Principles & Practices

FOR JAIIB
of Banking

Authored By :
Kanwal Kumar

2016
 PRINCIPLES AND PRACTICES OF BANKING
CONTENTS
Chapter No. Particulars Page No.
Module – I
1 Indian Financial System 1
2 Banking Regulation Act,1949 9
3 Reserve Bank of India Act, 1934 12
4 Capital Market 19
5 Mutual Fund 27
6 Insurance & IRDA 30
7 Factoring & Forfaiting 33
8 Capital Adequacy, BASEL I & BASEL II Norms 37
9 Alliance, Mergers & Consolidation 45
10 CIBIL, Fair Practice Code for Lenders, BCSBI & Ombudsman 47
11 Recent Developments in Indian Financial System 50
Module – II
12 Banker Customer Relationship 56
13 Special Customer Relationship 65
14 Ombudsman 68
15 Negotiable Instruments Act,1881 72
16 Type of Customers 84
17 Ancillary Services 91
18 CMS 93
19 Principles of Lending 95
20 Priority Sector Advances – Revised Guidelines 100
21 Agriculture – Scheme & Guidelines 105
22 MSME Finance 112
23 Govt. Sponsored Schemes 116
24 Self Help Groups (SHGs) 118
25 Credit Cards, Home Loan & Personal Loan 120
26 Documentation 126
27 Type of Charges 130
28 Type of Collaterals 135
29 Asset Classification 138
30 Financial Inclusion (BC & BF) 142
Module – III
31 Bank Computerization 146
32 Payment System & Electronic Banking 149
33 Data Communication Network & EFT System 154
34 Role of Technology Up-gradation & Its Impact on Banks 157
35 Security Considerations 159
Module – IV
36 Marketing – An Introduction 162
37 Social Media Marketing 165
38 Customer Behaviour 167
39 Pricing 169
40 Distribution 171
41 Channel Management 173
42 Promotion 174
43 Direct Selling Agents 176
44 MIS – Marketing Information System 178
 CHAPTER - 1
INDIAN FINANCIAL SYSTEM

Financial System plays important role in transformation of “Savings” into “Investments” and
“Consumption”. Financial Market consists of following four:

1. Money Market:- Call Money, Notice Money and Term Money, CD and CP
2. Debt Market :- Govt. Securities, Treasury Bills and Bonds
3. Forex Market :- Spot and Forward Contracts
4. Capital Market:- Shares and Debentures

APEX INSTITUTIONS

Institution Name Established Initial Ownership

in Capital
RBI Reserve Bank of 1-4-1935 5 crore 100% Central Govt.
India

Established under RBI Act, 1934

 Its main function is Note Issuance
 It exercises Credit Control over banks and FIs
 It frames and issues Monetary and Credit Policy
 It acts as Govt. banker
 It is Lender of last resort for banks.
 It acts as Store of Foreign exchange
 It manages Currency Chest
 It manages Payment System through NPCI
 It maintains external value of Rupee
 It acts as refinancing institution.
 Supervision and Surveillance are also its functions.

EXIM Bank Export Import 1-1-1982 500 crore 100% Central Govt.
Bank

Its functions are:

Financing Exports and Imports
 Refinancing Export/Import Financial Institutions
 Financing joint ventures in Foreign countries
 Arranging Trade Credit and External Commercial Borrowings
 Loans/ Lines of Credit to Foreign Govt., Overseas Buyer Credit
 Export Bills Rediscounting

NABARD National Bank 12-7-1982 1000 50% GOI

for Agriculture crore 50% RBI
and Rural
Development

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Its functions are:
 Productive and Investment Credit for Agriculture
 Refinance to eligible Institutions i.e. State Cooperative Banks, Land Development
Banks, Commercial Banks (only Long term) and other FIs approved by RBI.
 Coordinating the operation of Rural Credit agencies.
 Agent of Govt. and RBI in rural development.
 Training and Research
 Inspection of RRBs and Cooperative Banks (other than Primary Cooperative banks)
 Opening of branches of above said bank requires recommendation of NABARD.
NHB National Housing 9-7-1988 100 crore 100 % RBI (wholly
Bank owned subsidiary of
RBI)
 Established under NHB Act, 1987
 Promotion and Development of Specialized Housing Finance Institutions.
 Refinance to Hosing Finance Institutions and to SCBs.
 Guarantee and underwriting facilities to Housing Finance institutions.
 Promoting schemes for credit and subsidy for Housing finance to economically weaker
sector of society.
 Technical and administrative assistance to Housing Finance institutions.
SIDBI Small Industrial 2-4-1990 450 crore 72.15% by PSBs
Development Bank 21.43% by Insurance
of India Cos.
06.42% by FIs
Its Functions are: Established and working under SIDBI Act.
 Financing activities relating to Small Scale Sector
 Refinancing of Term Loans granted by banks, SFCs and SIDCs
 Discounting and Rediscounting of bills arising out of sale of machinery or Capital
equipment in small scale sector.
 Resource support to NBFCs, Electricity Boards, Factoring Companies and other
institutions concerned with small industries.
PSBs Public Sector 27 in number Includes Minimum 51% capital is
Banks SBI group owned by GOI
 SBI and 5 subsidiaries formed under SBI Act, 1955 and SBI (subsidiary Banks), Act,
1959. 5 Subsidiaries are being merged with SBI.
 19 Nationalized Banks formed under Banking Acquisition and Transfer of Undertakings
Act, 1970 (Amended in 1980).
 IDBI formed under IDBI Act.& Bhartiya Mahila Bank

New Set up as Body 53 in number Includes Paid up Capital and

Private Corporate Yes Bank, Reserve 300 crore
Sector Axis For new Banks, it is 500
Banks Bank, crore
HDFC etc.
 Shareholding or control in excess of 10% (now proposed 26%) in paid up capital of a
private bank by any single entity or group of entities require prior approval of RBI.
 Aggregate Foreign Investment from all sources (FDI, FII and NRI) cannot exceed 74% of
paid up capital
 For New Private banks, Requirement of minimum paid up capital is 5 billion rupees i.e.
500 crones.

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 Foreign Incorporate abroad 31 in number HSBC,
Banks Grandly,
Stan Chart
Bank etc.
 Controlled by RBI
 Governed by Banking Regulation Act
 25% of profit has to be deposited with RBI
 Can undertake normal Banking Business
 Financing of Foreign Trade.
RRBs Regional Rural 196 Authorize 50% by GOI
Banks established in d 5.00 35% by Sponsoring
Oct 1975 crore Bank
Now Paid up 15% by State Govt.
56 in number Capital
1.00 crore
 RRBS can undertake normal banking business as defined U/S 5(b) of BRA.
 These can grant loans to small enterprises for trade, commerce, industry and
Agriculture.
 Loans are refinanced by NABARD.
 Sponsoring bank also imparts training to employees of RRB.
Nos. of RRBs declined from 196 to 86 in 2009.
 CRR and SLR are same as in other banks
 RRBs are free to determine Rate of interest.

Cooperative One State and Cooperative Capital Control:

Credit Multi State Banks movement 1.00 lac Urban Cooperative
Institutions started in 2002 for Single Banks: SG and RBI
State Rural Cooperative
banks Banks:
SG and NABARD
Urban Cooperative Banks
 If operations lead to One State, these are governed by State Cooperative Society Act
 If operations cover more than 1 state, these are governed by Multi State Cooperative
Society Act, 2002.
Rural Cooperative Banks
3 Tier structure for short term credit is as under:
 Primary Agriculture Credit Societies at Village level
 District/Central Cooperative Banks at district level
 State Cooperative Bank at apex level.
2 tier long term credit structure is as under:
 Primary Cooperative Agriculture and Rural development Bank at district/block level.
 State Cooperative Agriculture and Rural Development Bank at apex level.

Local Area Public Limited 1996 Minimum Private Control with

Banks Companies Paid up promoter’s contribution,
Capital minimum 2.00 crore
Rs. 5.00
crore
 Area of Operation limited to maximum 3 geographically contiguous districts.

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  At present 4 local area banks are functioning – one each in Punjab, Gujarat.
Maharashtra and Andhra Pradesh.
 Promote rural and semi urban savings.
 Provide viable economic activities in local areas.

PAYMENT BANKS

On recommendations of Committee on Comprehensive Financial Services for Small Businesses

and Low Income Households, headed by Nachiket Mor, On 19 August 2015, the Reserve Bank
of India gave "in-principle" licences to eleven entities to launch payments banks:[10][11]

1. Aditya Birla Nuvo

2. Airtel M Commerce Services
3. Cholamandalam Distribution Services
4. Department of Posts
5. FINO PayTech
6. National Securities Depository
7. Reliance Industries
8. Dilip Shanghvi, Sun Pharmaceuticals
9. Vijay Shekhar Sharma, Paytm
10. Tech Mahindra
11. Vodafone M-Pesa

 The minimum capital requirement is Rs.100 crore.

 For the first five years, the stake of the promoter should be 40% minimum.
 Foreign share holding will be allowed in these banks as per the rules for FDI .
 The voting rights will be regulated by the Banking Regulation Act, 1949. The voting
right of any shareholder is capped at 10%, which can be raised to 26% by RBI
 The bank can accept utility bills.
 Initially, the deposits will be capped at 1,00,000 per customer, but it may be raised by the
RBI based on the performance of the bank.
 The bank cannot undertake lending activities. 25% of its branches must be in the
unbanked rural area.
 The banks will be licensed as payments banks under Section 22 of the Banking
Regulation Act, 1949 and will be registered as public limited company.

Primary Deal in Govt. Facilitate 21 in number Out of which 11 are Bank

Dealers securities Govt. Market PDS and 8 are NBFCs
Borrowings.
NBFCs  These are Non-Banking Financial Companies
 These deal in mainly – Leasing, Hire Purchase, Loans and Investment
 License is must from RBI
 NBFCs accept only Time Deposits.
DICGC Deposit Insurance Established Insurance Provides Guarantee
and Credit in 1962 Cover 1.00 lac Cover for loans granted
Guarantee Wholly per depositor by banks.
Corporation owned by per bank.

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 RBI Insurance
Premium @ 10
paisa per
Rs.100 p.a.
ECGC Export Credit and GOI Covers Provides Financial
Guarantee undertaking Commercial Guarantees to exporters.
Corporation and Political It also reimburses banks,
Risks of specific %age of loss
Exporters
CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises
 Under the scheme, loans offered to SMEs are collateral free.
 Under the scheme, loan up to 100 lacs is available
 Loans can be obtained for working capital requirements, purchase of
machines, expansion plans etc.
 Small businesses involved in retail trade are not eligible
 Annual Guarantee fee @1% is payable by the borrower.
 Claim is 85% for loans up to 5.00 lac and 75% for loans above 5.00 lac.
 Lock-in Period for lodging claim is 18 Months.
 Claim can be lodged within 2 years from the date of account becoming NPA or
within 2 years from expiry of lock-in-period, if the account becomes NPA
within lock-in-period.
CGFSEL Credit Guarantee Fund Scheme for Education Loans
 All Education loans in India and abroad up to 7.50 lac are covered.
 The loans should be collateral free and no security is required.
 No Guarantee has to be obtained in such loans
 Annual Guarantee fees is 0.50% which will be borne by the bank.
 Rate of Interest not less than MCLR
 In case of default, 75% claim will be settled by the trust.
FIs  These provide long term funds for Industry and Agriculture.
Financial  The institutions work under On-site and Offsite surveillance of RBI.
Institutions  They raise funds from Financial System and International Financial
Institutions.
 These are also called Development Financial Institutions.
All India level Development banks are SIDBI, IFCI Ltd., IRBI Ltd. Set up under
separate act of Parliament.
State Level FIs are SFCs (State Financial Corporations) , SIDCs (State Industrial
Development Corporations) and SDBs (Specialized Development Banks)
FIIs Foreign Institutional Investors
These are authorized Foreign Institutions registered with SEBI and are allowed to
invest in India. FIIs are entities established or incorporated outside India and
make proposals for investments in India. FIIs can invest in the stocks and
debentures of the Indian companies. In order to invest in the primary and
secondary capital markets in India, they have to venture through the Portfolio
Investment Scheme (PIS).
NPCI National Payments Corporation of India (NPCI) was incorporated in December
(National 2008 by RBI.
Payment
Corporatio Presently, there are ten core promoter banks (State Bank of India, Punjab
n of India) National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India,

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 ICICI Bank, HDFC Bank, Citibank and HSBC).

