Structure of Indian Banking System

The structure of banking varies widely from country to country. Often a country’s banking
structure is a consequence of the regulatory regime to which it is subjected. The banking
system in India works under the constraints that go with social control and public
ownership. Nationalization, for instance, was a structural change in the functioning of
commercial banks which was considered essential to better serve the needs of development
of the economy in conformation with national policy and objectives. Similarly, to meet the
major objectives of banking sector reforms, government stake was reduced up to 51 per cent
in public sector banks. New private sector banks were allowed and foreign banks were
permitted additional branches.
The Indian financial system comprises a large number of commercial and cooperative banks,
specialized developmental banks for industry, agriculture, external trade and housing, social
security institutions, collective investment institutions, etc. The banking system is at the
heart of the financial system. The Indian banking system has the RBI at the apex. It is the
central bank of the country under which there are the commercial banks including public
sector and private sector banks, foreign banks and local area banks. It also includes regional
rural banks as well as cooperative banks.

Reserve Bank of India

The central bank plays an important role in the monetary and banking structure of nation. It
supervises controls and regulates the activities of the banking sector. It has been assigned to
handle and control the currency and credit of a country. In older days, the central banks
 were empowered to issue the currency notes and bankers to the Union governments. The
first central bank in the world was Riks Banks of Sweden which was established in 1656. The
Reserve Bank of India, the central bank of our country, was established in 1935 under the
aegis of Reserve Bank of India Act, 1934. It was a private shareholders institution till January
1949, after which it became a state-owned institution under the Reserve Bank of India Act,
1948. It is the oldest central bank among the developing countries. As the apex bank, it has
been guiding, monitoring, regulating and promoting the destiny of the Indian financial
system.
Objectives of RBI
It plays a more positive and dynamic role in the development of a country. The financial
muscle of a nation depends upon the soundness of the policies of the central banking. The
objectives of the central banking system are presented below:
1. The central bank should work for the national interest of the country.
2. The central bank must aim for the stabilization of the mixed economy.
3. It aims at the stabilization of the price level at average prices.
4. Stabilization of the exchange rate is also essential.
5. It should aim for the promotion of economic activities.
Constitution and Management
Reserve Bank of India has been constituted as a corporate body having perpetual succession
and a common seal. Its capital is Rs. 5 crore wholly owned by the Government of India. The
general superintendence and direction of the affairs and business of the Bank has been
vested in the Central Board of Directors. The Central Government, however, is empowered to
give such directions to the Bank as it may, after consultation with its Governor, consider
necessary in the public interest.
The Central Board of Directors consists of the following:
a) A Governor and not more than four Deputy Governor to be appointed by the Central
Government.
b) Four directors to be nominated by the Central Government, one from each of the four local
boards.
c) Ten directors to be nominated by the Central Government.
d) One Government official to be nominated by the Central Government.
Besides the Central Board of Directors, four Local Boards have also been constituted for each
of the four areas specified in the first schedule to the Act. A Local Board has five members
appointed by the Central Government to represent as far as possible, territorial and
economic interests and the interests of cooperative and indigenous banks. A Local Board
 advises the Central Board on matters referred to it by the Central Board and performs such
duties as are delegated to it by the Central Board.
FUNCTIONS OF RBI
The RBI functions are based on the mixed economy. The RBI should maintain a close and
continuous relationship with the Union Government while implementing the policies. If any
differences arise, the government’s decision will be final. The main functions of the RBI are
presented below:
1. Welfare of the public
2. To maintain the financial stability of the country.
3. To execute the financial transactions safely and effectively.
4. To develop the financial infrastructure of the country.
5. To allocate the funds effectively without any partiality.
6. To regulate the overall credit volume for price stability.
Authorities

taken a number of series of actions in various sectors such as agriculture sector, industrial
sector, lead bank scheme and cooperative sector.

Establishment of Reserve Bank of India

The Reserve Bank is fully owned and operated by the Government of India. The Preamble of
the Reserve Bank of India describes the basic functions of the Reserve Bank as:

 Regulating the issue of Banknotes

 Securing monetary stability in India
 Modernising the monetary policy framework to meet economic challenges

The Reserve Bank’s operations are governed by a central board of directors, RBI is on the
whole operated with a 21-member central board of directors appointed by the Government
of India in accordance with the Reserve Bank of India Act. The Central board of directors
comprise of:

 Official Directors – The governor who is appointed/nominated for a period of four

years along with four Deputy Governors
 Non-Official Directors – Ten Directors from various fields and two government
Official
Organisation Structure

Objectives

The primary objectives of RBI are to supervise and undertake initiatives for the financial
sector consisting of commercial banks, financial institutions and non-banking financial
companies (NBFCs).

Some key initiatives are:

i. Restructuring bank inspections

ii. Fortifying the role of statutory auditors in the banking system

Legal Framework

The Reserve Bank of India comes under the purview of the following Acts:

 Reserve Bank of India Act, 1934

 Public Debt Act, 1944
 Government Securities Regulations, 2007
 Banking Regulation Act, 1949
 Foreign Exchange Management Act, 1999
 Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
 Credit Information Companies(Regulation) Act, 2005
 Payment and Settlement Systems Act, 2007
MAJOR FUNCTIONS OF RBI
Monetary Authority

 Formulating and implementing the national monetary policy.

 Maintaining price stability across all sectors while also keeping the objective of
growth.
Regulatory and Supervisory

 Set parameters for banks and financial operations within which banking and financial
systems function.
 Protect investors interest and provide economic and cost-effective banking to the
public.
Foreign Exchange Management

 Oversees the Foreign Exchange Management Act, 1999.

 Facilitate external trade and development of foreign exchange market in India.
Currency Issuer

 Issues, exchanges or destroys currency and not fit for circulation.

 Provides the public adequately with currency notes and coins and in good quality.

Developmental role
 Promotes and performs promotional functions to support national banking and
financial objectives.
Related Functions

 Provides banking solutions to the central and the state governments and also acts as
their banker.
 Chief Banker to all banks: maintains banking accounts of all scheduled banks.

HISTORY OF RBI
The Reserve Bank of India is the central bank of the country. Central banks are a relatively
recent innovation and most central banks, as we know them today, were established around
the early twentieth century.
The Reserve Bank of India was set up on the basis of the recommendations of the Hilton
Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory
basis of the functioning of the Bank, which commenced operations on April 1, 1935.
The Bank was constituted to
* Regulate the issue of banknotes
* Maintain reserves with a view to securing monetary stability and
* To operate the credit and currency system of the country to its advantage.
The Bank began its operations by taking over from the Government the functions so far
being performed by the Controller of Currency and from the Imperial Bank of India, the
management of Government accounts and public debt. The existing currency offices at
Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became
branches of the Issue Department. Offices of the Banking Department were established in
Calcutta, Bombay, Madras, Delhi and Rangoon.
Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued
to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April,
1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan
upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which
was originally set up as a shareholder's bank, was nationalised in 1949.
An interesting feature of the Reserve Bank of India was that at its very inception, the Bank
was seen as playing a special role in the context of development, especially Agriculture.
When India commenced its plan endeavours, the development role of the Bank came into
focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept
and practise of using finance to catalyse development. The Bank was also instrumental in
institutional development and helped set up insitutions like the Deposit Insurance and
Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development
Bank of India, the National Bank of Agriculture and Rural Development, the Discount and
Finance House of India etc. to build the financial infrastructure of the country.
With liberalisation, the Bank's focus has shifted back to core central banking functions like
Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System
and onto developing the financial markets.

SCHEDULED BANKS

Scheduled Banks in India refer to those banks which have been included in the Second
Schedule of Reserve Bank of India Act, 1934. RBI in turn includes only those banks in this
Schedule which satisfy the criteria laid down vide section 42(6)(a) of the said Act. Banks not
under this Schedule are called Non-Scheduled Banks.
There are some government banks, foreign banks, private banks and cooperative banks also
in this list.These banks are qualified to take debts/loans from RBI at the bank rates. They
will also become members in clearing house.
State Bank of India, HDFC bank and all nationalised banks are scheduled banks only.
Scheduled banks carry the normal business of banking such as accepting deposits, giving out
loans and other banking services.
Classification of Scheduled banks are

>> Scheduled Commercial Banks

>> Scheduled Co-operative Banks
Scheduled Commercial Banks are further classified as :-
>> Public Sector Banks: like SBI & Associates, Nationalized Banks, Other Public Sector Banks
>> Private Banks
>> Foreign Banks
>> Regional Rural Banks
Scheduled National Bank in India are Allahabad Bank, Syndicate Bank, Bank of Baroda, Bank
of India, Punjab National Bank, Dena Bank, United Bank of India, Union Bank of India,
Oriental Bank of Commerce etc
Scheduled Commercial Banks in India are Jammu and Kashmir Bank, ING Vysya Bank,
Federal Bank, Lakshmi Vilas Bank, Karur Vysya Bank etc.
Scheduled banks enjoy certain rights such as:

 Right to receive refinance facility from the apex bank

 Entitled for currency chest facility.
 Right to become members of clearing house

However, they are required to fulfil certain obligations like maintenance of an average daily
balance of CRR (Cash Reserve Ratio) with the central bank at the rates specified by it. Add to
that; these banks need to submit returns at regular intervals, to the central bank subject to
the rules of Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.
Facilities

Every Scheduled bank enjoys two types of principal facilities: it becomes eligible for
debts/loans at the bank rate from the RBI; and, it automatically acquires the membership
of clearing house

Internal Classification

The Scheduled banks comprise Scheduled Commercial Banks and Scheduled Co-operative
banks. The further classification is as follows:

 Scheduled Commercial banks

o Public Sector Banks
 State Bank of India and its associates, and
 Other Nationalised banks
o Private Sector Indian Banks
 Old private-sector banks
 New private-sector banks
o Private-sector Foreign banks
o Regional Rural Bank (RRBs)
 Scheduled Co-operative banks
o Scheduled State Co-operative Banks
o Scheduled Urban Co-operative Banks
Non Scheduled Banks

As per the Second Schedule of the Banking Regulation Act of 1965 a bank must satisfy the
following conditions, to get fully authorized to run banking business in India. The required
two conditions are:

 The bank should have paid a reserve capital of 5 lakh rupees to the Reserve Bank
of India and this capital must be maintained throughout their operational period.
 The RBI must be satisfied that the banks affairs are not conducted in a manner
that is harmful to the interest of its depositors.
Those banks that abide by this regulation are called as Scheduled Banks and banks
that do not come under this regulation are called as Non-Scheduled Banks. All most all
the existing banks in India are scheduled and the number of non-scheduled banks is
almost nil. Only a countable number of few banking sectors have claimed exemption
from the Second Schedule of banking Regulation Act. In the year 2006, only a total of
three non-scheduled banks existed in India. By 2011 and counting, the number of non-
scheduled banks in our country increased by one. Till today India has only four non-
scheduled banks in existence. These four Non-scheduled banks under operation in
India are:

1. Akhand Anand Co-operative Bank Limited

2. Alavi Co-Operative Bank Limited
3. Amarnath Co-Operative Bank Limited
4. Amod Nagrik Sahakari Bank Limited

Key Differences Between Scheduled and Non-Scheduled Bank

The difference between scheduled and non-scheduled banks can be drawn clearly on the
following premises:

1. A banking corporation whose paid up capital is Rs. 5 lacs or more and does not harm
the interest of the depositors, is called as Scheduled bank. Unlike, non-scheduled
banks are the banks which are not capable of complying with the provision of RBI, for
scheduled banks.

