilize

this extensive experience in marketing to both existing customers (for
retention and cross selling) and non-customers (for acquisition and
awareness). And they also have access to multiple communications
channels, such as statement inserts, direct mail, ATMs, telemarketing,
etc. Banks’ proficiency in using technology has resulted in improvements
in transaction processing.
1. What is Bancassurance?
2. What is the reason for offering Bancassurance?
3. How does Bancassurance benefit a bank?
! !240
BANCASSURANCE
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !241
BANK DRAFTS
Chapter 31
Bank Drafts
Objectives
The objective of this chapter is to explain the importance of Bank Drafts

and other factors that one should be aware of.
Structure
31.1 Introduction
31.2 Details
31.1 INTRODUCTION
• A bank draft is an order drawn by an office of a bank upon another office

of the same bank instructing the other office to pay a specified sum to a
specified person or his order.
• Although a draft is not specially mentioned as a negotiable instrument, it

has all the characteristics of one and in a case in 1960 the Allahabad
High Court held that a bank draft is a bill of exchange as it fulfills all the
requisites of one. In addition, drafts are mentioned in section 57A of the
Negotiable Instruments Act.
31.2 DETAILS
• Banks often, at the request of customers, issue bank drafts or demand

drafts payable in another city/location where they have offices. It is
issued by the bank on one of its branches.
• Drafts can be drawn either against cash or by debiting a client’s (the

entity requesting the draft) account. It must be noted that drafts are
always issued for consideration received in advance.
! !242
BANK DRAFTS
• Drafts of ` 50,000 or more must be issued only against another cheque

or by debiting the purchaser’s account.
• Banks normally charge a commission for the issuance of a draft.
• By purchasing a draft an individual does not become a customer. The

relationship between the purchaser of the draft and the banker is that of
creditor and debtor.
• It cannot be payable to bearer.
• All superscriptions about validity of the demand draft should be provided

at the top of the draft form.
• A draft should be uniformly valid for six months and procedure for
revalidation after six months should be simplified.
• Drafts for small amounts against cash should be issued to all irrespective
of whether the individual has an account or not.
• Bank’s counter staff must not refuse to accept small denomination notes
from customers (or non-customers) for issuance of drafts.
• The purchaser of a draft can by returning the draft have it cancelled

before it has been delivered to the payee.
• The purchaser cannot have the draft cancelled after it has been delivered
to the payee.
• A bank cannot ordinarily refuse to pay the amount unless there is some
doubt on the identity of the person presenting the draft.
• Banks should ensure drafts on their branches are paid immediately.

Payment must not be refused for the only reason that the relative advise
has not been received.
• Passport and postal identification card are adequate identification for

encashment of draft.
! !243
BANK DRAFTS
• Banks may, however, put a ceiling of ` 25,000 for payment of drafts

against passport/postal identification.
• If a draft is lost before it is handed over to the payee and is without any
endorsement, the bank can refuse payment. The bank must inform the
drawee branch about the loss.
• Duplicate drafts can be issued if the bank is satisfied that the draft has
been lost//mutilated and a confirmation is received from the drawee
bank that the draft has not been paid. The purchaser should furnish an
indemnity bond before a duplicate draft is issued
• Duplicate draft in lieu of lost draft upto and including ` 5,000 may be
issued to the purchaser on the basis of adequate indemnity and without
seeking non-payment advice from drawee office.
• In respect of lost drafts, duplicate drafts for amounts above ` 10,000 (in
cases where there is no reason to doubt the bonafides of the applicant)
shall be issued by the issuing branches on receipt of confirmation of non-
payment from the drawee branch and on execution of stamped letter of
indemnity with two sureties good for the amount involved.
• For issue of duplicate drafts upto ` 10,000 requirement of the relative

non-payment certificate from the other branch is waived. For issue of
duplicate drafts below ` 1,000, only indemnity letter will be necessary.
The customer should inform the issuing branch promptly of loss of
demand draft giving full particulars thereof in order to prevent misuse
thereof.
• Duplicate drafts should be issued to the customer within a fortnight from

the receipt of a request. If there is a delay beyond this stipulated period,
banks would have to pay interest at the rate applicable to a fixed deposit
of corresponding maturity. The period of a fortnight is applicable where
the request for a duplicate draft is made by the purchaser or the
beneficiary and not by a third party.
• Drafts are sought because of the comfort to receivers as it is considered

often as good as money (if not better) since the bank issuing it is bound
to honor it. Refusal is tantamount to stating the bank is bankrupt.
! !244
BANK DRAFTS
• If after a draft is lost and a duplicate draft is issued and encashed, the
first draft is presented to the bank by a holder in due course, technically
the bank cannot refuse to pay it. This is why bank drafts must always be
crossed account payee only. This is to avoid this possibility. In addition
banks also take an indemnity from the purchaser before issuing a
duplicate draft.
1. What is a Bank Draft?
2. What are Drafts drawn against?
3. What is the relationship between the banker and the purchaser of the
Draft?
4. How long is a Draft valid for?
5. Can a purchaser have the Draft cancelled?
6. If the Draft is lost is the bank liable to pay?
7. Can a bank refuse payment of a Draft?
8. Can duplicate Drafts be issued?
! !245
BANK DRAFTS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !246
PAY ORDERS
Chapter 32
Pay Orders
Objectives
This chapter explains Pay Orders.
Structure
32.1 Definition
32.2 Details
32.1 DEFINITION
• A pay order is a cheque drawn by a bank on itself to pay the named

person a sum certain in money.
32.2 DETAILS
• When a bank makes a payment to someone who does not maintain an

account with it, it issues a pay order.
• A pay order is like a bank draft but it is issued by the issuing office upon
itself unlike a draft which is payable by another office/branch of the
bank.
• It is made payable to a named payee or his order.
• These may also be issued at the request of a customer to someone who

is not prepared to accept the customer’s cheque. This is common in
commercial transactions when, on the submission of a pay order, the
vendor parts with the goods. If a cheque is given, he’d hand over the
goods only after the cheque is cleared.
! !247
PAY ORDERS
• As pay orders are not included in the definition of a bank draft in the
Negotiable Instruments Act, bankers cannot claim protection under
Section 131 of the Act if they make payment of a pay order bearing a
forged endorsement. The bank will also be answerable to the true owner
if the bank collects the pay order for a person who is guilty for its
conversion.
1. What is a Pay Order?
2. What is the difference between a Pay Order and a draft?
3. Can a bank claim protection against a Pay Order bearing a forged

endorsement?
4. Is a Pay Order a negotiable instrument?
! !248
PAY ORDERS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !249
TRAVELLER’S CHEQUES
Chapter 33
TRAVELLER’s CHEQUES
Objectives
This chapter will tell you about Traveller’s Cheques.
Structure
33.1 Introduction
33.2 Details
33.3 Benefits
33.1 INTRODUCTION
• American Express was founded in 1850, in Buffalo, New York, by Henry

Wells, William Fargo, and John Butterfield as an express delivery service.
In 1882, American Express launched its money order business to
compete with the U.S. Post Office’s money orders. This product quickly
spread to Europe where no such financial product existed.
• Sometime between 1888 and 1890, J.C. Fargo took a trip to Europe and
returned frustrated and infuriated. At Paris, despite the fact that he was
President of American Express and that he carried with him traditional
letters of credit, he found it difficult to obtain cash anywhere except in
major cities. In frustration, Mr. Fargo complained to a colleague Marcellus
Flemming Berry and asked him to create a better solution than the
traditional letter of credit. Mr. Berry created the American Express
Traveller’s Cheque which was launched in 1891 in denominations of $10,
$20, $50, and $100.
33.2 DETAILS
• Traveller’s cheques are issued by banks and financial institutions like

American Express to traveller’s.
! !250
• They are for the convenience of traveller’s and are considered safer than
money since if these are lost the issuing company will issue fresh
travelers cheques on being intimated of the loss.
• They are convenient as they are issued in different denominations and in

different currencies.
• Traveller’s cheques can be purchased at participating banks, building

societies, travel agents, foreign exchange bureaux, the Post Office, and
at American Express Travel Service locations.
• Traveller’s cheques are bought at their face value plus a small

commission (which is usually built into the exchange rate where the
traveller’s cheques are in foreign currency).
• Traveller’s cheques upto ` 50,000 can be purchased in cash. Above this

amount a person can purchase them only against a cheque/draft or by
debit to his account.
• Traveller’s cheques are widely accepted – not only at banks but at shops,
hotels and other outlets.
• On purchasing a traveller’s cheque, the purchaser is required to sign the

cheque in the presence of the issuer. Then when encashing it he is
required to again sign it in front of the person accepting the cheque. The
two signatures are compared before the traveller’s cheque is accepted. In
addition, the identity of the person is also required to be proven.
• Traveller’s cheques are usually in the form of a pay order drawn by the
issuing organization on itself. They are made payable to the order of a
payee to be named. The payee’s name is left blank at the time of issue of
the cheques and when they are encashed the payee’s name is inserted.
The holder may also enter his own name as payee. In such a situation if
the holder wants to give good title to another he has to endorse it and
hand it over.
• While in America, legal decisions have established traveller’s cheques to

be negotiable instruments, it is yet to be so established in India. The
reason is that the order contained is not unconditional as it requires the
! !251
holder’s countersignature before payment. In America this requirement is

not considered conditional.
• There is no expiry date for traveller’s cheques and they never go stale.
33.3 BENEFITS
• They are safer than cash. Cash once stolen or lost cannot be replaced.
Traveller’s cheques can be – usually within 24 hours.
• They are easy to use. To encash them all that the purchaser has to do is
sign the cheque at the time of encashment.
• They are accepted worldwide.
• They have no expiry date.
1. Who invented Traveller’s Cheques?
2. What are the advantages of purchasing Traveller’s Cheques?
3. Can Traveller’s Cheques be purchased with cash?
4. What is the procedure for purchasing Traveller’s Cheques?
5. Are Traveller’s Cheques negotiable instruments?
! !252
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !253
CLEARING
Chapter 34
Clearing
Objectives
The chapter explains how cheques are cleared.
Structure
34.1 Introduction
34.2 Clearing-House
34.3 Clearing in India
34.4 Types of Clearing
34.5 Time Taken for Clearing
34.6 Time Lag
34.7 Settlement
34.8 Other Functions of the Clearing-House
34.9 Inter Branch Clearing
34.10 Counter Return
34.11 Cheque Purchase
34.12 Purchase of Local Cheques, Drafts, etc., during Suspension of
Clearing
34.13 Cheques Lost in Transit/in Clearing Process
34.14 Dishonour of Cheques
34.15 Magnetic Ink Character Recognition
! !254
CLEARING
34.1 INTRODUCTION
• Clearing can be defined as an arrangement through which a bank

exchanges cheques drawn on other banks for those drawn on it.
• This exchange is done at the clearing-house.
34.2 CLEARING-HOUSE
• A clearing-house is a place where banks that are members of the

clearing-house meet to hand over cheques.
34.3 CLEARING IN INDIA
• In India clearing-houses were presided over by the Imperial Bank of

India (now the State Bank of India) until 1935.
• The Reserve Bank of India when constituted in 1935 took over the
clearing-house function.
• In those cities that the Reserve Bank has a presence, the Reserve Bank
manages the clearing-house.
• In other cities and towns the State Bank of India and its associates
manage clearing. In some locations a public sector bank (where the
State Bank and its associates do not have a dominant presence)
manages clearing.
• Clearing-houses are autonomous institutions having their own rules

regarding the conduct of operations. These rules relate to admission of
members and sub members, entrance fees, minimum balance of deposit,
meetings, quorum, representation and other matters.
- Banks may be direct members or sub members.
- All the branches of the member bank within the clearing-house

jurisdiction submit instruments deposited by customers drawn on other
members operating in the area.
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CLEARING
- Sub members, who are sponsored by a member bank, participate in

the same manner as a branch of a member bank. These are those who
do not have many instruments to submit to or receive from clearing.
- All banks including state co-operative banks and general post offices
are eligible to become members of the clearing-house.
- In India the clearing system is local and restricted to all the banks and
branches situated in the area under a particular zone.
- The zones may be that of a city or a town or an area.
• All the branches of the member bank within the clearing-house

jurisdiction can present and receive cheques drawn on any other member
bank/branch within the clearing-house jurisdiction.
• Each member bank in a centre is represented in the clearing-house by its

service branch which collects all the instruments from the various
branches and consolidates them for presentation to all the banks in the
clearing-house. Similarly it receives and distributes all the instruments
drawn upon its branches by other banks in the clearing-house.
• The instruments presented at a clearing-house are:
- Cheques;
- Drafts;
- Payment orders.
These are the instruments that are deposited by customers for collection.
34.4 TYPES OF CLEARING
• Outward clearing.
• Inward clearing.
Outward Clearing
• Outward clearing refers to instruments that are deposited by customers

that are drawn on other banks that need to be presented at clearing.
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CLEARING
• This can be further divided to:
- Local clearing (instruments drawn on banks in that city).
- Outstation clearing (instruments drawn on banks outside the city).

These may be within the country or on banks in other countries.
• Branches normally collect all the local cheques and other instruments
deposited by customers and after ensuring they have all the relevant
details send them to their service branch. The service branch then
presents these at the clearing-house. Cheques deposited at a bank
branch counters/in collection box within the branch premises before the
specified cut-off time will be presented for clearing on the same day.
Those deposited after the cut-off time will be presented in the next
clearing cycle.
• With regard to outstation cheques practices can differ:
- Some banks send the instruments to branches they have in the

locations where the banks on whom the instruments are drawn for
collection.
- Others hand over the instruments to a large bank that has branches in
multiple locations for collection.
- The bank can also participate in national clearing. This is managed by

the Reserve Bank. Cheques drawn on metropolitan centres are cleared
in seven days. In other cases cheques drawn on other centres are
cleared in fourteen days except those drawn on state capitals (other
than north eastern states and Sikkim) which are cleared in 10 days.
- If there are delays banks are expected to pay interest for the period of
delay at the rate stated in the Bank’s policy or at the rate applicable for
a fixed deposit for the period of delay beyond the stipulated days. If
the delay is abnormal then penal interest at the rate of 2% above the
fixed deposit rate has to also be paid. This has also been held by the
National Consumer Disputes Redressal Commission in 2008.
• Cheques are posted to the representative branch or correspondent

branch for presentation in the clearing-house in the outstation centre.
! !257
CLEARING
• On realization, the proceeds are remitted to the original presenting bank

for credit to the customer’s account.
• There is often considerable delay in the payment transaction both for the
recipient of the funds as well as the banks involved.
• In June 2009 the RBI introduced ‘speed clearing’ in Mumbai for

outstation cheques for all the member banks in the jurisdiction of the
Brihan-Mumbai Bankers’ Clearing House (BCCH). Those who have
implemented Centralized Banking Solution (CBS) can locally pay
outstation cheques of branches covered under CBS without having to
physically send the cheque to the branch of the drawee for clearing.
Customers get credit on T + 1 basis (T being cheque presentation day at
the clearing house) provided other conditions of passing the cheque are
met. In short outstation cheques drawn on branches covered under CBS
will be treated as local cheques for clearing purposes.
• If cheques deposited by a customer are lost in transit, banks must pay

the value of the cheques lost (State Bank of India vs. National Textile
Corporation).
• With regard to cheques payable in foreign countries, the bank may send
it to its branch in that country or if it does not have a branch, to its
correspondent in that country. If it does not have a branch/
correspondent in the country, the cheque would be sent to the bank
directly with a request that the proceeds be credited to a nostro account
it maintains with a correspondent bank. Payment is usually released after
21 working days from the value date and the rate used would be the rate
applicable on the date of credit to the customer’s account.
Inward Clearing
• The service branch will collect cheques drawn on the bank and the
cheques would then be checked for completeness – signature, whether
there is adequate balance, date and the likes.
• If there is any inconsistency the cheque is returned.
! !258
CLEARING
• It should be remembered that all paper based instruments have to be

presented at the drawer bank either in person or by another bank in
clearing or through collection.
• Delays are due to the requirement of physical presentation of the paper

instrument.
Return clearing
• Return clearing is the aggregate of all unpaid items. This:
- is debited to the original presenting bank.

- is credited to the drawee bank.
• Credit given to payee is reversed.
Cheque Collection Policy
• Banks must develop a policy (in line with IBA’s deposit policy) on the
following that includes instructions on:
- Immediate credit for local/outstation cheques;

- Time frame for collection of local/outstation cheques;
- Interest payment for delayed payment.
• The policy should clearly lay down liability of bank for interest payments
for non-compliance with standards set down by banks,
! !259
CLEARING
Cheque Clearing Cycle
34.5 TIME TAKEN FOR CLEARING
• For local cheques credit and debit should be given on the same day or at
most the next day of their presentation for clearing.
• After closure of return clearing customers should be able to withdraw the

money on the same day or maximum within an hour of the
commencement of business on the next working day.
• In short local cheques should be processed T + 1 working day and

customers should be able to withdraw T + 1 or T + 2 working day basis.
• Local clearance of outstation cheques should occur with core banking

service compliant branches.
• Time frame on cheques clearing drawn on state capitals/major cities/

other locations should be 7/10/14 days respectively. If delayed interest
! !260
CLEARING
should be paid at rate stated in the cheque collection policy of the bank.
If this is not specified then interest should be paid at the rate applicable
to a fixed deposit of corresponding period placed (Consumer Complaint
No. 82 of 2006).
• In metropolitan cities with MICR clearing systems, the amount of a

cheque drawn on any other metropolitan centre and presented for
collection should be credited in the customer’s account by the same day
of the following week. With regard to state capitals, customer’s account
should be credited within ten days.
• In the interest of the customer the Reserve Bank had directed that banks
should give immediate credit for all outstation instruments upto ` 15,000
to individuals who are maintaining satisfactory accounts. Customers
would have to bear service and postal charges. If a customer deposits
two outstation cheques below ` 15,000, he may draw only upto `
15,000. The bank’s exposure is thus limited to ` 15,000. In the event of
the cheque being returned unpaid, the customer would have to pay
interest for the period the funds were utilized. This is applicable only
where there is no speed clearing. Satisfactory in this connection is an
account opened atleast six months earlier complying with KYC norms
conducted satisfactorily, no irregular dealings and no cheques for
immediate credit which have been returned unpaid. However, to an
extent this is academic as cheques issued by banks nowadays are
encashable at all their branches in India.
34.6 TIME LAG
• The total clearing cycle including the return clearing introduces a time
lag in the payments process. The need for physical presentment of the
cheque at the branch where it is drawn on requires the movement of
cheques from one place to another. As a result, the recipient of payment
has to wait until the collecting banker is fully satisfied that the cheque
has been paid.
• This time lag will exist as long as the physical presentment of the cheque
is necessary.
! !261
CLEARING
34.7 SETTLEMENT
• Claims are made by a bank on other banks.

• The credit or debit position of the individual bank is determined.
• The account the bank maintains with the Reserve Bank of India is then
either credited or debited (depending on whether monies are due to the
bank or due from it).
34.8 OTHER FUNCTIONS OF THE CLEARING-HOUSE
• Apart from facilitating the exchange of instruments the clearing-house is

involved in settlements which may be:
- Settlements of claims;
- Settlement with major banks;
- Settlement with the Central bank.
! !262
CLEARING
34.9 INTER BRANCH CLEARING
• Cheques drawn on different branches of the same bank need not be sent
to the clearing-house.
• The service branch acts as the settlement branch for the branches.
• The instruments are sent to the drawee branches.
• The inter branch accounts are credited or debited internally.
34.10 COUNTER RETURN
• There are times, when banks are unable, because of the volume of
transactions to return the cheque received in inward clearing (from
another bank). Technically, if the cheque is not returned, it means that
the cheque is honored.
• If the cheque is not returned and the client does not have enough funds,
the bank can take it to the collecting bank and return it at their counters.
If the bank has not released money on the assumption that the cheque
had been honoured, the collecting bank will issue a draft to the bank (as
the collecting bank would have been paid) for the value of the cheque
returned at its counter.
34.11 CHEQUE PURCHASE
• Banks sometimes purchase, at the customer’s request, cheques

deposited by clients for collection. The bank discounts these cheques and
credits the proceeds net of its discounting charge to the customer.
34.12 PURCHASE OF LOCAL CHEQUES, DRAFTS, ETC.,

DURING SUSPENSION OF CLEARING
• Whenever clearing is suspended and it is apprehended that the

suspension may be prolonged, banks may temporarily accommodate
their constituents, both borrowers and depositors, to the extent possible
by purchasing the local cheques, drafts, etc., deposited in their accounts
! !263
CLEARING
for collection, special consideration being shown in respect of cheques

drawn by Government departments/companies of good standing and
repute, as also demand drafts drawn on local banks.
34.13 CHEQUES LOST IN TRANSIT/IN CLEARING PROCESS
• The bank must immediately bring this to the notice of the account holder
so that the account holder can inform the drawer to record stop payment
and take care that other cheques issued by him are not dishonoured due
to non credit of the amount of the lost cheques instruments.
• The onus of the loss lies with the collecting banker and not the account
holder.
• The bank should reimburse the account holder for expenses incurred in
obtaining duplicate instruments and also interest for reasonable delays.
• If the cheque has been lost at the paying bank’s branch, the collecting
banker should have a right to recover the amount reimbursed to the
customer for the loss of the cheque/instrument from the paying banker.
34.14 DISHONOUR OF CHEQUES
• Paying bank should return dishonored cheques presented through

clearing houses as per return discipline prescribed by clearing house.
• Dishonored instruments should be returned/dispatched by the collecting

bank to the customer promptly without delay, in any case within 24
hours. It must also adhere to the return discipline of the respective
clearing house.
• The collecting bank on receipt of dishonored cheques should dispatch it

immediately to the payee/holder.
• With regard to cheques presented directly to the paying bank for

settlement by way of transfer between two accounts with that bank, it
should return such dishonored cheques to payees/holders immediately.
! !264
CLEARING
• Cheques dishonored for want of funds should be returned with a memo

indicating the reason for dishonour as “insufficient funds.”
• Data in respect of each dishonored cheque of ` 1 crore and above should

be made part of the bank’s MIS on constituents and reported to head
office/controlling office.
• Cheques drawn in favour of stock exchanges and dishonored should be

consolidated separately irrespective of the value of the cheques as a part
of MIS relating to broker entities.
• Banks must introduce a condition for operation of accounts with cheque

facility that in event of dishonour of a cheque valued at ` 1 crore and
above on more than 4 occasions that no fresh cheque book would be
issued. Banks can also consider closing the account at their discretion.
• Banks should also have a Board approved policy with regard to frequent
dishonour of smaller cheques.
34.15 MAGNETIC INK CHARACTER RECOGNITION
Cheques to facilitate clearing, have critical data such as the location, city,
amount and type of transaction printed with a special ink which can
recognize characters. This is by the imbedding of metal in the ink.
The process is known as Magnetic Ink Character Recognition or MICR.
MICR was introduced in India in the mid-1980s to facilitate the clearing of

cheques.
Until then all cheques deposited were separated into banks and then
machine totaled to determine the amount due from a bank. This then had
to be agreed to the amount actually credited to deposit accounts. There
were many errors and considerable time was spent in reconciling figures.
As volumes grew, it became necessary to mechanize clearing. This was

introduced using Magnetic Ink Character Recognition (MICR) technology.
MICR technology enabled machines to sort cheques into banks and
amounts due from each thus ensuring speed and accuracy.
! !265
CLEARING
To facilitate cheque processing all instruments (cheques) have to be of a

standard format and size (8 X 3 2/3). These are printed on MICR grade
quality paper with a read band of 5/8 in width at the bottom reserved for
MICR coding (in E-138 Font).
1. The cheques are printed by approved printers. Not all printers are
permitted.
2. The MICR has a distinct code structure.
• The code line is divided into five fields with distinct separations.
• The first six numeric digits (numbers) is the cheque serial number.
• In the next band there are nine numbers. These are as follows:
i. The first three numbers represent the city (Mumbai is 400).

ii. The next three numbers represent the bank ( HDFC is 240).
iii. The next three numbers represent the branch (each branch has a
distinct number).
• When a new bank opens, it may not have the volume to be admitted as a
member of the clearing-house. In these cases, it becomes a sub member.
These banks would have the code number of the sponsoring bank
followed by the branch code.
• The next six numeric digits are optional. Some banks write the account
number. On others these represent the customer identification number).
In regard to Government cheques issued by the RBI alone these are
seven digits. Government accounts are 10 digits in length – 7 digits
occurring in the account number field and 3 in the transaction code field.
• The transaction code field comprises of two digits (except for government
cheques which have three).
• The last field represents the amount field and consists of 13 digits. The
amount is encoded in paise without the decimal point.
! !266
CLEARING
Some City Codes
560 Bangalore
700 Kolkata
600 Chennai
682 Kochi
400 Mumbai
110 New Delhi
! !267
CLEARING
Some Bank Codes
002 State Bank of India
012 Bank of Baroda