NPCI would function as a hub in all electronic retail payment systems which is
ever growing in terms of varieties of products, delivery channels, number of
service providers and diverse Technology solutions.

 The Institute of Development and Research in Banking Technology (IDRBT),

Hyderabad had been providing ATM switching service to banks in India
through National Financial Switch. NPCI has deputed its officials to IDRBT
Hyderabad and NPCI has taken over NFS (National Financial Switch)
operations from December 14, 2009.
 Immediate Payment Service (IMPS) offers an instant, 24X7, interbank
electronic fund transfer service through mobile phones. IMPS facilitate
customers to use mobile instruments as a channel for accessing their bank
accounts and put high interbank fund transfers in a secured manner with
immediate confirmation features. This facility is provided by NPCI through its
existing NFS switch.
 Automated Clearing House system is known as Electronic Clearing Service
(ECS) in India. NPCI proposes to build, implement and manage an
Automated Clearing House (ACH) system with built-in security features and
multiple level data validation facility accessible to all participants across the
country.
 NPCI has a mandate to create a domestic card scheme. The Brand name
finalized for the same is RuPay.
 NPCI is managing implementation of CTS (Cheque Truncation System).

Scheduled Banks
RBI includes name of a bank in its 2nd schedule, if the following conditions are fulfilled:

 Value of Paid up Capital and Reserves not less than 5.00 lac (Calculated as Realizable
Value of Assets less Outside Liabilities). It is Net Worth.
 Its affairs are not detrimental to the interest of depositors.
 It must be a State Cooperative Bank or Company as defined in Indian Company Act or
Institution notified by GOI in this regard or Corporation incorporated outside India.
 Urban Cooperative bank can now be included in 2nd schedule provided its DTL is
at least 750 crore, CRAR-12%, NPA not more than 5% and net profit in previous 3
years.

Scheduled Bank is eligible for Refinance/Financial support from RBI and is also subject to CRR
and SLR requirements.

Retail Banking Retail products fetch more business, more profits. These carry less risk and
low NPA level. It includes:
Retail Deposits: SB, RD, FD, CA, No frills accounts, Salary accounts, and
Pension accounts.
Retail Loans: Housing Loan, Vehicle Loans, Consumer Loan, Personal
Loan, Education Loans, Loans to traders, Crop Loans, Credit Card,

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 Education Loans (Normally up to 1.00 crore)
Retail Services: Lockers, Depository Services, Bank assurance.
Delivery channels for Retail Banking are ATM, IBS and IMPS etc.

As per latest directives of RBI, Single Deposit of 1.00 crore and above will
be called BULK DEPOSIT and not Wholesale deposit.
Wholesale It is also called Corporate Banking or Commercial Banking. It includes:
Banking Fund Based: TL, CC, STLs, Bills rediscounting, Export Credit and
Structured finance.
Non-Fund Based: Bank Guarantee, Letter of Credit and Bills Discounting.
Value Added Services: RTGS, CMS (Cash Management Service)
Corporate Salary accounts, Derivatives, Tax collection,
International Facilities for Exporters
Banking Pre-shipment Credit, Post-shipment credit, Export Bills Purchase,
Discounting and Negotiation, Rupee Loans against Export bills, Advising
and Confirming LC.
Facilities for Importers
Import collection Bill Service, Direct Import bills and settlement of payment,
Advance Payment to suppliers, Issue of LC, Buyers’ credit and Suppliers’
credit and Issuance of Bank Guarantees against 100% Cash margin.
Universal RH Khan Committee recommended the concept of Universal Banking. It
Banking implies that Banks will be Hub of all services including Merchant Banking,
International Banking, Sale of Gold, Insurance and Mutual funds to earn fee
based and non-fee based income.

Banks will also invest in securities besides sanctioning loans. This will
result into higher profits and channelizing of public deposits into Corporate.

Universal banking resulted into transformation of banking business and

banks started selling various products like Gold coins (purity 999.9 gold),
Insurance policies etc. ICICI Ltd. Was merged with ICICI Bank and IDBI
with IDBI bank in order to implement Universal Banking.

Under Universal Banking, banks are offering Demat services as depository

participants with NSDL or CDSL.
Narrow Banking Tarapore Committee suggested model of Narrow Banking according to
which banks will invest only in low-risk and risk free assets and maturity
period matching with liabilities so that there is no Asset Liability Mismatch.
Merchant It stands for provide various services relating to Capital Market and
Banking financing of Corporate sector. It includes as under:
1. Undertaking Share Issues (IPO/FPO etc.)
2. Project Counseling
3. Loan Syndication
4. Making arrangement for raising Capital from market
5. Raising funds though CP, zero coupon bands etc.
6. Portfolio management
7. OTC market operations
8. Mergers and amalgamation
ADRs (American ADRs are Receipts/Certificates issued by US Bank representing specified
Depository number of shares of non-US Companies. defined as under:
Receipts)  These are issued in capital market of USA alone.

7
  These represent securities of companies of other countries.
 These securities are traded in US market.
 The US Bank is depository in this case.
 ADR is the evidence of ownership of the underlying shares.
Unsponsored ADRs
It is the arrangement initiated by US brokers. US Depository banks create
such ADRs. The depository has to Register ADRs with SEC (Security
Exchange Commission).
Sponsored ADRs
Issuing Company initiates the process. It promotes the company’s ADRs in
the USA. It chooses single Depository bank. Registration with SEC is not
compulsory. However, unregistered ADRs are not listed in US exchanges.
GDRs – Global GDR is a Dollar denominated instrument with following features:
Depository 1. Traded in Stock exchanges of Europe.
Receipts 2. Represents shares of other countries.
3. Depository bank in Europe acquires these shares and issues
“Receipts” to investors.
4. GDRs do-not carry voting rights.
5. Dividend is paid in local currency and there is no exchange risk for
the issuing company.
6. Issuing Co. collects proceeds in foreign currency which can be used
locally for meeting Foreign exchange requirements of Import.
7. GDRS are normally listed on “Luxembourg Exchange “and traded in
OTC market London and private placement in USA.
8. It can be converted in underlying shares.
PNs Participatory Note is an Off-shore Derivative Instrument. These are like
(Participatory Contract Notes issued by FIIS to entities that want to invest in Indian Stock
Notes) market but do not want to register with SEBI. These Notes include details of
Scripts and expected returns. The client, if agrees, deposits amount and
shares are purchased by FIIs

FIIs cannot sell these PNs to NRIs, PIOs and OCBs (Overseas Corporate
Bodies).

Multi Commodity Exchange of India Ltd (MCX)

MCX is the first commodity exchange which deals on-line trading and Derivatives/Futures of
various commodities like Gold, Silver, ferrous and non-ferrous metals, crude oil, agri-based
commodities. It was established in Nov 2003 and operates within regulatory framework of
Forward Contracts (Regulation) Act, 1952. MCX offers a platform of Risk Management in the
commodity market. People can buy or sell commodities on-line in future without making
payment of whole lot. Only margin is deposited and more over Delivery is not must.

8
 CHAPTER - 2
THE BANKING REGULATION ACT, 1949
 An act to consolidate and amend the laws relating to banking
 Came in to force w.e.f.16.03.1949. The act was passed as “The Banking companies
Act, 1949” and later on the name changed to “The Banking Regulation Act, 1949, w.e.f.
01.03.1966.
 Extends to the whole country (made applicable to the J&K in 1956).
 The act is not applicable to primary agricultural credit societies, cooperative land
mortgage banks and non-agricultural primary credit societies.
 Salient provisions of the act are as under:-

Summary of salient provisions

Section Contains definition of Banking, Banking Company , secured loans or advances -
5 Banking means accepting for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order
or otherwise.

Banking Company means any company which transacts the business of banking in India

Secured loan or advance means a loan or advance made on the security of asset the
market value of which is not at any time less than the amount of such loan or advance,
and „unsecured loan or advance‟ means a loan or advance not secured.
Section Describes the forms of business in which a banking company may engage in addition to
6 the Banking Business.

Section Use of Word Banking: Banking company carrying on banking business in India to use at
7 least one word, bank, banker, banking, or banking company in its name.

Section Prohibition of trading: restricts/prohibits business like trading for goods etc.
8
Section Holding of Immovable Property (other than for own Use):
9 No Banking company shall hold any immovable property howsoever acquired except as is
acquired for its own use for a period exceeding 7 years from the date of acquisition. RBI
can further grant extension for a period not exceeding 5 years.

Section
11 Requirement as to minimum paid up Capital and Reserves required for a Scheduled
Bank (bank included in 2nd Schedule of RBI Act 1934).
 Domestic Banks – Min. – Rs. 5 lac (Rs.10 lac for business in Mumbai or
Kolkata)
 Foreign Banks - Min. - Rs.15 lac (Rs.20 lac for business in Mumbai or
Kolkata) (It is calculated as Value of All Assets minus Outside Liabilities)
 If place of business is one state – Rs. 1.00 lac for principal place business
PLUS 10000/- for additional place in same district or 20000/- for additional
place elsewhere (Maximum Rs. 500000/-).

Apart from this, Foreign banks are required to deposit at least 20% of profits for each year
with RBI in respect of business transacted through branches in India. (Presently – 25%)

9
Section Regulation of paid up capital, subscribed capital and authorized capital and voting
12 rights
Subscribed capital should not be less than ½ of its authorized capital
Paid up capital should not be less than ½ of its subscribed capital
(i.e. ratio of authorized capital, subscribed and paid up capital should be minimum 4:2:1)
No person shall have voting rights in excess of 10% of total voting rights of all the
shareholders.

Section Every banking company to create reserve fund and 20% of its profits should be
17 transferred to this fund before any dividend is declared. (RBI has directed the banks to
transfer not less than 25% of net profits to Reserve Funds). The appropriation of any sum
from the reserve fund or share premium account is to be reported to Reserve Bank, within
21 days from date of appropriation.

Section Cash Reserve: Non-scheduled banks to maintain 3% of the demand and time liabilities by
18 way of cash reserves with itself or by way of balance in a Current Account with RBI.

Section Permits bank to form subsidiary company for certain purposes (vide section 6)
19
Section No banking company shall hold shares in any company, whether as pledgee, mortgagee
19(2) or absolute owners of an amount exceeding 30% of its own paid up share capital +
reserves or 30% of the paid up share capital of that company whichever is less.

Section Restrictions on loans and advances:

20 Banks cannot grant loans against security of their own shares
Section Empowers the RBI to issue directives to banks to determine policy for advances
21
Section Rate of interest charged by banks shall not be reopened by any court on the ground that
21A the rate of interest charged by banks is excessive

Section Empowers RBI to issue license for opening a bank.

22
Section Empowers RBI to grant license for opening of branches. RBI requires banks to submit
23 request for new branches/ATMs/ Administrative offices once in a year.
Permission of RBI is valid for 1 year. For RRBs, application has to be routed through
NABARD.

No permission is required to open temporary branch for 30 days within in city.

Shifting of branch within same city/town of village does not require permission of RBI.

Section Statutory Liquidity Ratio--Every bank has to maintain liquid assets in form of cash, gold
24 & unencumbered approved securities at the close of any business which is minimum of
certain percentage (Presently 21.00%), of its total demand and time liabilities in INDIA as
on last Friday of the second preceding fortnight. There is no floor limit of SLR and it as per
RBI discretion, as against 25% earlier. However, maximum limit is 40%.

Section Return of unclaimed deposits (10 years and above) within 30 days of close of each
26 calendar year
Section Every bank to prepare its Balance Sheet as on last working day of March every year on
29 Form `A‟ and profit and loss a/c on Form `B‟ of the 3rd schedule of the Act.