2. Scheduled banks are the ones covered in the second schedule of the Reserve Bank,
whereas non-scheduled banks are the banks that are not covered in the second
schedule of the Reserve Bank.

3. Scheduled Banks need to maintain cash reserves with RBI, at the rates prescribed by
it. On the other hand, Non-Scheduled Bank also needs to keep cash reserves, but with
themselves only.

4. Scheduled banks are entitled to borrow money from the central bank for regular
banking purposes. Conversely, non-scheduled banks are not entitled to borrow
money from the central bank for regular banking purposes. Nevertheless, under
abnormal conditions, they can request the central bank for accommodation.

5. Scheduled banks must submit the periodic returns to the Reserve bank of India. As
against, there is no such requirement of submission of periodic returns to the central
bank, in case of non-scheduled banks.

6. Scheduled banks have the right to become the member in clearing house, while no
such facility is allowed to non-scheduled banks.
COMMERCIAL BANK
A commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes various loans, and offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is
where most people do their banking, as opposed to an investment bank.
Commercial banks make money by providing loans and earning interest income from those
loans. The types of loans a commercial bank can issue vary and may include mortgages, auto
loans, business loans, and personal loans. A commercial bank may specialize in just one or a
few types of loans.

Customer deposits, such as checking accounts, savings accounts, money market accounts, and
CDs, provide banks with the capital to make loans. Customers who deposit money into these
accounts effectively lend money to the bank and are paid interest. However, the interest
rate paid by the bank on money they borrow is less than the rate charged on money they lend.

How a Commercial Bank Works

The amount of money earned by a commercial bank is determined by the spread between the
interest it pays on deposits and the interest it earns on loans it issues, which is known as net
interest income.

Customers find commercial bank investments, such as savings accounts and CDs, attractive
because they are insured by the Federal Deposit Insurance Corp. (FDIC), and money can be
easily withdrawn. However, these investments traditionally pay very low interest rates
compared with mutual funds and other investment products. In some cases, commercial bank
deposits pay no interest, such as checking account deposits.

Example of How a Commercial Bank Earns Money

When a commercial bank lends money to a customer, it charges a rate of interest that is higher
than what the bank pays its depositors. For example, suppose a customer purchases a five-year
CD for $10,000 from a commercial bank at an annual interest rate of 2%.

On the same day, another customer receives a five-year auto loan for $10,000 from the same
bank at an annual interest rate of 5%. Assuming simple interest, the bank pays the CD customer
$1,000 over five years, while it collects $2,500 from the auto loan customer. The $1,500
difference is an example of spread—or net interest income—and it represents revenue for the
bank.
TYPES OF COMMERCIAL BANK

Commercial banks are classified into two categories i.e. scheduled commercial
banks and non-scheduled commercial banks. Further, scheduled commercial banks are
further classified into three types:
 Private Bank: When the private individuals own more than 51% of the share capital,
then that banking company is a private one. However, these banks are publicly listed
companies in a recognized exchange.

 Public Bank: When the Government holds more than 51% of the share capital of a
publicly listed banking company, then that bank is called as Public sector bank.

 Foreign Bank: Banks set up in foreign countries, and operate their branches in the home
country are called as foreign banks.

Non-scheduled commercial banks refer to the banks which are not covered in the Reserve
Bank of India’s second schedule. The paid-up capital of such banks is not more than Rs. 5
lakhs.

FUNCTIONS OF COMMERCIAL BANK

1. Primary functions

 Accepting Deposits: The primary function for which

the commercial banks were established is to accept
deposits from the general public, who possess
surplus funds and are willing to deposit them so as to
earn interest on it.
There are various products offered by the bank to the
customers for the deposit of their money, which
includes savings account, current account, fixed
deposit and recurring deposit.

Advancing Loans: Next important function

performed by the commercial bank is lending
money to the individuals and companies. The
banks make loans to the customers in the form of
term loans, cash credit, overdraft and discounting
of bills of exchange.

Secondary functions

 Agency Services: There are some facilities

provided by the commercial banks in which they
act as an agent of the customers. Such services are:

 Collection and payment of rent, interest and dividend.

 Collection and payment of cheques and bills.

 Buying and selling securities.

 Payment of insurance premium and subscriptions.

 General Utility Services: Commercial banks provide general utility services to the
customers and charges a fee for the same. It covers services like:

 Safekeeping of valuables, documents etc, in locker or vault.

 ATM card, credit card and debit card facility.

 Issue of demand draft, pay order and traveller’s cheque.

 Internet and mobile banking

  Sale of application forms of competitive exams.

 Transfer of funds: Banks assist in the transfer of funds from one person to another or
from one place to another through its credit instruments.

 Credit Creation: The commercial banks are authorized to create credit, by granting more
loans than the amounts deposited by the customers.

A commercial bank offers an array of facilities such as internet banking, mobile banking,
ATM facility, credit card facility, NEFT, RTGS and so forth for which it charges a definite sum
as a fee for providing these facilities.

CO-OPERATIVE BANKS

 A co-operative bank is registered under the cooperative society’s law of the state in which it
is founded.
 Serves the needs of the rural sector in general and the agricultural sector in particular.
 Provides short-term and medium-term credit to agriculture.

FEATURES OF CO-OPERATIVE BANKS

 Banking Regulation Act, 1949 is partially applicable to co-operative banks. Thus RBI has
partial control on co-operative banks.
 Co-operative banks work on principles of co-operation that is the reason why co-operative
banks get financial assistance from RBI on concessional rate.
 Only State Co-operative Bank can seek refinance facility from RBI.
 Co-operative banks cannot open their branches in foreign countries.
 Co-operative banks can operate its activities only within limited area.

STATE COOPERATIVE BANKS

 Organised at a state level.

 Apex of the three-tier co-operative credit structure.
 There were 28 SCBs, 14 of which were scheduled banks.
 It is only through them that the RBI provides credit to co-operatives.
 RBI generally provides loans to SCB on interest rate, one or two per cent lower than Bank
Rate.
 They operate as 'balancing centres' for central cooperative banks (CCBs).
 They raise funds on their own to make them available to the CCBs and through them or
directly to primary societies in such districts where CCBs are not in operation.
 CENTRAL CO-OPERATIVE BANKS
 It can be divided into two parts:
 Co-operative Banking Union: Members are only Co-operative societies.
 Mixed control Co-operative Bank: Members are co-operative societies and individuals.
 These are the middle level in the three-tier structure.
 Operate at district level.
 Main function is to lend money to affiliated primary societies. The duration of loans vary
from 1 year to 3 years.
 Their working capital derives from deposits, borrowings and other liabilities and owned
funds.
PRIMARY CO-OPERATIVE BANKS (PCBS)

They are non-agricultural credit societies. Two types:

 urban co-operative banks
 salary earners' societies
Development of PCBs is looked after by the RBI
 Operate only in urban and semi-urban areas.
 Working capital drawn largely from public deposits and to a smaller extent from owned
funds and borrowings.
 RBI and IDBI offer them concessional refinance facility on a selected basis.
 Provide housing finance and loans and advances for various other pus poses such as petty
trade and industry.

History of Cooperative Banking in India:

Cooperative movement in India was started primarily for dealing with the problem of rural credit.
The history of Indian cooperative banking started with the passing of Cooperative Societies Act in
1904. The objective of this Act was to establish cooperative credit societies “to encourage thrift,
self-help and cooperation among agriculturists, artisans and persons of limited means.”
Many cooperative credit societies were set up under this Act. The Cooperative Societies Act, 1912
recognised the need for establishing new organisations for supervision, auditing and supply of
cooperative credit. These organisations were- (a) A union, consisting of primary societies; (b) the
central banks; and (c) provincial banks.
Although beginning has been made in the direction of establishing cooperative societies and
extending cooperative credit, but the progress remained unsatisfactory in the pre-independence
period. Even after being in operation for half a century, the cooperative credit formed only 3.1 per
cent of the total rural credit in 1951-52

CASH RESERVE RATIO

cash Reserve Ratio is a certain minimum amount of deposit that the commercial banks have
to hold as reserves with the central bank. CRR is set according to the guidelines of the central
bank of a country.
Cash reserve ratio is:
 It is also referred to as the amount of funds which the banks have to keep with the Reserve
Bank of India (RBI)
 It's a vice-versa process
 If a central bank increases CRR then the available amount with the banks decreases or comes
down
 The CRR is used by RBI to wipe out excessive money from the system
 Commercial banks are required to maintain an average cash balance with the RBI, the
amount of which shall not be less than 3 per cent of the total Net Demand and Time Liability
(NDTL)
Description:
We can say that CRR is a tool used by a central bank to control liquidity in the banking
system. The aim is to ensure that banks do not run out of cash to meet the payment demands
of their depositors.
Example:
When someone deposits Rs 100 with a bank, it increases the deposits of the bank by Rs 100.
If the CRR is 9 per cent, then the bank will have to hold additional Rs 9 with the central bank.
This means that the commercial bank will be able to use only Rs 91 for investments and/or
lending or credit purpose.
Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the
Reserve Bank of India (RBI) to be maintained with the latter in the form of liquid cash.