013 Bank of India
026 Union Bank of India
035 BNP Paribas
036 Standard Chartered Bank

150 Bank of Bahrain and Kuwait
211 Axis Bank
240 HDFC Bank

259 IDBI Bank
Some Transaction Codes
10 Savings account cheque
11 Current account cheque
12 Banker’s cheque
13 Cash credit account cheque
14 Dividend warrant
15 Traveler’s cheques/Pre-denominated bank orders (not exceeding ` 1,000/-)
16 Demand draft
17 Cheque issued in lieu of existing payment order
18 Gift cheque
19 Interest warrant
28 Refund warrant/debenture redemption warrant/interest rebate warrant
29 At par current account cheque other than dividend/interest/refund warrant
30 Stockinvest
! !268
CLEARING
IFSC Code
• Indian Financial System Code (IFSC) is the addressing code in the user-
to-user message transmission and is used in RTGS (Real Time Gross
Settlement) and others for routing purposes. Banks have been asked to
allot IFSC to all their branches. The IFSC of the branch is to be printed
just above the MICR band on the cheques preferably above the serial
number of the cheque.
• The great benefit is that this code helps focus on the branch.
• The code is alphanumeric consisting of 11 digits. The first 4 represent the

bank’s code. The next character is reserved as control character
(presently ‘0’ appears in the fifth position and the remaining 6 identifies
the branch.
Cheques Deposited
• All cheques deposited for clearing by customers are to be crossed with a

special clearing stamp. The bank would also stamp its certification or
confirmation of the various endorsements on the cheque and an
undertaking to the effect that the proceeds will be credited to the payee’s
account on realization.
The Clearing Process
• Cheques deposited by clients are separated between intercity and

intracity (national clearing and others).
• The amount of the cheque is coded onto the cheque in the area
designated (the last field).
• The cheques are then put through a reader/sorter that lists amounts,
differentiates between banks and reads all the other fields and prepares
a listing that details the number of cheques, the banks they relate to and
the amount.
• These lists are submitted to the clearing-house along with the

instruments.
! !269
CLEARING
1. Define Clearing.
2. What is a Clearing house?
3. What are the instruments that can be presented at a Clearing house?
4. What are the different types of Clearing? Explain them in brief.
5. What is the normal time taken for Clearing?
6. What are the functions of a Clearing house?
7. What is MICR?
! !270
CLEARING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !271
TRUNCATED CHEQUE CLEARANCE
Chapter 35
Truncated Cheque Clearance
Objectives
The chapter will explain how cheques are Truncated and Cheques are
cleared.
Structure
35.1 Introduction
35.2 Cheque Truncation
35.3 Why Cheque Truncation in India
35.4 Introduction of Truncation in India
35.5 Eligibility
35.6 How the Quality of the Images will be Ensured?
35.7 How the Image and Data Transmitted Over the Network is Secured?
35.8 What Type of Cheque can be Presented in the CTS?
35.9 What are the Precautions Required to be taken by the Bank
Customers to Avoid Frauds?
35.10 Change in the Process for the Customers
35.11 How Does it Work?
35.12 Benefits
35.13 Other Important Information
35.14 Risks in Cheque Truncation
35.15 Legal Issues
35.16 Key Challenges
35.17 Options Available to the Customer to see Physical Cheques
! !272
35.1 INTRODUCTION
• The cheque is currently the most visible and significant mode of payment
in India. In view of the importance of cheque to the retail segment,
Magnetic Ink Character Recognition (MICR) technology was introduced by
the Reserve Bank of India. MICR technology enabled the banking system
to handle the growth in the cheque volumes and to provide faster and
efficient clearing services to customers and to do straight through
processing using MICR data. Over a period of two decades, a number of
MICR clearing-houses have evolved.
• The entire clearing cycle is dependent on the movement of the physical

paper cheque from the presenting bank to the drawee bank (branch) as
was mandated by the Negotiable Instruments Act. This bottleneck had an
overriding impact on any consideration for improvements or reduction in
the cycle time for clearing.
• Until very recently, legal covenants in India required the cheque to be

presented to the paying branch for payment. The paying branch is the
last node in the clearing cycle as it exists in the country, and thus the
paper cheque is on the move through the entire cycle from the bank
branch of the collecting bank where it is first deposited to the service
branch of the collecting bank, onward to the clearing-house, which acts
as a focal point for the cheques of all the banks, and from the clearing
centre to the paying bank service branch and lastly the paying branch. If
the cheque is returned unpaid, it has to re-trace the entire path back to
the presenting branch.
35.2 CHEQUE TRUNCATION
• The Negotiable Instruments Act states that a truncated cheque means a

cheque “which is truncated during the course of a clearing cycle either by
the clearing-house or by the bank whether paying or receiving payment
immediately on generation of an electronic image for transmission,
substituting the further physical movement of the cheque in writing.”
• Truncation is the process of stopping the flow of the physical cheque

issued by a drawer to the drawee branch. The physical instrument will be
truncated at some point en-route to the drawee branch and an electronic
image of the cheque would be sent to the drawee branch along with the
! !273
relevant information like the MICR fields, date of presentation, presenting

banks, etc. Thus with the implementation of cheque truncation the need
to move the physical instruments across branches would not be required,
except in exceptional circumstances. This would effectively reduce the
time required for payment of cheques, the associated cost of transit and
delay in processing, etc., thus speeding up the process of collection or
realization of the cheques.
• In short truncation is the process of stopping the flow of the physical

cheque issued by a drawer to the drawee branch. The physical
instrument will be truncated at a point enroute to the drawee branch and
an electronic image of the cheque is sent to the drawee branch along
with relevant data like MICR fields, date of presentation, presenting
banks, etc.
• Cheque truncation is a system of cheque clearing and settlement

between banks based on electronic data/images or both without physical
exchange of the instrument. Cheque truncation is being currently used in
many countries.
35.3 WHY CHEQUE TRUNCATION IN INDIA?
• Cheque Truncation speeds up collection of cheques and therefore

enhances customer service, reduces the scope for clearing related frauds,
minimizes cost of collection of cheques, reduces reconciliation problems,
eliminates logistics problems etc. With the other major product offering
in the form of RTGS, the Reserve Bank created the capability to enable
inter-bank payments online real time and facilitate corporate customer
payments. The other product, National Electronic Funds Transfer, is an
electronic credit transfer system. However, to wish away cheques is
simply not possible and that is the reason why the Bank decided to focus
on improving the efficiency of the Cheque Clearing Cycle. Cheque
Truncation is the alternative. Moreover contrary to perceptions, Cheque
Truncation is a more secure system than the current exchange of
physical documents in which the cheque moves from one point to
another, thus, not only creating delays but inconvenience to the customer
in case the instrument is lost in transit or manipulated during the
clearing cycle.
! !274
• In addition to operational efficiency, Cheque Truncation has several

benefits to the banks and customers which includes introduction of new
products, re-engineering the total receipts and payments mechanism of
the customers, human resource rationalization, cost effectiveness etc.,
35.4 INTRODUCTION OF TRUNCATION IN INDIA
To introduce cheque truncation in India, a working group was constituted

by the Reserve Bank. The working group suggested a model for cheque
truncation in India. The major recommendations of the working group
were:
• The physical cheque should be truncated within the presenting bank.
• Within the presenting bank the point of truncation could be decided by

each What can be presented individual member bank providing for
service bureau models where banks can approach or set up service
bureaux for capturing images and MICR data.
• Settlement should be generated on the basis of current MICR code line

data.
• Electronic images should be used for payment processing.
• Grey scale technology should be deployed for imaging.
• Images should be preserved for eight years.
• A centralized agency per clearing location should act as an image

warehouse for the banks. The group recommended norms for agencies to
provide the service.
• Public key infrastructure should be deployed to protect images and data

flow over the network.
35.5 ELIGIBILITY
• To participate in cheque truncation banks must be:
- Members of the clearing house in the National Clearing Region (NCR)

- Be members of the Indian Financial Network (INFINET).
! !275
In respect of banks who are not members of the INFINET, the following
alternatives are available:
(a) They may become the sub-members of the direct members or

(b) Such banks may use the infrastructure of the other banks having
INFINET membership without being the INFINET members
themselves and there clearing settlement can be done either
directly or through the member through whom they are
participating.
35.6 HOW THE QUALITY OF THE IMAGES WILL BE

ENSURED?
As the payments will be made on the basis of the images, it is essential to

ensure the quality of the images. For that purpose the solution proposes
Image Quality Audit (IQA) at different level. RBI will be specifying the
image standards to the member banks. The presenting bank is required to
perform the quality audit during the capture itself. Further quality audit will
be done at the gateway before onward transmission to clearing house.
Further the drawee bank can ask for the physical instrument if it is not
satisfied that the image quality is not good enough for payment
processing.
35.7 HOW THE IMAGE AND DATA TRANSMITTED OVER THE

NETWORK IS SECURED?
The security, integrity, non-repudiation and authenticity of the data and

image transmitted from the paying bank to payee bank will be ensured
using the Public Key Infrastructure (PKI). The CTS is compliant to the
requirement of the IT Act, 2000. It has been made mandatory for the
presenting bank to sign the image & data from the point of origin itself.
The image and data are secured using the PKI through out the entire cycle
covering capture system, the presenting bank, the clearing house and the
drawee bank. The PKI standards used are in accordance with the
appropriate Indian acts and practices of IDRBT which is the certifying
authority for banks & financial institutions in India. The standards defined
for the PKI are as followed:
! !276
hash algorithm SHA-1

padding algorithm pkcs#1
RSA asymmetric encryption with 1024 bit key length
Triple DES (3DES, TDES) symmetric encryption with 168 bit key length
Certificates in x.509v3 format
35.8 WHAT TYPE OF CHEQUES CAN BE PRESENTED IN THE

CTS?
All the local cheques can be presented in the CTS. Banks may also present
cheques on banks situated outside the NCR, but such banks have branches
in the NCR region. The CTS also supports the intercity clearing and
specialized clearing like high value clearing, etc. The on-us instruments
where both presenting and drawee banks are same are not allowed in the
CTS. Images of such instruments would be stopped at the Clearing House
Interface itself.
35.9 WHAT ARE THE PRECAUTIONS REQUIRED TO BE

TAKEN BY THE BANK CUSTOMERS TO AVOID FRAUDS?
Bank customers should use image friendly cheques. They should preferably
use dark coloured ink while drawing the instruments. Care should be
exercised in the use of rubber stamp, so that it could not interfere with the
material portions of the cheque. The date of the cheque, payees name,
amount and signature are the basic features which are essential in a
cheque. The use of rubber stamps, etc., should not overshadow the clear
appearance of these basic features in image. In order to ensure that all
essential elements of a cheque are captured in an image during the
scanning process, bank customers have to exercise appropriate care in this
regard.
35.10 CHANGE IN THE PROCESS FOR THE CUSTOMERS
There will be no change in the clearing process. Customers would continue

to use cheques as at present, except in the use of image friendly coloured
ink for making the instruments. Of course, such of those customers, who
used to receive the paid instruments, like Government Departments, would
! !277
only receive cheque images instead of the physical instruments. This will
also facilitate in better processing at their end, as they will be able to
access online images in addition to the data. As the images are going to be
moved across, the time taken for the receipt of paid instruments at their
end could be reduced so that better and timely control could be exercised
over payments. This will also give an early opportunity to the drawers or
issuers of cheques to detect frauds or alterations in their cheques.
It is also possible for cheque issuers to consider newer techniques such as

embedded verifiable features such as bar-codes or logos or watermarks,
encrypted codes, holograms, etc., which would facilitate early.
35.11 HOW DOES IT WORK?
• A scanner in the local branch where the cheque is deposited is used to

capture the image of the cheque and send it to an automated clearing-
house and from there onto the paying bank. Returned cheques follow the
same route.
• Only 2 legs will be imaged. The return leg is kept out. Physical cheques
will remain at the branch.
• In the pilot cheque truncation project the current paper based clearing
will be replaced by image and data clearing for outward and inward and
only data for return item processing. Cheque data and images will be
stored in image archives for outward and inward items.
• The image captured at the presenting bank level will be transmitted to

the clearing house and then to the drawee branches with digital
signatures of the presenting bank. Each image will also have the physical
endorsement of the presenting bank.
• To ensure only images of a requisite quality reach the drawee branches,

there will be a quality check at the level of the capture systems and the
clearing house interface.
• The archive at the clearing-house will retain all the clearing images and
data for eight years. The paper instruments are required to be retained
for eight years till further instructions on the subject are evolved.
! !278
• The size and the configurations of the systems to be used for outward
and inward processing is a function of the banks’ business requirements
and is to be worked out by the banks based on the volume of inward and
outward instruments of the bank, the period of retention of such inward
and outward images and MICR data by the bank and size of the images
of the cheques. The exact size of the three prescribed images of each
image may vary according to the source instrument of the different
banks. However, for the purpose of sizing, banks could choose
conservatively 75 (seventy-five) KB as the size of the three prescribed
images along with the digital signature. The point of truncation and the
retention period shall have a bearing on the storage requirements and
banks need to suitably work out the storage requirements of their
systems accordingly. Banks also need to consider the scalability of their
systems depending upon the future requirements.
• The electronic image of truncated cheques will be gray scale technology.

There will be three images of the cheques i.e., front grey, front black and
white and back black and white. The image specifications are:
Image type minimum DPI format compression

Front gray scale 100 DPI JFIF JPEG
Front black & white 200 DPI TIFF CCITT G4
Reverse black 7 white 200 DPI TIFF CCITT G4
The image quality of the grey scale will be 8 bits/pixel (256 levels)
• The RBI will specify image standards.
• The drawee can ask for physical instrument if the image quality is not
good enough for payment processing.
• Security, integrity and authenticity of the data and image transmitted

from the paying bank to payee bank is ensured using the Public Key
Infrastructure (PKI).
• The Reserve Bank will provide only the Clearing-House Interface (CHI)
application software to the member banks. The member banks have to
purchase (i) appropriate hardware, (ii) systems software and (iii)
networking infrastructure. The CHI will act as a gateway for outward
and inward MICR data and the images of the instruments to be sent to/
! !279
received from the clearing-house over the network/media. The

clearing-house interface is a windows based software with embedded
oracle relational database to be loaded on the gateway server. The
gateway shall be deployed using the public key infrastructure for all its
communication with the clearing-house. The clearing-house interface
shall aggregate the images and MICR data received from the branches
for outward presentation and will deliver the inward images and MICR
data drawee bank branch-wise to the respective clearing-house
interfaces. The images have to pass the required Image Quality
Assurance (IQA) and Image Quality Usability (IQU) specifications which
will be issued by the RBI. Failure to do so may result in rejection of
such images.
• As CTS clearing is based on images it is important that the source

documents are image friendly. The cheques have to be printed on the
MICR standard stationary given in the MICR procedural guidelines and
the size of the cheque remains unchanged. However, banks need to
take certain precautions which include:
- The background color should be light to enhance the text and dark
colors in the background may be avoided.
- Features which are heavy on design or excessive use of micro-

lettering may be avoided as they reduce the contrast between
background and the text. Holograms and logos and other unique
features of an instrument may remain on the face of the instrument.
• As a guide, ideally the bank’s image based processing system/s must

have the following characteristics:
- Redundancy with no single point of failure.

- High availability.
- Flexible to meet the bank’s current and future needs (distributed
capture, centralized capture, cluster model, image service bureau,
ATM/POS, corporate customer capture, etc).
- Seamless interface to the RBI CHI system.
! !280
- Must meet the clearing window and recovery procedures with the
CHI.
- Images and data to meet the IQA/IQU and security and other
specifications from RBI.
- Provide web-interfaces at the branches for marking returns and

printing of images.
- Capable of burning CDs for the outward presentation and inward

presentation to the paying branches.
- Track and monitor the sending and receiving of the items from the
various points of truncation.
- Update the bank account processing system.
35.12 BENEFITS
• The main advantage is reducing the delay, high costs and risk of fraud
inherent in the paper based clearing system.
• Faster clearing cycle. Bank customers would get their cheques realized
faster as T (transaction) +0 local clearing and T + 1 inter-city clearing
is possible in cheque truncation system (CTS). As straight through
processing and automated payment processing are enabled by CTS
faster realization is accompanied by a reduction in costs for the
customers and the banks. It is also possible for banks to offer
innovative products and services based on CTS. The banks have
additional advantage of reduced reconciliation and clearing frauds.
• Better reconciliation/verification process.

• Better customer service.
• Elimination of float.
• Lower transaction cost.
• Lower operating risks.
• No need to move physical instruments across branches.
• Operational efficiency benefits bottom lines of banks.
! !281
35.13 OTHER IMPORTANT INFORMATION
• It is the duty of the banker who receives payment on an electronic

image of a truncated bill held with him to verify the prima facie
genuineness of the cheque to be truncated and any fraud, forgery or
tampering on the face of the instrument that can be verified with due
diligence and ordinary care.
• When an electronic image of a truncated cheque is presented for

payment, the drawee bank is entitled to demand any further
information regarding the truncated cheque from the bank holding the
truncated cheque in case of any reasonable suspicion about the
genuineness of the tenor of the instrument. If the suspicion is that of
fraud, forgery, tampering or destruction of the instrument, it is entitled
to further demand the presentment of the truncated cheque itself for
verification, provided the truncated cheque so demanded shall be
retained by it if payment is made accordingly.
• Regarding cheques in an electronic form or a truncated cheque even

after the payment, the banker who has received the payment shall be
entitled to retain the truncated cheque.
• A certificate issued on the foot of the printout of the electronic image of

a truncated cheque by the banker who paid the instrument shall be
prima facie proof of such payment.
• If the payment has been made on an altered cheque and the alteration
is not apparent, payment is deemed to have been made in due course.
Where the cheque is an electronic image of a truncated cheque, any
difference in tenor of such electronic image and the truncated cheque
shall be a material alteration. The bank or clearing-house must ensure
the exactness of the apparent tenor of the electronic image of the
truncated cheque while truncating and transmitting the message. A
bank or clearing-house receiving a transmitted electronic image of a
truncated cheque shall verify from the transmitting party that the
image is exactly the same.
! !282
35.14 RISKS IN CHEQUE TRUNCATION
• The introduction of the truncation process will change the roles and the
responsibilities of the various participants in the truncation process and
may lead to introduction of certain risks that will have to be mitigated.
These are documented below:
- At the presenting bank level, the responsibility to verify the

genuineness of the cheque based on the apparent tenor or the visible
features of the cheque presented for collection may lead to banks
refusing to accept a genuine cheque or accepting a forged cheque
based on a manual scrutiny. Images and MICR data to be sent to the
clearing-house have to be matched before they are released to the
clearing-house.
- The clearing-house will have to assume that the data given by the
banks is the data meant for that day’s clearing and will have to arrive
at the settlement based on this assumption. If the MICR data given
by the bank is not matching with the day’s image the bank has sent
for collection, it may lead to erroneous settlement and large returns.
• Truncating cheques entails additional operational risks. Banks will have

to take adequate measures to ensure that all necessary safeguards are
provided for – in consonance with legal requirements and banking
practice while making payments, especially for high value instruments.
• The drawee bank has to verify the signature on the image of a cheque.
If a drawee bank chooses to verify signatures on the images of cheques
above a cut-off amount only, then it runs the risk of paying some
forged instruments.
35.15 LEGAL ISSUES
• The collecting bank under a truncated environment has to verify the

genuineness of the cheque based on visible features.
• It is being suggested that the clearing-house cannot be held

responsible for fraud, forgery, etc. As per the recommendations of the
working group, the clearing-house will be doing settlement based
purely on MICR data and will act as a pass through for the images.
! !283
Therefore, the clearing-house cannot be held responsible for the fraud

or forgery of cheques as it cannot even open the images sent in by the
banks.
• Protests have to be lodged per the timings of the existing return cycle.
• On the right of the drawee bank to seek further information on the

veracity/genuineness of the cheque, the amended NI Act already
provides for the same. The drawee bank can seek not only further
information but can also seek the physical instrument for verification
and can retain it if the payment has been made accordingly.
• Images must be retained for 8 (eight) years.
35.16 KEY CHALLENGES
• Cheque volumes will continue to increase for the next 5-7 years. The
need to ensure speedy clearance of these cheques would be a
challenge. Move to cheque truncation will ease this concern.
• Customers will have to be educated on cheque truncation.
• Image based processing of cheques in India present several challenges
- which all add up to the cost for the banking industry.
• Geographical spread & volumes impact speed of physical movement of

paper (especially inter-city).
• Multiple languages & scripts are used.
• Multiple handling due to current processes in branches leads to high

rejects in an imaging process.
• Legal & regulatory issues are complicated.
• Lack of centralized banking systems in many banks to enable STP is a

problem.
• Potential for fraud/counterfeit cheques increases.
! !284
• With RTGS and cheque truncation, banks will potentially lose large
income leverage.
• The truncation initiative will re-define business models.
• Loss of float.
• Additional cost of infrastructure & operations.
35.17 OPTIONS AVAILABLE TO THE CUSTOMER TO SEE

PHYSICAL CHEQUES
The physical instruments are required to be stored for a statutory period.

It would be obligatory for presenting bank to warehouse the physical
instruments for that statutory period. In case a customer desires to get a
paper instrument back, the instrument can be sourced from the
presenting bank through the drawee bank.
1. What is a Truncated cheque?
2. What is Truncation?
3. Which banks can participate in cheque Truncation?
4. How long do the archives at the clearing-house retain all the clearing
images and data?
5. What are the benefits of Truncated cheque clearance?
6. Are there any risks?
! !285
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !286
ELECTRONIC CLEARING SERVICE
Chapter 36
Electronic Clearing Service
Objectives
This chapter explains how Electronic Clearing Service (ECS) works.
Structure
36.1 Introduction
36.2 ECS Inward (Credit)
36.3 Advantages
36.4 ECS Outward (Debit)
36.5 Types of Institutions Using the ECS (Debit) Scheme
36.6 Benefits to a Corporate Body/Institution
36.7 Benefits to the Beneficiary Customer
36.8 Concern
36.9 Dishonour of Mandate
36.10 General
36.1 INTRODUCTION
• Electronic clearing service is a facility of electronically sending payment

instructions.
• The objective is to provide an alternate method of effecting bulk payment

or bulk collection transactions thereby obviating the need for issuing and
handling paper instruments thereby facilitating customer service.
• It is used to electronically transfer funds for transactions that are

repetitive and periodic in nature.
• The scheme is designed for high volume transactions and to discourage

low volume presentations.
• This is further divided into ECS credit and ECS debit.
! !287
36.2 ECS INWARD (CREDIT)
• This is a method of payment whereby the institutions having to make a

large number of payments can directly deposit the amount electronically
into the bank accounts of those they need to make the payment to
(without having to issue paper instruments).
• The scheme covers bulk payment transactions like periodic payments of

salary, interest, dividends and the likes and obviates the need to prepare
a large number of warrants, dispatching them by post and reconciling the
payments later. Often each individual payment is of a repetitive nature
and of a relatively small amount.
• The system works on the basis of one debit transaction triggering a large
number of credit entries.
• These credits or electronic payment instructions which possess details of

the beneficiary’s account number, amount and branch bank are
communicated to the bank branches through their respective service
branches for crediting the account of the beneficiary either through
magnetic media duly encrypted or through hard copy.
• Electronic clearing has been facilitated by MICR and the fact that several
companies issue cheques that are payable at par at many locations (such
as dividend cheques).
• ECS credit can only be given to customers who have accounts in banks
that participate in this form of settlement.
• The magnetic tape/floppy is the basis for the sponsor bank to debit the
user's account and the destination banks to credit the destination
account holder's accounts.
• National Clearing Cell (NCC) processes the transaction.
• The minimum number of transactions per user institution is 2,500. The

maximum value of any single item should not be more than ` 1,00,000
in a day at a centre.
• It is safe as there is no chance of the payment going astray.
! !288
• A deficiency is that sometimes the customer is not advised of the credit

to his account by the recipient bank even though beneficiaries are to be
informed of credits to their account and the nature of the credit.
36.3 ADVANTAGES
• Saves the company in administrative costs incurred for printing paper

instruments in MICR format and dispatching them by registered post.
• There would be no difficulty in reconciling transactions.
• Effortless receipt. There is no need for visiting the bank to deposit the
dividend/interest warrant.
• As no instrument is involved, loss of instrument in transit or fraudulent

encashment thereof and consequent correspondence with the company
are completely eliminated.
• Cash management becomes easier for the paying company as

arrangement for funds is required only on the specified day.
36.4 ECS OUTWARD (DEBIT)
• The Reserve Bank of India introduced the Electronic Clearing Service

(Debit) scheme to provide faster method of effecting periodic and
repetitive payments by ‘direct debit’ to customers’ accounts (duly
authorised) thereby minimising paper transactions and increasing
customer satisfaction.
• Electronic Clearing Service (debit) envisages ‘a large number of debits

and one credit’ in the case of collection of electricity bills, telephone bills,
loan installments, insurance premia, club fees, etc by the utility service
providers. In other words this is used for raising debits to a large number
of accounts maintained with bank branches at various locations within
the jurisdiction of a ECS Centre for single credit to an account of a bank
(that maintains the account of the user institution) used for utility
payments, EMI, etc.
• Under the existing system for collection of electricity bills and telephone
bills, customers/subscribers are required to go to the collection centres/
! !289
designated banks and stand in long queues for payment of bills/dues.

There would not be any cash transaction or payment through cheques in
the new system.
• It works on the strength of mandates by the destination account holder

to the user institution to raise a debit to their accounts.
• Utility Companies, banks/institutions receiving periodic/repetitive

payments towards electricity bills/telephone bills/loan installments/
insurance premia initially collect mandates from their customers/
subscribers for collection of amounts due from them by direct debit to
their accounts with banks. The mandate provides details such as the
name, account number, name of bank/branch, etc., duly certified by the
bank concerned.
• Based on the details furnished in the mandates, the user company

prepares transaction data on electronic media and submits the encrypted
data to the local clearing house, through its sponsor bank.
• After due validation of the data, the local clearing house processes the
same and arrives at the inter-bank settlement. It also generates bank-
wise/branch-wise reports (hard copies).
• NCC debits the destination banks’ accounts with clearing house and
simultaneously affords a consolidated credit to the sponsor bank’s
account and furnishes the bank-wise and branch-wise reports to the
service branches of destination banks.
• Withdrawal instructions of a customer have to be treated equivalent to a

stop payment instruction in the cheque clearing system.
• It works on the principle of pre-authorised debits, i.e., the account

holder’s account is debited on the appointed day and the amount passed
onto the utility company.
• It is noted that the amount may vary from month to month.
• To permit some control, the customer may state a maximum amount by

which his account may be debited.
! !290
• RBI has since deregulated service charges to be levied by sponsor banks.
• There is no value limit with regard to transactions.
36.5 TYPES OF INSTITUTIONS USING THE ECS (DEBIT)

SCHEME
• Utility service providers like MTNL, Telephone/Mobile companies, Telecom

Departments, State Electricity Boards, Banks (for collection of credit
cards dues) LIC, Housing Finance Companies, Intermediaries and Clubs,
etc.
36.6 BENEFITS TO A CORPORATE BODY/INSTITUTION
• Savings in administrative cost presently being incurred for printing of

paper instruments in MICR format and dispatching them by registered
post.
• Loss of instruments in transit or fraudulent encashment thereof totally

eliminated.
• Reconciliation of transactions is made automatic. By the time the ECS

cycle is completed, the user institution gets an electronic data file from
its bank with the date of payment and banker’s confirmation thereon.
• Cash management becomes easier as arrangement for funds is required

to be made only on the specified date.
• Better customer/investor service.
36.7 BENEFITS TO THE BENEFICIARY CUSTOMER
• Payment on the due date.
• Loss of instrument in transit or fraudulent encashment thereof and

consequent correspondence with the company are completely eliminated.
• Faster Collection of bills by the companies and better cash management

by them
! !291
• Eliminates the need to go to the collection centres/banks by the

customers and no need to stand in long ‘Q’s for payment
• Enables better cash flow management.
• Automatic debiting to the accounts once the mandates are given by the
customers. This cuts down procedural delay.
• There is no value limit for individual transactions.
36.8 CONCERN
• By giving the mandate, the individual may be debited for an expense

that is not his. There is, to protect the customer ‘a direct debit
guarantee’. If the customer is wrongly debited, the customer can
complain on the wrong billing to the service provider and inform the
bank. The amount will be refunded.
36.9 DISHONOUR OF MANDATE
• Banks should have a policy in dealing with frequent dishonour of ECS

mandate.
36.10 GENERAL
• A study group constituted by the RBI suggests that a fee be charged on

paper cheque payments which should be borne by the customers. It also
stated that customers should not be allowed to pay credit cards and
mobile bill dues by cheque. To encourage this the report stated that ECS
based transactions should be free for three years and legal protection
should be made available to such transfers. The RBI has however stated
that charges cannot be levied on cheques.
• RBI has stated that from August 1, 2008, all payments of ` 10 lakhs and
above between RBI regulated entities (banks, primary dealers and
NBFCs) and RBI regulated markets (money market, government
securities market and foreign exchange market) should be routed
through the electronic payment mechanism such as RTGS, NEFT and
ECS.
! !292
1. What is Electronic Clearance Service?
2. What is ECS inward?
3. What are the advantages of ECS?
4. Who use the ECS (debit) scheme?
5. What are the benefits to the beneficiary customer?
! !293
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !294
NATIONAL ELECTRONIC CLEARING SERVICE
Chapter 37
National Electronic Clearing Service
Objectives
This chapter explains how National Electronic Clearing Service (NECS)

works.
Structure
37.1 Introduction
37.2 The Scheme
37.3 Processing and Settlement
37.4 Registration of User
37.5 Clearing Settlement and Output Data for Destination Banks
37.6 Minimum and Maximum Number of Transactions
37.1 INTRODUCTION
• National Electronic Clearing Service’s (NECS) objective is to facilitate

centralised processing for repetitive and bulk payment instructions.
• Sponsor banks are required to submit NECS data at a single centre

(which is Mumbai).
• NECS (Credit) facilitates multiple credits to beneficiary accounts at the

destination branch against a single debit of the account of a User with
the sponsor bank.
• NECS (Debit) facilitates multiple debits to destination account holders

against single credit to user account.
• The system leverages on Core-Banking solution of member banks for

centralised posting of inward NECS transactions.
! !295
37.2 THE SCHEME
• The scheme covers bulk payment transactions like periodic (monthly/

quarterly/half-yearly/yearly) payments of interest/salary/pension/
commission/dividend/refund or bulk collection of utility bills/insurance
premium/school fee/loan installments, etc., by companies/corporations/
government departments and such other entities.
• Banks are required to:
- Include all NEFT/core banking enabled banks in NECS.
- Educate corporate customers and guide them in preparing a single