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Section Balance Sheet should be got audited from qualified auditors
30(I)
Section To publish Balance Sheet and Auditors report within 6 months from the end of period to
31 which they refer.

Section Every bank has to submit 3 copies of Balance sheet to RBI within a period of 3 months,
32 which can be extended up to another period of 3 months (Maximum 6 months).
Section RBI can terminate any Chairman or Employee of the bank where it considers desirable to
36 do so.

Section Returning a paid instrument to a customer after keeping true copy.

45Z
Section Nomination Facility
45(ZA to
ZF)

Constitution of Banks
 All Public Sector Banks are Body Corporate formed under Special Statue
 Other banks are registered under Company Act, 1956
 Cooperative Societies and State Co-operative Banks are registered and
controlled by State Govt. under State Cooperative Society Act of each State.
 Other Cooperative Banks (having branches in more than 1 state) are established
under Multi State Cooperative Society Act, 2002. Registrar appointed by Central
Govt. is the authority to register and wind up.
 Cooperative Banks operating in Rural areas are controlled by State Govt. and
NABARD.
 Cooperative banks in Urban areas are controlled by State Govt. and RBI.

Assets in India

 Every Banking Co. has to maintain assets in India up to the amount not less
than 75% of DTL as on close of business day on last Friday every quarter.

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 CHAPTER - 3
RESERVE BANK OF INDIA ACT, 1934
 Established on 1st April, 1935, under RBI Act, 1934 on the recommendations of John
Hilton Young Commission (known as Royal Commission on Indian Currency & Finance)
 Nationalized on Jan. 1, 1949
 Paid up capital – Rs. 5 crore (100% owned by CG)
 Management – Managed by a Central Board of Directors – (one Governor, 4 Dy.
Governors & 15 other Directors) and 4 Local Boards (at Mumbai, Chennai, Kolkata &
New Delhi)
 Dr. Urjit Patel assumed charge as Governor after retirement of Raghuram
Rajan
 Bank of England is central bank of UK and Federal Reserve Bank is that of USA.

Functions:
A) Issuance of Currency (Section 22 of RBI Act)
Sole authority to issue currency notes of various denominations under signatures of
Governor (except One rupee note, which is issued by Central Govt. under Signature of
Finance Secretary). Issue Department of RBI undertakes the job.

B) Banker to the Government

RBI transacts Govt. business & manages debt U/s 20 of RBI Act (for Central Govt. & U/s
21-A (for State Govt.), advises Govt. on monetary policy matters, provides Ways and
Means advance (U/s 17(5) of RBI Act) to Govt. (Central / State) for meeting temporary
mismatch / shortfall in revenue Maximum for a period of 3 Months @ Repo Rate.

C) Banker’s Bank
RBI acts as a banker to the Scheduled banks and the lender of the last resort by
providing financial assistance by way of refinance / rediscounting (Sec 17 (2) & (3) and
Liquidity Adjustment Facility (injection of liquidity through repo auctions & absorption of
liquidity through reverse repo auctions).

D) Controller of Banks
Grants license to carry on banking business, issue directions, carries out inspection
(onsite as well as offsite) and exercises management control.

E) Controller of Credit
U/s 21 & 35A of Banking Regulations Act, RBI can fix interest rates (including Bank rate)
and also exercises selective credit controls in order to control inflation and money supply
for ensuring growth of economy and price stability.

Various methods used by RBI for this purpose are:

 Change in Cash Reserve Ratio, Statutory Liquidity Ratio
 Stipulation of margin on securities
 Directed credit guidelines
 Open market operations (Sale and purchase of securities).
 Repo, Reverse Repo and MSF.
(Annual Monetary & Credit Policy is issued by RBI once in a year with Bi-monthly
Reviews)

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F) Collection of Information
RBI collects information on borrowers enjoying credit limits up to Rs.10 lac on secured
basis & Rs. 5 lac on unsecured basis (u/s 45C) and shares this information with other
Banks (Sec. 45-D). It also collects information on BSR
(Basic Statistical Return); BSR-I – Part A: Containing particulars of borrowal a/cs
enjoying credit limits above Rs. 2 lac, Part B: aggregate figures of limits of Rs.2 lac and
less), - BSR-II (containing information on deposits with break up in to current, Savings
and term deposits) & also the information on suit filed accounts and willful defaulters.

G) Managing Payment System

Acts as a regulator of payment & settlement system, manages cheque clearing system
(introduced Magnetic Ink Character Recognition System (MICR), Cheque truncation
system (CTS), Electronic Clearing Service (ECS), National Electronic Fund Transfer
(NEFT), Real Time Gross Settlement (RTGS) system for faster cheque clearance /
settlement. NPCI (National Payment Corporation of India was set up to coordinate and
implement all payment systems in India.

H) Maintenance of value of Indian currency

RBI maintains and regulates foreign exchange transactions under the Foreign Exchange
Management Act (FEMA) through its Exchange Control Department.

I) Supervision of Financial System

Board for Financial Supervision (BFS) has been set up u/s 58 of RBI Act on
16.11.1994, with Governor, RBI as its ex-officio Chairman. Its functions include
empanelment and selection of statutory auditors and exercise of integrated supervision
over commercial banks. Financial Institutions & NBFCs and other para-banking financial
institutions through onsite inspection & off-site supervision through DSB Returns (eight
Returns, DSB-I is monthly return, DSB-VIII is daily return of structured liquidity) & other
returns are quarterly returns.

SALIENT PROVISIONS OF SOME IMPORTANT SECTIONS

Sec. 17 Defines various types of business which RBI may transact which include:
i. Accepting deposits of Central / State Governments free of interest
ii. Purchase Purchase/rediscount of Bills of Exchange from banks.
iii. Purchase/sale of Foreign Exchange to/from banks
iv. To give loans to banks, SFCs, etc.
v. To provide advances to Central/State Governments.
vi. To purchase/sale Government securities, etc.
Sec. 18 Grant of Emergency loan to banks on liberal terms
Sec. 19 Specifies business which RBI may not transact
Sec. 20 Banker to Govt.- Obligation of the Bank to transact Govt. business
Sec. 21 Confers right to transact govt. business in India
Sec.22 Exclusive right to issue bank notes.
Sec.24 Denomination of bank note may be maximum Rs.10,000/-. Central Govt. may direct
discontinuance or non-issuance to bank note of any denomination
Sec 26 Banks notes issued by RBI shall be Legal tender money and Guaranteed by Central
Government.

13
 Sec.28 RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter
of grace.
Sec. 29 Bank note exempted from stamp duty under Indian Stamp Act.
Sec.31 No Body other than RBI or Central Government is authorized to issue promissory note
payable to bearer on Demand. Similarly, except RBI and Central Government, no one is
authorized to draw/accept / make or issue Bills of Exchange payable to bearer on
demand (Exception: Cheques payable to bearer on demand can be drawn by anybody).
Sec.33 Assets of the Issue department shall consist of gold coins, gold bullion and foreign
securities which will not be less than Rs.200 cr. at any time, of which gold coin and bullion
will not be less than Rs.115 crore.
Sec. 42 Maintenance of CRR by scheduled banks.
Sec. 45C Power to call for credit information from banks.
Sec. 48 Exemption to RBI from paying income tax and super tax
Sec. 49 Publication of Bank Rate. Standard rate at which RBI is prepared to buy or rediscount
bills of exchange or other commercial papers eligible for purchase under this Act.
Sec. 58 RBI’s Central Board is empowered to make regulations consistent with the Act.

CASH RESERVE RATIO

With a view to monitoring compliance of maintenance of statutory reserve requirements viz.

Cash Reserve Ratio and Statutory Liquidity Ratio by the Scheduled Commercial Banks
(SCBs), the Reserve Bank of India has prescribed statutory returns i.e. Form A return (for
CRR) under Section 42 (2) of the RBI Act, 1934 and Form VIII return (for SLR) under
Section 24 of the Banking Regulation Act, 1949. These guidelines are applicable to all
Scheduled Commercial Banks excluding Regional Rural Banks.

The Reserve Bank In terms of Section 42 (1) of the Reserve Bank of India Act, 1934 having
regard to the needs of securing the monetary stability in the country, prescribes the
CRR for Scheduled Commercial Banks (SCBs) without any floor or ceiling rate.

CRR is 4.00 % at present w.e.f. 9.2.2013

(Same rate for RRBs)

No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR In
view of the amendment carried out to RBI Act 1934, omitting sub-section (1B) of section 42, the
Reserve Bank of India does not pay any interest on the CRR balances maintained by
Scheduled Commercial Banks with effect from the fortnight beginning March 31, 2007.
Minimum Daily CRR balance on average basis be maintained at 95% (Revised 90%).

Fortnightly Return in Form A

Under Section 42 (2) of RBI Act, 1934, all SCBs are required to submit to RBI a provisional
return in Form 'A' within 7 days from the expiry of the relevant fortnight. The final Form 'A' is
required to be sent to RBI within 20 days from expiry of the relevant fortnight.

For reporting in Form 'A' return, banks should convert their overseas foreign currency
assets and bank credit in India in foreign currency in four major currencies viz., US
dollar, GBP, Japanese Yen and Euro into rupees at the Foreign Exchange Dealers
14
 Association of India's (FEDAI) noon mean rate on reporting Friday.

STATUTORY LIQUIDITY RATIO (SLR)

Consequent upon amendment to the Section 24 of the Banking Regulation Act, 1949 , the
Reserve Bank can prescribe the Statutory Liquidity Ratio (SLR) for SCB in
specified assets. The value of such assets of a SCB shall not be less than such
percentage not exceeding 40 per cent of its total demand and time liabilities in India as
on the last Friday of the second preceding fortnight as the Reserve Bank may, by
notification in the Official Gazette, specify from time to time.
SLR is 20.75% of DTL at present
Reserve Bank has decided that all SCBs shall continue to maintain a uniform SLR of 21.5 per
cent on their total net demand and time liabilities (NDTL). The SLR shall be reduced in
phases as under:
With Effect from 2.4.16----------------21.25%
With Effect from 9.7.16----------------21.00%
With Effect from 1.10.16--------------20.75%
With Effect from 7.1.17----------------20.50%
a. in cash, or
b. in gold valued at a price not exceeding the current market price, or
c. in unencumbered investment in the following instruments which will be referred to
as “SLR securities":
I. Treasury Bills of the Government of India;
II. Existing Dated securities of the Government of India with SLR Status
III. State Development Loans (SDLs) of the State Governments issued from time
to time under their market borrowing programme; and
IV. Any other instrument as may be notified by the Reserve Bank of India.
The proposed cash management bill will be treated as Government of India Treasury Bill and
accordingly shall be treated as SLR securities.
CRR & SLR AT A GLANCE
CRR SLR
Statutory basis Sec. 42 (1) of RBI Act, 1934 Sec. 24 (2.a) of Banking Regulation Act, 1949
Min. and Max. % to RBI Discretion Minimum :RBI discretion
NDTL Maximum :40%
Rate 4.00 % 20.75%
How maintained Cash balance with RBI Cash in hand, Gold/ investment in approved
Govt. Securities / net Bank balance with
scheduled commercial banks
Basis for %age of NDTL on fortnightly %age of NDTL on daily basis on last Friday of
computation average basis. (Min. 90% of average 2nd preceding fortnight
balance to be maintained on daily
basis)
Interest No interest payable w.e.f. 31.3.2007 According to class of securities in which
investment is made
Penal interest for 3% p.a. above bank rate for Ist day 3% p.a. above bank rate- 1st day
default – 5% p.a. above bank rate for 5% p.a. above bank rate- 2nd day onwards
remaining days.
Return to RBI Form A (fortnightly) Form VIII (by 20th every month)

15
OTHER IMPORTANT GUIDELINES

 Bank cannot declare dividend if CRAR is less than 9% of RWAs or Net NPAs
are more than 7%.
 There is no restriction on Share-holding. However Voting Rights are restricted
up to 1% for PSBs and 10% for Private Banks.(Revised 10% for PSBs and 26%
for Private Banks)
 Dividend Payout Ratio should not exceed 40%. Out of current profits.
 No bank can allow Commission/brokerage on sale of shares exceeding 2-1/2%
of paid up value of shares.
 Banks cannot issue FD in name of Chit Fund Companies.
 Banks cannot make loan against FD of other banks.
 Banks cannot make loan against security of own shares or partly paid shares of
a Company.
 Banks cannot grant loan against Certificate of Deposits or Money Market Mutual
Funds.
 Banks cannot make loans to its own directors or firms in which Director is
Manager/partner/employee/guarantor (with certain exemptions).
 Banks cannot make loan to spouse/children of directors except their earning is
separate.
 Banks cannot make additional loans to Willful defaulters for a period of 5 years.
 Banks’ aggregate investment in Shares/CDs/Bonds should not exceed limit of
40% of bank’s Net Owned Funds as at end of previous year.
 RBI keeps Cash of CG free of interest and also accepts no remuneration for
conducting ordinary CG business. However, Commission is charged for
managing public debts.
 RBI supervises the banks through “Board of Financial Supervision”
 Minimum Paid up Capital Requirement for New Private Bank is Rs. 500 Crores.
 At least 51% Directors should be in Specialized Fields.
 Directors should not be a partner of a firm or have substantial interest in a
Company/Firm which carries on Trade or Business. Substantial Interest in a
Company means Holding of beneficial interest by individual or spouse of minor
child exceeding 5.00 lac or 10% of Paid up Capital of a Company.
 Period of Office for a Director is 8 years whereas that of a CMD is 5 years.
 Every Bank must have Assets in India not less than 75% of NDTL.