1. Objectives of Cash Reserve Ratio

The Cash Reserve Ratio acts as one of the reference rates when determining the base rate.
Base rate means the minimum lending rate below which a bank is not allowed to lend funds.
The base rate is determined by the Reserve Bank of India (RBI). The rate is fixed and ensures
transparency with respect to borrowing and lending in the credit market. The Base Rate also
helps the banks to cut down on their cost of lending to be able to extend affordable loans.
 Apart from this, there are two main objectives of the Cash Reserve Ratio:

1. Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank
and is hence, secure.

Another objective of CRR is to keep inflation under control. During high

inflation in the economy, RBI raises the CRR to lower the bank’s loanable
funds.

2. How does Cash Reserve Ratio work?

When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is available
with the banks reduces. This is the RBI’s way of controlling the excess flow of money in the
economy. The cash balance that is to be maintained by scheduled banks with the RBI should not be
less than 4% of the total NDTL, which is the Net Demand and Time Liabilities. This is done on a
fortnightly basis.

NDTL refers to the total demand and time liabilities (deposits) that are held by the banks. It
includes deposits of the general public and the balances held by the bank with other banks. Demand
deposits consist of all liabilities which the bank needs to pay on demand like current deposits,
demand drafts, balances in overdue fixed deposits and demand liabilities portion of savings bank
deposits.

Time deposits consist of deposits that need to be repaid on maturity and where the depositor can’t
withdraw money immediately. Instead, he is required to wait for a certain time period to gain
access to the funds. This includes fixed deposits, time liabilities portion of savings bank deposits
and staff security deposits. The liabilities of a bank include call money market borrowings,
certificate of deposits and investment in deposits other banks.

In short, the higher the Cash Reserve Ratio, the lesser is the amount of money available to banks for
lending and investing.

3. How does CRR affect the economy?

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which is
used to regulate the money supply, level of inflation and liquidity in the country. The higher the
CRR, the lower is the liquidity with the banks and vice-versa.

During high levels of inflation, attempts are made to reduce the flow of money in the economy. For
this, RBI increases the CRR, lowering the loanable funds available with the banks. This, in turn,
slows down investment and reduces the supply of money in the economy. As a result, the growth of
the economy is negatively impacted. However, this also helps bring down inflation.

On the other hand, when the RBI needs to pump funds into the system, it lowers CRR. which
increases the loanable funds with the banks. The banks thus extend a large number of loans to
businesses and industry for different investment purposes. It also increases the overall supply of
money in the economy. This ultimately boosts the growth rate of the economy.

4. Difference between CRR & SLR

Both CRR & SLR are the components of the monetary policy. However, there are a few differences
between them. The following table gives a glimpse into the dissimilarities:

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)

In the case of SLR, banks are asked to have reserves of The CRR requires banks to have only

liquid assets, which include both cash and gold. Cash reserves with the RBI

Banks don’t earn returns on money

Banks earn returns on money parked as SLR
parked as CRR

SLR is used to control the bank’s leverage for credit The Central Bank controls the liquidity

expansion. in the Banking system with CRR.

In the case of SLR, the securities are kept with the banks
In CRR, the cash reserve is maintained by the ba
themselves, which they need to maintain in the form of
with the Reserve Bank of India.
liquid assets.

5. Why is Cash Reserve Ratio changed regularly?

As per the RBI guidelines, every bank is required to maintain a ratio of their total deposits that can
also be held with currency chests. This is considered to be the same as it is kept with the RBI. The
RBI can change this ratio from time to time in regular intervals. When this ratio is changed, it
impacts the economy.

For banks, profits are made by lending. In pursuit of this goal, banks may lend out to the max to
make higher profits and have very less cash with them. An unexpected rush by the customers to
 withdraw their deposits will lead to banks being unable to meet all the repayment needs. Therefore,
CRR is vital to ensure that there is always a certain fraction of all the deposits in every bank, kept
safe with them. RBI curbs these issues with the help of the CRR.

While ensuring liquidity against deposits is the prime function of the CRR, it has an equally
important role in controlling interest rates in the economy. The RBI controls the short-term
volatility in the interest rates by adjusting the amount of liquidity available in the system. Too much
availability of cash leads to the fall in rates while the scarcity of it leads to a sudden rise in rates,
both of which are unhealthy for the economy.

Thus, as a depositor, it is good for you to know of the CRR prevailing in the market that ensures that
regardless of the performance of the bank, a certain percentage of your cash is safe with the RBI.

STATUTORY LIQUIDITY RATIO

Ratio work?
Every bank must have a minimum portion of their Net Demand and Time Liabilities (NDTL) in the
form of cash, gold, or other liquid assets by the day’s end. The ratio of these liquid assets to the
demand and time liabilities is called the Statutory Liquidity Ratio. The Reserve Bank of India has the
authority to increase this ratio by up to 40%. An increase in the ratio constricts the ability of the bank
to inject money into the economy.

The Reserve Bank of India is responsible for regulating the supply of money and stability of prices to
run the Indian economy. Statutory Liquidity Ratio is one of its many monetary policies for the same.
SLR (among other tools) is instrumental in ensuring the solvency of the banks and the flow of money
in the economy.

2. Components of Statutory Liquidity Ratio?

Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial
banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks and
central co-operative banks in India to maintain SLR. It becomes pertinent to know in detail about the
components of the SLR, as mentioned below.
a. Liquid Assets
These are assets one can easily convert into cash – gold, treasury bills, govt-approved securities,
government bonds, and cash reserves. Additionally, it also consists of securities, eligible under Market
Stabilisation Schemes and those under the Market Borrowing Programmes.
b. Net Demand and Time Liabilities (NDTL)

NDTL refers to the total demand and time liabilities (deposits) of the public that are held by the
banks with other banks. Demand deposits consist of all liabilities which the bank needs to pay on
demand. They include current deposits, demand drafts, balances in overdue fixed deposits, and
demand liabilities portion of savings bank deposits.

Time deposits consist of deposits that will be repaid on maturity, where the depositor will not be
able to withdraw his/her deposits immediately. Instead, he/she will have to wait until the lock-in
tenure is over to access the funds. Fixed deposits, time liabilities portion of savings bank deposits,
and staff security deposits are some examples. The liabilities of a bank include call money market
borrowings, certificate of deposits, and investment deposits in other banks.

c. SLR Limit

The SLR has an upper limit of 40% and a lower limit of 23%.

Click here to read about: CRR & Repo Rate

3. Objectives of Statutory Liquidity Ratio

a. To curtail the commercial banks from over liquidating:

A bank/financial institution can experience over-liquidation in the absence of SLR when the Cash
Reserve Ratio goes up, and the bank is in dire need of funds. RBI employs SLR regulation to have
control over the bank credit. SLR ensures that there is solvency in commercial banks and assures
that banks invest in government securities.

b. To increase or decrease the flow of bank credit:

The Reserve Bank of India raises SLR to control the bank credit during the time of inflation.
Similarly, it decreases the SLR during the time of recession to increase bank credit.

5. Impact of SLR on the Investor

The Statutory Liquidity Ratio acts as one of the reference rates when RBI has to determine the
base rate. Base rate is nothing but the minimum lending rate. No bank can lend funds below this
rate. This rate is fixed to ensure transparency with respect to borrowing and lending in the credit
market. The Base Rate also helps the banks to cut down on their cost of lending to be able to
extend affordable loans.
When RBI imposes a reserve requirement, it ensures that a certain portion of the deposits are safe
and are always available for customers to redeem. However, this condition also restricts the bank’s
lending capacity. In order to keep the demand in control, the bank will have to increase its lending
rates.

Repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of
India (RBI) in case of shortage of funds. It is one of the main tools of RBI to keep inflation under
control.

REPO RATE

The term ‘Repo’ stands for ‘Repurchase agreement’. Repo is a form of short-term, collateral-backed
borrowing instrument and the interest rate charged for such borrowings is termed as repo rate. In
India, repo rate is the rate at which Reserve Bank of India lends money to commercial banks in
India if they face a scarcity of funds. Commercial banks sell government securities and bonds to
Reserve Bank of India with an agreement to repurchase the securities and bonds from Reserve
Bank of India on a future date at a pre-determined price including interest charges. Current Repo
Rate as of August 2019 is 5.40%.
How Does Repo Rate Work?
When you borrow money from the bank, the transaction attracts interest on the principal amount.
This is referred to as the cost of credit. Similarly, banks also borrow money from RBI during a cash
crunch on which they are required to pay interest to the Central Bank. This interest rate is called
the repo rate.

Technically, repo stands for ‘Repurchasing Option’. It is a contract in which banks provide eligible
securities such as Treasury Bills to the RBI while availing overnight loans. An agreement to
repurchase them at a predetermined price will also be in place. So, this interest rate is levied on
these kinds of repo transactions as well.

2. What are the Components of a Repo Transaction?

The components of a repo transaction between the RBI and the bank are as follows:

a. Banks provide eligible securities (RBI-recognised securities that are above the Statutory Liquidity
Ratio limit).

b. RBI gives one day or overnight loan to the bank.

c. RBI charges an interest (repo rate) from the bank.

d. Banks repay the loan after one day and repurchase the security they gave as collateral.
3. How Does Repo Rate Affect the Economy?

Repo rate is a powerful arm of the Indian monetary policy that can regulate the country’s money
supply, inflation levels, and liquidity. Additionally, the levels of repo have a direct relationship with
the cost of borrowing for banks. Higher the repo rate, higher will be the cost of borrowing for banks
and vice-versa.

a. When inflation rises

During high levels of inflation, RBI makes strong attempts to bring down the flow of money in the
economy. One way to do this is to increase the repo rate. This makes borrowing a costly affair for
businesses and industries, which in turn slows down investment and money supply in the economy.
As a result, it negatively impacts the growth of the economy. This also helps bring down inflation.

b. When RBI wants to flow cash into the system

On the other hand, when the RBI needs to pump funds into the system, it lowers the repo rate.
Consequently, businesses and industries find it cheaper to borrow money for different investment
purposes. It also increases the overall supply of money in the economy. This ultimately boosts the
growth rate of the economy.

REVERSE REPO RATE

What is Meant by Reverse Repo Rate?

Reverse repo as the name suggests is an opposite contract to the Repo Rate. Reverse Repo rate is
the rate at which the Reserve Bank of India borrows funds from the commercial banks in the
country. In other words, it is the rate at which commercial banks in India park their excess money
with Reserve Bank of India usually for a short-term. Current Reverse Repo Rate as of August 2019
is 5.15%.
A Reverse Repo Rate is a rate that RBI offers to banks when they deposit their surplus cash with
RBI for shorter periods. In other words, it is the rate at which the RBI borrows from the commercial
banks. When banks have excess funds but don’t have any other lending or investment options, they
deposit/lend the surplus funds with the RBI. This way, banks can raise additional interest from
their funds.