NECS file for credit to beneficiaries having accounts across the country
with destination branches participating in NECS.
- Have a mechanism to electronically collect NECS files sponsored by

different branches on behalf of their corporate customers across the
country.
- Afford NECS credit to customer accounts without delay.
- Avoid practices that delay and burden system.
- Strengthen infrastructure at the service branch (Mumbai).
37.3 PROCESSING AND SETTLEMENT
• The Clearing House (CH) is responsible for processing the input data
submitted by the Sponsor Bank on behalf of its User and supply of
relevant clearing details to the Sponsor Bank, Destination Banks and
Settlement Agency for accounting of the Clearing Settlements.
• CH monitors the performance of all the constituents in NECS Clearing to

ensure that the time schedule for various activities under NECS Process
Cycle as prescribed.
• CH has a Steering Committee comprising not more than 10 and not less
than 5 member banks to aid and advise it on operational issues. The
! !296
Committee is constituted by the CH and its term shall be one year. The
Committee meets at least once in a half-year.
• Settlement Agency provides the settlement service by way of crediting/

debiting the accounts of Destination Banks and the Sponsor Bank in its
books on the basis of settlement advised by the CH. Normally such
settlements, take place in the books of account of RBI at Mumbai. The
settlement rules for clearing pertaining to minimum balance and
withdrawal of favourable balance in clearing as defined in the Uniform
Regulations and Rules for Clearing Houses would also be applicable to the
settlements under NECS.
• The settlement is final and irrevocable, as defined in Section 23 of the

“Payment and Settlement Systems Act 2007” as soon as the same is
determined in terms of the procedures notified by RBI.
37.4 REGISTRATION OF USER
• Institutions desirous to avail of the NECS facility have to get themselves

registered with the CH.
37.5 CLEARING SETTLEMENT AND OUTPUT DATA FOR

DESTINATION BANKS
• On Day-0 CH would generate the output data files for the Destination
banks. The description and the record lay out of the output file.
• The output data and the report file, as indicated above, would be made
available to the Destination Bank through web-server.
• The ECS Service branches of Destination Banks should make their

internal arrangements immediately to download the information so that
the Destination Account Holder’s accounts are credited on Day-1 without
fail.
• On the day of settlement, CH would debit/credit the Sponsor Bank’s

account with the amount indicated in the mandate given by the latter
and credit/debit the accounts of the Destination Banks with amounts due
to them.
! !297
• In case of NECS (Credit), destination Bank would be held liable to pay

penal interest at the rate of prevailing Bank Rate plus two percent from
the due date of credit till the date of actual credit for any delayed credit
to the beneficiaries’ accounts. Penal interest, if any, may be credited to
the Destination Account Holder’s account even if no claim is lodged by
the Destination Account Holder.
37.6 MINIMUM AND MAXIMUM NUMBER OF

TRANSACTIONS
• There is no stipulation on the minimum number of transactions to be put

through. But considering that the Scheme is designed for bulk
transactions, CH may combine the settlements of more than one input
submissions on a single day.
• Therefore, a Sponsor Bank should finalise the settlement date in

consultation with the NCC/CH.
1. What are the objectives of the NECS?
2. What kind of payments does the NECS scheme include?
3. Who is responsible for processing the input data submitted by the

Sponsor Bank on behalf of its User?
4. What is the maximum number of transactions permitted?
! !298
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !299
SPEED CLEARING
Chapter 38
Speed Clearing
Objectives
This chapter explains how Speed Clearing works.
Structure
38.1 Speed Clearing

38.2 How Speed Clearing Works?
38.3 Crediting of Funds
38.4 Charges
38.1 SPEED CLEARING
Speed Clearing refers to collection of outstation cheques through the local

clearing. It facilitates collection of cheques drawn on outstation core-
banking-enabled branches of banks, if they have a net-worked branch
locally.
Speed Clearing aims to reduce the time taken (7/10/14 days for
Metropolitan centres/state capitals/other locations) for realisation of
outstation cheques.
38.2 HOW SPEED CLEARING WORKS?
Banks have networked their branches by implementing Core Banking

Solutions (CBS). In CBS environment, cheques can be paid at any location
obviating the need for their physical movement to the Drawee branch. The
concept Speed Clearing combines the advantages of MICR clearing with
CBS.
• Cheques drawn on outstation CBS branches of a Drawee bank can be

processed in the Local Clearing under the Speed Clearing arrangement if
the Drawee bank has a branch presence at the local centre.
! !300
SPEED CLEARING
• Cheques having transaction codes 10, 11 and 13 drawn on CBS-enabled

bank branches are eligible to be presented in Speed Clearing.
• Government cheques and demand drafts are not eligible for collection
under speed clearing.
38.3 CREDITING OF FUNDS
• Outstation cheques under Speed Clearing will be paid on T+1 or 2 basis

(within 48 hours).
• It is an improvement over national clearing as in national clearing the

cheque is realised in around a week.
• Speed Clearing facilitates the clearing of such cheques locally without the
need to move the cheques to the Drawee centre.
• Speed clearing has no geographical limitation. Cheques drawn on any

location may be cleared as long as the bank is on core banking solutions.
38.4 CHARGES
• Presenting branches are currently permitted to levy charges at a rate not

exceeding ` 150 per cheque (inclusive of all charges other than Service
Tax) for cheques of above ` 1 lakh presented through Speed Clearing.
• There are no charges for cheques upto ` 1 lakh.
1. What is Speed Clearing?
2. When are outstation cheques paid in Speed Clearing?
3. Are all cheques and draft be cleared through Speed Clearing?
4. Can cheques from all locations be cleared?
5. What are the charges levied for Speed Clearing? 
! !301
SPEED CLEARING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !302
ASIAN CLEARING UNION
Chapter 39
Asian Clearing Union
Objectives
This chapter explains Asian Clearing Union.
Structure
39.1 Introduction
39.2 Operation
39.3 Settlement Mechanism
39.4 Payments not Eligible to be Settled through the ACU
39.1 INTRODUCTION
• The Asian Clearing Union (ACU) was established with its head quarters at
Tehran, Iran on December 9, 1974 at the initiative of the United Nations
Economic and Social Commission for Asia and Pacific (ESCAP), as a step
towards securing regional co-operation.
• The ACU is a system for clearing payments among the member countries
on a multilateral basis.
• The central banks and monetary authorities of Iran, India, Bangladesh,

Bhutan, Nepal, Pakistan, Sri Lanka and Myanmar are the members of the
ACU.
• The detailed procedural instructions for channeling transactions through

the ACU have been issued, by the Reserve Bank, as a separate booklet
titled Memorandum ACM.
• All transactions to be cleared through the ACU are handled by authorised

dealers in the same manner as other normal foreign exchange
transactions. All authorised dealers in India have been permitted to
handle ACU transactions.
! !303
• Authorised dealers may freely enter into correspondent arrangements

with banks in the other countries participating in the Clearing Union.
• Authorized dealers can open ACU Dollar Accounts in the names of all
banks, in all member countries, including Pakistan, without the prior
approval of Reserve Bank of India.
39.2 OPERATION
• The Asian Monetary Unit is the common unit of account of ACU and is
equivalent in value to one U.S. dollar. The Asian Monetary Unit may also
be denominated as ACU dollar.
• All instruments of payment are required to be denominated in Asian

Monetary Unit. Settlement of such instruments may be made by
authorised dealers through operation on ACU dollar Accounts.
• Most of the transactions are settled directly through the accounts

maintained by authorised dealers with banks in the other participating
countries and vice versa; only the spill-overs in either direction are
required to be settled by the Central Banks in the countries concerned
through the Clearing Union.
• Authorised dealers are permitted to settle commercial and other eligible

transactions in much the same manner as other normal foreign exchange
transactions. The procedures for opening letters of credit, negotiation of
documents, etc., in respect of trade in convertible currencies are
applicable for trade routed through the ACU mechanism.
• To facilitate settlement of transactions through the ACU in this manner,

authorised dealers may freely open with their branches/correspondents
‘ACU dollar accounts’. These must be kept distinct from U.S. dollar
accounts, if any, maintained for settlement of transactions taking place
outside the Clearing Union. The term ACU dollar is specifically being used
in order to identify the use of U.S. dollar in relation to ACU transactions.
Otherwise there is no distinction value-wise between ACU dollar and the
U.S. Dollar.
• Authorised dealers should ensure that at all times the balances

maintained in the ACU dollar accounts are commensurate with the
! !304
requirements of their normal exchange business and funds rendered

surplus should be repatriated to India regularly.
• All eligible transactions between member countries are required to be

settled through the ACU.
39.3 SETTLEMENT MECHANISM
• Reserve Bank of India undertakes to receive and pay U.S. dollars from/to
authorised dealer for the purpose of funding or for repatriating the
excess liquidity in the ACU dollar accounts maintained by the authorised
dealer with their correspondents in the other participating countries.
Similarly, the Reserve Bank of India has also been receiving and
delivering U.S. dollar amounts for absorbing liquidity or for funding the
ACU dollar (vostro) accounts maintained by the authorised dealers on
behalf of their overseas correspondents.
• Funding of an ACU dollar account maintained with a correspondent bank

in another ACU participant country will continue to be effected by
Reserve Bank only after receiving an intimation that equivalent amount
of U.S. dollar is being credited to its account with the Federal Reserve
Bank of New York, by the authorised dealer bank on the value date.
Similarly, Reserve Bank will continue to arrange for payment of US dollar
from its account with the Federal Reserve Bank of New York to the
account of the correspondent of the authorised dealer in New York, in
case it has received intimation of surrender of surplus funds to the other
participant central bank on behalf of the authorised dealer bank in India.
• Transactions that are eligible to be made through the ACU are payments:
- From a resident in the territory of one participant to a resident in the

territory of another participant.
- For current international transactions as defined by the Articles of

Agreement of the International Monetary Fund.
- Permitted by the country in which the payer resides.
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- Payments which are in compliance with FEMA 1999, rules, regulations,

orders or directions issued thereunder and the specific provisions of the
Memorandum ACM.
- For export/import transactions between ACU member countries on

deferred payment terms.
39.4 PAYMENTS NOT ELIGIBLE TO BE SETTLED THROUGH

THE ACU
The following payments are not eligible to be settled through ACU:
• Payments between Nepal & India and Bhutan & India, exception being
made in the case of goods imported from India by an importer resident
in Nepal who has been permitted by the Nepal Rashtra Bank to make
payments in foreign exchange. Such payments may be settled through
the ACU mechanism;
• Payments which are not on account of current international transactions

as defined by the International Monetary Fund, except to the extent
mutually agreed upon between Reserve Bank and the other participants;
• Such other payments as may be declared by the Asian Clearing Union to

be ineligible for being channeled through the clearing facility.
1. What is the ACU?
2. What is the common unit of account of ACU and what is it equivalent to?
3. What is the procedure in respect of trade routed through the ACU

mechanism?
4. What are the transactions eligible to be made through the ACU?
5. What payments are not eligible to be settled through ACU?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
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STANDING INSTRUCTIONS
Chapter 40
Standing Instructions
Objectives
This chapter will explain Standing Instructions.
Structure
40.1 Introduction
40.2 Details
40.1 INTRODUCTION
• Standing instructions are instructions issued by customers to banks to

make payments to third parties on specific dates.
40.2 DETAILS
• Bank customers have payments they need to make with frightening

regularity such as life insurance premiums, rent, subscriptions, equated
monthly installments on housing loans, hire purchase loans and the like.
Banks can take this responsibility over, on receiving instructions from
customers, and make these payments on their behalf.
• These instructions would be to make a specific payment to a person/

organization on a specific date. The payment may be monthly, quarterly,
half yearly or annually. The period (length of time) the payments are to
be made would also be specified.
• The customer can, at any time, instruct the bank, to stop payment.
• The banker is expected to comply with the instructions and make

payment on the date/s specified. However, the bank bears no
responsibility in respect of payments.
! !308
• The bank is not bound to make payment if the customer does not have
an adequate balance. The assumption is that the payment will be made
provided the customer keeps the account adequately funded.
• In carrying out the customer’s instructions, the banker acts as the

customer’s agent and can be held liable for the loss sustained by the
customer due to the bank’s negligence on account of non-compliance or
delayed payment.
• RBI has stated that standing instructions should be freely accepted on all
current and savings bank accounts.
• The RBI has also stated that the scope should be enlarged to include
payments on account of taxes, school/college fees, licenses, etc.
1. What are Standing Instructions?
2. Does the bank have any responsibility towards the payment?
3. Is the bank liable for loss sustained by the customer for non-compliance
to the customer’s instructions?
4. On what type of accounts are Standing Instructions accepted?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
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MAIL AND WIRE/TELEGRAPHIC TRANSFERS
Chapter 41
Mail and Wire/Telegraphic Transfers
Objectives
This chapter will explain Mail and Telegraphic Transfers.
Structure
41.1 Mail Transfer

41.2 Wire or Telegraphic Transfer
41.3 Salient Features of a Wire Transfer Transaction
41.4 Role of Ordering, Intermediary and Beneficiary banks
41.1 MAIL TRANSFER
• A mail transfer is a way of remitting money from one place to another

through a bank.
• The remitter deposits the amount with a bank and gives the name and
address or account number of the payee to whom the money is to be
paid.
• The bank sends an advice by mail to its branch or correspondent at the

place of the payee with instructions to make payment.
• The bank charges a commission for this service.
• The receiving bank or branch sends an advice to the payee asking him to
collect the amount either through a bank or directly by establishing his
identity.
• In case the payee is a customer, his account is credited.
• Mail transfers are used for both internal and international remittances.
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• This is an arrangement between two offices/branches of a bank or two

banks and is not a negotiable payment order.
41.2 WIRE OR TELEGRAPHIC TRANSFER
• A telegraphic transfer is similar to a mail transfer. The difference is that

the transfer is made by telegram, telephone or telex (as required by the
remitter) and the remittance charges are higher.
• Banks use wire transfers as an expeditious method for transferring funds

between bank accounts. Wire transfers include transactions occurring
within the national boundaries of a country or from one country to
another. As wire transfers do not involve actual movement of currency,
they are considered as a rapid and secure method for transferring value
from one location to another.
4 1 . 3 S A L I E N T F E AT U R E S O F A W I R E T R A N S F E R
TRANSACTION
• Wire transfer is a transaction carried out on behalf of an originator

person (both natural and legal) through a bank by electronic means with
a view to making an amount of money available to a beneficiary person
at a bank. The originator and the beneficiary may be the same person.
• Cross-border transfer means any wire transfer where the originator and
the beneficiary bank or financial institutions are located in different
countries. It may include any chain of wire transfers that has at least one
cross-border element.
• Domestic wire transfer means any wire transfer where the originator and
receiver are located in the same country. It may also include a chain of
wire transfers that takes place entirely within the borders of a single
country even though the system used to effect the wire transfer may be
located in another country.
• The originator is the account holder, or where there is no account, the

person (natural or legal) that places the order with the bank to perform
the wire transfer.
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• Wire transfer is an instantaneous and most preferred route for transfer of

funds across the globe and hence, there is a need for preventing
terrorists and other criminals from having unfettered access to wire
transfers for moving their funds and for detecting any misuse when it
occurs. This can be achieved if basic information on the originator of wire
transfers is immediately available to appropriate law enforcement and/or
prosecutorial authorities in order to assist them in detecting,
investigating, prosecuting terrorists or other criminals and tracing their
assets. The information can be used by Financial Intelligence Unit-India
(FIU-IND) for analysing suspicious or unusual activity and disseminating
it as necessary. The originator information can also be put to use by the
beneficiary bank to facilitate identification and reporting of suspicious
transactions to FIU-IND. Owing to the potential terrorist financing threat
posed by small wire transfers, the objective is to be in a position to trace
all wire transfers with minimum threshold limits. Accordingly, banks must
ensure that all wire transfers are accompanied by the following
information:
(i) Cross-border Wire Transfers
• All cross-border wire transfers must be accompanied by accurate and

meaningful originator information.
• Information accompanying cross-border wire transfers must contain

the name and address of the originator and where an account exists,
the number of that account. In the absence of an account, a unique
reference number, as prevalent in the country concerned, must be
included.
• Where several individual transfers from a single originator are

bundled in a batch file for transmission to beneficiaries in another
country, they may be exempted from including full originator
information, provided they include the originator’s account number or
unique reference number.
(ii) Domestic Wire Transfers
• Information accompanying all domestic wire transfers of ` 50,000/-

(Rupees Fifty Thousand) and above must include complete originator
information, i.e., name, address and account number, etc., unless full
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originator information can be made available to the beneficiary bank

by other means.
• If a bank has reason to believe that a customer is intentionally

structuring wire transfers to below ` 50,000/- (Rupees Fifty
Thousand) to several beneficiaries in order to avoid reporting or
monitoring, the bank must insist on complete customer identification
before effecting the transfer. In case of non-cooperation from the
customer, efforts should be made to establish his identity and
Suspicious Transaction Report (STR) should be made to FIU-IND.
• When a credit or debit card is used to effect money transfer,

necessary information as stated above should be included in the
message.
(iii)Exemptions
• Interbank transfers and settlements where both the originator and

beneficiary are banks or financial institutions would be exempted
from the above requirements.
41.4 ROLE OF ORDERING, INTERMEDIARY AND

BENEFICIARY BANKS
(i) Ordering Bank
• An ordering bank is the one that originates a wire transfer as per the
order placed by its customer. The ordering bank must ensure that
qualifying wire transfers contain complete originator information. The
bank must also verify and preserve the information at least for a period
of ten years.
(ii) Intermediary Bank
• For both cross-border and domestic wire transfers, a bank processing

an intermediary element of a chain of wire transfers must ensure that
all originator information accompanying a wire transfer is retained with
the transfer. Where technical limitations prevent full originator
information accompanying a cross-border wire transfer from remaining
with a related domestic wire transfer, a record must be kept at least for
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ten years (as required under Prevention of Money Laundering Act,

2002) by the receiving intermediary bank of all the information
received from the ordering bank.
(iii)Beneficiary Bank
• A beneficiary bank should have effective risk-based procedures in place

to identify wire transfers lacking complete originator information. The
lack of complete originator information may be considered as a factor
in assessing whether a wire transfer or related transactions are
suspicious and whether they should be reported to the Financial
Intelligence Unit-India. The beneficiary bank should also take up the
matter with the ordering bank if a transaction is not accompanied by
detailed information of the fund remitter. If the ordering bank fails to
furnish information on the remitter, the beneficiary bank should
consider restricting or even terminating its business relationship with
the ordering bank.
1. What is a Mail Transfer?
2. Does the bank charge a commission for a Mail Transfer?
3. What is the difference between a mail transfer and a Telegraphic

Transfer?
4. What is the difference between a cross border and domestic Wire

Transfer?
5. What is the role of an intermediary bank in a Wire Transfer?
! !315
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !316
MONEY TRANSFER SERVICE SCHEME
Chapter 42
Money Transfer Service Scheme
Objectives
This chapter will explain how Money Transfer Service Scheme works.
Structure
42.1 Introduction
42.2 Statutory Basis
42.3 Entry Norms
42.4 Other Conditions
42.5 Overseas Principles
42.6 Appointment of Sub-agents by Indian Agents
42.7 Selection of Centres
42.8 Training
42.1 INTRODUCTION
Money Transfer Service Scheme (MTSS) is a quick and easy way of

transferring personal remittances from abroad to beneficiaries in India.
Only inward personal remittances into India such as remittances towards
family maintenance and remittances favouring foreign tourists visiting
India are permissible. No outward remittance from India is permissible
under MTSS.
The system envisages a tie-up between reputed money transfer companies

abroad known as Overseas Principles and agents in India known as Indian
Agents who would disburse funds to beneficiaries in India at ongoing
exchange rates. The Indian Agent is not allowed to remit any amount to
the Overseas Principle. Under MTSS the remitters and the beneficiaries are
individuals only.
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42.2 STATUTORY BASIS
The Reserve Bank of India may accord necessary permission

(authorization) to any person to act as an Indian Agent under the Money
Transfer Service Scheme. No person can handle the business of cross-
border money transfer to India in any capacity unless specifically permitted
by the Reserve Bank.
42.3 ENTRY NORMS
(i) The applicant to become an Indian Agent should be an Authorised

Dealer Category-I bank or an Authorised Dealer Category-II or a Full
Fledged Money Changer (FFMC).
(ii) The applicant should have minimum Net Owned Funds of ` 50 lakh.
42.4 OTHER CONDITIONS
(a) Only cross-border personal remittances, such as, remittances towards

family maintenance and remittances favouring foreign tourists visiting
India shall be allowed under this arrangement. Donations/contributions
to charitable institutions/trusts, trade related remittances, remittance
towards purchase of property, investments or credit to NRE Accounts
shall not be made through this arrangement.
(b) A cap of US $ 2,500 has been placed on individual remittance under

the scheme. Amounts up to ` 50,000/- may be paid in cash to a
beneficiary in India. Any amount exceeding this limit shall be paid by
means of account payee cheque/demand draft/payment order, etc., or
credited directly to the beneficiary's bank account only. However, in
exceptional circumstances, where the beneficiary is a foreign tourist,
higher amounts may be disbursed in cash.
(c) Only 30 remittances can be received by a single individual beneficiary

under the scheme during a calendar year.
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42.5 OVERSEAS principles
Overseas Principles with adequate volume of business, track record and

outreach will only be considered under the scheme. Further, since the
primary objective of permitting the business of money transfer business in
the country is to facilitate cheaper and more efficient means of receipt of
remittances, operators with limited outreach in terms of branch network in
the country and localized operations overseas will not be permitted.
The Overseas Principle should be a registered entity, licenced by the

Central Bank/Government or financial regulatory authority of the country
concerned for carrying on Money Transfer Activities. The country of
registration of the Overseas Principle should be AML compliant.
The minimum Net Worth of Overseas Principles should be at least US $ 1

million as per the latest audited balance sheet, which should be maintained
at all times. However, the Reserve Bank may consider relaxing the
minimum Net Worth criterion in case of Overseas Principles incorporated in
FATF member countries and are supervised by the concerned Central Bank/
Government or financial regulatory authority.
The Overseas Principle should be well established in the money transfer

business with a track record of operations in well regulated markets.
The arrangement with Overseas Principle should result in considerably

increasing access to formal money transfer facilities at both ends.
The Overseas Principle should be registered with the overseas trade/

Industry bodies.
The Overseas Principle should have a good rating from one of the
international credit rating agencies.
42.6 APPOINTMENT OF SUB-AGENTS BY INDIAN AGENTS
Indian Agents can enter into Sub Agency agreements with entities, fulfilling
certain conditions, for the purpose of undertaking money transfer business.
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Sub-agents
A Sub-agent should have a place of business, and whose bonafides are

acceptable to the Indian Agent. Indian Agents are free to decide on the
tenor of the arrangement as also the commission or fee through mutual
agreement with the Sub-agent. The audit and on-site inspection of
premises and records of the Sub-agents by the Indian Agent to be
conducted at least once in a month and in a year respectively.
Due Diligence of Sub-agents
The Indian Agents and the Overseas Principles should undertake the
following minimum checks while conducting due diligence of the Sub-
agents, other than ADs Cat-I, ADs Cat-II, Scheduled Commercial Banks,
FFMCs and the Deptt. of Posts.
• Existing business activities of the Sub-agent/its position in area
• Shop & Establishment/other applicable municipal certification in favour of

the Sub-agent
• Verification of physical existence of location of the Sub-agent
• Conduct certificate of the Sub-agent from the local police authorities.

(certified copy of Memorandum and Articles of Association and Certificate
of Incorporation in respect of incorporated entities).
• Declaration regarding past criminal cases, cases initiated/pending against

the Sub-agent and/or its directors/partners by any law enforcing agency,
if any
• PAN Card of the Sub-agents and its directors/partners
• Photographs of the directors/partners and the key persons of the Sub-

agent
The above checks should be done on a regular basis, at least once in a

year.
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42.7 SELECTION OF CENTERS
The Indian Agents are free to select centers for operationalising the
Scheme. However, this may be advised to the Reserve Bank.
42.8 TRAINING
The Indian Agents would be expected to impart training to the Sub-agents

as regards operations and maintenance of records.
42.9 SELF ASSESSMENT QUESTION
1. What is Mail Transfer?
2. Who are allowed to do Mail Transfer.
3. How many remittances can be received by an individual during a

calendar year.
! !321
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !322
REAL TIME GROSS SETTLEMENT
Chapter 43
Real Time Gross Settlement
Objectives
This chapter will explain how Real Time Gross Settlement works.
Structure
43.1 Introduction
43.2 Real Time Gross Settlement in India
43.3 Checks
43.4 Advantages
43.5 RTGS Membership
43.6 Account and Funding
43.7 Intra-day Liquidity Support
43.8 Important Information
43.9 General
43.1 INTRODUCTION
• RTGS is an internationally accepted system to minimize settlement risk

and is the centerpiece of an integrated payment system.
• An RTGS system is a funds transfer system where transfer of money

takes place from one bank to another on real time (payment transaction
not subject to any waiting period) and on gross basis (transaction is
settled on one to one basis without bunching with any other transaction).
In short transactions are settled as soon as they are processed.
• As money transfer takes place in the books of the RBI, payment is final
and irrevocable.
• This is the fastest possible money transfer system through the banking
channel.
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• If the money is not credited for any reason, it has to be returned in two
hours to the remitting bank.
• It is different from EFT and NEFT as these settle transactions in batches

on a net basis (during settlements).
• RTGS is for large value transactions. The minimum amount is ` 1 lakh.