LATEST AMENDMENTS OF BANKING LAWS AMENDMENT BILL – DEC 2012

 Paid up Capital can be raised by banks through Public Issue, Right Issue and
Bonus Issue.
 Banks can acquire Equity and Preference Shares with Voting Rights
 Revised Voting rights: This Bill also enables the government to raise voting
rights in state banks such as the State Bank of India to 10 (ten) per cent from the
current1(one) per cent, acceding partially to foreign investors’ demands to have
more say in Indian banking.

16
Unclaimed Bank Accounts
 The Bill gives power to RBI to transfer the money lying in the bank
account which is not operated by the account holder for more than 10
years, to the “Depositor Education and Awareness Fund”.
 But in a case where the account holder returns then, the account holder
can claim this money and that bank shall be bound to pay him interest as
well.

Authorized Capital of Nationalized Banks

This bill aims to address the issue of capital raising capacity of banks in India by
enabling nationalized banks to raise capital by issue of preference shares or
rights issue or issue of bonus shares. It would also enable them to increase or
decrease the authorized capital with approval from the Government and RBI
without being limited by the ceiling of a maximum of Rs. 3000 crore.
Voting rights (%)
Before After
Private Banks 10% 26%
Public Sector Banks 1% 10%

Acquisition of Shares and Voting Rights

Prior approval of RBI shall be needed for acquisition of 5% or more of shares or
voting rights in a banking company by any person. The RBI shall be empowered
to impose such conditions as it deems fit in this regard..

Regulating Cooperative Societies:

A license from the RBI is to be taken by primary cooperative societies to carry
on the business of banking.

LAF (Liquidity Adjustment Facility)

Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in
order to Inject Liquidity. Presently, Govt. securities are dealt with. All Repo
transactions are routed through CCIL. RBI has permitted Repo in Corporate
securities for only “AA” rated companies. But the market is yet to be activated.

There will now be a cap of 0.5% of NDTL (instead of 1% previously)

Under Reverse Repo, RBI sells securities with a commitment to buy at a later
date in order to Contain Liquidity.
Repo and Reverse Repo transactions are generally conducted for Overnight
period through Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and its
multiples. Margin is normally 5%.

 Maximum Cap has been increased to 0.75% for Term Repo of 7 days and 14
days; and
 Maximum Cap has been reduced to 0.25% for Overnight Repo

MSF (Marginal Standing Facility)

The banks will use Marginal Standing Facility to borrow overnight money from RBI only
when they have exhausted all other existing channels like Collateralized Borrowing and

17
 Lending Obligations (CBLO) and Liquidity Adjustment Facility (LAF). The features of the
scheme are as under:
 The eligible entities can avail overnight, up to 2% of their respective NDTL
nd
outstanding at the end of the 2 preceding fortnight.
 For the intervening holidays, the MSF facility will be for one day except on
Fridays when the facility will be for 3 days or more, maturing on the following
working day.
 The facility is available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.
 Interest on amount availed will be 100 basis points above the LAF repo rate, or
as decided by RBI from time to time.
 Requests will be received for a minimum amount of Rs. One Crore and in
multiple of Rs. One Crore thereafter.
 MSF will be undertaken in all SLR-eligible transferable Government of India
dated Securities/Treasury Bills and State Development Loans (SDL).
 A margin of 5% will be applied in respect of GOI dated securities and Treasury
Bills. In respect of SDLs, a margin of 10 per cent will be applied.

PRESENT RATES AT A GLANCE

Present Rate

Repo 6.25 %
Reverse 5.75 %
Repo
MSF 6.75 %
Bank Rate 6.75 %
CRR 4.00%
SLR * 20.75%
*( SLR is to be reduced in phases to 20.5% up to 7.1.17

New Amendment
Inclusion of Urban Cooperative Banks in Second Schedule of RBI Act,

With effect from 1.4.2013, Urban Co-operative Banks will be eligible to be included in 2nd
schedule which satisfy the following criteria:

 DTL not less than Rs. 750 crore

 CRAR – minimum 12%
 Net profit continuously for previous 3 years
 Gross NPAs – not more than 5%
 Compliance of CRR and SLR requirements
 No major regulatory and supervisory concerns.

18
 CHAPTER - 4
Money Market & Capital Market

Money Market
Money Market Products: Money market products relate to raising and deploying short term
resources with maturity Maximum 1 year. The money market products are:

1. Call Money: It refers to Overnight placement. It needs to be repaid on Next Working

Day. O/N MIBOR Rate is the indicative rate. Non-bank players (FIs/MFs) are not
eligible to participate.
2. Notice Money: It is placement of funds beyond overnight up to maximum period of
14 days.
3. Term Money: It deals with placement of funds in excess of 14 days up to 1 year.
1 to 6 month products are very common.

Participants of Money Market: Scheduled Commercial Banks (excluding RRBs), Co-operative

Banks, Land Development Banks and Primary Dealers.

Interest Rates: Participants are free to determine their own interest rate in call money/notice
money market. However methods of charging interest is given in handbook of Market practices
brought out by FIMMDA ( Fixed Income Money Market and Derivative association of India)

Borrowing Limits in Money Market

Participant Borrowings up to Lending up to

Scheduled Commercial 125% of Capital funds 50% of Capital funds
Banks (Fortnightly average not to (Fortnightly average not to
exceed 50% of capital funds) exceed 25% of capital funds)
Co-operative Banks 2% of their aggregate deposits No limit
of March prev. year
Primary Dealers 225% of Net Owned Funds of 25% of Net Owned Funds
March prev. year
Other Money Market Products:

1. Treasury Bills:
 These are issued by Govt. of India through RBI.
 Tenure is 91Days, 182 Days and 364 Days.
 These are issued at Discount in auction from par value of Rs. 100/-
 Banks and PDs participate in the auction.
 The auction is also available to all financial players (FIs/MFs/Corporate).
 Auction takes place on Wednesday every week in case of 91 days bills.
 It takes place on Wednesday every Fortnight in case of 182 D and 364 D bills.
 Notified amount of auction is Rs. 6000/- Crore
 Minimum tradable amount in secondary market is Rs. 25000/-.
 State Government and Govt. of Nepal cannot participate in auction.

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Commercial Papers & Certificates of Deposits

CP and CD Commercial Papers – CP:

 CP is issued by Corporate with Net Worth minimum 4 Crore, Rating
min.A3 and availing WC limit from any bank.
 CP is issued with tenure 7 Days to 1 year.
 CP is issued in multiples of Rs. 5.00 lac.
 CP is Promissory Note and is Negotiable and also attracts Stamp
Duty.
 It is fairly active in Secondary market.
 It is in Demat form and the price is less than Face Value.
Certificate of Deposit – CD
 CD is issued by banks
 CD is issued with tenure 7 Days to 1 year.
 CD is issued in multiples of Rs. 1.00 lac
 CD is Promissory Note and is Negotiable and also attracts
Stamp Duty.
 CD is not very active in Secondary market

LAF – Repo and Reverse Repo

As explained in Chapter No. 3

CBLO : Collateralized Borrowings and Lending Obligations:

It is money market instrument launched by CCIL for entities who have no access to
Interbank call money market or who have exhausted ceiling of borrowing under Repo. It
is a discounted instrument issued by CCIL available in electronic book entry with
maturity period 1 day to 1 year. CCIL provides dealing system through INFINET for
members of NDS (Negotiated Dealing System and through Internet for others. Borrower
can deposit G-sec with CCIL and borrow funds from others who have surplus funds
subject to re-purchase of securities. As per RBI guidelines, the tenure is 1 day to 1 year.

Fixed Income Market

1. Govt. Securities
2. Corporate Debt Papers.
3. Debentures and Bonds

(Explained in next part of this chapter)

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Derivatives of Money Market

1. Interest Rate Swap

It is an agreement between two parties under which each agrees to make periodic
payment of interest to other for an agreed period of time on Notional amount of Principal.
Principal amount is never exchanged but only interest is calculated on Notional amount.
 In India, Interest rate swaps are commonly traded on 2 benchmarks MIBOR and
MIFOR
 It is OTC product. It deals with exchange of Interest flows on an underlying
assets and liability

.
For Example: A company is paying interest on 5 years Debentures @7%. In market, rate of
interest is declining; the company will be benefitted if Interest rate is linked to market rate of
interest. The Company enters into Interest rate swap with bank with the terms that Fixed rate of
interest on Debentures will Swap 3M T-bills @5%. The fixed rate of 7 % on Debentures will be
swapped with T+2%. After every 3 months, bank will pay the company @ T-bills+2%.

Assuming that in the next quarter, 90 days T-bill rate is 4%, the Company will pay to
bank@6%(4+2%) and will receive from bank 7% thereby saving of 1%. This will neutralize the
loss of interest @1% (notional) on account of fall in the market interest rate.

On the other hand, if T-bill rate is increased to 5%, the company will lose by 1% which will
neutralize the gain of interest @1% (notional) on account of increase in the market interest rate.

2. Interest Rate Futures

This is exchange traded instrument with all the features of Interest rate swap as
explained above.

Inter Corporate Deposits: (ICD)

Companies registered under Indian Company Act can lend and borrow from each other without
collateral. The rate of interest is generally high, which is determined by rating of the corporate.
The tenure of deposit is generally 1 day to 1 year. Borrowing is restricted to 50% of Net Owned
Funds with minimum tenure of 7 days.

Forex Market Products:

It is virtual market without boundaries, highly volatile and liquid and most transparent. It
includes the following products.

1. Spot Trades: Currencies are generally bought and sold at spot rates when payment and
settlement takes place on 2nd working day. Cash and Tom rates are quoted at discount
from Spot rate.
2. Forward Trades : Purchase or sale of currency at future rates. Exchange takes place
after few days/months. Importers and Exporters cover risks by Forward trades. Forward
rates are arrived at on the basis of interest rate differentials of two currencies.

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 3. Swaps: Foreign Exchange transactions where one currency is sold and purchased for
another simultaneously is called Swap. Swap Deal may involve:Simultaneous purchase
of spot and sale of forward or vice versa. It may also involve Simultaneous sale and
purchase, both forward but for different maturities. It is called “Forward to Forward
Swap”.