The reverse repo rate has an inverse relationship with the money supply in the economy. During
high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks
to park more funds with the RBI to earn higher returns on idle cash. As a result, every excess rupee
is put to use in the banking system. Banks are left with lesser funds to extend loans, curbing the
purchasing power of individuals.
Repo Rate Reverse Repo Rate

It is the rate at which RBI lends money to banks

It is the rate at which RBI borrows money from banks

It is higher than the reverse repo rate

It is lower than the repo rate

It is used to control inflation

It is used to manage cash-flow

It involves the sale of securities which would be repurchased in future.

It involves the transfer of money from one account to another.

Current Repo Rate and Reverse Repo Rate its Impact

RBI keeps changing the repo rate and the reverse repo rate according to changing macroeconomic
factors. Whenever RBI modifies the rates, it impacts all sectors of the economy; albeit in different
ways. Some segments gain as a result of the rate hike while others may suffer losses. RBI recently
cut down the repo rate by 25 basis points to 5.75% from 6%. In the same line, the reverse repo
rate was also reduced by 25 basis points to 5.5% from 5.75%.

Changes in the repo rates can directly impact big-ticket loans such as home loans. An
increase/decrease in the repo rates can result in banks and financial institutions revising their
MCLR proportionately. The Marginal Cost of Funds Based Lending Rate or the MCLR is the
benchmark rate below which a bank/financial institution cannot lend.

A decline in the repo rate can lead to the banks bringing down their lending rate. This can prove to
be beneficial for retail loan borrowers. However, to bring down the loan EMIs, the lender has to
reduce its base lending rate. As per the RBI guidelines, banks/financial institutions are required to
transfer the benefit of interest rate cuts to consumers as soon as possible.

Reserve Bank of India formulates and administers monetary policies specifically for the purpose
of controlling the supply of money in the economy to stimulate various aspects of economic
growth. The primary objective of such monetary policies are promoting economic development
through price stability, regulation of the volume of bank credits, improving efficiency of the
financial system, promoting investments and increasing diversification in financial markets. In
this context, repo rate and reverse repo rate are instruments of RBI’s monetary policy that can
help control the money supply in the economy.
 The following are the key differences between repo and reverse repo in India:

Comparison Criteria Repo Rate Reverse Repo Rate

Lender – RBI, Borrower – Lender – Commercial Banks,

Lender and Borrower
Commercial Banks. Borrower – RBI.

To manage short term To reduce overall supply of

Borrower’s Objective
deficiency of funds money in the economy

Rate of Interest Higher than reverse repo rate Lower than repo rate

Interest Charge Applicable to Repurchase Agreement Reverse Repurchase Agreement

Commercial banks get funds from Commercial banks deposit their

Mechanism of Operation RBI using government excess funds with RBI and receive

bonds as collateral. interest from the deposit.

Cost of funds increases for Money supply in the economy

Impact of Higher Rate commercial banks hence loans decreases as commercial banks

become more expensive. park more surplus funds with RBI.

Cost of funds is lower for Money supply in the economy

Impact of Lower Rate commercial banks leading to increases as banks lend more and
reduced interest rates on loans. reduce their deposits with RBI.

Importance of Repo Rate and Reverse Repo Rate

 Repo and reverse repo are the monetary measures used by the Reserve Bank of India to deal
with the deficiency of funds and liquidity in the market. It is a vital money flow control
mechanisms used by the central bank.
 Bank lending rates are impacted by repo rate and reverse repo rate.
 Repo and reverse repo are the most effective and efficient tools used by the Reserve Bank of
India to achieve price stability and to boost economic development.
 Repo and reverse repo agreements help banks manage their liquidity requirements easily and
with a high degree of safety.
Significance of Repo Rate and Reverse Repo Rate

Liquidity Regulation: Under the liquidity framework designed by RBI, many facilities are
offered to commercial banks to meet their requirement of immediate liquidity or deficiency of
funds. The main motive of the liquidity framework is to avoid any liquidity crisis in the Indian
banking system through implementation of repo agreements. In the similar way, RBI has a
framework for managing surplus funds/cash in the banking system which ensures there is no
excess liquidity in the system. And this framework is referred to as reverse repo. Basically, repo
transactions inject liquidity into the Indian banking system. On the other hand, reverse repo
absorbs liquidity from the Indian banking system.

Inflation Control: Reserve Bank of India holds a key responsibility with respect to striking a
balance between inflation and economic growth by managing the repo rate and/or reverse repo
rate periodically. By changing the repo/reverse repo rate, the RBI can control money flow i.e.
liquidity in the economy – too much liquidity usually leads to inflation which can adversely affect
the economy, while too little liquidity can lead to an economic slowdown.

Impact of Repo Rate and Reverse Repo Rate Increase by RBI

 Increase in Repo Rate: Increase in repo rate makes borrowing from the RBI more expensive
for commercial banks and this can lead to increase in rates applicable to loans. As the interest
rates on various loans increases, fewer loans are applied for disbursed, which restricts the
money supply in the economy and may adversely affect the country’s economic growth.
 Increase in Reverse Repo Rate: If there is excessive liquidity in the banking system, RBI may
decide to increase the reverse repo rate. When there is a hike in reverse repo rate, banks can
earn higher interest on their excess funds deposited with the Reserve Bank of India. This is a
safer investment option for banks so overall flow of money into the markets will be decreased as
more of the bank’s surplus funds are deposited with RBI instead of being lent out.

Impact of Repo Rate and Reverse Repo Rate cuts by RBI

 Repo Rate Cut Impact: Banking is the first sector to get affected by any change in monetary
policies. A cut in repo rate can allow banks to borrow from the Reserve Bank of India at a
cheaper rate and infuse higher liquidity in the banking system. This can lead banks to reduce
their lending rates for customer leading to cheaper loans in the long term. As bank loans get
cheaper, consumers can borrow and spend more which boosts consumption and can eventually
lead to economic growth. However, this is depends on the decision by the bank whether to pass
on the RBI repo rate cut benefits to their customers through cheaper loan offers.
 Reverse Repo Rate Cut Impact: Whenever RBI decides to reduce the reverse repo rate,
banks earn less on their excess money deposited with the Reserve Bank of India. This leads the
banks to invest more money in more lucrative avenues such as money markets which increases
the overall liquidity available in the economy. While this can also lead to lower interest rate on
loans for the bank’s customers, the decision will depend on multiple factors including the bank’s
internal liquidity situation and the availability of other potentially less risky and equally
lucrative investment opportunities.

Bank rate

Bank rate, also known as discount rate in American English,[1] is the rate of interest which
a central bank charges on its loans and advances to a commercial bank. The bank rate is known
by a number of different terms depending on the country, and has changed over time in some
countries as the mechanisms used to manage the rate have changed.

Whenever a bank has a shortage of funds, they can typically borrow from the central bank based
on the monetary policy of the country.

The borrowing is commonly done via repos: the repo rate is the rate at which the central bank
lends short-term money to the banks against securities. It is more applicable when there is a
liquidity crunch in the market.

In contrast, the reverse repo rate is the rate at which banks can park surplus funds with the
reserve bank. This is mostly done when there is surplus liquidity in the market.

A bank rate is the interest rate at which a nation's central bank lends money to domestic banks,
often in the form of very short-term loans. Managing the bank rate is a method by which central
banks affect economic activity. Lower bank rates can help to expand the economy by lowering
the cost of funds for borrowers, and higher bank rates help to reign in the economy when
inflation is higher than desired.

How Bank Rates Work

The bank rate in the United States is often referred to as the federal funds rate or the discount
rate. In the United States, the Board of Governors of the Federal Reserve System sets the
discount rate as well as the reserve requirements for banks.

The Federal Open Market Committee (FOMC) buys or sells Treasury securities to regulate the
money supply. Together, the federal funds rate, the value of Treasury bonds, and reserve
requirements have a huge impact on the economy. The management of the money supply in this
way is referred to as monetary policy
Virtual Money

Virtual Money can be defined as a digital representation of value that is issued and controlled by its
developers, and used and accepted among the members of a specific (virtual) community. Unlike
regular money, it is relying on a system of trust and not issued by a central bank or other banking
authority. In this article, Sia Partners explains why “Virtual Money” could become really important,
which are the main products and players in the market today and what are their main
characteristics, risks and advantages. We also explain key concepts related to Virtual Money, such
as “Mining” and “Blockchain”.
A virtual currency is digital money used for payment without the intervention of banks and
countries.
The most well-known virtual currency is Bitcoin. This currency has several variants such as the
Litecoin, Dogecoin, Namecoin and PPCoin.

How does it work?

A virtual currency is linked to a unique algorithm through which only internet payments can be
made.

What rules apply to virtual currencies?

None. Virtual currencies are not legal tender. Nobody is obliged to accept payments in virtual
currencies. Virtual money does not benefit from legal protection. The government does not
supervise transactions with virtual currencies.

Is virtual money the same as digital money?

A lot of confusion exists around the terms virtual money and digital money. When we are talking
about digital money, this concerns the categories M2 and M3 of the financial system (M1 are the
physical notes and coins in circulation). Worldwide, more than 95% of the currencies is digital.
Virtual money originally only referred to the currencies that did not live in the real world and were
only exchanged online (typically in gaming systems). In a later phase, virtual currencies started to
expand to the physical world and blurred the line between virtual and digital money.
Who are the different important players in the virtual money market and how many are
there?
A lot of virtual currencies exist (see table for an overview of some of the most important players),
and every virtual currency has its own way of functioning. Most of them are cryptocurrencies
(digital currencies in which encryption techniques are used).
 Each virtual currency has its own founder(s), its algorithms and a varying level of anonymity. What
they all have in common is their young age. Bitcoin for example, the most “settled” currency which
is still – by far – the most important one in terms of Market Capitalization and popularity has been
created in 2009. Since then, many virtual currencies have appeared as you can see
on CoinMarketCap.com. Bitcoin today still accounts for approximately 90% (approximately $4.8bn
out of $5.3bn), of total Market Capitalization which consists of more than 650 virtual currencies.
Others however, like for example XenCoin, have only lived for a couple of months and reached a
Market Capitalization of a mere $40k before disappearing.
With a mere $5.3bn Market Capitalization today, we cannot expect Virtual Currencies to really
disrupt the traditional system in the following years. However, we are convinced that these
currencies will mark the start of a new era, in which technology as a currency will gradually take
its place in the traditional payment environment. As they are putting banks under pressure –
offering an alternative for (instant) payments and showing new technologies like Blockchain –
Banks and Fintechs will need to look towards the virtual alternative and decide how to position
themselves in order to avoid missing the boat of the (mid/long term) future of payments.
Meanwhile, the EBA and other regulators worldwide will first need to seek to implement the PSD2
regulation and set up a frame for Instant Payments.