There is no maximum limit.
• Trading follows T + 2 (trade plus 2 days) or T + 3 settlement systems

which means at any particular time banks worldwide carry a settlement
risk of over $4 trillion. In order to reduce this, central banks all over the
world are moving towards adopting a real time gross settlement (RTGS)
system.
• Transfers are settled individually without the netting of debits against

credits as happens in a traditional net settlement system. Under a
normal netting settlement system, the settlement of funds transfers
occurs on a net basis. A participating institution’s net position is
calculated (all debit and credit transactions are netted) and this net
settlement usually happens at a particular designated time which may be
the end of the trading cycle or the business period. This system carries
various types of risks.
• The continuous intra-day fund transfer feature of RTGS system reduces

payment system risks, credit risks and systemic risk.
- Payment system risk. With the availability of sufficient funds to cover

the settlement, the time to process the settlement is almost zero and
hence the primary source of risks in inter-bank funds transfers is
eliminated. However, in the situation where the sending bank does not
have sufficient funds for settlement, the operational design of the RTGS
system ensures that that particular transaction is not lost by either
putting it into a queue or by ways of extension of bank credit to the
sending bank.
- Credit risk. Since final funds transfer takes place in real time, the
payment leg (final transfer of funds) can be coordinated with the
delivery leg (final transfer of assets) such that one takes place only if
the other also takes place. This ensures that the system is safeguarded
! !324
against credit risk and is very beneficial in securities and foreign

exchange transaction settlements.
- Systemic risk. With real time settlement taking place, intraday

interbank exposures are substantially reduced. This decreases the
likelihood of banks having to absorb liquidity shortfalls in the event of
any participating institution failing to settle its obligations. Central
banks also look forward to reduce systemic risk and hence this is a key
reason for them to adopt RTGS system for large value payments and
transfers. RTGS system has already been implemented by central
banks of various countries including India, US, UK, France, Germany,
Japan and Italy.
• In India, Real Time Gross Settlement (RTGS) is a comprehensive secured

on line settlement solution, set up, operated and maintained by Reserve
Bank of India to enable funds settlement across banks in the country on
real time basis to minimize costs and maximize benefits, increase
velocity of funds-flow both inter- city and inter bank, reduce credit risk,
increase transparency of payments and better liquidity management.
• The main essence of RTGS system is its deviation from the erstwhile net
settlement system where transmission, processing is done for a set of
transactions (cheque clearing, Electronic funds transfer or sale/purchase
of securities, call lending/ borrowing etc.) at a particular point of time
and the settlement takes place on a pre-fixed interval of time or at the
end of the day. In RTGS system, inter-bank payment instructions are
processed and settled transaction by transaction and continuously
(online) through out the day.
43.2 REAL TIME GROSS SETTLEMENT IN INDIA
• RTGS was introduced in India in March 2004.
• The system allows banks to give electronic instructions to transfer funds

from their account to that of another bank.
• Under this system payment occurs only if there is transfer of settlement

balances between accounts at the Reserve Bank of India. All payments
settled under real time gross settlement are same day funds.
! !325
• The RTGS system is maintained and operated by the RBI.
• In Real Time Gross Settlement system (RTGS), both processing and final
settlement of funds transfer instruction takes place simultaneously and
continuously.
• Transfer of funds is made individually and sequentially on a gross basis.
• The RTGS solution provides for a separate transaction type which can be
used to transmit the customer information along with the payment
message to the beneficiary's bank in a structured format.
• As it is a real time settlement system, final settlement takes place

continuously provided that a payee bank has sufficient covering balance.
• Transactions are processed continuously throughout the RTGS business

hours. RTGS for customers are from 9 a.m. to 4.30 p.m. on weekdays
and 9 a.m. to 1.30 noon on Saturdays. Interbank transactions are from 9
a.m. to 6 p.m. on weekdays and 9 a.m. to 3.00 p.m. on Saturdays.
• There are 14 holidays in a year when RTGS transactions cannot be

processed.
• The remitting bank has to give the following information:
- Amount to be remitted;
- Account to be debited;
- Name of the beneficiary bank and account number;
- Name of beneficiary customer and account number;
- Sender to receiver information;.
- IFSC code of receiving branch.
• Beneficiary bank is expected to get funds in real time, i.e., as soon as

funds transferred by remitting bank.
• Remitting bank will get a message from RBI that money has been
credited. Based on this remitting bank can advise customer that money
has been delivered.
! !326
• It is important to give the beneficiary’s account number as without it an

account cannot be credited.
• The beneficiary’s account is to be credited within 2 hours after receiving

funds transfer messages. If the account is not credited the receiving
bank has to return the money to the remitting bank and the original
entry is reversed.
• A bank customer receiving RTGS credit should be provided the name of

remitter in the account statement/pass book.
• A bank customer sending RTGS remittance should be provided the name

of the beneficiary in the account statement/pass book.
• Minimum amount to be remitted through RTGS is ` 1 Lakh. There is no

maximum. The RBI has asked that NEFT be used for smaller
denomination transactions.
• The RBI has stated that banks should open windows commensurate to
RBI business sessions.
• The RBI has urged banks to make its entire branch network RTGS
enabled.
• The RBI has asked banks to expedite providing RTGS facility to

customers of RRBs sponsored by respective banks.
• RBI has stated that banks should give SMS alerts on fund transfers
(debit/credit).
• From August 1, 2008, all payments of ` 10 lakhs and above between RBI
regulated entities (banks, primary dealers and NBFCs) and RBI regulated
markets (money market, government securities market and foreign
exchange market) are to be routed through the electronic payment
mechanism such as RTGS, NEFT and ECS.
43.3 CHECKS
• It is mandatory for banks to put in place maker – checker facility during

data entry.
! !327
• All transactions put through must be digitally signed and encrypted.
• Staff accountability must be fixed for any lapses.
43.4 ADVANTAGES
• Individual and sequential settlement in RTGS makes it easier to ensure

unconditional and irrevocable settlement.
• Due to elimination of time lag in system, the risk is greatly reduced.
• Progress in information technology has made RTGS feasible, easier and

less costly to build and operate.
- Payments settled in real time on a transaction-by-transaction basis, as

soon as they are accepted by the system.
- There is no credit and settlement risk involved in RTGS system for

receiving participant as each payment transaction is settled instantly.
- RTGS facilitates predictability of cash flows as customers know when

their accounts will be debited or credited.
- The instant finality of payments ensures fast, secure and irrevocable

settlement of major business and financial market transactions
• RTGS will reduce the systemic risk that exists in the present settlement
systems like cascading affect on banks due to failure of one bank to meet
its settlement commitments.
• It improves confidence of out side agencies like world bank in Indian

economy.
• It enables efficient settlements and avoids settlement delays
• To banks it offers immediate and irrevocable settlement, provides for

high value inter bank funds transfer and has the potential to formulate
new products by individual banks based on RTGS.
! !328
• Customers can get new banking services based on reliable high value
funds transfer system.
43.5 RTGS MEMBERSHIP
There are 4 types of membership – Type A, B, D and E.
Membership Type “A”
• All scheduled banks, including scheduled co-op. banks and local area
banks.
• Are eligible for all types of transactions, including customer-based

transactions.
• Will have a participant interface (PI) each.
• Eligible for intra-day liquidity support from the RBI.
Membership Type “B”
• All Primary dealers.
• Eligible for all types of RTGS transactions excluding customer-based

RTGS transactions.
• Have participant interface (PI) each.
• Eligible for intra-day liquidity support from RBI.
Membership Type “D”
• Clearing organizations.
• Each member will have net settlement interface software from RBI.
• Eligible to submit Multilateral Net Settlement Batch/s (MNSBs) for

settlement, and will receive notifications, including broadcast.
! !329
Membership Type “E”
• Special institutions.
• At discretion of Reserve Bank.
43.6 ACCOUNT and FUNDING
• All A and B type members will open a separate account called

“settlement account”, with Deposit Accounts Department (DAD), RBI.
• This settlement account should be funded to take care of the transactions

in the queue.
• This account will be an intra-day account, i.e., it would be operational

only during the duration of RTGS day.
43.7 INTRA-DAY LIQUIDITY SUPPORT
• Intra-Day Liquidity (IDL) support by RBI is available for type A and B

members, in their settlement account, specially opened for RTGS
purpose, with DAD, RBI.
• IDL is against the securities held (95% of securities) in special general

ledger account identified for RTGS purpose.
Settlement of IDL Support Account
• Normally by the End Of the Day (EOD), this support should be liquidated
and made nil.
• If any member fails to repay the IDL by day end, the securities against
which such IDL has been availed of will get transferred to the RBI’s
investment account, i.e., the current account the participant holds under
the present system at deposit account department, RBI, Mumbai.
• On the next working day, the member will have to repurchase the
securities from the RBI’s investment account, before the RTGS start of
the day.
• The member will not be supported for IDL till the repurchase.
! !330
• If the member does not repurchase the above securities within the
stipulated period of time, it will be seriously viewed by RBI.
• The member will be imposed penalties, at the applicable rate.
• Additionally, the member will also be liable for suspension from RTGS
membership.
Transaction Types
(a) Inter-institutional transactions.

(b) Customer transactions.
(c) Delivery versus payment transactions.
(d) Own account transfers transactions.
(e) Multilateral Net Settlement Batches (MNSB) transactions.
43.8 IMPORTANT INFORMATION
1. Under RTGS, the debit is initiated first and there is no instrument like
cheque, DD, or banker’s cheque as in the case of high value clearing.
2. The debit is against the written request of the customer, or RTGS

message to that effect.
3. The RTGS window is available from 9.00 to 16.30 hours on weekdays

and between 9.00 and 13.30 noon on Saturdays. For interbank
transactions, the window is open from 9.00 to 18.00 hours on weekdays
and 9.00 to 15.00 hours on Saturdays
4. In RTGS, the beneficiary’s account number is vitally important, even if

the beneficiary’s name is spelt incorrectly/different.
5. In its present form, RTGS is in short SWIFT in rupee.
6. There are sender/receiver transaction code in 11 characters, of which:
- First 4 characters represent the bank/institution’s name in short.
- Fifth character is marked ‘0’ (zero) and is reserved by RBI without

allotment.
! !331
- Last 6 characters in the code are institution's choice for referring to

their department/office. These six characters can be digits/alphabets or
both.
7. In the outgoing the sender is able to get details of the total messages
sent and messages pending for authorization in the queue.
8. Authorization is possible through digital card signatures, issued by

IDRBT, Hyderabad. However, password based method can be used for
initiating the message by the clerical level, by the respective institution.
9. “Logica” software used in RTGS is supplied by RBI.
10.RTGS is used as a “selling” product by bankers to attract high net worth

individuals/corporate for routing their high value transactions in trade.
43.9 GENERAL
A bank customer receiving RTGS credit must be provided with the name of
the remitter in his accounts statement/pass book.
Important Terminologies
• CCIL Clearing Corporation of India Ltd.
• IDRBT CA Institute for Development and Research in Banking Technology

(Hyderabad) Certifying Authority.
• UTR Unique transaction reference
IDL Intra-day liquidity
PI Participant interface
IFTP Inter-bank funds transfer processor
SOD Start of the day

EOD End of the day
FIFO First-in first-out

DvP Delivery vs. payment
! !332
Use of electronic mode of payment for large value transactions.
Recognizing the importance of ensuring the safety and security of the

payment systems, Reserve Bank has put in place three modes of electronic
payments, i.e., Real Time Gross Settlement (RTGS) System, National
Electronic Fund Transfer (NEFT) System and Electronic Clearing Service
(ECS). Payments through these modes have been steadily growing in the
last few years.
An internal Working Group set up by the Reserve Bank had examined

various issues related to migration from paper-based systems to electronic
systems and had recommended a phased approach of encouraging,
monitoring and mandating. Based on the recommendations of the Group,
an approach paper was placed on Reserve Bank’s website inviting
comments from the members of public on the need for making the
payment transactions of ` 1 crore and above between Reserve Bank
regulated entities through electronic payment systems mandatory. The
comments received from the stake holders were examined. As the proposal
has been found to be generally acceptable, it has been decided that large
value payments of ` 10 lakhs and above be mandatorily routed through
electronic payment mechanism with time frame.
1. What is Real Time Gross Settlement?
2. What is the one most important advantage of Real Time Gross

Settlements?
3. What is the minimum and maximum value for Real Time Gross
Settlements?
4. How is the RTGS protected from credit risks?
5. What checks banks must set up for RTGS?
6. What are the different types of RTGS memberships?
! !333
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !334
ELECTRONIC FUNDS TRANSFER
Chapter 44
Electronic Funds Transfer
Objectives
This chapter will explain Electronic Funds Transfers (EFT).
Structure
44.1 Introduction
44.2 RBI EFT
44.3 How EFT is an Improvement over the Other Facilities
44.4 Limit
44.5 Acknowledgment for Transfer
44.6 Additional Organizational Structure
44.7 Benefits of Using EFT
44.1 INTRODUCTION
Electronic Funds Transfer (EFT) is a quick means of transferring money to

another location swiftly.
44.2 RBI EFT
RBI EFT is a scheme introduced by Reserve Bank of India (RBI) to help

banks offering their customers money transfer service from account to
account of any bank branch to any other bank branch in places where EFT
services are offered.
A customer to avail of these services approaches the bank and issues

instructions to make a payment either by making a cash payment or
authorizing his account to be debited. He has to give full details of whose
account is to be credited including the bank account number and bank.
If the remitting bank transmits the funds transfer message to RBI so as to

hit the first settlement at 12 noon, the receiving bank’s account is credited
! !335
by RBI at the destination centre and the beneficiary gets the credit on
Day-1 itself. If the same is included in subsequent settlements, i.e., for 2
pm and 4 pm, the beneficiary gets credit on Day-2.
This operates on a Deferred Net Settlement (DNS) basis and settles

transactions in batches. All transactions are held up till that time.
The system operates in the following manner:
Step 1: The remitter fills in the EFT application form giving the particulars
of the beneficiary (city, bank, branch, beneficiary’s name, account type and
account number) and authorizes the branch to remit a specified amount to
the beneficiary by raising a debit to the remitter’s account.
Step 2: The remitting branch prepares a schedule and sends the duplicate
of the EFT application form to its service branch for EFT data preparation.
If the branch is equipped with a computer system, data preparation can be
done at the branch level in the specified format.
Step 3: The service branch prepares the EFT data file by using a software
package supplied by RBI and transmits the same to the local RBI (national
clearing cell) to be included for the settlement of 12 noon, 2 pm and 4 pm.
Step 4: The RBI at the remitting centre consolidates the files received
from all banks, sorts the transactions city-wise and prepares vouchers for
debiting the remitting banks on Day-1 itself. City-wise files are transmitted
to the RBI offices at the respective destination centres.
Step 5: RBI at the destination centre receives the files from the originating
centres, consolidates them and sorts them bank-wise. Thereafter, bank-
wise remittance data files are transmitted to banks on Day-1 itself. Bank-
wise vouchers are prepared for crediting the receiving banks’ accounts the
same day or next day.
Step 6: On Day 1/2 morning the receiving banks at the destination centres
process the remittance files transmitted by RBI and forward credit reports
to the destination branches for crediting the beneficiaries’ accounts.
! !336
44.3 HOW EFT IS AN IMPROVEMENT OVER THE OTHER

FACILITIES
The primary modes of funds transfer at present are demand draft, mail
transfer and telegraphic transfer. The demand draft facility is paper based.
The remitter, after purchasing demand draft from a bank branch,
dispatches it by post/courier to the beneficiary. The beneficiary, in turn,
lodges the draft in his/her bank for collection and clearing. The time taken
for completing the process is about 10 days. In the case of telegraphic
transfer, funds reach the beneficiary either on the same day or the next;
but both the remitter and the beneficiary would have to be account holders
of the same bank. If they are customers of different banks, a good deal of
paper processing is required.
On the other hand, RBI EFT system is an inter-bank oriented system. RBI
acts as an intermediary between the remitting bank and the receiving bank
and effects inter-bank funds transfer. The customers of banks can request
their respective branches to remit funds to the designated customers
irrespective of bank affiliation of the beneficiary.
44.4 LIMIT
There is no value limit for individual transactions.
44.5 ACKNOWLEDGMENT FOR TRANSFER
The receiving branch acknowledges every transaction it receives after

crediting the beneficiary’s account. The acknowledgment particulars reach
the remitting branch as an inward message on Day-3 of the EFT processing
cycle. The remitting branch will, therefore, have precise information as to
when the beneficiary’s account was credited.
It is not necessary for all branches to have computer systems. Branches

can send the remittance details to their service branch in paper format (the
copies of the EFT application forms submitted by the remitting customers
accompanied by a remittance scroll). The service branch will make data
entry and transmit the funds transfer information electronically to the local
NCC. But, if a branch has computer facility, it can transmit funds and
transfer information electronically to its service branch either on a floppy or
! !337
through a network. This would minimize the data entry work at the service
branch.
44.6 ADDITIONAL ORGANIZATIONAL STRUCTURE
Each participating bank has to identify a branch at the respective centre to

act as the link point for transmitting all outward messages and receiving all
inward messages. The service branches/main branches of banks that have
been coordinating the cheque-clearing work are in the best position to
discharge this role. So no additional organizational infrastructure is
required to be created.
44.7 BENEFITS OF USING EFT
• Banks can provide inter-bank TT service.
• Reconciliation is automatic.
• Banks can make use of the EFT infrastructure for introducing new
payment/cash management products to their customers.
The number of outstation cheques issued by customers and consequent

service load on banks may decline over a period of time.
1. What is the facility that EFT offers customers?
2. What are the advantages of EFT over other forms of money transfer
offered by banks?
3. What are the benefits of using EFT?
! !338
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !339
NATIONAL ELECTRONIC FUNDS TRANSFER
Chapter 45
National Electronic Funds Transfer
Objectives
This chapter discusses National Electronic Funds Transfer (NEFT) and what
it entails.
Structure
45.1 Introduction
45.2 Who can use NEFT
45.3 Operation
45.4 General
45.1 INTRODUCTION
• National Electronic Funds Transfer (NEFT) is a nationwide funds transfer

system to facilitate transfer of funds from any branch to any other
branch of any other bank branch.
• This is the fastest option available for inter-city transfers.
• There is no restriction of centres or any geographical area inside the

country. The system uses the concept of centralized accounting system
and the bank account that is sending or receiving transfer instructions
gets operated at one centre – Mumbai only. The individual participating
branches can be anywhere.
• The beneficiary gets credit the same day or the next day depending on
the time of settlement.
• It is necessary to have a bank account to originate NEFT as it is an

account to account transfer system.
• There is no value limit for transactions.
! !340
• It can only be used to transfer rupees among participating banks. It

cannot receive foreign remittances or send remittances abroad.
45.2 WHO CAN USE NEFT
• Individuals, firms or corporates with a branch bank.
• Walk in customers who do not have a bank account can also deposit cash
and transfer funds to a beneficiary. For this a separate transaction code
(50) has been allotted.
45.3 OPERATION
• The remitter fills in the NEFT form giving the relevant details. This
includes the beneficiary details such as the beneficiary name & account
number and the name & IFSC of the beneficiary bank branch.
• IFSC is the acronym of Indian Financial System Code. It is an 11 digit

alphanumeric code designed to identify bank branches in India
• The remitting bank prepares a Structured Financial Messaging Solution

(SFMS) and sends it to its service centre for NEFT.
• This operates on a Deferred Net Settlement (DNS) basis which settles

transactions in batches. All transactions are held up uptil that time,
• The service centre forwards the SFMS to the local RBI to be included in
the next settlement. There are 6 settlements on weekdays and 3 on
Saturdays. Timings are 9.00 a.m., 11.00 a.m., 12.00 noon, 1 p.m., 3
p.m. and 5 p.m. on weekdays and 9.00 a.m., 11.00 a.m. and 12 noon on
Saturdays.
• The beneficiary can expect to get credit on the first 4 batches on week
days and first two batches on Saturdays. For transactions settled in the
last two batches on week days and the last batch on Saturdays
beneficiaries can expect to get credit either on the same day or on the
next working day morning (depending on the type of facility enjoyed by
the beneficiary with his bank).
! !341
• If it is not possible to afford credit to the beneficiary the funds are

returned to the remitter.
• The RBI at the clearing centre sorts the SFMS bankwise and prepares
accounting entries for net credit/ net debit for passing onto the banks.
After this bankwise remittance messages are transmitted to banks.
• The receiving bank processes the remittance messages received from the
RBI and effects the credit to the beneficiary’s account.
• There is no limit to the value amount of individual transactions.
• It works on the principle of net settlements
• The remitting customer can track the remitting transaction through the
remitting branch only, as the remitting bank is informed about the status
of the remitted transaction.
• NEFT can be used to transfer funds from or to NRO or NRE accounts.
• Inward foreign remittances cannot be received through NEFT as it is only

for Indian rupees.
• Remittances cannot be made abroad using NEFT
• NEFT can be used to pay credit card dues to card issuing banks.
45.4 GENERAL
• The RBI-EFT system is confined to the 15 centres where RBI provides

this facility. NEFT has no such restriction.
• Levy of charges is left to the bank.
• As NEFT is an account to account transfer it is necessary to have an

account to receive money through NEFT.
• NEFT can be used only for remitting Indian rupees among participating
banks within the country and Nepal. Remittances abroad (other than
! !342
Nepal) cannot be sent though NEFT. However, subject to the provisions

of FEMA, one can send/receive funds from/to NRI accounts.
• From August 1, 2008, all payments of ` 10 lakhs and above between RBI
regulated entities (banks, primary dealers and NBFCs) and RBI regulated
markets (money market, government securities market and foreign
exchange market) have to be routed through the electronic payment
mechanism such as RTGS, NEFT and ECS.
• Banks are required to set up a client facilitation centre for prompt

resolution of complaints received from customers.
• Nepalese citizens in India can avail of NEFT as a walk in customer or as

an account holder and initiate remittance to a beneficiary in Nepal upto `
50,000.
1. What is NEFT?
2. Is it necessary to have an account to use the NEFT facility?
3. What is the amount that can be transferred?
4. What are the geographical limitations of the NEFT?
5. What is IFSC?
6. Does the bank levy a charge for the use of the NEFT facility?
! !343
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !344
SWIFT
Chapter 46
SWIFT
Objectives
This chapter explains how remittances are made internationally

electronically.
Structure
46.1 Introduction
46.2 Membership of SWIFT
46.3 How SWIFT Operates
46.4 Messages and Fields
46.5 Precautions
46.6 Advantages of SWIFT
46.7 Commonly Used SWIFT Formats
46.1 INTRODUCTION
• S.W.I.F.T (SWIFT) is the acronym for the Society for Worldwide Interbank
Financial Telecommunications.
• Its headquarters are in La Hulpe near Brussels, Belgium.
• It runs a worldwide network by which messages concerning financial

transactions are exchanged between banks and other financial
institutions globally.
• It was established as a cooperative society in 1973 under Belgian Law by

239 banks in 15 countries.
• It was started to establish a common language for financial transactions

and a shared data processing system through a worldwide
communications network.
! !345
SWIFT
• SWIFT is the industry-owned co-operative supplying secure, standardized

messaging services and interface software to nearly 8,300 financial
institutions in 208 countries and territories
• The SWIFT community includes banks, broker/dealers and investment

managers, as well as their market infrastructures in payments,
securities, treasury and trade.
• It operates as a non-profit making society.
• Its fundamental operating procedure and rules were laid down in 1975
and the first message was sent in 1977.
• Apart from a hub in Brussels, SWIFT has hubs in New York and in the
Netherlands.
• The society functions round the clock for operational services of its
members globally.
• India joined the society in 1991.
• Initially only 41 banks in India participated. Presently because of its

efficiency and the fact that nearly all banks world-wide are members,
most banks in India are members of SWIFT. In India bank locations are
connected to the SWIFT regional processor in Mumbai.
46.2 MEMBERSHIP OF SWIFT
• Any bank/financial institution can become a member of the society by

paying the relevant fees, subject to the terms and conditions and the
approval of the society.
• On becoming a member, the new member is allotted an address called

Bank Identification Code (BIC) of 8 characters.
• This address is circulated by the society to its members and only then
can the new member participate in the SWIFT system.
• The society updates the BIC Directory at regular intervals.
! !346
SWIFT
46.3 HOW SWIFT OPERATES
• SWIFT enables banks and institutions (its members) to send secure and
reliable messages, since the entire transmission of messages is system
based, with uniformity in language and format and authenticated at
every level.
• Each member is provided with an interface-terminal with SWIFT Link

Network (SLN).
• The sending banker/institution transmits the message in the relevant

format (formats are pre-designed by SWIFT) to the SWIFT hub (also
called the FIN center) and the FIN center arranges to transmit to the
beneficiary’s bank/institution.
• In those countries where banks do not have many branches/offices, they

operate through a correspondent bank for all transactions.
• Where such correspondent bank’s services are availed, the message will
need the details of such correspondent bank.
• When messages are transmitted through correspondent banks, additional

details such as correspondent bank’s name, BIC address, account
numbers are to be included in the message, in the relevant column of the
SWIFT format.
• The message transmitted through SWIFT is received within a few

seconds by the ultimate beneficiary institution, if the receiver is “logged
in” the interface.
• In case the receiving participant is not on, the messages are arranged in
queue at the FIN center and whenever the receiver “logs in” the
interface, the messages are pumped in from the SWIFT hub to the
beneficiary’s interface.
46.4 MESSAGES AND FIELDS
• SWIFT messages that are normally exchanged between banks have been
divided into categories such as:
! !347
SWIFT
- Customer transfers and cheques.

- Financial institution transfers.
- Financial trading.
- Collections and cash letters.
- Documentary credits (L/C) & guarantees.
- Securities.
- Precious metals and syndications.
- Travellers’ cheques.
- Cash management and customer status.
- Supporting system messages.
• The serial number given against each category is known in SWIFT as the
CATEGORY CODE.
• Under each category, various types of messages are sent/received by

banks.
• For example, under the category documentary credit, messages

pertaining to issuance of L/C, amendments to L/C, reimbursement claim,
advice of discrepancy in documents etc. are transmitted by banks.
• Each of the above messages is considered as a MESSAGE TYPE.
• The following details appear in a SWIFT message:
- Sender.
- Receiver.
- Transaction reference number.
- Related reference.
- Date (YYMMDD).
- Currency code.
- Amount.
- Narrative.
46.5 PRECAUTIONS
• The sender should use the format prescribed for different purposes. The
relevant columns in the format should be correctly filled in.
! !348
SWIFT
• Once the message is complete and sent, the SWIFT-FIN center

acknowledges the same with an ACK message. In case there is any
technical/formatting error, the FIN center sends a NAK message (not
acknowledged) with details of the error field. The sender has to make
corrections in the relevant field/s and send the message again to the
SWIFT – FIN center.
• The sender, when he receives ACK copy from the SWIFT-FIN center, gets
legal protection for any disputes, if any, in future.
• To maintain its secrecy, the society sends to each of its members,

rectified/changed program intimations at regular intervals.
46.6 ADVANTAGES OF SWIFT
• It is operational throughout the year 24 hours a day.
• SWIFT delivers worldwide support to its customers. The service covers

administrative, operational and technical matters.
• The SWIFT Customer Service Centres (CSC) are open 24 hours a day,
seven days a week.
• Funds transfers effected by banks using conventional instruments like

DD, TT, etc., which though time tested can lead to duplication in payment
and also gives scope for perpetration of fraud. Hence the need for a
computerized solution was desired which would expedite payment and
a l s o e l i m i n a t e t h e o p p o r t u n i ty f o r c o m m i s s i o n o f f ra u d o r
misappropriation of funds. The SWIFT method is totally system based
and the duplication of message is cautioned and has minimized these
difficulties.
• Transmissions of messages are immediate and all messages are

acknowledged (either accepted or rejected).
• Information is confidential and is protected against unauthorized

disclosure and tampering.
! !349
SWIFT
• SWIFT assumes financial liability for the accuracy and timely delivery of
all validated messages from the point they enter the network to the point
they leave the network.
• In case of trade related activities, the process of transmission of

documentary credits/issue of guarantees too needed to be automated.
SWIFT meets this requirement.
• Remittances and messages are transmitted in seconds to the beneficiary.
• Uniform Customs and Practices Board’s international remittance and

telecommunications department supports the services in processing
outgoing and incoming remittances for local and international funds
transfers through SWIFT.
46.7 COMMONLY USED SWIFT FORMATS
• Format 103 – Customer funds transfer from correspondent banks.