LIBOR Rate London Interbank Offering rate is the rate fixed at 11 am (London time) at
BBA – British Bankers Association consisting of 16 banks in London offer to
lend funds in interbank markets. BBA weeds out the best 4 and worst 4 and
calculates average of remaining 8. It is issued for USD, GBP, Euro, Swiss
Franc, CAD and JPY.
MIBOR Rate Mumbai Inter-bank Offering rate is benchmark for majority of money market
dealings in India. It is calculated daily by NSE. It is representative of 31
banks, institutions and PDs in India.
RBI controls RBI is empowered to
Foreign  Control and regulate Foreign Exchange Reserves
Exchange  Supervise Foreign Exchange dealings
 Maintain external value of Rupee
FERA was replaced by FEMA in the year 1999 and is effective from
01.06.2000. It extends to whole of India.
 Directorate of Enforcement is the controlling authority.
 Adjudication Authority issues notice to the person who
contravenes FEMA guidelines.
 Aggrieved party can prefer appeal with Special Director (Appeals)
against adjudication authority.
 Appeal can also be filed with Appellant Tribunal against orders of
Special Director (Appeals)
FEMA The important FEMA guidelines with regard to Foreign exchange are as
provisions under:
1. No drawl of exchange for Nepal and Bhutan
2. If Rupee equivalent exceeds Rs. 50000/-, payment by way of
crossed Cheque.
3. During visit abroad, one can carry foreign currency notes up to USD
3000 or equivalent. For Libya and Iraq, the limit is USD5000 and the
entire amount for Iran and Russian states.
4. Indian citizens can retain and possess foreign currency up to USD
2000 or its equivalent.
Basic Travel Quota (BTQ)
Purpose of Visit Up to USD or Present Limits
equivalent (Revised)
Personal/Tourism 10000 per financial 250000 USD per
year Financial Year
Business Purpose 25000 per visit --------do---------
Seminars/conferences 25000 per visit --------do---------
Employment/Immigration 100000 --------do---------
Studies 100000 per academic --------do---------
year
Medical 100000 --------do---------
Donations/Gifts 5000 per donor per --------do---------
year
Consultancy services 100000 per project

-22-
 Capital Market
It is market where securities like Share, Bonds and Debentures are purchased and sold. Shares
(Both Equity and Preference) are dealt in Equity Market whereas Debentures and Bonds are
dealt in Debt Market. SEBI is regulator of Capital Market. Capital Market is of two types:

1. Primary Market: When securities are sold by the Company directly under Public issue
or private placement. It is called Primary Market.
2. Secondary Market: When securities are traded though Stock Exchanges, it is called
Secondary Market. Companies are listed in Stock Exchange and sale is made through
auction. It also includes OTC (Over the Counter market) and Futures of securities
through dealers.

Stock There are 22 Stock Exchanges in India. Out of which 19 are Companies whereas
Exchanges remaining 3 (BSE, ASE and MPSE ) are Associations of persons. All are non-profit
making organizations.

Transition process of exchanges from mutually owned association to a Company is

called Demutualization of Stock Exchanges.

National Stock Exchange (NSE) was started in 1992 by banks and FIs. NSE can
allow FII up to 26% and FDI up to 23% (Total up to 49%) of its paid up capital which
is 45 crore at present.

No single investor can invest more than 5% in any Indian Stock Exchange.

What is Sensex 30?

It is Sensitive Index launched by BSE which is market capitalization weighted index
of 30 Stocks (Shares) representing large and sound Indian Companies.
What is Nifty 50?
It is Sensitive Index launched by NSE which is market capitalization weighted index
of 50 Stocks (Shares) representing large and sound Indian Companies.

Shares,
Debentures Equity Share Preference Share
and Bonds It is permanent capital and is not It may be redeemable or non-
redeemed. It forms part of Tier-I redeemable. If redeemable, forms part
Capital. of Tier-II Capital
Dividend is paid out of profits after
Preference is given while paying
making payment to Preference dividend. Unpaid dividend can be
Share holders. carried forward. This is why these are
called Cumulative Preference shares.
The Company, if liquidated, pays to Preference Shares are given
Equity Shares at last. preference for payment at the time of
liquidation.
These carry Voting Rights. These don’t carry Voting rights.
Generally Preference Shares are
Cumulative and Redeemable.

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 IPO is initial public offer by the Company inviting public to subscribe for shares.
FPO is Further public offer to subscribe for same class of shares.
Right Issue means Offer of shares to existing shareholders for purchase at a price
if same class of share are again issued.
Bonus Share is the share issued to existing shareholders without receiving price
i.e. free of cost.
Preference Shares: Owners of these kind of shares are entitled to fixed dividend
on preference. Dividend is paid first. They also get priority over Equity shares in
repayment at the time of liquidation. Preference Shares are of following types:
 Cumulative and Non-Cumulative Preference Shares
 Redeemable and non-redeemable Preference Shares
 Participating and non-participating Preference Shares
 Convertible and non-convertible Preference Shares
Debentures Debentures and Bonds constitute Debt Market.
and Bonds
Debenture Bond
Issued by Corporate in Private Issued by institutions in Public
sector sector
It is Secured by Floating charge It is not secured
Provisions of Company Law It is governed by Indian Contract
applies Act
It can be transferred through It is negotiable instrument
registration
It can be convertible or non-  Bond, if given option can
convertible be convertible into equity
shares.
It can be
 Zero Coupon Bond
 Perpetual Bond
 Convertible Bond

Commercial Papers and Certificates of Deposit

Commercial Papers – CP:
As explained above

Govt. Treasury Bills:

Securities  These are issued by Govt. of India through RBI.
and Treasury  Tenure is 91Days, 182 Days and 364 Days.
Bills  These are issued at Discount in auction.
 Banks and PDs participate in the auction.
 The auction is also available to all financial players
(FIs/MFs/Corporate).
 Auction takes place on Wednesday every week in case of 91 days
bills.
 It takes place on Wednesday every Fortnight in case of 182 D and
364 D bills.

Govt. Securities:
 These are Risk free coupon bearing instruments.
 Issued by RBI on behalf of GOI.

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  Fixed Interest is paid on Half yearly basis.
 Short term (up to 1 year) and Long term (up to 30 years) securities can be
purchased. Bidding ranges fro Rs. 10000/- to Rs. 2.00 crore
 Settlement of Trading takes place at CCIL from 9:00 am to 5:00 PM from
Monday to Friday

Process of Securities offered to public must be listed in one or more Stock exchanges. Any
Share Issue Company making public issue or a listed company making Right Issue of value
and Role of more than Rs. 50 lac is required to file a draft offer document with SEBI for its
Stock observations. Company has to open Issue within 3 months.
Exchanges
The Offer Document means Prospectus in case of IPO/FPO or Letter of Offer for
sale in case of Right Issue which are filed with ROC. The Draft Offer Document is
to be filed with SEBI at-least 21 days prior to filing of Offer Document with ROC.

Rolling Presently trades pertaining to Rolling Settlement are settled on T+2 day basis,
Settlement where T stands for trade day. Trade executed on Monday are settled on
Pay in and Wednesday.
Pay out day
Pay in Day is the day when broker makes payment or delivery of securities to the
Exchange.
Pay out Day is the day when Exchange makes payment or delivery of securities to
the Broker.
Exchanges ensure that Brokers make payment or deliver securities within 24 hours
of Pay out.

Red Hearing RHP is the Offer Document which does not have details of either price or number of
Prospectus - shares being offered or the amount of issue.
--- Price Band
------ Book Under Price Band, the price is not disclosed but upper and lower price bands are
Building disclosed. The cap in Price Band should not be more than 20% of Floor Price.
Only on completion of bidding process, details of final price are included in the offer
document. The Offer document filed thereafter is called Prospectus.

Book Building is a process of building up of demand. It is the process of Price

discovery by receiving Bids from public. Actual price of the security is assessed on
the basis of bids obtained. Under book-building process, the proportion of different
types of investors is as under:
1. RII (Retail Individual Investor) ---------35%
2. NII (Non- Institutional Investors)--------15%
3. QIB (Qualified Institutional Buyers----50%
RII is a person who has to apply for shares up to Rs. 2.00 lac

Safety Net – It is a Buy-back arrangement for original investors who are resident individual.
1000 shares – Maximum number of shares is 1000 and the period of Buy back is 6 M from date of
Period 6M dispatch of securities.

Qualified QIBs are listed as under:

Institutional 1. Public Financial Institutions
Buyers 2. Scheduled Commercial Banks
(QIBs) 3. Mutual Funds
4. FIIs registered with SEBI.
5. Venture Capital Funds (Indian and Foreign) registered with SEBI.

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 6. SIDCs
7. Insurance Companies
8. Provident Fund with minimum corpus of 25 crore
9. Pension Fund with minimum corpus of 25 crore
Shares allotted to QIBs is called QIP (Qualified Institutional placement)
SEBI Security and Exchange Board of India was established in 1988 and accorded
statutory powers through SEBI Act 1992 for the following purposes:
1. Protecting interest of investors
2. Promotion , Development and Regulation of Security Market
3. Registration of brokers, sub-brokers and underwriters
4. Prohibiting unfair practice
5. Inspection of books of companies
SEBI has same powers as that of Civil Court. It can:
 Suspend trading
 Restrain a person from assessing security market
 Attach bank account for maximum 30 days
 Impound proceeds of securities
SEBI has introduced rule of refund of allotment money if 90% subscription is not
received. It has also made compulsory completion of allotment procedure within 30
days.
ASBA “Applications Supported by Block Amount” is a system of on-line application for
subscription of securities without parting with funds by the investor. The funds
remain in the account and are remitted only if allotment is made by the company.
Otherwise block is released when allotment is finalized and shares are not allotted.
Security It is a Receipt issued by Securitization company or a Reconstruction company to a
Receipt QIB for acquiring any right, title or interest in the financial assets of such
companies.

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 CHAPTER - 5
MUTUAL FUND

It is mechanism of pooling resources from public and investing in securities. Following are the
features of Mutual Fund:

 Units are sold to public

 Investors are called unit holders
 Money is kept in trust
 Registration is required with SEBI
 Mutual Fund is set up in the form of trust with sponsored trustees, Asset Management
Companies (AMCs) and custodians.
 Sponsor is like a promoter of a company. AMC manages funds by making investment in
various types of securities. Custodian holds securities in its custody
 SEBI requires that at least 2/3rd of directors of Trustee Company must be independent
and at-least 50% of directors of AMC must be independent.

NAV (Net It measures performance of any Mutual Fund. It is calculated as under:

Asset Value)
Market Value of Securities of scheme - Expenses incurred on the scheme
Total number of units of a scheme as on date

NAV has to be disclosed by the Mutual Fund on daily basis and published in at-
least two newspapers. Under Fund of Fund Schemes, NAV is published on
AMPHI website at 9:00 AM.

NAV is rounded off to 4 decimal places for Index funds and all types of Debt and
Money market schemes. In other Equity and Balanced Fund Schemes, it is
rounded off to 2 decimal points.
Types of There are two types of Mutual Funds:
Mutual Funds
Open Ended Plan
It is available for subscription and repurchase on continuous basis. There is no
fixed maturity period. Sale and Purchase is made at NAV on daily basis. NAV is
declared on daily basis.

Close Ended Plan

Under this plan, there is fixed maturity period. Investors invest during Public Offer
which is valid for some specified period. Sale and Purchase of units is made in
Stock Exchanges.NAV is generally declared on weekly basis.

Growth Growth Scheme of Mutual fund has following features:

Scheme or
Equity  Major part of Corpus is invested in Equities
Oriented  The risk is higher
Scheme  Capital appreciation is more if the market rises.
 Chances of losses can also be not rules out

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Income Income Scheme of Mutual fund has following features:
Scheme or  Major part of Corpus is invested in Bonds, Debentures and G-Secs
Debt  Risk is lesser as compared to Growth Scheme
Oriented  Regular and Steady Income to investors
Scheme  NAV is affected due to change in interest rates
 Fall in Interest rates leads to Higher NAV.

Balanced Mixed Scheme of Mutual fund has following features:

Plan
 It is a mixed plan. Investment is made in both equities and bonds.
 The general proportion is 40 in equity and 60 in bonds.
 Fund is affected by fluctuation in share market but not too much.
 NAV is less volatile as compared to Equity Fund.