Banking scams

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned
or held by a financial institution, or to obtain money from depositors by fraudulently posing as a
bank or other financial institution.There are different kinds of bank fraud for example, Accounting
fraud, Bill discounting fraud, Fraudulent loans.
Bank frauds destroy all the economic development and cause financial problems in the country. Big
defaulters like Vijay Mallya, Nirav Modi, Mehul Choksi usurp thousands of crores which not only
add to sharp increase in the quantum of Non-Performing Assets (NPAs) but reduce off sizable funds
that could have otherwise been used for economic well-being of thousands of poor willing to
become entrepreneurs with banks’ help and plan to start up their small businesses.
A survey by FIS, a financial services technology provider, showed that 18% of Indians suffered from
an online banking fraud. This was a higher percentage than any other country. In comparison, only
8% of people from Germany reported a fraud followed by 6% in the UK. According to Reserve Bank
of India reports, during the past five years more than 23,000 cases of fraud involving Rs. 1 lakh
crore have been reported.
In one year only, from April 2017, to March 1, 2018, Number of Bank fraud cases has gone up to
5,152 from 5,000 in 2016-17. Not only high, but the highest ever amount of Rs 28,459 crore is
involved in the bank fraud cases reported during April 2017 to March 2018. There were 5,076 Bank
fraud cases involving Rs 23,933 crore in 2016-17.
Top Banking fraud cases are of over Rs 13,000-crore fraud in the Punjab National Bank (PNB)
allegedly committed by diamantaire Nirav Modi and his uncle Mehul Choksi, the promoter of
Gitanjali Gems.
Vijay Mallya the Chairman of Kingfisher, United Breweries and many other companies has allegedly
routed Rs. 9,000 crore (US$1.3 billion) in loans from 17 Indian Banks and has run away and is still
at large.
Most of the big corporates who have committed fraud to the tune of thousands of crores are shying
away from coming back and to repay the money as they are aware that the punishment by law will
still be there even if they repay.
Indian Law or the Indian Government has no way to award softer punishment even if these
defaulters repay the amount in full. Accordingly, it is more important to prevent a bank fraud than
to run after it when it is done. With the existing rules and laid down procedures most of banking
frauds can be prevented, in case they are meticulously followed, and bank staff is not pressurized to
sanction the loan.
Former RBI governor Raghuram Rajan writes in his book, I Do What I Do: “Today, a variety of
authorities…monitor the performance of public sector banks… It is important that we streamline
and reduce the overlaps between the jurisdictions of the authorities and specify clear triggers or
situations where one authority’s oversight is invoked.”

The banking system of any country comprises of the small savings of the people. When a large
number of people deposit the money into banks, it becomes the huge amount in the hands of the
banks. Commercial Banks lends this money to individuals, traders and institutions and earns
profits in the form of interest. But when these lenders do not return this amount to the banks it
becomes the Non Performing Assets (NPA) to the banks which further creates threat to the
existence of the banks.

Neerav Modi Bank scam;

This bank scam is being called the biggest scam (Rs 11,400 crore) in the banking sector of India.
The main accused of the scandal is billionaire jeweller Nirav Modi and his uncle Mehul Surakshi
(owner of Gitanjali James). Both of them had received "Letter of Undertaking" from the consent
of the employees of PNB’s Mumbai branch and withdrawn the funds from the foreign banks on
the guarantee of Punjab National Bank. However, the Enforcement Directorate has seized assets
of Nirav worth over Rs 5870 crore.
Bank Scam by Vijay Mallya
Mallya's Kingfisher Airlines had borrowed Rs 9,432 crore from 13 banks till February 2018.
The State Bank of India was the biggest lender with 1600 cr. followed by the PNB 800 cr, IDBI
650 cr and Bank of Baroda lend 550 cr.
Allahabad Bank Scam:
Kolkata-based Allahabad Bank has said it has an exposure of ₹2,363 crore in the PNB fraud
case.However, Allahabad Bank stressed that it is sure about the recovery of the payment as the
exposure was fully secured by Letter of Undertaking (LoU) documents.“The bank, through our
overseas branch at Hong Kong, has been taking exposure with Punjab National Bank as
counter-party under various Letters of Undertakings issued through authenticated SWIFT
message”.

How this scam taken Place:

SWIFT stands for the "Society for
Worldwide Interbank Financial
Telecommunications". It is a messaging
network that financial institutions use
to securely transmit information and
instructions through a standardized
system of codes.
To do the scam in the Allahabad bank;
the SWIFT technique is misused by the
internal employees of the Allahabad bank. The internal banking system of the Allahabad bank was
not attached to the SWIFT that is why the transactions were not mentioned in the accounting book
of the Allahabad bank. That is why there was no transaction record found between the PNB and
Nirav Modi.
Rotomac Pen Scam;
The Promoter of Rotomac pen Vikram Kothari, allegedly fraudulently cheated Rs. 3,695 crore
with seven banks. Kothari has misappropriated loans worth Rs 2,919 crore from 7 banks and
the total outstanding amount, including interest on him, is Rs. 3,695 crore. The CBI has arrested
managing director of Rotomac Global Pvt Ltd Vikram Kothari.
The banks whose money is trapped in this scam are;
This scam is related to the biggest Private Sector Bank of the country i.e. SBI leading the
consortium of 14 public and private sector. The principle loan is about Rs. 824 crore, adding
the interest due would indicate a loss of more than Rs 1,000 crore to the banks.
 The main accused in this scam is Kanishka Gold Pvt. This company did not pay a loan of Rs. 824
crore, which has been converted into "NPA". The CBI has registered a case against Chennai-
based company Kanishka Gold and ED has started investigating the fraud. The director of this
company Bhupendra Kumar Jain and his wife Neeta Jain have fled the country.

ANTI MONEY LAUNDERING

The interest rate charged by banks to their largest, most secure, and most creditworthy
customers on short-term loans. This rate is used as a guide for computing interest rates for
other borrowers. See also London Interbank Offered Rate. Also called prime rate.
“anti-money laundering”

over the past several decades, money laundering has become an increasingly prevalent issue.
Both financial institutions and governments are constantly looking for new ways to fight money
launderers, and several anti-money laundering policies have been put in place to help this effort.
The term “anti-money laundering” specifically refers to all policies and pieces of legislation that
force financial institutions to proactively monitor their clients in order to prevent money
laundering and corruption. These laws also require both that financial institutions report
any financial crimes they find and that they do everything possible to stop them.
Anti-money laundering laws entered the global arena soon after the Financial Action Task
Force was created. The FATF was responsible for the creation of most anti-money laundering
standards, and it made a framework for countries to follow. After putting this framework into
effect, the FATF then began to systematically identify countries that did not have proper
legislation regarding money laundering. This “name and shame” tactic helped motivate countries
to alter their legislation and start properly enforcing the policies that were in already place.
Currently, the FATF counts 37 member countries.
Given that financial institutions play such a pivotal role in the world of financial crime, it is
important that they are properly trained on how to identify and handle money laundering.
Almost every bank employee receives training in anti-money laundering, and all of them are
legally required to report any suspicious activity. Additionally, new anti-money laundering
software increasingly used to help detect potential criminal activity that bank employees may
not notice.
Although financial institutions are obliged to follow anti-money laundering regulations, this does
not necessarily mean that they agree with them. Recently, many banks have become vocal about
their dislike of anti-money laundering policies and their belief that these policies are both costly
and ineffective. Every year in Europe and America alone, millions of dollars are used in an
attempt to regulate and stop money laundering. But many are starting to believe that the anti-
money laundering systems currently in place are largely ineffective and that the amount of
money we spend on them is not worth their questionable accomplishments.
In addition to the FATF, the United Nations Office on Drugs and Crime also proactively tries to
identify and stop money laundering. This office has an informative website that provides facts
and details about money laundering, as well as how it can be spotted and prevented. The UN
Office on Drugs and Crime also provides software that can be used to help prevent financial
crime, collect data, and perform analysis.
Lastly, the World Bank also provides information on its website about money laundering, as well
as offering a plethora of advice to help both governments and private enterprises end the money
laundering epidemic.

Plastic money

Plastic money is a term that is used predominantly in reference to the hard plastic cards we use
everyday in place of actual bank notes. They can come in many different forms such as cash
cards, credit cards, debit cards, pre-paid cash cards and store cards.

Cash Cards - A card that will allow you to withdraw money directly from your bank via an
Authorised Teller Machine (ATM) but it will not allow the holder to purchase anything directly
with it.

Credit Cards - Again this card will permit the card holder to withdraw cash from an ATM, and a
credit card will allow the user to purchase goods and services directly, but unlike a Cash Card the
money is basically a high interest loan to the card holder, although the card holder can avoid any
interest charges by paying the balance off in full each month.

Debit Cards - This type of card will directly debit money from your bank account, and can
directly be used to purchase goods and services. While there is no official credit facility with
debit cards per se, as it is linked to the bank account the limit is the limit of what is in the
account, for instance if an overdraft facility is available then the limit will be the extent of the
overdraft.

Pre-paid Cash Cards - As the name suggests the user will add credit to the card themselves, and
will not exceed that amount. These are usually re-useable in that they can be 'topped up'
however some cards, usually marketed as Gift Cards are not re-useable and once the credit has
been spent they are disposed of.
 Store Cards - These are similar in concept to the Credit Card model, in that the idea is to
purchase something in store and be billed for it at the end of the month. These cards can be
charged at a very high interest rate and can are limited in the places they can be used, sometimes
as far as only the store brand that issued it.
Technology has changed the way we deal with money giving us more convenience and easy
access to funds from anywhere. It all started with a simple credit card that allowed you to make
purchases today and pay later.Further, technological advancements lead to a new trend where
most banks gave you one ATM card or debit card which can be used for withdrawing money as
well as for making purchases or payments – offline as well as online.