• Format 202 – Institutional transfer.
• Format 999 – Free format, for any query/clarification.
• Format 199 – Customer payment query.
1. What does S.W.I.F.T. stand for?
2. Where is its headquarters?
3. What purpose does SWIFT serve?
4. How does a bank become a member of SWIFT?
5. What kind of SWIFT messages are transferred between banks?
6. Name some advantages of using SWIFT.
7. What are the precautions that need to be taken.
! !350
SWIFT
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !351
INDO-NEPAL REMITTANCE FACILITY SCHEME
Chapter 47
Indo-Nepal Remittance Facility Scheme
Objectives
This chapter explains the Indo-Nepal facility scheme.
This chapter explains how remittances are made internationally

electronically.
Structure
47.1 Introduction
47.2 Documentation
47.3 Transactions
47.4 Charges for the Remittance Arrangement
47.5 If Funds Not Delivered.
47.1 INTRODUCTION
This is a cross-border one-way remittance facility scheme facilitating

remittance from India to Nepal. A remitter can transfer funds up to Indian
` 50,000 from any of the NEFT branches to Nepal. The beneficiary would
receive funds in Nepalese rupees.
It is not necessary for a remitter needs to maintain an account with a bank

in India. Even a walk-in customer can deposit cash upto ` 50,000 and
remit it to the beneficiary.
While it is preferred if the beneficiary maintains a bank account, to which

credit could be made, it is not necessary. If the beneficiary resides in the
hinterland or in a location not serviced by a bank branch, Nepal SBI Ltd.,
has tied up with a money transfer company in Nepal who would make
arrangements for delivery of cash to the beneficiary.
! !352
47.2 DOCUMENTATION
If the remitting customer is maintaining an account there is no further

need for additional identification. Otherwise, the remitter has to produce
proof of identification document like Passport/PAN/Driving License/
Telephone Bill/certificate of identification issued by employer with details
and photograph, etc. This information will be captured in the system in
compliance with KYC norms. The complete address and telephone/mobile
number of the beneficiary in Nepal will also be required.
47.3 TRANSACTIONS
Remittances can be originated from any of the NEFT enabled branches in

India. The transactions would flow to the designated branch of State Bank
of India, which would consolidate all such remittance information received
during the day. At the end of the day the remittance information would get
passed on to Nepal SBI Bank Ltd., in a secured mode. Nepal SBI would
make arrangements to either credit to the bank account or disburse the
funds to the beneficiary through their authorised money transfer agent.
If the beneficiary’s account details are available, Nepal SBI would make
arrangements for credit of the account. Other-wise the beneficiary has to
get in touch with the outlet of the Money Transfer agency, after getting the
UTR number from the remitter. He has to produce details of the remitter
and a photo identity document, (generally citizenship certificate) to prove
his/her identity.
If the beneficiary does not approach the money transfer agency even up to
one week, the money transfer agency would make arrangements for return
of the remittance to the originator.
47.4 CHARGES FOR THE REMITTANCE ARRANGEMENT
As the scheme is targeted at the migrant workers, the charges will be

concessionary. For transfer of fund from an account in an NEFT enabled
branch in India to an account maintained with Nepal SBI, there would be
no charges. All remittances from any NEFT branch in India is free of
charge. However, under the arrangement, as Nepal SBI has to make
! !353
payment to the money transfer agent, charges for other transfers would be
as under:
(i) up to INR. 5,000/- will attract a flat charge of INR. 50.00 inclusive of
service tax for every remittance
(ii) above INR. 5,000/- and up to INR 50,000.00 will attract a flat charge
of INR. 75.00 for every remittance inclusive of service tax
The entire amount of charges collected from the remitter would be

remitted to Nepal as a part of the remittance and would form a part of the
message format.
A remitter is allowed to remit maximum of 12 remittances in a year under

this Scheme. The location and addresses of Nepal SBI as also that of the
money transfer agency are available in the procedural guidelines, that
would be available with the NEFT branches in India.
47.5 IF FUNDS NOT DELIVERED
The amount of remittance will flow back to the originating branch through
NEFT and the bank would communicate to the remitter about the return of
the remittance. He has to produce some evidence as a proof of remittance
like the counterfoil of the remittance application form and receive it, if it
was a cash remittance. If it had been remitted by debit to an account the
credit will flow to the concerned account.
1. How much Indian rupees can a remitter transfer to Nepal?
2. Is the beneficiary required to have a bank account?
3. How does the transfer of money take place?
4. What are the bank charges?
! !354
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !355
CASH
Chapter 48
Cash
Objectives
The objective is to explain all aspects of Cash in banks.
Structure
48.1 Introduction
48.2 Coins
48.3 Notes
48.4 Sorting/Processing of Notes
48.5 Display of Notice Board
48.6 Facility for Exchange of Notes and Coins at Bank Branches
48.7 Remittance of ` 50,000 and above
48.8 Agreement Between RBI and Commercial Banks
48.9 Detection and Impounding of Counterfeit Notes
48.10 Dual Custody
48.11 General
48.12 Currency Chest
48.13 Small Coin Depot
48.14 Clean Note Policy
48.15 Acceptance of Cash over the Counter
! !356
CASH
48.1 INTRODUCTION
• Cash is money held in the form of currency notes or in coins or in

accounts with other banks that are available on demand or after giving
notice.
• Banks hold cash in two forms:
- Cash with banks; and

- Cash in hand.
• Banks keep cash at branches to meet the business needs of clients.
• The intent is to keep as little cash as possible as cash does not earn any
interest while the bank has to pay interest to its depositors on amounts
they have deposited in the bank.
Cash with Banks
• Banks keep cash or balances with:
- The Reserve Bank of India and

- Other commercial banks.
Cash with the Reserve Bank of India
• Commercial Banks keep money with the Reserve Bank for two purposes:
- To meet statutory requirements. Banks are under the Banking

Regulation Act required to keep a certain percentage of their net
demand and time liabilities in cash with the Reserve Bank of India. The
RBI does not pay any interest to this money kept by banks. The
average daily CRR (Cash Reserve Ratio) balance must be 70% of the
total CRR requirement on all days of the fortnight. The Reserve Bank
would levy penal interest at 3% per annum above the bank rate on the
amount by which the amount maintained falls short of the prescribed
minimum on that day and if the shortfall continues on the next
succeeding day, penal interest will be recovered at 5% per annum
above the bank rate.
! !357
CASH
- To make payments to and receive amounts from other commercial

banks. This may be with regard to investment transactions or clearing
or other interbank transactions including borrowing from or lending to
commercial banks.
Cash with Other Banks
• Accounts are kept with other banks for commercial needs. Banks in India
often maintain accounts with banks in other countries for trade
transactions.
• Accounts may be maintained with other banks in India for convenience

especially if the bank does not have a branch in a particular location or
alternatively if services of another bank are availed of for cash
management or clearing or other services.
Cash in Hand
• Cash is kept by banks to meet day-to-day needs.
• The amount kept by a bank will vary from bank to bank and from branch
to branch as the demands of customers will vary.
• Banks will aim to keep the minimum they require to meet needs as cash
is unproductive and earns no interest.
• The cash held in a bank branch may be divided into cash:
- In the vault and

- With tellers.
Cash in the Vault
• The amount kept in the vault is the total the branch estimates is required
to meet its needs. It is usually for this amount or slightly more that the
bank will take insurance cover.
• This money is kept in a safe inside a strong room or a vault and is under
the custody of a cashier.
! !358
CASH
Cash with Tellers
• Normally at the start of each day, the cashier hands over to tellers cash
for the day. The amount handed out to tellers will depend on the bank
and the usual volume of transactions the bank has.
• In addition each teller often has a certain amount in his box as bait
money. This consists of assorted notes. The numbers of these notes are
marked and the intent is to hand these over if a robbery takes place. The
fact that the numbers of these notes are recorded can help trace the
notes to those who robbed the bank.
- During the day if a teller needs more money he would either borrow
the amount he requires from another teller or from the cashier.
- At the end of the day the teller should account for the cash he has in
his box.
- It is not unusual, at the end of the day for a teller to have a difference.
A person may have been paid more or less money or the teller may
have received more or less money. This is known as “unders or overs”.
In some banks tellers are expected to make good any “unders”. In
others no action is taken apart from a record of unders and overs. At
the end of a month, the net amount is either added or deducted from
cash and taken to either income or expenses as appropriate.
- The practice of what should be done at the end of a day varies from
bank to bank. In some banks the money is returned to the cashier
whereas in others the box is not emptied every day but is replenished
after taking into account the net inflow/outflow.
- At the end of the day cashiers perform a bundle check to satisfy

themselves that all money held can be accounted for.
Excess Money
• If the branch has more money than it requires it would surrender the
extra money that it has either to the Reserve Bank or to another bank
with whom it has a relationship or to the bank’s currency chest branch.
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• Large banks and those that have several branches in a city often have a
currency chest. This is technically money of the Reserve Bank that the
bank keeps on behalf of the Reserve Bank.
48.2 COINS
At present coins are in denominations of ` 10, ` 5, ` 2, ` 1 and 50 paise.

Coins upto 50 paise are called small coins. Those above a rupee are called
rupee coins. There are also coins for ` 150, ` 500 and ` 1,000. These
have been issued as commemorative coins and have no commercial value.
• 25 paise, 20 paise, 10 paise, 5 paise, 3 paise, 2 paise and 1 paise coins

have been discontinued.
• The RBI has issued instructions that banks must accept coins as it is
legal tender. This notice was issued as there were several banks that
refused to handle a large amount of coins deposited because of the time
it would take to count them.
• Banks accept coins of all denominations tendered at their counters either

for exchange or for deposit in accounts and pay the value in notes.
• Small coins in large quantities may be taken by weight.
• Small coins can be sent to the Government of India Mint.
48.3 NOTES
• Notes refers to currency notes issued by the Reserve Bank of India. This
is legal tender and are presently available in denominations of ` 1,000, `
500, ` 100, ` 50, ` 20 and ` 10. The printing of ` 5, ` 2 and ` 1 notes
have been discontinued. Those notes issued earlier are still legal tender.
• The RBI has issued instructions that notes must not be stapled. This was
because earlier banks had the habit of awkwardly stapling the notes and
binding bundles with multiple staples. The result was that it was very
difficult to separate the notes and the multiple stapling also resulted in
the notes tearing. Bundles should be secured by paper bands.
• The RBI has also issued instructions that notes should not be written on.
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• Banks should sort out notes into re-issuable notes and non-issuable
notes. Only clean notes should be issued to the public.
• No one should write on the watermark window of the note.
• No bank may refuse to accept low denomination notes.
• In March 2008, the RBI appealed to the public not to use banknotes for
making garlands, decorating pandals and places of worship or for
showering on personalities in social events as such actions deface
banknotes and shorten their life.
48.4 SORTING/PROCESSING OF NOTES
Bank notes in denominations of ` 100 and above may be reissued by banks

over their counter or through ATMs only if they are checked for
authenticity/genuineness and fitness by machines.
48.5 DISPLAY OF NOTICE BOARD
All designated bank branches are required to display at their branch

premises, at a prominent place, a board indicating the availability of note
exchange facility with the legend, "MUTILATED NOTES ARE ACCEPTED AND
EXCHANGED HERE". Banks should ensure that all their designated
branches provide facilities for exchange of notes and coins and place
details of designated branches in public domain.
48.6 FACILITY FOR EXCHANGE OF NOTES AND COINS AT

BANK BRANCHES
All branches of banks in all parts of the country should provide the
following customer services:
(i) Meeting the demands for fresh/good quality notes and coins of all
denominations,
(ii) Exchanging soiled notes, and
(iii) Accepting coins and notes either for transactions or exchange.
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All the designated bank branches should provide facility for exchange of
damaged/ mutilated notes. The names and addresses of such bank
branches are available with RBI or the respective banks. Availability of such
facilities at the branches should be published for information of the public
at large.
None of the bank branches/staff should refuse to accept small

denomination notes and/or coins tendered at their counters.
48.7 REMITTANCE OF ` 50,000 AND ABOVE
Remittance of funds by demand draft/mail/telegraphic transfer or any other

mode and issue of traveler’s cheques of ` 50,000 and above is effected by
debit to the customer’s account or against cheques and not against cash
payment..
48.8 AGREEMENT BETWEEN RBI AND COMMERCIAL BANKS
The agreement between the Reserve Bank of India and the commercial
banks for establishment of currency chests/and/or Small Coin Depots
provide that the bank branches would accept coins in exchange of notes.
The banks have been advised to instruct their branches that:
(i) They should accept coins of all denominations from any member of
public without any restriction and pay the value in notes.
(ii) They should use counting machines or accept coins by weight for large
receipts, as hitherto.
(iii) Rupee coins accepted can be held as part of chest balance and small
coins as part of the Small Coin Depot balance.
The banks are required to direct all their branches to accept coins of all
denominations tendered at their counters either for exchange or for deposit
in accounts. Such coins, particularly lower denominations, may be
preferably accepted by weighment. However, as accepting coins packed in
polythene sachets of 100 each would be more convenient for the cashiers
as well as the customers, the banks may keep such sachets at the counters
and make them available to the customers. A notice to this effect should be
displayed suitably inside as also outside the branch premises for
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information of the public. Considering that aluminium coins of 5 paise, 10

paise,20 paise, aluminum-bronze coins of 10 paise, stainless steel coins of
10 paise, cupronickel coins of 25 paise, 50 paise and rupee one
denominations are being withdrawn and remitted to the mints, customers
may be requested, and not insisted, to pack each of these denominations
separately and also metal-wise with 100 coins in each sachet before they
are tendered at the counters. Similar arrangements may also be made for
acceptance of current coins of 25 paise, 50 paise and one rupee of
stainless steel and two rupees and five rupees coins of cupronickel. In case
of large variations of weight, counting machines may be used.
In order to obviate the problem of storage of coins at the branches,

aluminum coins of 5 paise, 10 paise, 20 paise, aluminium-bronze coins of
10 paise, stainless steel coins of 10 paise and cupronickel coins of 25
paise, 50 paise and Re.1 may be remitted to Government of India Mints at
Mumbai/Kolkata/Hyderabad with prior intimation to them through the
designated branches of the bank concerned (or through link branches of
other banks) as per the existing procedure. Stainless steel coins of 25
paise, 50 paise, Re. 1 and ` 2 and cupronickel/stainless steel coins of ` 5
denominations should, however, be put back in circulation. ` 2 cupronickel
coins may not be issued to the public but retained at the designated
branches till further instructions. In case, the stocks of these coins reach
beyond the holding capacity for lack of demand the Issue Department of
the Circle should be approached for remittance of coins.
Mutilated/Soiled Notes
• Soiled notes are bank notes which have become dirty and limp due to
excessive use.
• Mutilated bank notes are those which are torn, disfigured, burnt, washed,
eaten by white ants, etc.
• A double numbered bank note cut into two pieces but on which both the
numbers are intact is treated as a soiled bank note.
• All bank branches must provide the facility of exchanging soiled notes.
• Soiled notes are exchanged for its full value.
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• Banks must accept mutilated notes provided all the relevant details such
as numbers, etc., are on the note. It must be noted that a mutilated note
is a note of which a portion is missing or which is composed of pieces.
• Payment of value of mutilated banknotes is governed by the Reserve

Bank of India (Note Refund) Rules 1975. The public can get value for
these notes as a matter of grace after adjudication. The current
provisions exist for paying full, half or no value for bank notes in the
denomination of ` 10 and above. With regard to Re. 1, ` 2 and ` 5,
either full or no value is given depending on the condition of the note.
• In case re-issuable bank notes are found to be in excess of 5% in any

soiled note remittance, the entire remittance will be returned to the bank
at its cost besides debiting the amount of the remittance to the account
of the bank maintained with the Reserve Bank of India.
• Soiled notes in unstapled condition may be tendered to the Reserve

Bank. The tolerance level of re-issuable notes in the soiled bank note
remittance to the RBI should not be more than 5% of each remittance.
• Section 28 of the RBI Act states no person is entitled as a right to

recover from the Government or from RBI the value of any lost, stolen,
mutilated or imperfect currency note. In certain circumstances, RBI, in
order to mitigate hardships will exchange notes. These are accepted over
bank counters in payment of Government dues.
• If mutilated notes are presented banks should accept them if they are
not in more than two pieces and no essential feature of the note is
missing. Both the pieces should be of the same note and the complete
number of the note in an undivided area on each piece should be the
same. On these notes the officer in charge should stamp PAY/PAID/
REJECT. The PAY & REJECT stamp should bear the name of the bank and
branch concerned. These notes should be treated as soiled notes and
kept with soiled notes.
• Notes which are extremely brittle or badly burnt or inseparably stuck

should not be accepted for exchange. The holders may be advised to
tender these notes to the concerned issue offices where they would be
adjudicated under a special procedure. Soiled/mutilated note bearing
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‘PAY/PAID’ or ‘REJECT’ of any RBI office or a bank should be rejected. No

bank should issue such notes.
• Banks should ensure that all their designated branches undertake note
exchange business and all such designated branches are required to
display a board indicating the availability of note exchange facility with
the legend, “MUTILATED NOTES ARE ACCEPTED AND EXCHANGED HERE”.
• Unfit notes should not be issued to the public. These should be deposited
in currency chests and periodically sent to the Reserve Bank.
• All the banks branches have instructions not to issue notes bearing PAY/
PAID stamps to the public even through oversight. Customers should be
cautious and should not accept such notes from any bank or anybody
else.
• In order to facilitate quicker exchange facilities, the soiled and cut note
should be freely exchanged by all bank branches. The single numbered
notes in the denomination of ` 1/-, ` 2/- & ` 5/- should not be presented
in more than two pieces, the essential feature of the such note should
not be missing and the complete number should be available in an
undivided area on one of the pieces. The doubled numbered notes in the
denomination of ` 10/-, ` 20/-, ` 50/-, ` 100/-, ` 500/- and ` 1,000/-
should not be presented in more than two pieces, the essential feature of
the such note should not be missing and both the pieces should be of the
same note
• Notes with slogans and political messages cease to be legal tender.
• Disfigured notes are not legal tender.
• Deliberately cut/mutilated notes should be rejected.
• If the bank takes a badly mutilated note, it should be communicated to

the client that if the Reserve Bank does not accept the note, his account
will be debited.
• Banks should not force customers to note their names on bank notes or
list note numbers on the bills submitted for payment or insist on an
undertaking when depositing higher denomination notes.
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• A bank note is not eligible for payment if it is:
- Less than half the area of the full banknote
- Devoid of the major portion of the number on an individual area
- Cancelled by any office of the RBI or against which the value has
already been paid.
- Found to be forged/counterfeit.
- Deliberately cut, mutilated or tampered carrying extrinsic words or

visible representation intended to convey or capable of conveying any
message of a political character.
- These are sent to the RBI where they are destroyed.
Defectively Printed Notes
• Defectively printed notes in any packet are replaced with a good note
bearing the same number as the one replaced.
• To benchmark procedures against international best practices the

Reserve Bank has adopted the STAR series numbering system.
• A ‘star series’ banknote will have an a star in the number panel between
the prefix and the number.
• The bands of the packets containing the ‘star series’ will clearly indicate
the presence of such banknotes in the packet.
• Star series banknotes are legal tender and may be freely accepted and
used.
48.9 DETECTION AND IMPOUNDING OF COUNTERFEIT

NOTES
The Counterfeit Notes can be impounded by:
(i) All branches of Public Sector Banks.
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(ii) All branches of Private Sector Banks and Foreign Banks.

(iii) All branches of Co-operative Banks & Regional Rural Banks.
(iv) All Treasuries and Sub-Treasuries.
(v) Issue Offices of Reserve Bank of India.
Detection of Counterfeit Notes
(i) Detection of counterfeit notes should be at the back office/currency

chest only. Banknotes when tendered over the counters may be
checked for arithmetical accuracy and other deficiencies like whether
there are mutilated notes, and appropriate credit passed on to the
account or value in exchange given.
(ii) Thereafter the notes should be passed over to the back office/currency
chest, as the case may be, for detailed verification and authentication
through machines.
(iii) The banknotes categorized as suspect during machine processing

should be subjected to manual verification for checking their
authenticity.
(iv) In no case, the counterfeit notes should be returned to the tenderer or

destroyed by the bank branches/treasuries. Failure of the banks to
impound counterfeit notes detected at their end will be construed as
willful involvement of the bank concerned, in circulating counterfeit
notes and penalty will be imposed.
Impounding of Counterfeit Notes
The notes identified as counterfeit should be kept separately with proper

impounding stamp. Details of each impounded note should be recorded
under authentication in a separate register.
If a forged note is presented, the presenter’s (tenderer’s) name and

address should be noted. He should be given an acknowledgement.
The note should be stamped “COUNTERFEIT BANK NOTE” and impounded.

The stamp must also state the name of the bank, the branch and date. The
stamp should be 5cms by 5 cms (uniform size).
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In case counterfeit banknotes are found in remittances from currency

chests, entire amount equal to the value of counterfeit banknotes will be
debited to the bank's current account and penal interest will be levied on
the amount of counterfeit banknotes from the date of previous remittance
to RBI. FIRs will also be lodged with the Police in all cases of detection of
counterfeit banknotes in chest remittances.
Issue of Receipt to Tenderer
There will not be any requirement to issue acknowledgement to the

tenderer. Notice to this effect should be displayed prominently at the
offices/branches for the information of the public.
Detection of Counterfeit Notes – Reporting to Police and Other

Bodies
A counterfeit note detected in the cash received by the bank branch/

Treasury, across the counter shall be impounded.
Thereafter, the following procedure should be followed while reporting

incidence of detection of counterfeit note to the Police:
For cases of detection of counterfeit notes upto 4 pieces, in a single

transaction, a consolidated report should be sent by the Nodal Bank Officer
to the police authorities or the Nodal Police Station, along with the suspect
counterfeit notes, at the end of the month.
For cases of detection of counterfeit notes of 5 or more pieces, in a single

transaction, the counterfeit notes should be forwarded by the Nodal Bank
Officer to the local police authorities or the Nodal Police Station for
investigation by filing FIR. The note will include name/address of tenderer
and statement on how he came to be in possession of the note. A copy of
the FIR must be sent to the RBI.
FIRs must be sent in all cases even if only one or two notes are detected
and the tenderer appears innocent. The notes must be impounded and sent
to the RBI.
If notes are sent to police it must be by registered post, acknowledgement

must be got.
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A copy of the monthly consolidated report/FIR shall be sent to the Forged

Note Vigilance Cell constituted at the Head Office of the bank(only in the
case of banks), and in the case of the treasury, it should be sent to the
Issue Office of the Reserve Bank concerned.
Acknowledgement of the police authorities concerned has to be obtained

for note/s forwarded to them both as consolidated monthly statement and
FIR. If the counterfeit notes are sent to the police by insured post,
acknowledgement of receipt thereof by the police should be invariably
obtained and kept on record. A proper follow-up of receipt of
acknowledgement from the police authorities is necessary. In case, any
difficulty is faced by the Offices/Branches due to reluctance of the police to
receive monthly consolidate statement/file FIRs, the matter may be sorted
out in consultation with the Nodal Officer of the police authority designated
to coordinate matters relating to investigation of counterfeit banknotes
cases. The list of Nodal Police Station may be obtained from the respective
Regional Office of Reserve Bank.
Banks should also monitor the patterns/trends of such detection and

suspicious trends/patterns should be brought to the notice of RBI/Police
authorities immediately.
The progress made by banks in detection and reporting of counterfeit notes

to Police, RBI, etc., and problems thereof, should be discussed regularly in
the meetings of various State Level Committees, viz., State Level Bankers’
Committee (SLBC), Standing Committee on Currency Management
(SCCM), State Level Security Committee (SLSC), etc.
The data on detection of counterfeit Indian notes at bank branches &

treasuries should be included in the monthly Returns forwarded to the
Reserve Bank Issue Offices.
The definition of 'counterfeiting' in the Indian Penal Code covers currency

notes issued by a foreign government authority as well. In case of
suspected foreign currency note received for opinion from the police and
government agencies, etc., they should be advised to forward the case to
the Interpol Wing of the CBI, New Delhi after prior consultation with them.
Examination of the Banknotes before Issuing over Counters,

Feeding ATMs and Remitting to Issue Offices of the Reserve Bank
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Banks should re-align their cash management in such a manner so as to

ensure that cash receipts in the denominations of ` 100 and above are not
put into re-circulation without the notes being machine processed for
authenticity. This rule shall be applicable to all bank branches, irrespective
of the volume of daily cash receipt. Any non-compliance will be construed
as a violation.
In order to obviate complaints regarding receipt of counterfeit notes

through ATMs, and to curb circulation of counterfeits, it is imperative to put
in place adequate safeguards/checks before loading ATMs with notes.
Dispensation of counterfeit notes through the ATMs would be construed as
an attempt to circulate the counterfeit notes by the bank concerned.
Detection of counterfeits in chest remittances is also liable to be construed

as wilful involvement of the chest branches concerned in circulating
Counterfeit Notes and may attract special investigation by police
authorities, and other action like suspending the operation of the chest
concerned.
Reserve Bank may consider the option of levying higher penal interest/
penalties for the amount of forged notes detected in the chest remittances
by RBI or during inspection.
Designating Nodal Bank Officer
Each bank should designate Nodal Bank Officer, district-wise and notify the
same to the concerned Regional Office of RBI and Police Authorities. All
cases of reporting of counterfeit note detection as indicated in Para 5
should be through the Nodal Bank Officer. The Nodal Bank Officer will also
serve as the contact point for all counterfeit note detection related
activities.
Establishment of Forged Notes Vigilance Cell at Head Office of Bank
Each bank shall establish at its Head Office, a Forged Note Vigilance Cell to
undertake the following functions:
(i) Dissemination of instructions issued by the Reserve Bank on

counterfeit notes to bank’s branches. Monitoring the implementation of
these instructions. Compilation of data on detection of counterfeit
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notes, and its submission to Reserve Bank and FIU-IND as per extant
instructions. Follow-up of cases of counterfeit notes, with police
authorities/designated nodal officer.
(ii) Sharing of the information thus compiled with bank’s CVO and report
to him/her all cases of acceptance/issue of counterfeit notes over the
counters.
(iii) Conducting periodic surprise checks at currency chests where

shortages/defective/ counterfeit notes, etc., are detected.
(iv) Ensuring operation of Note Sorting Machines of appropriate capacity at

all the currency chests and closely monitoring the detection of
Counterfeit Notes at currency chest branches and maintaining the
record of the same. Ensuring that only properly sorted and machine
examined banknotes are fed into the ATMs/issued over the counters
and to put in place adequate safeguards, including surprise checks,
both during the processing and in transit of notes.
Forged Note Vigilance Cell shall submit status report on a quarterly basis
covering the aforesaid aspects to the Chief General Manager, Department
of Currency Management, Reserve Bank of India, Central Office, Amar
Building, Fourth Floor, Sir P.M. Road, Fort, Mumbai-400 001, and to the
Issue office of the Regional office of Reserve Bank under whose jurisdiction
the FNV Cell is functioning, within a fortnight from the conclusion of the
quarter under report.
In order to update the record of the addresses of the Forged Note Vigilance
Cells, the bank shall furnish by e-mail, particulars to the Reserve Bank
every year, as on 1st July.
Provision of Ultra-Violet Lamp and Other Infrastructure
With a view to facilitating the detection of counterfeit notes, all bank

branches/identified back offices should be equipped with ultra-violet lamps/
other appropriate banknote sorting/detection machines. In addition, all
currency chest branches should be equipped with verification, processing
and sorting machines and should be used to their optimum capacity. Such
machines should conform to the guidelines on ‘Note Authentication and
Fitness Sorting Parameters’ prescribed by the Reserve Bank.
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The banks shall maintain a daily record of the notes processed through the
Note Sorting machines, including the number of counterfeits detected.
The banks should also consider providing at least one counting machine
(with dual display facility) for public use at the counter.
Compensation
(i) The banks will be compensated by RBI to the extent of 25% of the
notional value of the counterfeit notes of ` 100 denomination and
above, detected and reported to RBI and Police authorities.
(ii) Claims for compensation should be made through the Forged Note
Vigilance Cell of the banks in the prescribed format on a monthly basis
within fifteen days of the succeeding month.
(iii) Reimbursement will be done by RBI, Department of Currency

Management, to begin with, on a quarterly basis.
(iv) A review of the above system will be conducted after one year.
Preservation of Counterfeit Notes Received from Police Authorities
All Counterfeit Notes received back from the police authorities/courts may
be carefully preserved in the safe custody of the bank and a record thereof
be maintained by the branch concerned. Forged Note Vigilance Cell of the
bank shall also maintain a branch-wise consolidated record of such
Counterfeit Notes.
These Counterfeit Notes at branches should be subjected to verification on

a half-yearly basis (on 31st March and 30th September) by the Officer-in-
Charge of the bank office concerned. They should be preserved for a period
of three years from the date of receipt from the police authorities.
They may thereafter be sent to the concerned Issue Office of Reserve Bank
of India with full details.
Counterfeit notes, which are the subject matter of litigation in the court-of-
law should be preserved with the branch concerned for three years after
conclusion of the court case.
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Detection of Counterfeit Notes – Training of Staff
It is necessary to ensure that the cash handling staff in bank branches,

currency chests, and treasuries/sub-treasuries is fully conversant with the
security features of a banknote.
With a view to educating the branch staff on detection of counterfeit notes,

the design and security features of all the banknotes have been supplied to
all the banks/treasuries with instructions to display them prominently at
the branches for information of the public. Posters of the 2005-06 series of
banknotes have also been supplied to bank branches for display at the
branches. Posters of the 2005-06 series are also available for download.
The Controlling Offices/Training Centers should also organise/conduct

training programmes on the security features of banknotes for members of
staff to enable detection of counterfeit notes at the point of receipt itself.
The banks should ensure that all bank personnel handling cash are trained
on features of genuine Indian bank notes within a period of 2 years. The
Reserve Bank will also provide faculty support and training materials.
48.10 DUAL CUSTODY
• As a matter of control the vault must be under dual control. This means
that the second key and the combination should be with another person.
This ensures that if the vault is to be opened there has to be two persons
present and embezzlement will therefore not happen unless there is
collusion.
• The controls on cash must be very strong. Cash is fungible – changes

form and once lost is difficult to trace.
48.11 GENERAL
• Notes and coins are kept at bank branches to meet the needs of
customers. These are also accepted on behalf of customers who wish to
deposit monies in their accounts.
• The amount of cash and coins kept at banks are the minimum they need
to meet business requirements as these are idle assets. This is why
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banks at times request customers to intimate them in advance if they

require to withdraw large amounts.
• Banks must not accept cash in excess of ` 50,000 for the issuance of
drafts/ traveler’s cheques.
• Suspicious transactions/large withdrawals should be noted and reported

to the RBI.
48.12 CURRENCY CHEST
• To facilitate the distribution of banknotes and rupee coins, the Reserve

Bank has authorised select branches of scheduled banks to establish
Currency Chests.
• These are actually storehouses where banknotes and rupee coins are
stocked on behalf of the Reserve Bank.
• The currency chest branches are expected to distribute banknotes and

rupee coins to other bank branches in their area of operation.
• The minimum amount of deposit into/withdrawal from a currency chest is

` 1,00,000 and thereafter in multiples of ` 50,000.
• If reissuable banknotes are in excess of 5% in any soiled remittance, the

entire remittance would be returned to the bank at its cost.
48.13 SMALL COIN DEPOT
• Some bank branches are also authorised to establish Small Coin Depots
to stock small coins.
• The Small Coin Depots also distribute small coins to Acceptance of cash
over the counter.
• Other bank branches in their area of operation.
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48.14 CLEAN NOTE POLICY
• Reserve Bank of India has been continuously making efforts to make

good quality banknotes available to the members of public. Banks and
the public have been asked:
- Not to staple the banknotes.
- Not to write/put rubber stamp or any other mark on the banknotes.
- Store the banknotes safely to prevent any damage.
- Banks should sort notes into re-issuables and non-re-issuables and

issue only clean notes to the public. Soiled notes in unstapled condition
can be tendered to the RBI.
48.15 ACCEPTANCE OF CASH OVER THE COUNTER
• All branches of banks must accept cash over the counters from all their
customers who desire to deposit cash at the counter.
• Banks cannot introduce products where customers are not permitted to

deposit cash over the counters. In some cases banks had incorporated a
clause that cash deposits are required to be deposited through ATMs.
This is not permitted. Banks must accept cash over the counters from all
their customers who desire to deposit cash at the counters.
• Banks cannot incorporate clauses which restricts deposit of cash over the
counters.
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1. In what forms do banks hold Cash?
2. Why do banks keep Cash with the Reserve Bank?
3. How much Cash does a bank keep in its vault?
4. Do banks accept coins?
5. Do banks accept mutilated notes and what is the value of the mutilated
notes?
6. When is a note not eligible for payment?
7. What is the procedure on receiving a forged note?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !377
ELECTRONIC BANKING
Chapter 49
Electronic Banking
Objectives
This chapter discusses and explains the different forms of Electronic

Banking.
Structure
49.1 Introduction
49.2 Automated Teller Machines
49.3 Bank Teller Machines
49.4 Point-of-Sale (POS) Terminals
49.5 Internet Banking
49.6 Digital Cash
49.7 Digital Checks
49.1 INTRODUCTION
Electronic banking is accessing bank accounts and withdrawing/depositing

money and issuing instructions without the intervention of a bank
employee. Electronic banking involves many different types of transactions.
These include:
• Automated teller machines;

• Bank teller machines;
• Point of sale terminals;
• Internet banking;
• Virtual cards;
• Digital cash;
• Digital checks
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ELECTRONIC BANKING
49.2 AUTOMATED TELLER MACHINES
• Automated Teller Machines (ATMs) or 24-hour tellers are electronic

terminals that provide customers the facility of accessing their accounts
for dispensing cash and to carry out other financial transactions.
• There are two types – interior and exterior. Interior are those in banking
premises whereas exterior are in malls/shopping centres and other
locations.
• ATM cards/debit cards/credit cards and other prepaid cards that permit
withdrawal can be used at ATMs.
• ATMs facilitate the withdrawal of money at times when banks are not
open (outside banking hours) and are primarily used for performing
some of the banking functions such as withdrawal of cash or deposit of
cash/cheque, etc., by using an ATM card.
• In addition to cash withdrawal, etc., customers can access ATMs for

account information, bill payment, purchase of reload vouchers for
mobile phones, mini/short account statement (deposit and loan
accounts), enquiry etc.
• Each customer is provided with an ATM card with a unique Personal

Identification Number (PIN). Whenever a customer performs a
transaction, the person has to key in the PIN which is validated by the
ATM, before the machine permits any transaction. The PIN has to be kept
secret by the customer, to prevent any misuse or fraudulent transactions
in the event of loss of the card.
• If the customer forgets his PIN or the card is sucked in by the ATM, the
customer should approach the card issuer.
• Stand-alone ATMs made their appearance in India, in the early 1990s.