Other Plans Gilt Fund: It consists of Investment in Govt. Securities

Index Fund:
The portfolio consists of particular Index securities such as BSE sensitive index or
Nifty Index.

Tax Saving Schemes

Under this plan, money is invested in Tax Saving Securities under specific
provisions of IT Act. For Example, ELSS (Equity Linked Saving Scheme) and
Pension Plans launched by Mutual Funds are types of Tax Saving Schemes

Fund of Funds
A scheme that invests primarily in other schemes of same mutual funds or other
mutual funds is known as FOFs (Fund of Funds)

Product Each mutual fund will label the scheme on following parameters:
Labeling in  Nature of scheme – short term, medium term and long term
Mutual Funds  Brief about the scheme
 Level of risk – Blue – low risk, Yellow – medium risk and Brown – High
risk.

What is SIP It is not a scheme but a systematic Investment Plan which is available in most
schemes. It allows the investor to invest small amount monthly or quarterly in the
plan and after maturity, he can draw big amount. Withdrawals are also allowed.

AMFI - AMFI is Association of Mutual Funds of India Certificate Test.

It is an examination which has to be passed for new entrants in marketing and

selling of units of Mutual Funds

Firms and Corporate have to obtain certificate of registration from AMFI whereas
all employees engaged in marketing of these funds have to pass AMFI
examination.

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Latest Developments

Gold ETF ETF means Exchange Traded Fund which is an investment fund traded in stock
exchanges . It can hold stocks, commodities including Gold bonds. It trades close
to NAV.

Gold ETF is a mutual fund scheme that invests in standard gold of 99.5 purity.
Value of ETF is based on market price of gold. It is held in Demat form and can be
traded in exchanges.

NAV is calculated as under:

Market Value or Fair Value of Investments + CA – CL and Provisions

Nos. of units outstanding under scheme on date of valuation

Rajiv Gandhi It is a scheme for providing 50% tax rebate to new retail investors who invest up to
Equity 50000/- in eligible securities provided their annual income is up to Rs. 12.00 lac.
Saving Lock in period for investment is 3 years. (Sec 80CCG of IT Act.)
Scheme

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 CHAPTER - 6
INSURANCE AND IRDA

Insurance business in India is conducted as per Insurance Act, 1938. First Insurance Company
(GIC) was established in 1818 in Kolkata. It was having 4 subsidiaries:

1. Oriental Insurance Company Limited

2. New India Assurance Company Limited
3. National Insurance Company Limited
4. United Insurance Company Limited

The above said 4 subsidiaries were made independent and GIC became Re-insurer with effect
from December 2000.

The private companies also entered Insurance sector in the year 1999. Minimum Capital was
kept at 100 crore. IRDA is the regulatory authority for all private sector and public sector
companies. Currently, there are 52 Insurance Companies, the break- up of which is as under:

Public Sector Private Sector Total

Life Insurance 1 23 24
General Insurance 6 21 27
Reinsurance 1 0 1
Total 8 44 52
 Entry level Capital Requirement is Rs. 1.00 crore.

IRDA was made independent Regulatory authority from the year 2000
IRDA under special Act IRDA Act, 1999. The functions of IRDA are as under:
1. Issue of Certificate of Registration of Insurers
2. Renewal, Modification and Withdrawal of Registration
3. Protecting interest of Policy holders
4. Maintaining Solvency Margins
5. Conduct of Reinsurance business
6. Specifying Code of conduct for intermediaries
7. Training for intermediaries and agents
8. Levying fees and calling information
9. Control and Regulation of rates
10. Supervising functions of TAC
Types of Insurance 1. Life Insurance
Business 2. Fire Insurance
3. Marine Insurance
4. Misc. Insurance (Travel, Motor or Property)
Life Insurance Products are:
Endowment Assurance (participating), Term Assurance (non-
participating) Money back policies.

 Life Insurance is a contract in which payment of the policy is

promised on maturity to the policy holder.
 The payment of policy in full is made to the nominee on death.
 Under Money back policy, payment is made on specified dates.

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 Advantages
1. Aid to Thrift i.e. it facilitated long term saving and investment.
2. Liquidity is maintained i.e. amount can be withdrawn before
maturity at surrender value. Loan can also be obtained against
surrender value of the policy.
3. Tax relief under IT Act.

Types of Schemes
 Medical and Non- medical schemes – medical examination is not
required in certain schemes
 With Profit and Without profit schemes – Bonus is declared and
paid in With profit policies.
 Key man Insurance – firm insures risk of life of Key employee to
protect the loss caused to firm on death of its key man.
 Group Insurance Policies
How to Calculate If sum assured is 100000. Premium is payable in 20 years. There is
Paid up Value of default after 10 the premium.
Policy Paid up value = Sum Assured*Nos. of premiums paid / payable
In the above example, Paid up Vale = 100000*10/20=50000
If bonus is 35000/-. Paid up value = 50000+35000=85000
Agents and Sub- IRDA has prescribed minimum qualification standard for Agents and sub-
agents agents. Practical training is also imparted. Insurance Institute of India
has course of Qualifying examination for agents.
Principles of 1. Utmost Good Faith : Disclosure
Insurance 2. Insurable Interest.: Loss is not deliberate
3. Indemnity :: Amount is settled proportionately to Value of Goods
as compared to amount assured.
4. Subrogation : Insurance Co. acquires right to sue 3rd party who
caused loss.
5. Contribution: Where there are two or more insurers.
6. Proximity Cause: Fir insurance but loss due to other cause
BANCASSURANCE Any Scheduled commercial bank is permitted to undertake insurance
business as agent on fee basis without Risk participation.
Banks that satisfy eligibility criteria can set up Joint venture company for
undertaking insurance business with Risk participation
Parameters for underwriting business by banks:
 Net worth not less than 500 crore
 CAR not less than 10%
 3 years track record of continuous profits
 NPA at reasonable level
It is distribution of insurance products (both life and non-life) by banks as
corporate agents through their branches, prior approval of IRDA is must.
However, banks need to obtain prior approval of RBI.
Models of Banc assurance
1. Corporate Agency model
2. Joint venture model
3. Merger between bank and an insurer
4. Build or buy own insurance
In India, only first two models have been adopted by commercial banks.
TAC (Tariff Tariff Advisory Committee lays down tariff rates for the Insurance
Advisory Companies (Both life and non-life)
Committee)

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Consumer At present 12 Ombudsman are looking after complaint aspect of
Protection Insurance. A complaint with claim amount up to 20 lac can be filed with
the Ombudsman.
Contract of Contract can be entered into by the competent authority on the principal
Indemnity of Good faith. Indemnity type of contract is made.
and Uberrima fides
Uberrima fides It is a doctrine of disclosing all the facts while affecting insurance. The
Indemnified has to reveal complete information failing which Insurance
Company can reject the claim.

Latest

AAM Aadmi Bima Yojna

This scheme extends life and disability cover to persons in the age group of 18-59 living below
and marginally above Poverty line. Sum assured is 30000/- on Natural death, 75000/- on
accidental death and 37500/- on partial permanent disability and 75000/- on permanent
disability. As per the scheme, scholarship of Rs. 100/- per month per child is paid to maximum 2
children per family in 9th to 12th Standards.

Premium is Rs. 200/- per beneficiary out of which 50% is contributed by The Central Govt. and
balance 50% by the State Govt.

PMSBY (Pardhan Mantri
Surksha Bima Yojna)
SB Account Holders
18-70 years
KYC Verification
1.6.15 to 31.5.16
Death Insurance (accidental)
Cover Rs. 2.00 lac
Loss of Eyes/hands/feet---
2.00 lac
Loss of one eye/hand/foot ---
1.00 lac
Premium Rs.12/- per year
PMJJBY( Pardhan Mantri
Jiwan Jyoti Bima Yojna)
SB Account Holders
18-50 years
KYC Verification
1.6.15 to 31.5.16
Death Insurance (Any reason)
Cover Rs. 2.00 lac
Premium Rs.330/- per year
APY (Atal Pension Yojna)
Citizens of India – SB A/C
18-40 years
KYC Verification
1.6.15 to 31.5.16
Guaranteed Pension after 60
Years (Minimum 1000/- p.m.)
1000/-, 2000/-, 3000/- , 4000/-
& 5000/- per month
Depending upon contribution
Govt. contribution 50%
1/- up 100/-
2/- up to 500/-
5/- up to 1000/-
10/- above 1000/-

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 CHAPTER - 7
FACTORING AND FORFAITING

Factoring is financing and collection of Receivables. The client sells Receivables at discount to
Factor in order to raise finance for Working Capital. It may be with or without recourse. Factor
finances about 80% and balance of 20% is paid after collection from the borrower. Bill should
carry LR/RR. Maximum Debt period permitted is 150 days inclusive of grace period of 60 days.
Debts are assigned in favor of Factor. There are 2 factors in International Factoring. One is
Export Factor and the other is Import Factor. Importer pays to Import factor who remits the
same to Export Factor.

Forfaiting is Finance of Export Receivables to exporter by the Forfaitor. It is also called

discounting of Trade Receivables such as drafts drawn under LC, B/E or PN. It is always No
Recourse Basis (i.e. without recourse to exporter). Forfaitor after sending documents to
Exporters’ Bank makes 100% payment to exporter after deducting applicable discount.

Factoring It is of two types:

Domestic Factoring
Receivables arising out of domestic sales, if financed by the factor, are called
Domestic factoring. The process is as under:
 Supplier supplies and the purchaser accepts Bill of Exchange.
 Bill of exchange is got pre-paid to the extent of 80% by the factor.
 Balance of 20% is paid after collection from the debtor on due date.
 Bill should carry LR/RR etc.
 Maximum Debt period permitted is 150 days inclusive of grace period of 60
days.
 Debts are assigned in favour of factor.
 Discount and service charges may range from 1-2%.

International Factoring
Receivables arising out of export sales, if financed by the factor, are called
International factoring. The process is as under:
 There are 2 factors in case of International Factoring.
 One is Export Factor and the other in Import Factor
 Exporter receives order and contacts Export Factor
 Request is forwarded to Import factor who conveys its approval.
 Goods are dispatched and documents are delivered.
 Export Factor makes pre-payment and forwards bills to Import factor.
 Importer pays to Import factor and money is remitted to Export factor.
Forfaiting It is a means of finance which is available to exporter from intermediary (Forfeiter)
against export receivables, but without obligations to repay the credit. The process is
as under:
 It is used for international transactions.
 It is discounting of trade receivables such as drafts drawn under LC, B/E, P/N
etc.
 It is always without recourse to exporter.
 The debt instruments are drawn by exporter and the same are accepted by
importer. These are backed by LC.

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  Documents are sent to the bank of importer by the Forfaitor.
 Forfaitor makes payment to exporter after deducting discount.
 The amount of finance is 100% of value of exports.
Off
Balance In Balance sheet, some of the liabilities are contingent which may or may not arise in
Sheet future. These are not included in the totals of Balance sheet, rather these are shown
Items as foot note. The Examples are:
1. Guarantees
2. Letter of Credit
3. Re-Discounting of Bills
4. Forward purchases
5. Revolving Underwriting facilities.
6. Aggregate outstanding of Foreign Exchange contracts.
7. Take out financing
8. Forward rate agreement

Guarantees
Contract of Guarantee is a contract to perform the promise or discharge liability of a
third person in case of his default. There are 3 parties:
1. Guarantor or Surety – who gives guarantee.
2. Principal Debtor – on whose behalf guarantee is given
3. Creditor or Beneficiary – in favor of whom guarantee is given.

There are 3 types of guarantee:

1. Performance guarantee
2. Financial Guarantee
3. Deferred Payment Guarantee
Letters of
Credit (LC) LC is a document:
 Issued by Buyer’s bank at his request.
 Carrying undertaking to pay to the seller
 Upon presentation of documents evidencing shipping of goods.
 In compliance with terms and conditions.