However, plastic money has its share of issues that one must be careful about. Plastic money
definitely provides an alternative in some cases and compliments cash as a medium.

Since he may require a lot of cash for inter-city travel which can span a few days or weeks he
preferred to use his debit card or credit cards.

For instance he could use his card to pay for hotel stays where cards were commonly accepted.
Similarly for travel he could book tickets online, while for food he had to rely on cash.

However, with his debit card he could withdraw cash whenever required which made his life
easier. Even if he forgets to carry cash he can use his debit card to withdraw funds whether
required.

Advantages of Plastic Money

There are several advantages of plastic money as seen in the above illustration. The advantages
include

1. Eliminates the need for carrying huge cash: This eliminates the need for carrying huge load of
cash which is risky and inconvenient too.

2. Risk of Loss or Theft minimized: In case of cash there is a high risk of losing cash and a chance of
cash getting stolen. However, in case of debit/credit card you can report the matter to the bank
and block the card to avoid misuse.

3. Anytime/Anywhere Access Using cards you have the unique advantage and convenience of using
it anywhere in the country or even abroad.

4. Credit Facility: In case of credit card you have the option of buying on credit or paying later.
Although the charges are high, it helps you in case of emergencies and contingencies.
5. Online Payments: You can use cards for online payments, fund transfers and various other
transactions.

These are the key benefits which I can easily remember, but there could be various other good
features too that are specific to certain cards.

Disadvantages of Plastic Money

So far I’ve been sounding like a nice, pleasant Bank Executive who is convincing you to open an
account. Please note a few points before we look at the disadvantages of plastic money

 Cards/plastic money is not a complete replacement for cash

 Use of cards can also be risky in some cases

Note: I’m not saying that cards are not useful because of these drawbacks. The disadvantages are
just to make you aware of any risks, threats, etc so that you can use it carefully.

Some of the drawbacks or risk related to cards are

1. Non-Acceptance at Small Retail Outlets

Unless you are a person who shops only in supermarkets and hypermarkets you will be forced to
use cash

2. Cannot be used for all daily needs

You cannot pay your milkman, servant, paper wala (newspaper guy), etc by card.

3. Loss & Misuse

Once a card is lost you have to immediately report it and get the card blocked to avoid misuse.
Sometimes when you are not aware that you lost the card….the chances of misuse is higher.

Mr. Dev, who was on a vacation returned home after 10 days. He was not aware of his card
(which he lost during the trip). One fine day when he checked his bank account he found that
Rs.75,000 worth of purchases have been made on his credit card. Too late. But this case is a little
old.Today lot of checks and balances have been put in place. For instance for debit card the
customer has to key in the PIN for offline purchases, and additional passwords/authentication
for online transactions. Even then taking precautions is absolutely necessary.

4. Low Value Transactions As discussed above already there are cases where small and
medium sized retailers don’t accept cards for low value transactions (say less than Rs.200 or
other criteria). You may have noticed this even in case of outlets like petrol bunks or restaurants.
5. Service Charges
In some cases the outlets charge additional service charges for cards. So this can be another burden
on your pocket.

6. Damage to Card
Sometimes the card’s magnetic strip gets damaged or scratches or cuts can render the card unusable.
So keeping it safe and secure is very important.

7. Carrying or Keeping the Card

Keeping the card and cash in the wallet together is like “inviting trouble”. This is the way everyone
(including me) used to carry cash and cards. But this means once you lose your wallet you lose
everything.

So here the card doesn’t come to your rescue after losing cash. The best practice is to keep cash and
cards separately so that if you lose one you have the other to bank upon.

By the way, nowadays I don’t carry cards in my wallet. Its mostly in the bag or sometimes in a
different pocket. You can try this or other methods but ensure that you don’t keep everything in one
place and lose it all.

Now that we have a clear idea of some of the drawbacks of credit and debit cards lets also look at
some key points on how to strike a balance between use of cash, cards and control your spending
habits.

8. Spending Habits & Other Tips

Whether you use cash or cards, having a control on your spending is very important. A few pointers
would be worth noting.

9. Impulsive Purchases
Don’t yield to impulsive purchases. Try to see what real benefit or value are you getting from the
purchase. If you can’t live without it you can postpone or keep the spending on hold.

10. Peer Pressure

Its okay to spend some money on entertainment, outing, fine dining, etc. once in a while (say once or
twice a month).

But if you do it every week on instance of your friend, colleague, etc you will have not savings every
month end. Your future financial planning is out of question if you live from pay cheque to pay
cheque.
So its time to become smart and avoid unnecessary wasteful expenditure. Sometimes you may have
to attend a few parties, dinner/lunch activities, etc but prioritize and attend only the ones which are
important and add value to you. For others you can say sorry and avoid or try to finish it over a
simple coffee.

11. Overuse of Cards

I find that people who are finding cards as a convenient medium try to use it everywhere – left, right
and center. Further, they have 3-4 cards which are used one after the other at different places. I
would advice them to have fewer transactions so that it is easier to keep a check on the transactions
every month and easier to pay the bill as well.

12. Special Offers, Discounts

Some people have this fancy and think that they are smart when they get special discounts on cards
at retail outlets.

Ha ha ha ha…… What a joke! Do you think the card company and the retail chains are so kind enough
to serve you at a discount. They want you to loosen your purse and spend more so that they can
laugh all the way to their bank.

13. Debt Trap

Overuse of credit cards and rolling over your balance is the shortest route to bankruptcy. Remember
that you have to pay your credit card in full. If you know what this means in letter and spirit you will
be careful while spending on your credit card. The interest rate on credit card roll over is as high as
3-4% every month which translates to 36%-48% every year.

14. Cash Management (Running to ATM often)

Most people particularly those who started their careers in the last 3-4 years have been more used to
cards than cash. They don’t carry much cash and don’t keep cash at home too.

This is absolutely disastrous. When someone at home has a medical emergency or has to buy
groceries or do some major repairs cash in hand is absolutely necessary. I’ve seen people who often
run to ATM when they want to purchase some groceries.

EXCHANGE RATE HISTORY

Exchange rate is simply value of a currency in terms of another currency. The buyers and sellers of
foreign currency includes the, brokers, students,, commercial banks, central banks, individual firms,
foreign exchange brokers etc. The system of exchange rate works through the facility provided by the
key players of the markets. The major functions of the foreign exchange include:
I. Transferring currency from one market to other where it is needed in the transactions.

II. Providing short-term credit to the importers, and thereby facilitating the smooth flow of goods
and services between the countries.

III. Stabilizing the foreign exchange rate through spot and forward market.

Historical Background
Since Independence, the exchange rate system in India has transited from a fixed exchange rate
regime where the Indian rupee was pegged to the pound sterling on account of historic links with
Britain to a basket-peg during the 1970s and 1980s and eventually to the present form of market-
determined exchange rate regime since March 1993. The evolution of exchange management is
discussed below:

Par Value System (1947-1971): After gaining Independence, India followed the par value system of
the IMF whereby the rupee's external par value was fixed at 4.15 grains of fine gold.

Pegged Regime (1971-1992): India pegged its currency to the US dollar (from August 1971 to
December 1991) and to the pound sterling (from December 1971 to September 1975).

The Period Since 1991: A two-step downward adjustment of 18-19 per cent in the exchange rate of
the Indian rupee was made on July 1 and 3, 1991.

Liberalised Exchange Rate Management System: The Finance Minister announced the liberalised
exchange rate management system (LERMS) in the Budget for 1992- 93. This system introduced
partial convertibility of rupee. Under this system, a dual exchange rate was fixed under which 40 per
cent of foreign exchange earnings were to be surrendered at the official exchange rate while the
remaining 60 per cent were to be converted at a market-determined rate.
INTERNET BANKING

Online banking, also known as internet banking, is an electronic payment system that enables
customers of a bank or other financial institution to conduct a range of financial transactions through
the financial institution's website. The online banking system will typically connect to or be part of
the core banking system operated by a bank and is in contrast to branch banking which was the
traditional way customers accessed banking services. Some banks operate as a "direct bank" (or
“virtual bank”), where they rely completely on internet banking.
Internet banking software provides personal and corporate banking services offering features
such as viewing account balances, obtaining statements, checking recent transaction and making
payments.

What is Internet Banking?

Internet banking is the system that provides the facility to the customer to conduct the financial
and non-financial transactions from his net banking account. The user can transfer funds from his
account to other accounts of the same bank/different bank using a website or an online
application. The customer uses a resource and a medium to conduct financial transactions. The
resource that a customer uses might be an electronic device like a computer, a laptop, or a mobile
phone. The internet is the medium that makes the technology possible. The facility of internet
banking is provided through banks and the customer must be an account holder with any bank to
get the facility available for him/her.

Features of Internet Banking

The customer using this facility can conduct transactional and non-transactional tasks including:

 The customer can view account statements.

 The customer can check the history of the transactions for a given period by the concerned bank.

 Bank, statements, various types of forms, applications can be downloaded.

 The customer can transfer funds, pay any kind of bill, recharge mobiles, DTH connections, etc.

 The customer can buy and sell on e-commerce platforms.

 The customer can invest and conduct trade.

 The customer can book transport, travel packages, and medical packages.

ADVANTAGES OF INTERNET BANKING

 The customers get permanent access to his/her bank anytime and anywhere.
 Transactions are safe and highly secure.
 Immediate funds transfer helps the user in time of urgent need.
 It saves valuable time of the users.

Security of Internet Banking

The financial information of a customer is important. This is the reason a customer trusts
financial institutions. The financial institutions keep it on a high priority that the security of
customers’ accounts shouldn’t face a breach. The financial institutions are using two types of
security methods to make internet banking safe and secure:
 Use of PIN/TANs –Under this system, a PIN is used to login and TANs are used to conduct
transactions. TANs are one time passwords. TAN is sent to the customer via SMS on registered
mobile number that corresponds with the login user id. It is valid for a short time frame.

Internet banking is conducted using web browsers with SSL enabled websites, so encryption is not
an important issue. It also uses signature verification as a base. Under this method, the transactions
done by the customer are signed and encrypted digitally. The smart cards or any other memory
storable medium can be used to store keys for signature generation and encryption.

What is e-Banking?