These were mostly installed by foreign banks in their branch premises, as
per the then existing policy. Easing of restrictions on the location of ATMs
has led to their being installed at convenient places such as airports,
central business districts, hospitals, etc.
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ELECTRONIC BANKING
• Most commercial banks have their own ATMs. In the case of smaller
banks they piggyback, at times, on the ATMs of larger banks to allow
their customers access to money outside banking hours.
• Shared payment network arrangements allow participating banks to issue

universal cards that can be used on the electronic banking services used
by the different banks.
• Some banks charge a fee if you use another bank ATM (to which they are
connected or have an arrangement with). With effect from October 15,
2009 a customer can take out a maximum of ` 10,000 per withdrawal
from ATMs not owned by the bank. This number of withdrawals is limited
to 5 per month. Additional withdrawals will be charged.
• RBI guidelines require customer complaints (regarding money not being

discharged by an ATM) that banks should reimburse customer’s accounts
wrongly debited within a maximum period of 12 days from the date of
receipt of customer complaint. Banks not complying with this deadline
will be penalized by the RBI (` 100 per day for delays beyond 12 working
days). If this is not paid, a complaint can be lodged with the Bank
Ombudsperson.
• The RBI also states that the claim should be credited to the customer’s
account automatically without any claim from the customer, on the same
day when the bank affords the credit for the failed ATM transaction.
Issuer banks can claim compensation paid to the customer from acquirer
bank/ATM operators if the fault is the latter’s.
• ` 100 and above notes may be issued through ATMs only after they are
checked for authenticity, genuineness and fitness by note sorting
machines.
• No permission is required from the Reserve Bank to set up an ATM

outside branch premises.
• Banks are required to ensure that all ATMs are provided with ramps so
that wheel chair users/persons with disabilities/wheel chairs can access
them. Additionally height of the ATM should not create an impediment for
a wheel chair user.
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ELECTRONIC BANKING
• At least a third of new ATMs should be installed as talking ATMs with

Braille keypads. It should be, in consultation with other banks ensured
that one such ATM is available in each locality.
• Banks should consider covering all ATM sites by CCTV so that identity of
person withdrawing cash can be established.
• Guards posted at ATMs should be properly trained in the above regard.
49.3 BANK TELLER MACHINES
• These are similar to ATMs and installed at bank premises.

• Unlike ATMs they require the presence of an employee of the bank to
operate.
49.4 POINT-OF-SALE (POS) TERMINALS
• Cash withdrawals are permitted at POS terminals for all debit cards
issued in India upto ` 1,000 per day.
• Facility is available at any merchant establishment designated by bank

after process of due diligence.
• Facility is available irrespective of whether customer makes purchase or

not.
• If availed of with purchase of merchandise, receipt generated should

indicate amount of cash withdrawn.
49.5 INTERNET BANKING
• Internet banking permits an account holder to access his account by a

computer from home or other remote location and issue instructions.
• The account is accessed by the account holder stating a unique

identification customer number and a password.
• Customers can:
- Ascertain their account balance;
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ELECTRONIC BANKING
- Transfer amounts from one account to another;

- Arrange for the issuance of a cheque;
- Instruct payments to be made;
- Request for a cheque book;
- Request for a statement of their account;
- Make a fixed deposit.
• There is a confidentiality issue as hackers could get vital numbers and

then withdraw amounts.
• The integrity of the system is extremely important.
• Once the transaction instructions are issued, it is very difficult to

repudiate them.
49.6 DIGITAL CASH
• Digital cash is designed to allow the consumer to pay cash rather than
use a credit card to purchase products on the internet.
• One type of digital cash allows consumers to transfer money from a

financial institution or a credit card into an “electronic purse”. The cash is
held in a special bank account that is linked to the computer.
• Another type of digital cash converts money into digital coins that can be
placed on the computer’s hard drive.
49.7 DIGITAL CHECKS
• Digital checks allow consumers to use their personal computers to pay

recurring bills. Consumers can use computer software provided by a
bank, or they can use personal finance software packages such as
Quicken or Microsoft Money and subscribe to an electronic bill-paying
service. This is currently not available in India.
• The technology of paying bills electronically by home computers is

advancing rapidly, but relatively few businesses currently can accept
payments made directly by computers. Digital checking is expensive.
Fees generally run from $5 to $10 a month for 20 transactions. Privacy
and security issues are major consumer concerns. Encryption technology
may lessen privacy concerns in the future.
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ELECTRONIC BANKING
1. Define Electronic Banking.
2. What are the functions of an ATM machine?
3. Can any banks ATM card be uses at any ATM?
4. What is the difference between a bank teller machine and an ATM?
5. What facilities does internet banking offer a customer?
6. What are digital checks?
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ELECTRONIC BANKING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !384
TELEPHONE BANKING
Chapter 50
Telephone Banking
Objectives
This chapter explains what Telephone Banking is.
Structure
50.1 Telephone Banking

50.1 TELEPHONE BANKING
• Telephone banking is a facility offered to customers whereby they can, by

dialling a number, issue instructions or seek information.
• The customer when he makes a call is answered by an operator in a call

centre. This person has access to the customer’s account. To ensure that
it is indeed an authorized person who is seeking information, the
customer would be required to state an identifying number (Personal
Identification Number – T-Pin), date of birth, billing address or any other
unique information. On being satisfied that it is indeed the customer, the
transaction required is carried out. These may include:
• Transfers to a fixed deposit;
• Balance enquiry;
• Request for a cheque book;
• Request for a statement;
• Payment of a bill.
• There is one concern. In many instances the information required is in

the public domain and therefore it is possible for a person not properly
authorized to access sensitive information.
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TELEPHONE BANKING
1. What is Telephone Banking?
2. What kind of transactions can be carried out by Telephone Banking?
3. Are there any disadvantages to Telephone Banking?
! !386
TELEPHONE BANKING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !387
MOBILE BANKING
Chapter 51
Mobile Banking
Objectives
This chapter explains how Mobile Banking works.
Structure
51.1 Introduction
51.2 Regulatory and Supervisory Issues
51.3 Registration of Customers for Mobile Service
51.4 Technology and Security Standards
51.5 Authentication
51.6 Inter-Operability
51.7 Clearing and Settlement for Inter-Bank Funds Transfer Transactions
51.8 Customer Complaints and Grievance Redresal Mechanism
51.9 Transaction Limit
51.10 Remittance of Funds for Disbursement in Cash
51.11 Board Approval
51.12 Approval of Reserve Bank of India
51.13 Customer Protection Issues
51.1 INTRODUCTION
• Mobile banking is being increasingly seen as an alternative channel of

delivery of banking services.
• Mobile banking is undertaking banking services using mobile phones that

involve debits/credits to their account.
• Banks offer information based services like balance enquiry, stop

payment instruction of cheques, transactions enquiry, location of the
nearest ATM/branch, etc.
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MOBILE BANKING
• Acceptance of transfer of funds instruction for credit to beneficiaries of

same/or another bank in favor of pre-registered beneficiaries have also
commenced in a few banks.
• To ensure a level playing field and considering that the technology is

relatively new, Reserve Bank has brought out a set of operating
guidelines for adoption by banks.
51.2 REGULATORY and SUPERVISORY ISSUES
• Only banks which are licensed and supervised (regulated) in India and
have a physical presence in India will be permitted to offer mobile
banking services. They should also have implemented core banking
solutions.
• The services shall be restricted only to customers of banks and/or

holders of debit/credit cards issued as per the extant Reserve Bank of
India guidelines.
• Only Indian Rupee based domestic services shall be provided. Use of

mobile banking services for cross border inward and outward transfers is
strictly prohibited.
• Banks may also use the services of Business Correspondent appointed in

compliance with RBI guidelines, for extending this facility to their
customers.
• Mobile banking transactions should be validated by 2 factor

authentication system.
• Banks may also use the services of Business Correspondent appointed in

compliance with RBI guidelines, for extending this facility to their
customers.
• The guidelines issued by the Reserve Bank on ‘Risks and Controls in

Computers and Telecommunications’ dated 4th February 1998 will apply
to mobile banking.
• The guidelines issued by Reserve Bank on “Know Your Customer (KYC)”,

“Anti- Money Laundering (AML)” and Combating the Financing of
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MOBILE BANKING
Terrorism (CFT) from time to time would be applicable to mobile based

banking services also.
• Only banks who have implemented core banking solutions would be

permitted to provide mobile banking services.
• Banks shall file Suspicious Transaction Report (STR) to Financial

Intelligence Unit-India (FIU-IND) for mobile banking transactions as in
the case of normal banking transactions.
51.3 REGISTRATION OF CUSTOMERS FOR MOBILE

SERVICE
• Banks shall put in place a system of document based registration with

mandatory physical presence of their customers, before commencing
mobile banking service. Reserve Bank would consider relaxation in
specific cases while approving the proposals of banks.
• On registration of the customer, the full details of the Terms and

Conditions of the service offered shall be communicated to the customer.
51.4 TECHNOLOGY AND SECURITY STANDARDS
• Technology used for mobile banking must be secure and should ensure
confidentiality, integrity, authenticity and non-repudiability.
• Information Security is most critical to the business of mobile banking

services and its underlying operations. Therefore, technology used for
mobile banking must be secure and should ensure confidentiality,
integrity, authenticity and non-repudiability.
• Transactions up to ` 5,000/- can be facilitated by banks without end-to-

end encryption. The risk aspects involved in such transactions may be
addressed by the banks through adequate security measures.
• Technology deployed is fundamental to safety and soundness of any

payment system. Therefore; banks are required to follow the Security
Standards appropriate to the complexity of services offered.
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MOBILE BANKING
• Banks are required to put in place appropriate risk mitigation measures

like transaction limit (per transaction, daily, weekly, monthly),
transaction velocity limit, fraud checks, AML checks, etc., depending on
the bank’s own risk perception, unless otherwise mandated by the
Reserve Bank.
51.5 AUTHENTICATION
• Banks providing mobile banking services shall comply with the following
security principles and practices for the authentication of mobile banking
transactions:
• All mobile banking transactions shall be permitted only by validation

through a two factor authentication.
• One of the factors of authentication shall be mPIN or any higher

standard.
• Where mPIN is used, end to end encryption of the mPIN is desirable, i.e.,
mPIN shall not be in clear text anywhere in the network.
• The mPIN shall be stored in a secure environment.
• Proper level of encryption and security shall be implemented at all stages

of the transaction processing. The endeavor shall be to ensure end-to-
end encryption of the mobile banking transaction. Adequate safe guards
would also be put in place to guard against the use of mobile banking in
money laundering, frauds etc. The following guidelines with respect to
network and system security shall be adhered to:
(a) Implement application level encryption over network and transport

layer encryption wherever possible.
(b) Establish proper firewalls, Intruder Detection Systems (IDS), data

file and system integrity checking, surveillance and incident
response procedures and containment procedures.
(c) Conduct periodic risk management analysis, security vulnerability

assessment of the application and network, etc., at least once in a
year.
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MOBILE BANKING
(d) Maintain proper and full documentation of security practices,

guidelines, methods and procedures used in mobile banking and
payment systems and keep them up to date based on the periodic
risk management, analysis and vulnerability assessment carried out.
(e) Implement appropriate physical security measures to protect the

system gateways, network equipments, servers, host computers,
and other hardware/software used from unauthorized access and
tampering. The Data Centre of the Bank and Service Providers
should have proper wired and wireless data network protection
mechanisms.
• The dependence of banks on mobile banking service providers may place

knowledge of bank systems and customers in a public domain. Mobile
banking system may also make the banks dependent on small firms,
(i.e., mobile banking service providers) with high employee turnover. It is
therefore imperative that sensitive customer data, and security and
integrity of transactions are protected. It is necessary that the mobile
banking servers at the bank’s end or at the mobile banking service
provider’s end, if any, should be certified by an accredited external
agency. In addition, banks should conduct regular information security
audits on the mobile banking systems to ensure complete security.
• For mobile banking facilities which do not contain the phone number as
identity, a separate login ID and password is desirable to ensure proper
authentication.
51.6 INTER-OPERABILITY
Banks offering mobile banking service must ensure that customers having
mobile phones of any network operator are in a position to avail the
service, i.e., should be network independent. Restriction, if any, for the
customers of particular mobile operator(s) are permissible only during the
initial stages of offering the service, up to a maximum period of six months
subject to review.
The long-term goal of mobile banking framework in India would be to

enable funds transfer from account in one bank to any other account in the
same or any other bank on a real time basis irrespective of the mobile
network a customer has subscribed to. This would require interoperability
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MOBILE BANKING
between mobile banking service providers and banks and development of a

host of message formats. To ensure inter-operability between banks, and
between their mobile banking service providers, banks shall adopt the
message formats like ISO 8583, with suitable modification to address
specific needs.
51.7 CLEARING AND SETTLEMENT FOR INTER-BANK

FUNDS TRANSFER TRANSACTIONS
To meet the objective of nation-wide mobile banking framework facilitating

inter-bank settlement, a robust clearing and settlement infrastructure
operating on a 24 × 7 basis is necessary. Bank and non-bank entities
putting such systems in place, bilateral or multilateral, need authorisation
from Reserve Bank of India, under the Payment and Settlement System
Act, 2007.
51.8 CUSTOMER COMPLAINTS AND GRIEVANCE

REDRESSAL MECHANISM
The customer/consumer protection issues assume a special significance in

view of the fact that the delivery of banking services through mobile
phones is relatively new.
51.9 TRANSACTION LIMIT
Banks are permitted to offer mobile banking facility to their customers

without any daily cap for transactions involving purchase of goods/services.
However, banks may put in place per transaction limit depending on the
bank’s own risk perception, with the approval of its Board.
51.10 REMITTANCE OF FUNDS FOR DISBURSEMENT IN

CASH
In order to facilitate the use of mobile phones for remittance of cash,

banks are permitted to provide fund transfer services which facilitate
transfer of funds from the accounts of their customers for delivery in cash
to the recipients. The disbursal of funds to recipients of such services can
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MOBILE BANKING
be facilitated at ATMs or through any agent(s) appointed by the bank as

business correspondents. The recipient can be a non-account holder also.
Such fund transfer service shall be provided by banks subject to the

following conditions:
(a) In case of cash out, the maximum value of such transfers shall be `
10,000/- per transaction. Banks may place suitable cap on the velocity
of such transactions, subject to a maximum value of ` 25,000/- per
month, per beneficiary.
(b) The disbursal of funds at the agent/ATM shall be permitted only after
identification of the recipient. In this connection, attention of banks is
drawn to the provisions of the Notification dated November 12, 2009,
issued by Government of India, under Prevention of Money Laundering
Act, 2002, as amended from time to time.
(c) Banks may carry out proper due diligence of the persons before
appointing them as authorized agents for such services.
(d) Banks shall be responsible as principals for all the acts of omission or
commission of their agents.
51.11 BOARD APPROVAL
Approval of the Board of Directors (Local Board in case of foreign banks)

for the product, as also the perceived risks and mitigation measures
proposed to be adopted must be obtained before launching the scheme.
51.12 APPROVAL OF RESERVE BANK OF INDIA
Banks wishing to provide mobile banking services shall seek prior one time
approval from Reserve Bank of India by furnishing full details of the
proposal.
51.13 CUSTOMER PROTECTION ISSUES
Any security procedure adopted by banks for authenticating users needs to

be recognized by law as a substitute for signature. In India, the
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MOBILE BANKING
Information Technology Act, 2000, provides for a particular technology as a

means of authenticating electronic record. Any other method used by
banks for authentication is a source of legal risk. Customers must be made
aware of the said legal risk prior to signup.
Banks are required to maintain secrecy and confidentiality of customers’

accounts. In the mobile banking scenario, the risk of banks not meeting
the above obligation is high. Banks may be exposed to enhanced risk of
liability to customers on account of breach of secrecy, denial of service,
etc., on account of hacking/other technological failures. The banks should,
therefore, institute adequate risk control measures to manage such risks.
As in an Internet banking scenario, in the mobile banking scenario too,

there is very limited or no stop payment privileges for mobile banking
transactions since it becomes impossible for the banks to stop payment in
spite of receipt of stop payment instruction as the transactions are
completely instantaneous and are incapable of being reversed. Hence,
banks offering mobile banking should notify the customers the timeframe
and the circumstances in which any stop-payment instructions could be
accepted.
The Consumer Protection Act, 1986 defines the rights of consumers in

India and is applicable to banking services as well. Currently, the rights and
liabilities of customers availing of mobile banking services are being
determined by bilateral agreements between the banks and customers.
Taking into account the risks arising out of unauthorized transfer through
hacking, denial of service on account of technological failure, etc., banks
providing mobile banking would need to assess the liabilities arising out of
such events and take appropriate counter measures like insuring
themselves against such risks, as in the case with internet banking.
Bilateral contracts drawn up between the payee and payee’s bank, the
participating banks and service provider should clearly define the rights
and obligations of each party.
Banks are required to make mandatory disclosures of risks, responsibilities

and liabilities of the customers on their websites and/or through printed
material.
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MOBILE BANKING
The existing mechanism for handling customer complaints/grievances may

be used for mobile banking transactions as well. However, in view of the
fact that the technology is relatively new, banks should set up a help desk
and disclose the details of the help desk and escalation procedure for
lodging the complaints, on their websites. Such details should also be
made available to the customer at the time of sign up.
In cases where the customer files a complaint with the bank disputing a
transaction, it would be the responsibility of the service providing bank, to
expeditiously redress the complaint. Banks may put in place procedures for
addressing such customer grievances. The grievance handling procedure
including the compensation policy should be disclosed.
Customers complaints/grievances arising out of mobile banking facility

would be covered under the Banking Ombudsman Scheme.
The jurisdiction of legal settlement would be within India.
1. What are the RBI regulations that govern the use of Mobile Banking?
2. What are the security procedures that must be enforced by banks that
offer Mobile Banking?
3. Are inter-bank funds transfers permissible?
4. Are there any transaction limits?
! !396
MOBILE BANKING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !397
CARDS
Chapter 52
Cards
Objectives
This chapter explains Cards.
Structure
52.1 Introduction
52.2 Charge Card
52.3 Credit Card
52.4 Virtual Cards
52.5 Smart Card
52.6 Electronic Purse
52.7 Debit Card
52.1 INTRODUCTION
• There are several cards issued to customers to facilitate banking

activities. These cards are in plastic and usually about 8.5 cm by 5.5 cm
in size. The name of the holder is embossed as is the number of the
card. It also has an expiry date. These are the forms that are used
worldwide.
52.2 CHARGE CARD
• In these cards transactions are accumulated over a period of time

(generally a month) and then the total is debited to the account. The
card holder is given 25 to 50 days to pay. These are called charge cards
as the transactions are accumulated and not debited to the account
immediately. The amount on a charge card is payable in full and no credit
is given.
• American Express and Diners Cards are the major charge cards in
circulation. These are also called T & E cards.
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CARDS
52.3 CREDIT CARD
• Credit cards are similar to charge cards. At the end of a month details of
all amounts purchased are sent to the card holder who is required to pay
a minimum amount (if he does not wish to pay the entire amount). He is
then given credit for the balance not paid and charged interest on the
balance (varies between 2–3% per month).
• The major credit card issuers are Mastercard and Visa and most banks
offer either Mastercard or Visa linked cards. This is for acceptability at
vendor establishments.
Basic Features of Credit Cards
The term “credit card” usually/generally refers to a plastic card assigned to

a cardholder, usually with a credit limit, that can be used to purchase
goods and services on credit or obtain cash advances.
Credit cards allow cardholders to pay for purchases made over a period of
time, and to carry a balance from one billing cycle to the next. Credit card
purchases normally become payable after a free credit period, during which
no interest or finance charge is imposed. Interest is charged on the unpaid
balance after the payment is due. Cardholders may pay the entire amount
due and save on the interest that would otherwise be charged.
Alternatively, they have the option of paying any amount, as long as it is
higher than the minimum amount due, and carrying forward the balance.
A credit card scheme typically involves the following parties:
• Cardholders: persons who are authorized to use credit cards for the
payment of goods and services;
• Card issuers: institutions which issue credit cards;
• Merchants: entities which agree to accept credit cards for payment of

goods and services;
• Merchant acquirers: Banks which enter into agreements with

merchants to process their credit card transactions; and
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CARDS
• Credit card associations: organisations that license card issuers to

issue credit cards under their trademark, e.g., Visa and MasterCard, and
provide settlement services for their members, (i.e., card issuers and
merchant acquirers).
Credit card schemes normally operate at an international level. This means

that cardholders belonging to card issuers in one country can make
purchases at the place of business of merchants in another country.
Types of Credit Cards
Credit cards can be broadly categorised into two types:
General purpose cards and private label cards: The former are issued
under the trademark of credit card associations (VISA and Mastercard) and
accepted by many merchants while the latter are only accepted by specific
retailers, (e.g., a departmental store).
Banks in India can undertake credit card business either departmentally or

through a subsidiary company set up for the purpose. They can also
undertake domestic credit card business by entering into tie-up
arrangement with one of the banks already having arrangements for issue
of credit cards.
Prior approval of the Reserve Bank is not necessary for banks desirous of
undertaking credit card business either independently or in tie-up
arrangement with other card issuing banks. Banks can do so with the
approval of their Boards. However, only banks with net-worth of ` 100
crore and above should undertake credit card business. Banks desirous of
setting up separate subsidiaries for undertaking credit card business would,
however, require prior approval of the Reserve Bank. Banks should adopt
adequate safeguards to ensure that their credit card operations are run in
a sound, prudent and customer friendly manner.
Most of the card issuing banks in India offer general purpose credit cards.
These cards are normally categorised by banks as platinum, gold or classic
to differentiate the services offered on each card and the income eligibility
criteria. Banks may, at the request of a cardholder, issue a supplementary
card (also referred to as ‘add-on cards’) to another individual who is
usually an immediate family member of the cardholder.
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CARDS
It is quite common for banks to partner with business corporations or non-

profit making organisations, (e.g., charitable or professional bodies) to
issue co-branded cards. However they need to undertake due diligence on
the non-bank entity to protect themselves against the reputation risk to
which they are exposed to in such an arrangement.
Banks may also issue corporate credit cards to the employees of their
corporate customers.
The types of credit cards mentioned above are illustrative and not
exhaustive. Banks may, from time to time, introduce new credit card
products to satisfy customer needs and cater to the changes in market
conditions.
Fair Practices Code
The Reserve Bank requires each bank must have a well documented policy
and a Fair Practices Code for credit card operations.
Issue of Cards
Banks should ensure prudence while issuing credit cards and independently
assess the credit risk while issuing cards to persons, especially to students
and others with no independent financial means. Add-on cards i.e. those
that are subsidiary to the principal card, may be issued with the clear
understanding that the liability will be that of the principal cardholder.
The Reserve Bank has advised banks that in case of all categories of loans
irrespective of any threshold limits, including credit card applications,
banks should convey in writing the main reason/reasons which in the
opinion of the bank have led to the rejection of the loan applications. It is
reiterated that banks should convey in writing the main reason/reasons
which have led to the rejection of the credit card applications.
As holding several credit cards enhances the total credit available to any
consumer, banks should assess the credit limit for a credit card customer
having regard to the limits enjoyed by the cardholder from other banks on
the basis of self-declaration/credit information.
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CARDS
The card issuing banks would be solely responsible for fulfillment of all KYC
requirements, even where DSAs/DMAs or other agents solicit business on
their behalf.
While issuing cards, the terms and conditions for issue and usage of a
credit card should be mentioned in clear and simple language (preferably in
English, Hindi and the local language) comprehensible to a card user. The
Most Important Terms and Conditions (MITCs) termed as standard set of
conditions should be highlighted and advertised/sent separately to the
prospective customer/customers at all the stages, i.e., during marketing, at
the time of application, at the acceptance stage (welcome kit) and in
important subsequent communications.
Interest Rates and Other Charges
Credit card dues are in the nature of non-priority sector personal loans and
as such, upto June 30, 2010, banks were free to determine the rate of
interest on credit card dues without reference to their BPLR and regardless
of the size in terms of the Directives on Interest rates on advances.
However, with the introduction of Base Rate system with effect from July 1,
2010, all categories of loans, except certain specified exemptions, should
be priced only with reference to the Base Rate.
Banks are advised to be guided by the instructions on interest rate on