ILC is Inland Letter of Credit and FLC is Foreign Letter of Credit. The parties to LC
are as under:

Applicant Buyer or Importer

Beneficiary Seller or Exporter

Issuing Bank It is opening Bank which ultimately pays on behalf of

importer in the Importer’s country.
Advising Bank or Bank in Exporter Country through which LC is advised. It
Notifying Bank acts as agent without responsibility to pay unless it confirms.
Negotiating Bank Bank in Exporter Country which makes payment to exporter
or Nominated Bank or accepts Bill of Exchange.

Confirming Bank In Exporter’s country. It may be advising bank also if it adds

confirmation. This bank will be responsible for default, if any.
Reimbursing Bank The bank which re-imburses the negotiating bank. (Usually,
it is the bank having Nostro account of Opening Bank.

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UCPDC –
600 It is a publication of ICC (international Chamber of Commerce). It does not apply by
Uniform default. There must be special mention in LC about applicability of UCPDC – 600. It
Custom has 39 articles. Some of the important are here under:
and  Reasonable time for acceptance/refusal of Documents is 5 Banking days
Practice of after presentation.
Document  Bank to deal with documents and not with goods. Bank not to check quality of
ary Credit the goods. However shipping documents must contain the particulars of
commodity shipped which should match with LC.
 Bank is not concerned with underlying contract of buyer and seller.
 Courts refrain from passing injunction on complaint of importer regarding any
discrepancy of goods.
 Amount of Bill may differ from LC amount ±10% (Tolerance limit)
 Quantity of Bill may differ from LC specification ±5% (Tolerance limit).
 Documents are original if it carries original signatures, stamp mark and label
of issuer.
 Documents must be presented for negotiation within 21 Calendar days from
date of Shipment. It becomes stale thereafter.
 If expiry of LC falls on Public holiday, Under, such situations documents can
be submitted on Preceding banking day.

Types of
LC LC Type Features
Revocable It is an LC which can be amended or cancelled without consent
of all parties. UCPDC 600 does not allow issue of such LC.
Irrevocable It is LC which cannot be cancelled or amended without consent
of all parties.
Confirmed LC If confirmed by some bank in exporter country.
Transferable LC It can be transferred in Full or part by advising bank at the
request of issuing bank. ONLY ONCE
Red Clause LC It enables the beneficiary to avail pre-shipment credit from
advising bank.
Green Clause Besides pre-shipment, advising bank can allow advance for
Letter of Credit storage and shipment.
Revolving LC Where bills are negotiated and LC is automatically renewed.
Back to Back LC Beneficiary Uses LC to open another LC in favor of local
suppliers.
Standby LC It is issued in lieu of Guarantee. It is substitute of guarantee and
is used in countries like US where guarantees are not used.

 If nothing is mentioned, LC will be Irrevocable, non-transferable.

Documents under LC
1. Bill of exchange.
2. Invoice
3. Transport Documents: Bill of Lading & Airway Bill
4. Insurance Documents (Insurance is done at 110% of CIF value)
5. Certificate of Origin

Short Bill of Lading: Which does not carry detailed terms and conditions
Thorough Bill of Lading covers entire voyage with several modes of transport
Straight Bill of Lading is issued directly in the name of consignee.

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 Clause Bill of Lading: It bears super imposed clause that declared defective
condition of Goods.
Clean Bill of Lading: It has no such super imposed clause declaring goods or
packaging as defective.
Forward
Exchange A customer intends to purchase or sell Foreign currency on some future date at a
Contract pre-determined price. The contact entered into between customer and the bank is
called Forward Exchange Contract.

By entering into Forward contract, risk of exchange fluctuation is reduced.

Forward
Rate FRA (Forward Rate Agreement) is a product where interest payable for future
Agreement period is committed. IRS covers series of periodic interest payments whereas FRA is
for single interest payment in future.

It is a contract between two parties to exchange interest payment for a ‘notional

principal’ amount on settlement date for a specified period from start date to maturity
date.

Interest
Rate Swap It is OTC product. It deals with exchange of Interest flows on an underlying assets
and liability.

For Example: A company is paying interest on 5 years Debentures @7%. In market,

rate of interest is declining; the company will be benefitted if Interest rate is linked to
market rate of interest. The Company enters into Interest rate swap with bank with
the terms that Fixed rate of interest on Debentures will Swap 3M T-bills @5%. The
fixed rate of 7 % on Debentures will be swapped with T+2%. After every 3 months,
bank will pay the company @ T-bills+2%.

Assuming that in the next quarter, 90 days T-bill rate is 4%, the Company will pay to
bank@6%(4+2%) and will receive from bank 7% thereby saving of 1%.

On the other hand, if T-bill rate is increased to 5%, the company will lose by 1%.

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 CHAPTER - 8
CAPITAL ADEQUACY, BASEL-II & BASEL-III NORMS

BASEL–I (back- Bank for International Settlements (BIS) is situated at Basel (name of the city in
ground) Switzerland). BCBS – Basel Committee on Banking Supervision met at Basel
and released guidelines on Capital Adequacy in July 1988. These guidelines
were implemented in India by RBI w.e.f. 1.4.1992 on the recommendations of
Narsimham Committee. The basic objective was to strengthen soundness and
stability of Banking system in India in order to win confidence of investors, to
create healthy environment and meet international standards.

Calculation of Basel – I requires measurement of Capital Adequacy in respect of Credit risks

CRAR (Capital to and Market Risks only as per the following method:
Risk Weighted
Asset Ratio) Capital fund ( Tier I & Tier II)
-------------------------------------- X 100
Risk Weighted Assets (RWAs)

Minimum requirement of CRAR is as under:

As per BASEL-II recommendations 8%

As per RBI guidelines 9%
Banks undertaking Insurance business 10%
New Private Sector Banks 10%
Local Area banks 15%
For dividend declaration by the banks (during previous 2 years 9%
and current year)

Tier I & Tier II Tier –I Capital

Capital Tier –I Capital includes
 Equity capital & Statutory reserves,
 Other disclosed free reserves,
 Capital Reserve representing surplus out of sale proceeds of assets,
 Investment fluctuation reserve without ceiling,
 Innovative perpetual Debt instruments (Max. 15% of Tier I capital)
 Perpetual non-cumulative Preference shares
( Less Intangible assets & Losses)
(Sum total of Innovative Debt Instruments and Preference shares as stated
above should not exceed 40% of Tier I capital. Rest amount will be treated as
Tier II capital.)

Tier –II Capital

It includes:
 Redeemable Cumulative Preference shares,
 Redeemable non-cumulative Preference shares
 Revaluation reserves at a discount of 55%,
 General Provisions & Loss reserves up to 1.25 % of RWAs,
 Hybrid debts (say bonds) & Subordinate debts
(Long term Unsecured loans) limited to 50% of Tier –I Capital.
Tier – II capital should not be more than 50% of Total Capital.

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 Tier – III Capital
Banks may at the discretion of the National Authority, employ 3rd tier of Capital
consisting of short term subordinate debts for the sole purpose of meeting a
proportion of capital requirements for market risks. Tier III capital will be limited
to 250% of bank’s Tier –I Capital (Minimum of 28.5%) that is required to support
market risks.
Two ways to
improve CRAR By raising more capital. Raising Tier I capital will dilute the equity stake of
existing investors including Govt. Raising Tier II Capital is definitely a costly
affair and it will affect our profits.
Reduction of risk weighted assets by implementing Risk mitigation Policy.

Advances against NSC/KVC/FDs/LIC 0%

Govt. guaranteed Advances 0%
Central Govt. Guarantees 0%
State Govt. Guarantees 20%
Govt. approved securities 2.5%
Balance with other scheduled banks having CRR at least 9% 20%
Secured loan to staff 20%
Loans upto 1.00 lac against Gold/Silver 50%
Consumer Credit / Credit Cards/Shares loan 125%
Claims secured by NBFC-non-deposit taking (other than AFCs) 100%
Venture Capital 150%
Education Loans 75%
Other loans (Agriculture, Exports) 100%

HL up to 75 lac 50%
Above 75 lac 75%
CRE-RH (Commercial Real Estate – Residential Housing) 75%
CRE - (Commercial Real Estate) 100%
BASEL II The Committee on Banking Regulations and Supervisory Practices released
revised version in the year 2004. These guidelines have been got implemented
by RBI in all the banks of India. Parallel run was started from 1.4.2006. In
banks having overseas presence and foreign banks (except RRBs and local
area banks,’ complete switchover has taken place w.e.f. 31.3.2008. In banks
with no foreign branch, switchover will take place w.e.f. 31.3.2009.

Distinction
between Basel I Basel – I measures credit risks and market risks only whereas Basel II
and Basel II measures 3 types of risks i.e. Credit Risk, Operational Risk and Market Risk

Three Pillars of Pillar –I Minimum Capital Requirement

BASEL-II Pillar – II Supervisory Review Process
Pillar –III Market Discipline

1. Credit Risk
Credit Risk is the risk of default by a borrower to meet commitment as per agreed terms and
conditions. In terms of extant guidelines contained in BASEL-II, there are two approaches to
measure Credit Risk given as under:
1. Standardized approach
2. IRBA ( Internal Rating Based approach )

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Standardized Approach and IRBA
Under standardized approach, risk rating will be done by credit agencies. Four Agencies are
approved for external rating:
1. CARE 2. FITCH India 3.CRISIL 4. ICRA
Risk weights prescribed by RBI are as under:
Rated Corporate
Rating Risk Percentage

AAA 20%
AA 30%
A 50%
BBB 100%
BB & below 150%
Education Loans 75%
Retail portfolio and SME portfolio 75%
Housing loans secured by mortgage 50% to 75%
Commercial Real Estates 100%
Unrated Exposure 100%
Off Balance Sheet Items
Against Cancelable commitments 0%
Against up to 1 year maturity 20%
Against more than 1 year maturity 50%
IRBA – Internal rating Based Approach
IRBA is based on bank’s internal assessment. It has two variants (Foundation and advanced). Bank
will do its own assessment of risk rating and requirement of Capital will be calculated on Probability
of default, Loss given default, Exposure of default and Effective maturity. Bank has developed its
own rating module system to rate the undertaking internally. The internal rating is being used for the
following purposes:
 Credit decisions
 Determination of Powers
 Price fixing

2. Operational Risk

Operational Risk is the risk of loss resulting from Inadequate or failed internal processes, people and
system. External events such as dacoity, burglary, fire etc.

It includes legal risks but excludes strategic /reputation risks.

Identification
 Actual Loss Data Base
 RBIA reports
 Risk Control & Self Assessment Survey
 Key Risk indicators
 Scenario analysis
Four ways to manage Risk
 Prevent
 Reduce
 Transfer
 Carry/Accept

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 Operational Risk – Measurement

Three approaches have been defined to measure Operational Risk at the branches/offices of the
bank:
 Basic Indicator approach
 Standardized approach
 AMA i.e. Advanced measurement approach

Basic Indicator Approach

15% of Average positive gross annual income of previous 3 years will be requirement of capital.
To start with banks will have to adopt this approach and huge capital is required to be maintained.

The Standardized approach – Capital Requirement

All banking activities are to be divided in 8 business lines. 1) Corporate finance 2) Trading &
Sales 3) Retail Banking 4) Commercial Banking 5) Asset Management 6) Retail brokerage 7)
Agency service 8) Payment settlement
Within each business line, Capital requirement will be calculated by multiplying the average gross
income generated by a business over previous 3 years by a factor β ranging from 12 % to 18 %
depending upon industry-wise relationships.

Advanced Measurement approach

Capital requirement is calculated by the actual risk measurement system devised by bank’s own
internal Operational Risk Measurement methods using quantitative and qualitative criteria. Our
bank has started measuring actual losses and estimating future losses by introducing statement of
Operational Risk Loss data w.e.f. 1.4.2005. Minimum 5 year data is required for a bank to switch
over to AMA.