The facility of e-banking provided by the banks to their customers uses the internet as a medium.
The services under this facility include funds transfer, payment of bills, opening bank accounts
online, and much more. There are mainly two methods to deliver e-banking to the customers:

1. Banks with physical presence offering electronic transaction

2. Virtual banks offering transaction services
Most of the banks have a physical presence and offer banking facility online. But, there are some
banks that don’t have any physical presence anywhere. They are virtual banks.
Features of e-Banking

ATMs – ATM is shot form of Automated Teller Machines. These machines are actually electronic
terminals which provide the customers to bank anytime. The ATM machines take inputs from the
ATM that the banks provide to its customers. To make use of ATM, the user must have a password.
Banks charge a nominal fee from the customers on every transaction made after crossing the
specified limit of free transactions, if the transaction is done from any other bank’s ATM machine.

Deposit and Withdraws (Direct) –This service under e-banking offers the customer a facility to
approve paycheques regularly to the account. The customer can give the bank an authority to
deduct funds from his/her account to pay bills, instalments of any kind, insurance payments, and
many more.

Pay by Phone Systems – This service allows the customer to contact his/her bank to request them
for any bill payment or to transfer funds to some other account.

Point-of-Sale Transfer Terminals – This service allows customers to pay for purchase through a
debit/credit card instantly.
Forms of e-Banking

 Internet Banking – The customer uses electronic devices like computer or mobile to conduct
transactions using the internet.
 ATM machines – The customers can withdraw cash, deposit cash, transfer funds using ATMs.

 E-cheque – The customer can transfer money using PayPal or other e-service providers.

Net banking allows for customers of financial institutions to perform transactions online through a
website interface. First introduced in 1994 by Stanford Federal Credit Union in 1994, net banking is
now available across the spectrum of the financial industry, from traditional institutions to banks
that exist only online. Net Banking
Net banking is changing the ways that people interact with financial institutions by enabling
transactions to be performed through personal computers and mobile devices. This access allows
customers to be in virtual contact with their banks on a regular basis, while minimizing the time
spent in a physical location. For example, smart-phone apps allow customers to make deposits by
taking pictures of the front and back of checks, which eliminates the need to go to a brick and
mortar location. Online banking also enables paperless bill paying, record keeping and money
transfers between accounts.

Advantages of Online Banking

Net banking allows customers to access their accounts around the clock. This facilitates real-time
account maintenance, which can be done while traveling, sitting at a coffee shop or after arriving
home late from work. Online access provides the convenience and time savings of being able to take
care of banking activities without needing to drive to a physical location and wait in line for a
teller's window to open. These advantages can also be applied to loan applications and assessing
interest rates on time deposits such as certificates of deposit.

Disadvantages on Net Banking

Some of the disadvantages of net banking depend on whether the institution has brick and mortar
locations or is online only. For banks that have only a virtual presence, disadvantages include the
absence of face-to-face conversations for customer service issues or special situations such as
applying for business loans. One example of this type of disadvantage would be a situation that
requires the customer to provide documentation, such as when overdraft fees are being contested.
Instead of being able to walk in a bank branch and present paperwork in person, the customer
would need to print out the documents and either fax or scan and email them.
 Ongoing Challenges
Online banking presents challenges to the financial industry as well as end users. For traditional
banks, the biggest challenge is keeping up with rapidly evolving technologies and alternative
banking options. Online banks present one form of competition, while digital payment systems such
as Apple Pay, Google Wallet and PayPal offer alternatives to traditional credit cards. Account
security presents challenges to both banks and end users. The financial industry has become one of
the primary targets of professional hackers, while the loss of a mobile device, for example, can
result in full access to an online bank account for the person who finds it.

What is an Internet Payment Gateway?

TSYS® offers a complete payment processing center that lets you accept credit and debit cards through
any internet connection — and no terminal is needed. With an internet payment gateway, you can
process credit card orders from your website in real time.

Our electronic payment gateway can be integrated with almost any website and virtual shopping cart. A
shopping cart allows your customers to pick and choose the various items they want to purchase from
your site, and at checkout the shopping cart totals the items, adds tax and shipping and collects the
customer’s shipping and billing information.

The payment gateway then captures the credit card transaction, encrypts the transaction information,
routes it to the credit card processor and then returns either an approval or decline notice.

More specifically, there are three things that an online payment gateway does when a customer makes a
purchase from your site using a credit card. These are: authorization, settling and reporting.

Authorization

Any purchase made with a credit or debit card via a payment gateway must first be authorized by the
credit card issuer. The payment gateway checks that the credit card is acceptable and creates a secure
link between you, your customer and your credit card processor. It also allows for fast and efficient
transaction processing, with an average response time of less than two seconds.

Settling

At the end of the day, the internet payment gateway groups all of your transactions together and sends
them to your bank in a single batch. This process, known as settling, passes the transaction to your bank
so that you receive payment.
TSYS offers clients an auto-batch close service that automatically settles transactions at the same time
every day. If there are no transactions pending in the batch, it is not closed and no batch fee is charged.
Once the funds settle, it normally takes two business days for you to see the funds deposited into your
bank account.

Reporting

All of your transactions are recorded and you can view, print or download them using payment gateway
reporting features. TSYS offers advanced search capabilities, including customizable reporting with up
to five user-defined fields.

Unlimited Users

With an internet payment gateway, an unlimited number of users can use the gateway at the same time.
(In contrast, with a terminal only one transaction can be processed at a time.)

Fraud Screening Tools

An internet payment gateway also offers fraud screening tools to reduce the risk of fraudulent
transactions. Fraud screening tools include: Address Verification Service (AVS), card code value (CCV)
and card verification value (CVV). An internet payment gateway also helps prevent fraud and reduces
your liability by storing the credit card transactions in the gateway (instead of on your website).

Other Benefits

Payment gateways provide you with a “virtual terminal” where you can manually enter transactions.
This is extremely useful for entering orders you take over the phone or through the mail.

Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has the monopoly for printing the currency notes in the country.
It has the sole right to issue currency notes of various denominations except one rupee note (which is
issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve System for
issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs.
200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies.
2. Banker to the Government–The second important function of the Reserve Bank is to act as the
Banker, Agent and Adviser to the Government of India and states. It performs all the banking functions
of the State and Central Government and it also tenders useful advice to the government on matters
related to economic and monetary policy. It also manages the public debt of the government.
3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial banks as
the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of
the country.
Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created by the
commercial banks. RBI uses two methods to control the extra flow of money in the economy. These
methods are quantitative and qualitative techniques to control and regulate the credit flow in the
country. When RBI observes that the economy has sufficient money supply and it may
cause inflationary situation in the country then it squeezes the money supply through its
tight monetary policy and vice versa.
5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates stable, the
Reserve Bank buys and sells the foreign currencies and also protects the country's foreign exchange
funds. RBI sells the foreign currency in the foreign
exchange market when its supply decreases in the
economy and vice-versa. Currently India has Foreign
Exchange Reserve of around US$ 360bn
6. Other Functions:-The Reserve Bank performs a
number of other developmental works. These works
include the function of clearing house arranging
credit for agriculture (which has been transferred to
NABARD) collecting and publishing the economic
data, buying and selling of Government securities
(gilt edge, treasury bills etc)and trade bills, giving
loans to the Government buying and selling of valuable commodities etc. It also acts as the
representative of Government in International Monetary Fund (I.M.F.) and represents the membership
of India.

PUBLIC SECTOR AND PRIVATW SECTOR BANKS

Public Sector banks and private sector banks - a definition Public Sector Banks: Public sector bank is
a bank in which the government holds a major portion of the shares. Say for example, SBI is public
sector bank, the government holding in this bank is 58.60%. Similarly PNB is a public sector bank,
the government holds a stake of 58.87%. Usually, in public sector banks, government holdings are
more than 50 per cent. Public sector banks are classified into two categories further- 1. Nationalised
Banks 2. State Bank and its Associates.
In nationalized banks the government control and regulates the functioning of the banking entity.
Some examples are SBI, PNB, BOB, OBC,Allahabad Bank etc. However, the government keeps
reducing the stake in PSU banks as and when they sell shares. So to that extent they can also become
minority shareholders in these banks.

Private Sector Banks: In these banks, most of the equity is owned by private bodies, corporations,
institutions or individuals rather than government. These banks are managed and controlled by
private promoters. Post-liberalisation in the 1990s, banks such as ICICI, HDFC which got the license
are the new age Private sector banks.
They owing to their improved service offerings give a tough competition to the players in the public
sector.
Of the total banking industry in India, Public sector banks constitute 72.9% share while the rest is
covered by private players. In terms of the number of banks, there are 27 public sector banks
whereas 22 private sector banks. As part of its differentiated banking regime, RBI, the apex banking
body, has given license to Payments Bank and Small Finance Banks or SFBs. This is an attempt to
boost the government's Financial Inclusion drive. As a result Airtel Payments Bank has come up and
Paytm Payments Bank Limited shall commence its operations in May 2017.

The major differences between a private and public sector bank

Shareholders a) In a public sector bank more than fifty percentage of the stake is held by the
Government. b) In a private sector majority of the stake owned to private shareholders, including
corporations and individuals.
Interest Rate Deposit interest rates offered by public sector banks are almost the same when
compared to private sector banks. However new-age banks such as the Bandhan Bank, Airtel Bank
are offering marginally better interest rates when compared with their counterparts In case of loans,
interest rates are marginally lower as for example SBI introduced a new home loan offering for its
women customers with an interest rate of 8.35% for a ticket size of upto Rs. 30 lakhs.
Fees & Service Private Sector Banks have made names in providing better service, however, they
charge for the extra services provided by them. Public sector banks fees and charges are less such as
on balance maintenance. A lot of public sector banks are still picking up in their service offerings.
Customer Base: Mostly public sector accounts are opened for government employees for their
salaries, fixed deposits, lockers etc. Their customer base is also relatively large when compared with
their peers in the private sector as they have been in the domain for long and have managed to gain
customer's confidence. Whereas private sector bank in India target company employees,for their
salary accounts, credit cards and net banking.
Comparing financial performance of public and private sector banks In terms of financial
performance, PSU banks lag behind. When comparing most of the parameters like non performing
assets or NPA and net interest margins, private sector banks tend to be much better placed. For
example, some of the private sector banks like HDFC Bank and IndusInd Bank have very low level of
non performing assets, as compared to the public sector or government owned banks. Some of the
banks like Bank of Baroda from the government or public sector have reported record losses. Losses
from the steel sector has aggravated the non performing assets of the public sector banks in India.
Share prices of these banks is also on a higher side.
On NPA front, to combat the issue of ballooning NPAs in the public sector banks, an ordinance to
amend the Banking Regulation Act has been cleared which empowers RBI with more powers such
that now banks are directed to take prompt action against bad debts. Another important factor is
that in terms of capital adequacy as well, public sector banks are lagging behind, their private sector
banking peers. Only recently the government of India decided to infuse fresh capital in some of the
government owned banks such that they are solvent and at the same time are fully compliant with
Basel III, global capital adequacy norms. The recapitalisation of the banks shall be done under the
Center's exclusive Indradhanush 2.0 scheme. An infusion to the tune of Rs. 10,000 crore is
earmarked for the sector in the F.Y 2017-18 and 2018-19. It is hoped that there would be some
recovery in the losses and the public sector banks would be able to compete with the private sector
banks in India.
Examples of private and public sector banks Some of the public and government sector banks
in the country include State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India,
Canara Bank, Andhra Bank, Syndicate Bank, Allahabad Bank, State Bank of Mysore, Bank of
Maharashtra etc. Some of the larger private sector banks in the country include ICICI Bank, HDFC
Bank, Yes Yank, IndusInd Bank, Kotak Mahindra Bank, Axis Bank and a host of others. There are also
smaller private sector banks like Karnataka Bank, Karur Vysya Bank, IDFC First Bank etc.