advances, as amended from time to time, while determining the interest
rate on credit card dues. Banks have also been advised that they should
prescribe a ceiling rate of interest, including processing and other charges,
in respect of small value personal loans and loans similar in nature. The
above instructions are applicable to credit card dues also. In case, banks
charge interest rates which vary based on the payment/default history of
the cardholder, there should be transparency in levying of such differential
interest rates. In other words, the fact that higher interest rates are being
charged to the cardholder on account of his payment/default history should
be made known to the cardholder. For this purpose, the banks should
publicise through their website and other means, the interest rates charged
to various categories of customers. Banks should upfront indicate to the
credit card holder, the methodology of calculation of finance charges with
illustrative examples, particularly in situations where a part of the amount
outstanding is only paid by the customer.
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Further, the banks have to adhere to the following guidelines relating to

interest rates and other charges on credit cards:
(a) Card issuers should ensure that there is no delay in dispatching bills
and the customer has sufficient number of days (at least one fortnight)
for making payment before the interest starts getting charged. In
order to obviate frequent complaints of delayed billing, the credit card
issuing bank may consider providing bills and statements of accounts
online, with suitable security measures. Banks could also consider
putting in place a mechanism to ensure that the customer’s
acknowledgement is obtained for receipt of the monthly statement.
(b) Card issuers should quote Annualized Percentage Rates (APR) on card
products (separately for retail purchase and for cash advance, if
different). The method of calculation of APR should be given with a
couple of examples for better comprehension. The APR charged and
the annual fee should be shown with equal prominence. The late
payment charges, including the method of calculation of such charges
and the number of days, should be prominently indicated. The manner
in which the outstanding unpaid amount will be included for calculation
of interest should also be specifically shown with prominence in all
monthly statements. Even where the minimum amount indicated to
keep the card valid has been paid, it should be indicated in bold letters
that the interest will be charged on the amount due after the due date
of payment. These aspects may be shown in the Welcome Kit in
addition to being shown in the monthly statement. A legend/notice to
the effect that “Making only the minimum payment every month would
result in the repayment stretching over years with consequent interest
payment on your outstanding balance" should be prominently
displayed in all the monthly statements so as to caution the customers
about the pitfalls in paying only the minimum amount due.
(c) Banks should step up their efforts on educating the cardholders of the
implications of paying only ‘the minimum amount due’. The “Most
Important Terms and Conditions” should specifically explain that the
‘free credit period’ is lost if any balance of the previous month’s bill is
outstanding. For this purpose, banks could work out illustrative
examples and include the same in the Welcome Kit sent to the
cardholders as also place it on their website.
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(d) Banks should not levy any charge that was not explicitly indicated to
the credit card holder at the time of issue of the card and without
getting his/her consent. However, this would not be applicable to
charges like service taxes, etc., which may subsequently be levied by
the Government or any other statutory authority.
(e) The terms and conditions for payment of credit card dues, including
the minimum payment due, should be stipulated so as to ensure that
there is no negative amortization.
(f) Changes in charges (other than interest) may be made only with
prospective effect giving notice of at least one month. If a credit card
holder desires to surrender his credit card on account of any change in
credit card charges to his disadvantage, he may be permitted to do so
without the bank levying any extra charge for such closure. Any
request for closure of a credit card has to be honoured immediately by
the credit card issuer, subject to full settlement of dues by the
cardholder.
(g) There should be transparency (without any hidden charges) in issuing

credit cards free of charge during the first year.
Wrongful Billing
The card issuing bank/NBFC should ensure that wrong bills are not raised
and issued to customers. In case, a customer protests any bill, the bank/
NBFC should provide explanation and, if necessary, documentary evidence
may also be provided to the customer within a maximum period of sixty
days with a spirit to amicably redress the grievances.
Use of Direct Sales Agent (DSAs)/Direct Marketing Agents (DMAs)

and Other Agents
When banks/NBFCs outsource the various credit card operations, they have
to be extremely careful that the appointment of such service providers
does not compromise with the quality of the customer service and the
banks’ ability to manage credit, liquidity and operational risks. In the
choice of the service provider, the banks have to be guided by the need to
ensure confidentiality of the customer’s records, respect customer privacy,
and adhere to fair practices in debt collection.
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Banks should ensure that the DSAs engaged by them for marketing their
credit card products scrupulously adhere to the Code of Conduct for Credit
Card operations of the banks which should be displayed on the website of
individual bank and be available easily to any credit card holder.
The bank should have a system of random checks and mystery shopping to
ensure that their agents have been properly briefed and trained in order to
handle with care and caution their responsibilities, particularly in the
aspects included in these guidelines like soliciting customers, hours for
calling, privacy of customer information, conveying the correct terms and
conditions of the product on offer, etc.
Protection of Customer Rights
Customer’s rights in relation to credit card operations primarily relate to

personal privacy, clarity relating to rights and obligations, preservation of
customer records, maintaining confidentiality of customer information and
fair practices in debt collection. The card issuing bank would be responsible
as the principal for all acts of omission or commission of their agents
(DSAs/DMAs and recovery agents).
Right to Privacy
(a) Unsolicited cards should not be issued. In case, an unsolicited card is

issued and activated without the written consent of the recipient and
the latter is billed for the same, the card issuing bank shall not only
reverse the charges forthwith, but also pay a penalty without demur to
the recipient amounting to twice the value of the charges reversed.
(b) In addition, the person in whose name the card is issued can also
approach the Banking Ombudsman who would determine the amount
of compensation payable by the bank to the recipient of the unsolicited
card as per the provisions of the Banking Ombudsman Scheme 2006,
i.e., for loss of complainant’s time, expenses incurred, harassment and
mental anguish suffered by him.
(c) There have been instances where unsolicited cards issued have been
misused before reaching the person in whose name these have been
issued. It is clarified that any loss arising out of misuse of such
unsolicited cards will be the responsibility of the card issuing bank only
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and the person in whose name the card has been issued cannot be
held responsible for the same.
(d) The consent for the cards issued or the other products offered along
with the card has to be explicit and should not be implied. In other
words, the written consent of the applicant would be required before
issuing a credit card.
(e) Unsolicited loans or other credit facilities should not be offered to the
credit card customers. In case an unsolicited credit facility is extended
without the consent of the recipient and the latter objects to the same,
the credit sanctioning bank shall not only withdraw the credit limit, but
also be liable to pay such penalty as may be considered appropriate.
(f) The card issuing bank should not unilaterally upgrade credit cards and
enhance credit limits. Prior consent of the borrower should invariably
be taken whenever there are any change/s in terms and conditions.
(g) Banks may ensure that they engage telemarketers who comply with
directions/ regulations on the subject issued by the Telecom
Regulatory Authority of India (TRAI) from time to time.
Customer Confidentiality
(a) The card issuing bank should not reveal any information relating to
customers obtained at the time of opening the account or issuing the
credit card to any other person or organization without obtaining their
specific consent, as regards the purpose/s for which the information
will be used and the organizations with whom the information will be
shared. Instances have come to light where banks, as part of the
MITCs, obtain the consent of the customer for sharing the information
furnished by him while applying for the credit card, with other
agencies. Banks should give the customer the option to decide as to
whether he is agreeable for the bank sharing with other agencies the
information furnished by him at the time of applying for credit card.
The application form for credit card may be suitably modified to
explicitly provide for the same. Further, in case where the customers
gives his consent for the bank sharing the information with other
agencies, banks should explicitly state and explain clearly to the
customer the full meaning/implications of the disclosure clause. Banks
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should satisfy themselves, based on specific legal advice, that the

information being sought from them is not of such nature as will
violate the provisions of the laws relating to secrecy in the
transactions. Banks would be solely responsible for the correctness or
otherwise of the data provided for the purpose.
(b) In case of providing information relating to credit history/repayment

record of the card holder to a credit information company (specifically
authorized by RBI), the bank may explicitly bring to the notice of the
customer that such information is being provided in terms of the Credit
Information Companies (Regulation) Act, 2005.
(c) Before reporting default status of a credit card holder to a Credit

Information Company which has obtained Certificate of Registration
from RBI and of which the bank/NBFC is a member, banks should
ensure that they adhere to a procedure, duly approved by their Board,
including issuing of sufficient notice to such card holder about the
intention to report him/her as defaulter to the Credit Information
Company. The procedure should also cover the notice period for such
reporting as also the period within which such report will be withdrawn
in the event the customer settles his dues after having been reported
as defaulter. Banks should be particularly careful in the case of cards
where there are pending disputes. The disclosure/release of
information, particularly about the default, should be made only after
the dispute is settled as far as possible. In all cases, a well laid down
procedure should be transparently followed. These procedures should
also be transparently made known as part of MITCs.
(d) The disclosure to the DSAs/recovery agents should also be limited to

the extent that will enable them to discharge their duties. Personal
information provided by the card holder but not required for recovery
purposes should not be released by the card issuing bank. The card
issuing bank/NBFCs should ensure that the DSAs/DMAs do not transfer
or misuse any customer information during marketing of credit card
products.
Fair Practices in Debt Collection
(a) In the matter of recovery of dues, banks should ensure that they, as
also their agents, adhere to the extant instructions on Fair Practice
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Code for lenders as also BCSBI’s Code of Bank’s Commitment to

Customers (those banks which have subscribed to the BCSBI Code). In
case banks have their own code for collection of dues, they should, at
the minimum, incorporate all the terms of BCSBI’s Code referred
above.
(b) In particular, in regard to appointment of third party agencies for debt

collection, it is essential that such agents refrain from action that could
damage the integrity and reputation of the bank and that they observe
strict customer confidentiality. All letters issued by recovery agents
must contain the name and address of a responsible senior officer of
the card issuing bank whom the customer can contact at his location.
(c) Banks and their agents should not resort to intimidation or harassment
of any kind, either verbal or physical, against any person in their debt
collection efforts, including acts intended to humiliate publicly or
intrude the privacy of the credit card holders’ family members,
referees and friends, making threatening and anonymous calls or
making false and misleading representations.
(d) The banks should also ensure to comply with the guidelines in respect
of engagement of recovery agents issued by RBI. These guidelines
inter-alia cover aspects relating to (i) engagement of Recovery Agents
including verification of antecedents of their employees by agents, (ii)
incentives to recovery agents – banks to ensure that contracts with the
recovery agents do not induce adoption of uncivilized, unlawful and
questionable behaviour or recovery process, (iii) methods followed by
recovery agents, (iv) training to recovery agents, (v) taking possession
of property mortgaged/hypothecated to banks, (vi) use of forum of Lok
Adalats, (vii) complaints against the bank/recovery agents, and (viii)
periodical review of the recovery agents’ mechanism.
Insurance Cover to Cardholders
In cases where the banks are offering any insurance cover to their credit
card holders, in tie-up with insurance companies, the banks may consider
obtaining in writing from the credit card holders the details of nominee/s
for the insurance cover in respect of accidental death and disablement
benefits. Banks may ensure that the relevant nomination details are
recorded by the Insurance Company. Banks may also consider issuing a
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letter to the credit card holder indicating the details regarding the name,
address and telephone number of the Insurance Company which will
handle the claims relating to the insurance cover.
Redressal of Grievances
Generally, a time limit of 60 (sixty) days may be given to the customers for
preferring their complaints/grievances.
The card issuing bank should constitute Grievance Redressal machinery

within the bank and give wide publicity about it through electronic and
print media. The name and contact number of designated grievance
redressal officer of the bank should be mentioned on the credit card bills.
The designated officer should ensure that genuine grievances of credit card
subscribers are redressed promptly without involving delay.
Banks should ensure that their call centre staff is trained adequately to
competently handle all customer complaints.
Banks should also have a mechanism to escalate automatically unresolved

complaints from a call center to higher authorities and the details of such
mechanism should be put in public domain through their website.
The grievance redressal procedure of the bank and the time frame fixed for
responding to the complaints should be placed on the bank’s website. The
name, designation, address and contact number of important executives as
well as the Grievance Redressal Officer of the bank may be displayed on
the website. There should be a system of acknowledging customers’
complaints for follow up, such as complaint number/docket number, even if
the complaints are received on phone.
If a complainant does not get satisfactory response from the bank which is
a subsidiary of a bank within a maximum period of thirty (30) days from
the date of his lodging the complaint, he will have the option to approach
the Office of the concerned Banking Ombudsman for redressal of his
grievance/s. The bank, which is a subsidiary of a bank shall be liable to
compensate the complainant for the loss of his time, expenses, financial
loss as well as for the harassment and mental anguish suffered by him for
the fault of the bank and where the grievance has not been redressed in
time.
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Internal Control and Monitoring Systems
With a view to ensuring that the quality of customer service is ensured on

an on-going basis in banks, the Standing Committee on Customer Service
in each bank should review the credit card operations including reports of
defaulters to a Credit Information Company which has obtained Certificate
of Registration from RBI and of which the bank is a member and credit
card related complaints on a monthly basis and take measures to improve
the services and ensure the orderly growth in the credit card operations.
Banks should put up detailed quarterly analysis of credit card related
complaints to their Top Management. Card issuing banks should have in
place a suitable monitoring mechanism to randomly check the genuineness
of merchant transactions. Banks should prepare and place before their
Boards/Management Committee a comprehensive Review Report on credit
card business on half-yearly basis as at the end of September and March of
each accounting year, which should cover essential data on credit card
business, such as category and number of cards issued and outstanding,
number of active cards, average turnover per card, number of
establishments covered, average time taken for recovery of dues from the
card holders, debts classified as NPAs and provisions held there-against or
amounts written off, details of frauds on credit cards, steps taken to
recover the dues, profitability analysis of the business, etc.
Fraud Control
Banks should set up internal control systems to combat frauds and actively
participate in fraud prevention committees/task forces which formulate
laws to prevent frauds and take proactive fraud control and enforcement
measures.
With a view to reducing the instances of misuse of lost/stolen cards, it is

recommended to banks that they may consider issuing (i) cards with
photographs of the cardholder (ii) cards with PIN and (iii) signature
laminated cards or any other advanced methods that may evolve from time
to time.
In terms of instructions issued by Department of Payment and Settlement

Systems, Reserve Bank of India on security issues and risk mitigation
measures, as amended from time to time, banks have been advised to put
in place a system of providing for additional authentication/validation
based on information not visible on the cards. The same has been
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extended to Mail Order Transactions Order (MOTO) transactions, which are

also a subset of the card-not present transactions. Further, banks have
been advised to take steps to put in place a system of online alerts for all
types of transactions irrespective of the amount, involving the usage of
cards at various channels. Banks have also been advised to put in place
various security and risk mitigation measures for electronic payment
transactions, in terms of guidelines issued by DPSS from time to time.
Banks are advised to block a lost card immediately on being informed by

the customer and formalities, if any, including lodging of FIR can follow
within a reasonable period.
Banks may consider introducing, at the option of the customers, an

insurance cover to take care of the liabilities arising out of lost cards. In
other words, only those cardholders who are ready to bear the cost of the
premium should be provided an appropriate insurance cover in respect of
lost cards.
52.4 VIRTUAL CARDS
• Virtual cards are not physical cards. They are generated for internet
transactions and are allotted for short term and even for one time
transactions.
• This is a limited validity number and would expire after 48 hours.
• The credit limit is decided by the customer subject to actual credit limit.
• Unused credit is credited back to the account after 48 hours.
• It is used for online shopping and its intent is to prevent fraud while
purchasing items online.
• The customer when he approaches his bank for a virtual card would
stipulate the amount he requires the card for.
• The bank would require the individual to fill in personal details on the
bank’s home page.
• The Bank generates a virtual card that has a 16 digit card number, expiry
date and CVV number just like plastic credit cards or they generate a
masked equivalent of the customer’s real plastic card.
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• On purchasing the item, the card number and the CVV number would be
keyed in and the purchase made.
• The great benefits are that it restricts the amount spent (to the amount
indicated when the card was applied for) and once the card is used it can
never be used again.
• In the case of a temporary virtual card, customers can top up their cards
with as much money as they require and the requisite amount will be
credited by the bank from the anchored account. This is like crediting a
prepaid card out of a credit or debit card and the purpose is to make
online transactions safe.
• They are very secure.

• SMS alerts are to be sent for transactions done.
• This is issued free of cost.
52.5 SMART CARD
• A smart card is like any other credit card. It however has an Integrated
Circuit (IC) chip installed in it. The chip contains memory, may contain a
processor and communicates through contacts on the surface of the
card.
• As these are difficult to copy there is a move to make credit cards and
other cards smart cards.
• Smart cards are sometimes called stored-value cards. These sometimes

have a specific amount of credit embedded electronically in the card. For
example, a ` 1,000 smart card that has been purchased in advance can
be used to cover expenses such as pay phone charges, bridge or
expressway tolls, parking fees or internet purchases. These cards make
the transaction fast, easy and convenient.
• Smart card technology is in a period of rapid change. Ultimately

consumers should be able to customize their smart cards to suit their
financial needs with access from their personal computer or cellular
phone.
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• The computer chip within the card will contain both financial and personal
information. Privacy and security issues could be a problem. Banks can
introduce smart/on-line debit cards with the approval of their Boards.
• Banks cannot issue smart/debit cards in tie-up with other non-bank

entities.
• No cash transaction, that is, cash withdrawals or deposits should be

offered at the Point of Sale, with the smart/debit cards under any facility,
without prior authorization of RBI.
• The banks can issue smart on-line debit cards to select customers with
good financial standing even if they have maintained the accounts with
the banks for less than six months subject to their ensuring the
implementation of ‘Know Your Customer’ concept. However, banks
introducing off-line mode of operation of debit cards should adhere to the
minimum period of satisfactory maintenance of accounts for six months.
• Banks can extend the smart card/debit card facility to those having
saving bank account/current account/fixed deposit accounts with built-in
liquidity features maintained by individuals, corporate bodies and firms.
• Smart card/debit card facility should not be extended to cash credit/loan

account holders.
• The banks can, however, issue on-line debit cards against personal loan
accounts, where operations through cheques are permitted.
• In case of smart cards having stored value (as in case of the off-line
mode of operation of the smart card), no interest may be paid on the
balances transferred to the smart cards. In case of debit cards or on line
smart cards, the payment of interest should be in accordance with the
interest rate directives issued to banks from time to time under Sections
21 and 35A of the Banking Regulation Act, 1949.
• The bank shall ensure full security of the smart card. The security of the
smart card shall be the responsibility of the bank and the losses incurred
by any party on account of breach of security, failure of the security
mechanism shall be borne by the bank.
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• No bank shall despatch a card to a customer unsolicited, except in the

case where the card is a replacement for a card already held by the
customer.
• Banks shall keep for a sufficient period of time, internal records to enable
operations to be traced and errors to be rectified (taking into account the
law of limitation for the time barred cases).
• The cardholder shall be provided with a written record of the transaction

after he has completed it, either immediately in the form of receipt or
within a reasonable period of time in another form such as the customary
bank statement.
• The cardholder shall bear the loss sustained up to the time of notification
to the bank of any loss, theft or copying of the card but only up to a
certain limit (of fixed amount or a percentage of the transaction agreed
upon in advance between the cardholder and the bank), except where
the cardholder acted fraudulently, knowingly or with extreme negligence.
• Each bank shall provide means whereby his customers may at any time
of the day or night notify the loss, theft or copying of their payment
devices.
• On receipt of notification of the loss, theft or copying of the card, the

bank shall take all action open to it to stop any further use of the card.
• As there has been increasing cases of fraud, the RBI has stipulated that
from August 1, 2009 banks must:
- Have a system of providing for additional authentication/validation

based on information not visible on the cards for all on-line card not
present transactions except IVR transactions. This is by the card holder
keying in an extra security code.
- A system of ‘on line alerts’ to the cardholder for all ‘card not present’
transactions of the value of ` 5,000 and above.
52.6 ELECTRONIC PURSE
• An electronic purse is a smart card that has transferred into it an amount

of money. Every time a transaction is entered into, the purse is depleted
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by the money taken out. Once empty it can be electronically replenished

from bank accounts or credit card accounts.
• The purse holder can use funds either to transfer funds to another
account anywhere (through RTGS/DD) or make online purchases.
• The RBI views this as the acceptance of deposits which can be with
drawn on demand.
52.7 DEBIT CARD
• Debit cards are dissimilar to charge and credit cards as the holder
receives no credit. As soon as a transaction is undertaken, the
customer’s account is debited with the amount of the purchase. If the
customer does not have sufficient balance the transaction is rejected.
• These are issued by banks and are linked to the account of the holder.
The great benefit is that individuals cannot buy more than they have
funds for.
• Debit cards are similar to ATM cards and have a unique number.
• Bank customers may use this to withdraw money from ATMs by punching
in their personal identification number or they may pay for goods and
services.
• When paying for goods/services the vendor swipes the card through a
point of sale terminal. The customer’s account is checked and if there is
adequate balance, the account is debited and the vendor’s account is
credited.
• The great benefit is that the customer will not, by using these, create
huge outstandings.
• The flaw is that customers cannot avail of credit (as they can with a
credit card).
Banks may issue debit cards, including co-branded debit cards, without
seeking prior approval of the Reserve Bank.
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Board Approved Policy

Banks may formulate a comprehensive debit cards issuance policy
including policy on co-branded debit cards with the approval of their Boards
and issue debit cards to their customers in accordance with this policy.
Debit cards should be issued to customers having Saving Bank/Current
Accounts but not to cash credit/loan account holders.
Types of Debit Cards
Banks may issue only online debit cards including co-branded debit cards
where there is an immediate debit to the customers’ account, and where
straight through processing is involved.
Offline Debit Cards
Banks are not permitted to issue offline-debit cards. Banks which have
been issuing offline debit cards were advised to conduct a review of their
offline debit card operations and discontinue operations of such cards
within a period of six months from December 12, 2012. Banks may,
however, ensure that customers are duly informed regarding switching
over to online debit cards. However, till such time as offline cards are
phased out, the outstanding balances/unspent balances stored on the
cards shall be subject to computation of reserve requirements.
Compliance with Know Your Customer (KYC) Norms/Anti-Money

Laundering (AML) Standards/Combating of Financing of Terrorism
(CFT)/Obligation of Banks under PMLA, 2002
The instructions/guidelines on KYC/AML/CFT applicable to banks, issued by

RBI from time to time, have to be adhered to in respect of all cards issued,
including co-branded debit cards.
Payment of Interest on Balances
Payment of interest should be in accordance with interest rate directives as

issued from time to time.
Terms and Conditions for Issue of Cards to Customers
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(i) No bank shall dispatch a card to a customer unsolicited, except in the

case where the card is a replacement for a card already held by the
customer.
(ii) The relationship between the bank and the card holder shall be
contractual.
(iii) Each bank shall make available to the cardholders in writing, a set of
contractual terms and conditions governing the issue and use of such a
card. These terms shall maintain a fair balance between the interests
of the parties concerned.
(iv) The terms shall be expressed clearly.
(v) The terms shall specify the basis of any charges, but not necessarily
the amount of charges at any point of time.
(vi) The terms shall specify the period within which the cardholder’s
account would normally be debited.
(vii) The terms may be altered by the bank, but sufficient notice of the
change shall be given to the cardholder to enable him to withdraw if he
so chooses. A period shall be specified after which time the cardholder
would be deemed to have accepted the terms if he had not withdrawn
during the specified period.
(viii) (a) The terms shall put the cardholder under an obligation to take all
appropriate steps to keep safe the card and the means (such as PIN or
code) which enable it to be used. 
 
(b) The terms shall put the cardholder under an obligation not to
record the PIN or code, in any form that would be intelligible or
otherwise accessible to any third party if access is gained to such a
record, either honestly or dishonestly. 
 
(c) The terms shall put the cardholder under an obligation to notify the
bank immediately after becoming aware:
- of the loss or theft or copying of the card or the means which

enable it to be used;
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- of the recording on the cardholder’s account of any unauthorised

transaction;
- of any error or other irregularity in the maintaining of that account

by the bank.
(d) The terms shall specify a contact point to which such notification
can be made. Such notification can be made at any time of the day or
night.
(ix) The terms shall specify that the bank shall exercise care when issuing
PINs or codes and shall be under an obligation not to disclose the
cardholder’s PIN or code, except to the cardholders.
(x) The terms shall specify that the bank shall be responsible for direct
losses incurred by a cardholder due to a system malfunction directly
within the bank’s control. However, the bank shall not be held liable for
any loss caused by a technical breakdown of the payment system if
the breakdown of the system was recognizable for the cardholder by a
message on the display of the device or otherwise known. The
responsibility of the bank for the non-execution or defective execution
of the transaction is limited to the principal sum and the loss of
interest subject to the provisions of the law governing the terms.
Cash Withdrawals
No cash transactions through the debit cards should be offered at the Point
of Sale under any facility without prior authorization of Reserve Bank of
India under Section 23 of the Banking Regulation Act, 1949.
Security and Other Aspects
(i) The bank shall ensure full security of the debit card. The security of
the debit card shall be the responsibility of the bank and the losses
incurred by any party on account of breach of security or failure of the
security mechanism shall be borne by the bank.
(ii) Banks shall keep for a sufficient period of time, internal records to
enable operations to be traced and errors to be rectified (taking into
account the law of limitation for the time barred cases).
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(iii) The cardholder shall be provided with a written record of the

transaction after he has completed it, either immediately in the form of
receipt or within a reasonable period of time in another form such as
the customary bank statement.
(iv) The cardholder shall bear the loss sustained up to the time of
notification to the bank of any loss, theft or copying of the card but
only up to a certain limit (of fixed amount or a percentage of the
transaction agreed upon in advance between the cardholder and the
bank), except where the cardholder acted fraudulently, knowingly or
with extreme negligence.
(v) Each bank shall provide means whereby his customers may at any
time of the day or night notify the loss, theft or copying of their
payment devices.
(vi) On receipt of notification of the loss, theft or copying of the card, the
bank shall take all action open to it to stop any further use of the card.
(vii) With a view to reducing the instances of misuse of lost/stolen cards,

banks may consider issuing cards with photographs of the cardholder
or any other advanced methods that may evolve from time to time.
Compliance with DPSS Instructions
The issue of debit cards as a payment mechanism would also be subject to

relevant guidelines including guidelines on security issues and risk
mitigation measures, card-to-card fund transfers, merchant discount rates
structure, failed ATM transactions, etc., issued by the Department of
Payment and Settlement Systems under the Payment and Settlement
Systems Act, 2007, as amended from time to time.
Issue of International Debit Card
Issue of international debit cards will also be subject to directions issued

under Foreign Exchange Management Act, 1999, as amended from time to
time.
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Review of Operations
The banks should undertake review of their operations/issue of debit cards

on half-yearly basis. The review may include, inter-alia, card usage
analysis including cards not used for long durations due to their inherent
risks.
Redressal of Grievances
Banks may ensure to put in place an effective mechanism for redressal of

customer complaints. The grievance redressal procedure of the bank and
the time frame fixed for responding to the complaints should be placed on
the bank's website. The name, designation, address and contact number of
important executives as well as the Grievance Redressal Officer of the bank
may be displayed on the website. There should be a system of
acknowledging customers’ complaints for follow up, such as complaint
number/docket number, even if the complaints are received on phone. If a
complainant does not get satisfactory response from the bank within a
maximum period of thirty (30) days from the date of his lodging the
complaint, he will have the option to approach the Office of the concerned
Banking Ombudsman for redressal of his grievance/s. DPSS guidelines on
timeframe for reconciliation of failed transactions at ATMs as amended from
time to time should be complied with in this regard.
Co-branding Arrangement
Co-branded debit cards issued by banks will be subject to the following

terms and conditions, in addition to the above:
• Board approved policy: The co-branding arrangement should be as per

the Board approved policy of the bank. The policy may specifically
address issues pertaining to the various risks associated with such an
arrangement including reputation risk and put in place suitable risk
mitigation measures.
• Due diligence: Banks should carry out due diligence in respect of the
non-banking entity with which they intend to enter into tie-up for issue of
such cards to protect themselves against the reputation risk they are
exposed to in such an arrangement. Banks may ensure that in cases
where the proposed co-branding partner is a financial entity, it has
! !420
CARDS
obtained necessary approvals from its regulator for entering into the co-
branding agreement.
• Outsourcing of activities: The card issuing bank would be liable for all
acts of the co-branding partner.
• Role of non-bank entity: The role of the non-bank entity under the tie-
up arrangement should be limited to marketing/distribution of the cards
or providing access to the cardholder for the goods/services that are
offered.
• Confidentiality of customer information: The card issuing bank

should not reveal any information relating to customers obtained at the
time of opening the account or issuing the card and the co-branding non-
banking entity should not be permitted to access any details of
customer’s accounts that may violate bank’s secrecy obligations.
Banks, which were granted specific approvals for issue of co-branded debit
cards in the past, were advised to ensure that the co-branding
arrangement is in conformity with the instructions mentioned above. In
case, the co-branding arrangement is between two banks, the card issuing
bank may ensure compliance with the above conditions.
Unsolicited Commercial Communication
Banks may ensure that they engage telemarketers who comply with
directions/ regulations issued by the Telecom Regulatory Authority of India
(TRAI) from time to time.
Issuance of Rupee Denominated Co-branded Pre-paid Cards
While foreign currency denominated pre-paid cards, including co-branding

arrangements, if any, can be issued subject to the guidelines issued under
Foreign Exchange Management Act, 1999, issue of rupee denominated pre-
paid payment instruments is subject to the stipulations contained in the
Notification on the Issuance and Operation of Pre-paid Payment
Instruments in India (Reserve Bank) Directions, 2009 by Department of
Payment and Settlement Systems (DPSS) of the Reserve Bank of India,
under the Payment and Settlement Systems Act, 2007. Banks/NBFCs/other
! !421
CARDS
persons desirous of issuing such co-branded pre-paid instruments may

seek one time approval from Reserve Bank of India.
General permission has been granted to banks to issue rupee denominated

co-branded pre-paid cards in India, subject to the following terms and
conditions:
Board Approved Policy
The co-branding arrangement should be as per the Board approved policy

of the bank. The policy may specifically address issues pertaining to the
various risks associated with such an arrangement including reputation risk
and put in place suitable risk mitigation measures.
Due Diligence
Banks should carry out due diligence in respect of the non-banking entity
with which they intend to enter into tie-up for issue of such cards to
protect themselves against the reputation risk they are exposed to in such
an arrangement. In case of proposed tie up with a financial entity, they
may ensure that that entity has the approval of its regulator for entering
into such arrangement.
Outsourcing of Activities
The card issuing bank would be liable for all acts of the co-branding
partner.
Role of Non-bank Entity
The role of the non-bank entity under the tie-up arrangement should be
limited to marketing/distribution of the cards or providing access to the
cardholder for the goods/services that are offered.
Compliance with Know Your Customer (KYC) Norms/Anti-Money