Types of Bank accounts in India:

Demand Deposits

Term Deposits

Non-Resident Deposits

Other Accounts

1. DEMAND DEPOSITS In these types of accounts, money is payable on demand. It includes current
accounts and savings accounts (CASA - Current Account and Savings Account)
(a) Savings account: A savings account is an interest-bearing account held at a bank. There are
mainly three types of saving accounts in Indian banks:

(i) Basic Savings Bank Deposit Accounts (BSBDA)

(ii) Basic Saving Bank Deposit Accounts Small scheme

(iii) Normal Saving Bank Account

(i) Basic Savings Bank Deposit Accounts (BSBDA):

These accounts are normal banking accounts available to all customers. There are no restrictions on
age and income criteria of the individual for opening BSBDA. Know Your Customer (KYC) norms are
applicable to these accounts. Jan Dhan accounts under Pradhan Mantri Jan Dhan Yojana comes under
this category.

(ii) Basic Saving Bank Deposit Accounts Small Scheme:

When a person doesn't possess any of the ‘official valid documents’, still he/she can open ‘small
accounts’ with banks. These accounts are valid for a period of 12 months initially which may be
extended by another 12 months if the person provides proof of having applied for an official valid
document.

(iii) Normal Saving Bank Account:

In this account, facilities and minimum balance vary from bank to bank. Generally, these accounts are
held by individuals like the salaried person, student etc.

(b) Current Account: A current account is an interest-free account held at a bank. People engaged in
business prefer these types of accounts. In this account, there is no restrictions on the number of
transactions permitted per day.For providing these facilities, banks take charges from the customers.
Banks also provide overdraft facility to the customers. Overdraft facility allows the company or
businessman to withdraw more money than what they have in their accounts with a promise of
repayment of money within a stipulated time frame.

2. TERM DEPOSITS

In these types of accounts, money is deposited for a specific period. In this, the interest rate given by
the bank is more than the saving account. Interest rate slightly higher for senior citizen (60+ years) It
includes Recurring Deposit and Fixed Deposits.
(a) Fixed Deposit In this type of deposits, banks accept deposits varying from 7 days to a maximum
of 10 years.Interest rate varies from bank to bank. Pre-withdrawal facility available with some
penalties.

(b) Recurring Deposis In this type of accounts, banks accept a fixed amount from a customer in fixed
installments in regular interval of time. Deposit period varies from six months to ten years.

3. NON-RESIDENT DEPOSIT These accounts are only held by non-resident Indians. Currently, there
are three types of Non-Resident Deposits accounts in India.

(a) Foreign currency Non-Resident (Banks): FCNR (B) These accounts are only opened and
maintained in the foreign currency. These accounts can be opened in the following currencies viz., US
dollar, Pound Sterling, Euro, Japanese Yen, Canadian Dollar and Australian Dollar. Only term deposit
is allowed. These accounts are non-taxable in India.

(b) Non-Resident External Rupee Account (NRE) These accounts are held in Indian rupee. Term
deposits and saving deposits are allowed. These accounts are also non-taxable in India.

(c) Non-Resident Ordinary Rupee Account (NRO): Anyone individual residing outside India is eligible
for NRO Account. If Indian resident migrated abroad can shift his account to this category. Term
deposits and saving deposits are allowed. These accounts are taxable in India

4. Other Accounts

(a) DEMAT Account DEMAT stands for Dematerialised Accounts. These accounts are used to transact
shares in electronic format.

(b) Nostro Account These accounts are held by Indian Banks in foreign Banks in foreign currency.
Example- Punjab National Bank has an account in Bank of America in dollars.

(i) Loro Account (a) These accounts are held by a third party bank, other than both banks who are
doing the transaction. (b) Example: If South Indian bank wants to do some transaction with Bank of
America in dollars in the USA. but he doesn't have the account in with Bank of America. State Bank of
India has an account with Bank of America in the USA in dollars. If State bank of India does the
transaction in the bank of America in the USA on behalf of South Indian bank. In this case, for SBI this
account is known as Nostro Account and for South Indian Bank it is known as Loro Account.
(c) Vostro Account These accounts are held by foreign banks in India in Indian Rupees.
Example: Bank of America has an account in Punjab National Bank in Indian Rupees.

(d) Escrow Account It is the temporary pass through an account held by third parties during the
transaction between two parties.

(e) GILT Account These accounts are maintained by investors with the Primary dealers for holding
their Government securities and Treasury bills in the Demat form.

"Know Your Customer" or KYC

These accounts are maintained by investors with the Primary dealers for holding their Government
securities and Treasury bills in the Demat form.
"Know Your Customer" or KYC is an important term used by businesses and refers to the process of
verification of the identity of the customers and clients either before or during the start of doing
business with them. Banks, digital payment companies or any kind of financial institutions are now
required by the RBI norms to have their customers KYC process completed before allowing them
complete access to all services.

KYC is done as a precaution against illegal activities like money laundering, bribery or corruption. It
helps the government and businesses keep track of such activities or suspect them beforehand. Apart
from being a legal requirement, completing the procedure will also help you gain access to many of
the financial company's premium products and get transactions done faster. The Government of
India has notified six documents as 'Officially Valid Documents (OVDs) for the purpose of producing
proof of identity. Even when you already submit the KYC documents once, the banks can ask again as
they are required to periodically update KYC records. This is a part of their ongoing due diligence on
bank accounts. The periodicity of such updation would vary from account to account or categories of
accounts depending on the bank's perception of risk. Opening bank account, mutual fund account,
bank locker, online investing in the mutual fund or gold your KYC should be updated with bank.

Here is a list of documents that can be submitted as proof of identity and address
Passport Driving Licence
Voters' Identity Card PAN Card Aadhaar Card issued by UIDAI NREGA Card You need to submit any
one of these documents as proof of identity. If these documents also contain your address details,
then it would be accepted as as 'proof of address'. If the document submitted by you for proof of
identity does not contain address details, then you will have to submit another officially valid
document which contains address details.
Address Proof Utility bills like telephone bill, electricity bill, gas bill, Passport Bank account
statement received by mail or courier along with signature verification by the Banker Ration card
Letter from employer, bank manager of scheduled commercial banks. Many banks and financial
institutions ask individuals to self attest before submitting and it should be accompanied by the
original documents for verification. If needed it should be property attested by entities authorized
for attesting documents. Notary public, gazetted officer, manager of scheduled commercial/co-
operative bank along with name date and seal.
Why Is KYC Important?
KYC is important because it helps the banker to ensure that the application and other details are real.
There have been instances of fraud and siphoning off of money from accounts. By ensuring the
identity of individuals, it would help to prevent fraud. The Know Your Customer practice has been in
vogue for many years now. It is a must and all individuals have to comply, if they wish to open
account. It is not possible to open a back account or account for mutual funds without KYC
compliance.
Who needs KYC?
Those who want to open a bank account, a demat and stock trading account, open FD in another
bank, would definitely need to comply with KYC requirements. You can not open any of the accounts
without the Know Your Customer Documents. In fact, it is now mandatory as per guidelines from the
Securities and Exchange Board of India to comply with these KYC norms before you open a demat
and trading account. Banks too will not open an account unless you have the same.
Definition of KYC
Know Your Customer is the process of verifying the identity of customer. The objective of KYC
guidelines is to prevent banks from being used, by criminal elements for money laundering activities.
It also enables banks to understand its customers and their financial dealings to serve them better
and manage its risks prudently
Importance of KYC
KYC is the means of identifying and verifying the identity of the customer through independent and
reliance source of documents, data or information. For the purpose of verifying the identity of: -
Individual customers, bank will obtain the customer’s identity information, address and recent
photograph. Similar information will also have to be provided for joint holders and mandate holders.
- Non-Individual customers – banks will obtain identification data to verify the legal status of the
entity, operating address, the authorized signatories and beneficial owners. Information is also
required on the nature of employment/business that the customer does or expects to undertake and
the purpose of opening of the account with the bank.
Purpose
The KYC guidelines have been put in place by the Reserve Bank of India in the context of the
recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering
(AML) standards and on Combating Financing of Terrorism (CFT). The Prevention of Money
Laundering Act requires banks, financial institutions and intermediaries to ensure that they follow
certain minimum standard of KYC and AML.
Periodicity of KYC refresh KYC is to be provided at the time of opening a new account as well as
refresh. It may be necessary to obtain additional information from existing customers based on the
conduct of the account, where there are changes to the account or at fixed periodic refresh cycles
based on the risk categorization of the customer. Similarly, an existing customer will be required to
provide fresh KYC for new account opening to adhere to the latest applicable KYC standards.
Contact Person in the bank As a customer of the bank, you will need to liaise with your Relationship
Manager or the bank staff that initiated your account opening.
Failure to provide KYC Banks are entitled to refuse to open an account or discontinue an existing
relationship if there is failure to meet the minimum KYC requirements. However, there is flexibility
provided to certain categories of customer who are unable to provide the necessary document at
the time of account opening.