Laundering (AML) Standards/Combating of Financing of Terrorism
(CFT)/Obligation of Banks under PMLA, 2002
! !422
CARDS
The instructions/guidelines on KYC/AML/CFT applicable to banks, issued by

RBI from time to time, should be adhered to, in respect of all cards issued
under the co-branding arrangement.
Confidentiality of Customer Information
The card issuing bank should not reveal any information relating to
customers obtained at the time of opening the account or issuing the card
and the co-branding non-banking entity should not be permitted to access
any details of customer’s accounts that may violate bank’s secrecy
obligations.
Payment of Interest
No interest may be paid on the balances transferred to pre-paid payment

cards.
Compliance with DPSS Guidelines on Issue and Operation of Pre-

paid instruments in India
The arrangement will be subject to adherence/compliance with instructions

issued by DPSS from time to time on issue and operation of pre-paid
instruments, which includes pre-paid cards, in India.
Banks, which were granted specific approvals for issue of rupee

denominated co-branded pre-paid cards in the past, are advised to ensure
that the co-branding arrangement is in conformity with the instructions
mentioned above. In case, the co-branding arrangement is between two
banks, the card issuing bank may ensure compliance with the above
conditions.
Unsolicited Commercial Communication
Banks should ensure that they engage telemarketers who comply with
directions/ regulations issued by the Telecom Regulatory Authority of India
(TRAI) from time to time.
! !423
CARDS
1. Why is a charge card referred to as a “charge” Card?
2. What is the difference between a charge card and a Credit Card?
3. What is a Debit Card?
4. What is a Smart Card and what are its advantages?
5. What can an electronic purse be used for?
! !424
CARDS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !425
TELEMARKETING
Chapter 53
Telemarketing
Objectives
This chapter will explain how bankers telemarket.
Structure
53.1 Telemarketing
53.2 Technical Conditions for Operation of Telemarketer Centre
53.3 Compliance to Directions/Orders
53.4 Restrictions on ‘Transfer of Registration’
53.5 Requirement to Furnish Information
53.6 Security Conditions
53.7 Prohibition of Certain Activities by the Telemarketer
53.8 Suspension, Surrender or Termination of Registration
53.9 Unsolicited Commercial Communications – National Do Not Call
Registry
53.1 TELEMARKETING
• Telemarketing is used by banks to market their various products. As

there has been intense activity by telemarketeers, the Reserve Bank has
laid down some rules in this regards.
• Banks should ensure that all telemarketers(DSAs/DMAs) engaged by

them register themselves with DoT as telemarketers.
• Banks should not engage telemarketers (DSAs/DMAs) who do not have a

valid registration certificate from DoT, Government of India, as
telemarketers. This is reiterated by the Supreme Court in Harsh Pathak
vs. Union of India. In this case the Supreme Court directed that any
telemarketer who is not registered with the Department of
Telecommunications should not be permitted to operate telemarketing
services.
! !426
TELEMARKETING
• Banks should furnish the list of telemarketers (DSAs/DMAs) engaged by

them along with the registered telephone numbers being used by them
for making telemarketing calls to IBA to enable IBA to forward the same
to TRAI.
• As per the laid down procedure, the telemarketer(DSAs/DMAs) shall get

automatically registered with NDNC Registry while they register
themselves with DoT.
• As IBA will be the co-ordinating agency at the industry level, to ensure

compliance with the requirements of TRAI regulations, banks are
required to actively cooperate with IBA in this regard.
• The registration issued by DoT to the telemarketer is valid for 10 years.
• National Informatics Centre (NIC) has been authorized to set up a

National Do Not Call (NDNC) registry. Telephone users who do not want
unsolicited commercial calls can register with NDNC registry.
• Telemarketers must scrupulously follow the orders/directions/regulations

issued by DoT/TRAI on the unsolicited commercial communication
including scrubbing of the list of the subscribers to be called for
telemarketing purpose through the National Do Not Call (NDNC) registry
of National Informatics Centre (NIC).
53.2 TECHNICAL CONDITIONS FOR OPERATION OF

TELEMARKETER CENTRE
• Telemarketer must obtain telecom resources from a licensed telecom

service providers only.
• Telemarketer is permitted to have both way (incoming/outgoing) PSTN

connectivity for telemarketing activities.
• Telemarketer may have connectivity through leased lines/Internet/VPN

for non voice applications to a remote location {clients/National Do Not
Call registry (NDNC)}
• Telemarketer must not misuse telecom resources for any other activity
and shall be responsible for the same.
! !427
TELEMARKETING
• Telemarketer must ensure complete separation between PSTN lines used

for the purpose and any other telecom resource being used in the same
premises.
• Interconnection between telemarketing centres is not permitted.
53.3 COMPLIANCE TO DIRECTIONS/ORDERS
• The Telemarketer shall comply with:

• Guidelines for Telemarketer
• Orders/Directions issued by DoT
• Orders/Directions/Regulations issued by TRAI on Unsolicited Commercial
Communication (UCC).
53.4 RESTRICTIONS ON ‘TRANSFER OF REGISTRATION’
• The telemarketer shall not, without the prior written consent of DoT,
either directly or indirectly, assign or transfer the registration in any
manner whatsoever to a third party or enter into any agreement for sub-
Leasing and/or partnership relating to any subject matter of the
registration to any third party either in whole or in part/and third party
interest shall be created.
53.5 REQUIREMENT TO FURNISH INFORMATION
• The telemarketer must furnish to DoT, on demand in the manner and as

per the time frames such documents, accounts, estimates, returns,
reports or other information in accordance with the rules/orders as may
be prescribed from time to time.
53.6 SECURITY CONDITIONS
• The telemarketer must make available on demand to the person

authorized by DOT, full access to their equipments for technical scrutiny
and for inspection, which can be visual inspection or an operational
inspection.
! !428
TELEMARKETING
• The telemarketer must ensure that their equipment installations should

not become a safety hazard and is not in contravention of any statute,
rule or regulation and public policy.
• The telemarketer would be required to provide the call data records of all
the specified calls handled by the system at specified periodicity, as and
when required by the security agencies.
• Wherever considered appropriate, DoT may conduct any inquiry either

suo-moto or on complaint to determine whether there has been any
breach in compliance of the guidelines for registration by the
telemarketer and upon such inquiry the telemarketer shall extend all
reasonable facilities without any hindrance.
53.7 PROHIBITION OF CERTAIN ACTIVITIES BY THE

TELEMARKETER
• The telemarketer must not engage in the provision of any service other
than telemarketing and/or requiring separate licence/permission.
• The telemarketer should take necessary measures to prevent

objectionable, obscene, unauthorized or any other content, messages or
communications infringing copyright, intellectual property, etc., in any
form, consistent with the established laws of the country. Once specific
instances of such infringement are reported to the telemarketer by the
enforcement agencies, the Telemarketer shall ensure that the carriage of
such material is prevented immediately.
• Telemarketer will not infringe on the jurisdiction of licensed telecom

service providers and they shall neither provide switched telephony nor
use telecom resources as Public Call Office (PCO).
53.8 SUSPENSION, SURRENDER OR TERMINATION OF

REGISTRATION
• The Department of Telecommunications, Ministry of Communications &

Information Technology can suspend the operation.
! !429
TELEMARKETING
• Telemarketer may surrender the Registration, by giving 30 days notice to

DoT.
• Registration may be terminated for any failure to comply with the

guidelines for Registration of Telemarketer.
53.9 UNSOLICITED COMMERCIAL COMMUNICATIONS –

NATIONAL DO NOT CALL REGISTRY
• The RBI has issued instructions regarding maintenance of Do Not Call

Registry by all credit card issuing banks in order to tackle the complaints
relating to unsolicited commercial communications being received by
customers/non-customers as part of the telemarketing efforts of banks
and with a view to protecting the right to privacy of the members of the
public.
• Keeping in view the continuous complaints from credit card subscribers

and the observations of the Hon’ble High Court of Delhi in the context of
a Public Interest Litigation, the Telecom Regulatory Authority of India
(TRAI) has taken certain national level initiatives to address the various
issues relating to unsolicited commercial communications (UCC). As part
of these measures, TRAI has framed The Telecom Unsolicited Commercial
Communications(UCC) Regulations 2007 for curbing UCC.
• The Regulation envisages that all the telecom service providers would set
up a mechanism to receive requests from subscribers who do not want to
receive UCC and for this purpose they will maintain and operate a Private
Do Not Call List. The Private Do Not Call List will include telephone
numbers and other details of all such subscribers. The telephone
numbers and area code from this Private Do Not Call List will be updated
online by the operators to a National Do Not Call Registry (NDNC) which
will be maintained by National Informatics Centre (NIC) and thus the
NDNC will have the telephone numbers of all the subscribers all over
India who have opted not to receive any UCC. Telemarketers will have to
register in the NDNC Registry. The telemarketers would submit online the
calling list to the NDNC Registry where the list will be modified/scrubbed
by excluding the numbers listed in the registry and the modified/
scrubbed list will be online transferred back to the telemarketers for
making calls.
! !430
TELEMARKETING
• Further, the Department of Telecommunications (DoT) has issued

guidelines which make it mandatory for telemarketers to register
themselves with DoT or any other agency authorized by DoT. It has also
specified that telemarketers shall comply with the Guidelines and Orders/
Directions issued by DoT and Orders/Directions/ Regulations issued by
TRAI on Unsolicited Commercial Communications (UCC).
• For the effective implementation of the UCC Regulations, TRAI has

mandated that telemarketers have to register themselves with the DoT,
Ministry of Communication and Information Technology, Government of
India which their telecom services may face disconnection. Telecom
service providers have been directed to disconnect the telephone
connections provided to the telemarketers in case of violation of the UCC
Regulations by them.
1. Do a bank’s Telemarketers need to be registered?
2. Are there any restrictions on the operations of Telemarketer?
3. What is the purpose of the DO NOT CALL registry?
! !431
TELEMARKETING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !432
DOORSTEP BANKING
Chapter 54
Doorstep Banking
Objectives
This chapter will explain Doorstep Banking – a service bankers give their
customers.
Structure
54.1 Doorstep Banking

54.2 Modality of Delivery
54.3 Delivery Process
54.4 Risk Management
54.5 Transparency
54.6 Others
54.1 DOORSTEP BANKING
• Bankers can offer the following to customers at their doorstep:
- Pick up cash;
- Pick up instruments;
- Delivery of cash against cheques received at the counter;
- Delivery of demand drafts.
• These are against cheques received at the counter or requests received

through any secure convenient channel as phone banking/internet
banking.
54.2 MODALITY OF DELIVERY
• Through own employees;

• Through agents. In this case there must be a policy approved by the
Board that lays down broad principles for selection of agents and
payment of fee/commissions by the bank.
! !433
DOORSTEP BANKING
54.3 DELIVERY PROCESS
• Cash collected from the customer must be acknowledged by a receipt on

behalf of the bank.
• Cash collected should be credited to the customer’s account on the same

day unless it was collected late. In that case it should be credited the
next day.
• The customer should be informed (through an advice) of the date of

credit.
• Delivery of demand draft should be by debit to the account and not

against cash/instrument collected at doorstep.
• Cash delivery can be offered to individual customers and corporate

clients (including government departments and public sector
undertakings) against cheques received at the counter or requests
received through any secure convenient channel such as phone banking/
internet banking.
• This is subject to the bank adopting technology and security standards

that ensure that those availing the services are properly authenticated.
The banks must have adequate safeguards/precautions.
54.4 RISK MANAGEMENT
• Agreement entered into with customer should not entail any legal or
financial liability on the bank for failure to offer doorstep banking.
54.5 TRANSPARENCY
• Charges should form part of the agreement entered into by the customer.
• Charges should be prominently indicated on brochures offering doorstep

banking.
! !434
DOORSTEP BANKING
54.6 OTHERS
• This service is only for those who have complied with all Know Your
Customer procedures.
• Services should be offered at either office or residence. This must be

specified.
• Scheme should not be restricted to any particular client.
1. What kind of services can a bank offer customers at their doorstep?
2. If cash is collected from a customer at his house what procedures must

the bank follow?
3. Doorstep banking should be offered to customers who have complied

with ____________ procedures.
! !435
DOORSTEP BANKING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !436
SAFE DEPOSIT LOCKERS
Chapter 55
Safe Deposit Lockers
Objectives
This chapter will tell you about the facility of Safe Deposit Lockers offered
by banks to their clients.
Structure
55.1 Safe Deposit Lockers

55.2 Allotment
55.3 Lease Agreement
55.4 Eligibility
55.5 Wait List
55.6 Security
55.7 Operation
55.8 Key
55.9 Nomination
55.10 Death of Hirer
55.11 No Nomination
55.12 Liability
55.13 Co-ordination with Officers of Central Board of Direct Taxes
55.1 SAFE DEPOSIT LOCKERS
• Safe deposit locker facility is one that is offered by banks especially in

residential areas to help individuals safeguard their valuables.
55.2 ALLOTMENT
• Branches must have a waitlist for the purpose of allotment of lockers and
ensure transparency in allotment of lockers.
• All applications for allotment of lockers should be acknowledged and

given a waitlist number.
! !437
• Linking the lockers facility with placement of fixed or any other deposit
beyond what is specifically permitted is a restrictive practice and is
prohibited.
• To ensure prompt payment of rent banks may, at the time of allotment

obtain a fixed deposit which would cover three years rent and the
charges for breaking open the locker in case of an eventuality. However,
banks should not insist on such fixed deposits from existing locker hirers.
55.3 LEASE AGREEMENT
• Banks normally expect the individual hiring a locker to execute a lease

agreement.
• A copy of the agreement regarding the operation of the locker should be

given to the locker hirer at the time of allotment.
• The relationship in this instance between the banker and the customer is
that of a lessor and a lessee.
• The lease rent charged would vary from bank to bank and is dependant
on the size of the locker leased.
55.4 ELIGIBILITY
• Any individual is entitled to hire a locker from a bank.
• Some banks insist that the hirer either open a savings/current account or
place an amount with the bank in a fixed deposit. The RBI has stated
that this is a restrictive practice and banks should refrain from asking for
a deposit. However, if the locker hirer has a fixed deposit with the bank it
can be earmarked for an amount so that the interest covers the locker
rental as an alternative to collecting the annual rental in advance.
55.5 WAIT LIST
• Banks should maintain a waitlist for allotment of lockers and must ensure
transparency in allotment of lockers.
! !438
• All applications received should be acknowledged and given a waitlist

number.
55.6 SECURITY
• Banks should carry out due diligence for both new and existing
customers at least at the levels prescribed for customers classified as
medium risk. If the customer is classified in a higher risk category due
diligence as per KYC norms applicable to that category should be carried
out.
• Where lockers have remained unopened for more than three years for
medium risk category or one year for a higher risk category, banks
should immediately contact the locker hirer and advise him either to
operate the locker or surrender it. This must be done even if the hirer is
paying rent regularly. Banks should also ask the hirer in writing why the
locker is not being operated
• If there are genuine reasons (hirer is an NRI or on transfer), the bank

may permit the hirer to continue with the locker.
• If the locker hirer does not respond nor operate the locker banks should
consider opening the locker after giving notice.
• Banks should incorporate a clause in the locker agreement that in case

the locker remains un-operated for more than one year, the bank would
have the right to cancel the allotment of the locker and open the locker
even if the rent is paid regularly.
• Banks must have a clear policy drawn in consultation with legal advisers
on breaking open lockers and taking inventory.
55.7 OPERATION
• A locker may be hired in a single name or in joint names.
• If it is joint names there must be clarity on how it will be operated.
! !439
• When a holder seeks to open the locker, the banker has the person sign a
register in his/her presence. After checking the signature the banker
accompanies the holder to the locker.
• Lockers usually open with two keys – one being with the banker and the
other with the holder. These two keys are inserted at the same time to
open the locker.
• After the locker is opened, the banker usually leaves, leaving the holder
to either place more articles in the locker or remove articles from the
locker.
• Whenever possession is given and contents are handed over to a third

party, a detailed inventory should be taken. This should be ideally in the
presence of the bank’s lawyer fand the lawyer of the person who is being
handed possession of the contents.
• In 2006, a safe deposit locker in a branch of a nationalized bank was

opened by the bank after several years of it not being opened. Explosives
and ammunition was found in it. Consequently guidelines have been
issued that if there has been no operation of a locker for two years or
more the bank may have it opened after giving notice.
• Banks must exercise due care and necessary precautions for the
protection of the lockers provided to the customer.
• Banks should review the systems in force for operation of safe deposit
vault/locker on an ongoing basis and take corrective action where
appropriate. The security procedures should be well documented and the
concerned staff should be properly trained.
• Internal auditors should ensure procedures are in place and strictly

adhered to.
55.8 KEY
• In order to facilitate the identification of locker keys by the Income-tax

officials, the banks should emboss on all locker keys an identification
code which would indicate the bank and the branch which had hired out
the lockers.
! !440
55.9 NOMINATION
• Nomination facility is available with lockers.

• Banks should give wide publicity to this facility
• Details of access to nominees should be placed on the bank’s website.
• Banks must insist that a person opening an account names a nominee.
• Facility of nomination is not available in case of deposit of safe custody
articles by more than one person.
• The Banking Regulation Act does not preclude a minor being a nominee
for obtaining delivery of a locker. Banks must ensure that in this case
that at the time of handing over the contents that the articles are handed
over on behalf of the minor to someone competent.
• Regarding lockers hired jointly, on the death of one of the hirers, the
contents are only to be removed jointly by the nominees and the survivor
after a full inventory has been done. If the locker was to be operated
jointly, on the death of any of the hirers, bank should give access and
liberty to remove contents jointly with the survivor and the nominee. If
the locker was hired jointly with survivorship clause (either or survivor,
anyone or survivor or former or survivor)) banks should follow the
mandate.
• If the sole hirer nominates a person banks should give the nominee
access to the locker and liberty to remove the contents.
55.10 DEATH OF HIRER
• If the sole locker hirer nominates a person banks must give the nominee
access to the locker and liberty to remove contents from the locker in the
event of death of the hirer.
• If locker hired jointly and one person dies, the nominee of the person
who died would get access jointly with the other hirer. If however there
was a “either or survivor” or “anyone or survivor” or “former or survivor”
clause in the operation, banks should follow the mandate given in the
event of death. However, care should be taken to establish identity of
nominee, fact of death, etc.
! !441
• Banks must exercise care in establishing identity of survivor/nominee

and the fact of death of the hirer and obtain documentary evidence.
• Banks must make clear to nominees/survivor that access to locker is

given only as trustee to legal heirs
• Banks should also check if there is a restraint from a competent court not
allowing access to the locker of a deceased hirer.
• Bank should make diligent effort to find out if there is any restraining
order from a competent court.
• Access given to nominee/survivor gives the bank full discharge. Banks

should not insist on succession certificates, etc.
55.11 NO NOMINATION
• If the hirer dies and there is no nomination banks should adopt a

customer friendly approach in consultation with their legal advisers to
give access to legal heirs.
• Banks must prepare an inventory before returning articles in safe

custody.
• If nominee/survivor want to continue locker, banks should enter into a

fresh agreement and adhere to KYC norms.
• Banks are not required to open sealed closed packets left with them
while releasing to nominee.
55.12 LIABILITY
• Bankers are not liable for items lost from the locker or for individual
items claimed to be missing as the banker does not know the contents of
the locker.
• The exception is when due to gross negligence the locker is opened and
items are stolen. Even then it is difficult to quantify the loss as the
! !442
contents are only known to the holder. In these situations courts usually
determine whether banks are liable to pay damages and the amount.
• In the case of Union Bank of India vs. Smt. Kanak Choudhary (July
2007), the National Consumer Redressal Commission awarded
compensation for the loss suffered by the customer on account of
termites destroying currency notes and valuable papers kept in the
locker. The Commission said, “The bank was bound to ensure that the
respondent’s locker remained safe at all times.”
• In Punjab National Bank vs. K.V. Shetty, the apex Consumer court stated
the consumer must be compensated for damages of around ` 1.26 lakhs
along with interest at 18% to compensate for the loss of jewellery kept in
the locker of the bank.
55.13 CO-ORDINATION WITH OFFICERS OF CENTRAL

BOARD OF DIRECT TAXES
• There is a need for greater co-ordination between the Income Tax

Department and the banking system. As such, the banks may ensure
that they extend necessary help/co-ordination to tax officials whenever
required. Further, the banks will have to view with serious concern cases
where their staff connives/assists in any manner with offences
punishable under the Income Tax Act. In such cases, in addition to the
normal criminal action, such staff member should also be proceeded
against departmentally.
1. What is the relationship of the customer with the bank regarding the
hiring of a Locker and what kind of agreement is signed?
2. What should a bank do if a Locker remains un-opened for three years?
3. Who can access the Locker on the death of the hirer?
4. Is the bank liable for any loss from the Locker?
! !443
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !444
SAFE CUSTODY
Chapter 56
Safe Custody
Objectives
This chapter will explain how bankers keep goods on valuables in Safe
Custody for their customers.
Structure
56.1 Introduction
56.2 Details
56.1 INTRODUCTION
• Banks accept goods and valuables of customers for safe custody.
56.2 DETAILS
• As these are given to the banker to keep safe, the banker cannot
exercise his general lien on them.
• When items are given for safe custody they may be open or sealed.
When open, the banker must make a detailed note of the items and then
have that list signed by the customer preferably in front of a witness.
This will stop him from later claiming that certain items handed over
have been lost or stolen. When a sealed packet or envelope is given, the
banker should clearly state that he has received a sealed envelope and
that he does not know the contents. He must have this signed by the
customer also.
• When items are received for safe custody, they should be entered in a
register or some other record.
• Nomination is available only in the case of individual depositors and not

in respect of persons depositing jointly articles for safe custody.
! !445
SAFE CUSTODY
• Bank must make clear that items are returned to them as trustees of
legal heirs/and that access does not give them any claims. If access is
given it will constitute a full discharge of the bank’s liability.
• Banks should not insist on succession certificates, etc.
• When the item kept in safe custody is taken back by the client, the
receipt earlier issued at the time of deposit should be discharged and be
held in the bank’s possession as proof that the deposited item has been
returned.
• Even though the banker may not be aware of the contents (as in the
case of a sealed box), the banker must take reasonable care of the
articles placed in his possession.
• A banker will be held liable if:
- He keeps the items in an open place or at a place that is easily

accessible to others and it is stolen.
- The safe deposit vaults are not strong.
- He hands the items kept for safe custody to some other person
(conversion).
- One of the bank’s employees steals the items kept under safe custody.
1. Does the bank have a lien on items given to them for Safe Custody?
2. Can customers jointly put an item with the bank being put for Safe
Custody?
3. Under what circumstance is a banker held liable for the item left for
Safe Custody?
! !446
SAFE CUSTODY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !447
CONCLUSION
Chapter 57
Conclusion
Retail Banking is the Future
It is dynamic. The changes that have taken place in the last few years have
been stunning. It is clear that the manner banking will evolve in the next
few years will be very different. Electronic banking will undoubtedly be the
way banking will evolve. Paper instruments including cheques will become
obsolete. At this time it might sound inconceivable. But then so were
computers, the internet and mobile phones several years ago. No one ever
thought of or believed virtual cards could exist.
In this book I have incorporated all the new innovations and happenings
that have taken place. It was an extremely interesting exercise as it forces
you to wonder – what next?
! !448
CONCLUSION
REFERENCE MATERIAL
chapter
Video Lecture - Conclusion
! !449

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RETAIL BANKING

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition (June-2014)

Chapter No. Chapter Name Page No.

1 Retail Banking 5-8

2 Deposit Accounts 9-12

15 Retail Loans 147-149

22 Loans Against Shares and Debentures 185-189

28 Mutual Funds 223-231

31 Bank Drafts 241-245

40 Standing Instructions 307-309

45 National Electronic Funds Transfer 339-343

49 Electronic Banking 317-383

• Exemption provisions of small service provider.

1.1 Retail Banking

1.1 RETAIL BANKING

What is retail banking? I believe it is important to define retail banking as it

Retail banking is the provision of banking facilities and services to

Retail banking is the fastest growing segment in banking in the country

Of these retail banking is the most vibrant. Banks in their desire to be

Going forward, without a doubt, retail banking will continue to be one of

1.3 SELF ASSESSMENT QUESTIONS

1. What is retail banking?

2. What was the result of the nationalization of banks in 1969?

3. How is retail banking likely to grow in the immediate future?

This chapter will introduce you to deposit accounts.

• The acceptance of deposits and maintenance of these deposits is the core

• The relationship between a banker and a customer begins when the

• As customers have different needs, bankers offer different types of

2.2 TYPES OF DEPOSIT ACCOUNTS

2.3 DEMAND DEPOSITS

• Demand deposits are those deposits where the money deposited is

• There are three types of demand deposit accounts. These are:

- Current Accounts: This is defined by the Reserve Bank as “a form of

- Savings Accounts: A savings account has been defined as “a deposit

- Call Deposits: These are deposits maintained by banks. These are

2.4 FIXED DEPOSITS

• Fixed Deposit: A fixed or time deposit is defined as “a deposit received

• Banks are required to formulate a transparent and comprehensive policy

- The scheme being approved by the board of directors; and

2.6 SERVICE CHARGES

• Banks must ensure charges are reasonable. Customers with a low

2.7 SELF ASSESSMENTS QUESTIONS

1. What is the core activity of a bank?

3. Define a Fixed Deposit.

4. Can a bank accept interest free deposits?

• By opening a deposit account, an individual who has no other account

3.2 OPENING OF DEPOSIT ACCOUNTS

A large number of frauds are perpetrated in banks mainly through opening