3. Market Risk
It is simply risk of losses on Balance sheet and Off Balance sheet items basically investments due to
movement in market prices. The Basel Committee has two approaches for calculation of Capital
Charge on Market Risk as under:

Standardized approach
Internal Risk Management approach
Under Standardized approach, there are two methods: Maturity method and duration method. RBI
has decided to adopt Standardization duration method to arrive at capital charge on the basis of
investment rating as under:

Other Risks and

Capital Other Risks like Liquidity Risks, Interest Rate Risk, Strategic Risk, Reputational
Requirement Risks and Systemic Risks are not taken care of while calculating Capital
Adequacy in banks.

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Pillar – II
Supervisory SRP has two issues:
Review Process  To ensure that bank is having adequate capital.
(SRP)  To encourage banks to use better techniques to mitigate risks.

SRP concentrates on 3 main areas:

Risks not fully captured under Pillar -1 i.e. Interest Rate Risks, Credit
concentration Risks, Liquidity Risk, Settlement Risks, Reputational Risks and
Strategic Risks.

Risks not at all taken care of in Pillar -1.

External Factors.

This pillar ensures that the banks have adequate capital. This process also
ensures that the bank managements develop Internal risk capital assessment
process and set capital targets commensurate with bank’s risk profile and
capital environment. Central Bank also ensures through supervisory measures
that each bank maintains required CRAR and components of capital i.e. Tier –I
& Tier –II are in accordance with BASEL-II norms. RBIA and other internal
inspection processes are the important tools of bank’s supervisory techniques.

Every Bank will prepare ICAAP(Internal Credit Adequacy Assessment Plan)

on solo basis which will comprise of functions of measuring and identifying
Risks, Maintaining appropriate level of Capital and Developing suitable Risk
mitigation techniques.

Pillar – III
Market Discipline Market discipline is complete disclosure and transparency in the balance sheet
and all the financial statements of the bank. The disclosure is required in
respect of the following:
Capital structure.
Components of Tier –I and Tier –II Capital
Bank’s approach to assess capital adequacy
Assessment of Credit Risks, Market Risk and Operational Risk.
Credit Aspects like Asset Classification, Net NPA ratios, Movement of NPAs
and Provisioning.
Frequency of Disclosure
Banks with Capital funds of Rs. 100 crore or more will make interim Disclosures
on Quantitative aspects on standalone basis on their respective websites.
Larger banks with Capital Funds of Rs. 500 crore or more will disclose Tier-I
capital , Total Capital, CAR on Quarterly basis on website.

Time frame for Application to RBI by Approval by RBI by

application of IRB approach for Credit Risk 01.04.2012 31.3.2014
different AMA approach for Operational 01.04.2012 31.3.2014
approaches Risk
Internal Model approach for 01.04.2010 31.3.2011
Market Risk

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 BASEL –III
RBI has rescheduled implementation of BASEL-III from 1.1.2013 to 1.4.2013. The ratios of BASEL-
III will be disclosed in the Balance Sheet as at 30.6.2013.
Under Basel-III, Capital will include the following:
1. Tier - I Capital (Going concern concept)
2. Tier - II Capital (Gone Concern Concept)

Tier-I Capital consists of:

a) Common Equity Tier - I (CET-I)
b) Additional Capital Tier – I (AT-I )

CET – I (Common Equity Tier-I ) : It includes as under:

 Paid up equity capital (Common shares)
 Share Premium (Stock surplus)
 Statutory Reserves
 Capital Reserve
 Other disclosed free reserves
 Balance in PL account
 Qtly profit after incremental provision of NPAs
 Common Shares issued by subsidiaries of bank (Minority interest).

AT-I (Additional Capital) : It includes the following

 Perpetual Non-Cumulative Preference Shares (PNCPS).
 Share premium on PNCPS).
 Innovative perpetual Debt Instruments.
 Minority Interest i.e. Preference shares issued by subsidiaries.

Tier –II Capital consists the following:

 Redeemable Cumulative Preference shares,
 Redeemable non-cumulative Preference shares
 Revaluation reserves at a discount of 55%,
 General Provisions & Loss reserves up to 1.25 % of RWAs,
 Debt Capital instruments
 Minority Interest.

Regulatory Adjustments/Deductions: Following adjustments have to be applied to Regulatory

Capital at both solo and consolidated level.

 Goodwill and all intangible assets,

 DTA (Deferred Tax Assets)
 Cash flow Hedge reserve
 Shortfall in stock of provisions for expected losses.
 Gain on related securitization transactions.
 Investment in own shares
 Investment in Capital of Banking, Financial and Insurance entities.

Minimum Capital Requirement will be calculated as under:

The below mentioned %age will have to be maintained up to 31.3.2018 (Now date extended up to

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31.3.2019)

%age of RWAs
Minimum CET-I (Common Equity) 5.5%
Max. AT-I (Additional Tier-I) 1.5%
Minimum Tier - I Capital 7.00 %
Maximum Tier-II Capital 2.00 %
Minimum CRAR 9%
CCB – Capital Conservative Buffer in the form of Common 2.5%
Equity(Tier –I )
Countercyclical Capital Buffer within range of 0-2.5%of RWAs
Leverage Ratio (Minimum Standard) 4.5%

 Capital Conservation Buffer in the form of Common Equity Tier-I.

 Countercyclical Capital Buffer within the range of 0-2.5% of RWAs will also be in the form of
Common Equity. It will be implanted as per national requirements.
 Leverage Ratio prescribes minimum standard of 4.5% of Tier – I Capital compared with
Total Exposure. Total Exposure includes Balance Sheet Items and Non-Balance sheet
items as well as 10% of un-availed limits even if there is unconditional cancellable
undertaking.

LCR under Basel-III

Liquidity Coverage Ratio is a new concept adopted under BASEL-III. It aims at ensuring that
banks have sufficient High Quality Liquid Assets to survive an acute stress scenario lasting for
30 days. LCR will be implemented in a phased manner from 1.1.2015 and its 100%
implementation will be up to 1.1.2019.

It will be applicable on Indian banks on standalone basis including foreign branches. In foreign
banks, framework to be applicable for Indian operations only.

HQLA (High Quality Liquid Assets)

These are assets which can be easily converted into cash with no loss or little loss of value.
There are two categories:

1. Level-1 Assets:
These are included in HQLA without any limit or haircut. Following are Level-1 assets:
 Cash including Cash reserves in excess of CRR.
 Govt. securities in excess of minimum SLR requirement.
 Marketable securities issued/guaranteed by foreign sovereigns with zero risk
weight.
2. Level 2 Assets:
These are included in HQLA subject to maximum 40% of overall stock of HQLA after
applying haircut. Level-2 assets are further divided in 2 parts:

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  Level-2A assets are included after applying 15% hair cut. The examples of
these assets are:
I. Marketable securities guaranteed by sovereigns/PSEs with 20% Risk
Weight.
II. Corporate bonds whose valuation is readily available with AA rating or
above
III. Commercial Papers not issued by banks/PDs/FIs with minimum AA
rating

 Level- 2B assets are included in HQLA after applying 50% haircut. These
should comprise not more that 15% of total HQLA. The examples of these
assets are:
I. Marketable securities guaranteed by sovereigns/PSEs with Risk Weight
above 20% up to 50% i.e. credit rating up to BBB only.
II. Common Equity shares not issued by banks/FIs/NBFC/ and included in
Nifty/Sensex index

HQLA= Level 1 Assets + Level-2A Assets + Level 2B Assets – Adjustment of 15% Cap –
Adjustment of 40% Cap

Total NET Cash flow = Expected Cash Outflow - Expected Cash Inflow for subsequent 30
calendar days.

LCR (Liquidity Coverage Ratio) = Stock of HQLA

Total net cash outflow over next 30 days
> 100%

CAMELS
C- Capital adequacy: A – Asset Quality: M – Management, E- Earnings: L- Liquidity ; S –
System and Control.

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 CHAPTER - 9
ALLIANCES

Alliance means two or more organizations agree to cooperate in operation of business activity.
Each Company differs in strengths and capabilities. Each business remains separate and keeps
its identity.

Purpose of Alliance
 To achieve market growth
 Reduction of transport cost
 Avoiding problems relating to culture integration
 More funds can be diverted for research and training
 Benefit of ability and knowledge of each other
 Establishing technological standards and providing added value to customers

Example of Alliances
Indian Bank, Corporation Bank and OBC came together for alliance in 2006 for leveraging
combine Balance Sheet strength and avail economies of large scale.

MERGER (AMALGAMATION)
When two or more companies combine and ultimately one of them survives with its name. The
assets of merging company get transferred to surviving company. It is also known as
Amalgamation.

Dictionary meaning of merger is combining of two companies resulting into survival of one. But
Amalgamation implies combining of two or more companies thereby survival of one with its
name.

Benefits of Merger
 It improves profitability
 Better customer service
 Removes bottleneck in input supply
Diversification

Types of Merger When Both Companies are having

Horizontal Merger Similar products or same services

Vertical Merger One is supplier of the other

Concentric Merger Merged company provides extension of technology

Conglomerate Merger When Diversified products are produced after merger.

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 CONSOLIDATION
Consolidation means combining of two or more existing companies in a new company. The
existing Company loses identity and a new name is created.

Acquisition and Take Over

It is one company buying capital of another company so as to acquire controlling stake in
ownership of a company. This is buying share capital of another company either from the
market or with consent of existing owners.

Consolidation and Mergers in Indian Banking

Banks consolidated/merged New Bank formed

Bank of Bengal, Bank of Bombay, Bank of Madras Imperial Bank of India in 1921

New Bank of India merged in Punjab National Bank

Bank of Tamilnadu merged in Indian Bank

Global Trust Bank merged in Oriental Bank of Commerce

United Western Bank merged in IDBI

Times Bank merged in HDFC

Bank of Madura merged in ICICI

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 CHAPTER - 10
CIBIL (Credit Information Bureau of India Limited)

CIBIL is a Credit Information Company (CIC) which provides information about past loan history
of a prospective or existing borrower.

CIBIL was established by SBI and HDFC with shareholding of 40% each. D& B (Dun and
Bradstreet Information) and Trans union International (TU) were holding 10% shares each.

At present, SBI, HDFC, D&B and TU hold 10% shares each whereas PNB, BOI, CBI, UBI, BOB,
IOB, City Corp finance, Stan Chart Bank, HSBC hold 5% each.

Every Credit Institution has to become member of at-least one CIC. Presently there are 4 CICs
namely:
1. CIBIL
2. Equifax
3. Experian
4. High Mark

CIBIL is owned by TransUnion International Inc., 3 NBFCs and 10 SCBs in India. Score varies
from 300 to 900. Score 800-900 is least risky and score 300 is extremely risky.

Bank submits Credit information to CIC every month and Data Base is created. The data can be
accessed from website of respective CIC by login by the members. CIBIL provides us two
bureaus – Consumer and Commercial.

Exceptions: CIR is not required in loan against Own Deposits, Govt. Securities, PSU Bonds,
Postal securities, loan against 100% Cash Margin and Staff Loans.
Charges- Consumer Category: Rs. 50/- for each CR in case of Consumer category.
Charges- Commercial Category: Rs. 800/- up to Rs. 2.00 lac, Rs. 1000/- from 2-10 lac and
Rs. 1300/-for loans above 10.00 lac,

LENDERS’ LIABILITY
FAIR PRACTICE CODE FOR LENDERS was adopted by the banks as per RBI directives after
enactment of SARFAESI in the year 2002-2003. The Code of conduct is as under:

Loan Application
1. Loan application up to 2.00 lac must be comprehensive and it must contain processing
fees and other charges which are to be levied in the borrowal account.
2. Acknowledgement should be given to the prospective borrower who applies for loan.
3. Application must be disposed of within reasonable time.
4. Rejection of loan must be conveyed with valid reasons.
5. Sanction of loan should also be conveyed.

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Loan Appraisal
6. Loan appraisal must be proper and credit worthiness should be ascertained.
7. Loan agreement must clearly stipulate about drawing beyond limit and drawls from CC
account for the sole purpose of purchasing stock.

Disbursement of loan
8. Timely disbursement
9. Notice of hike in interest rate/charges

Post Disbursement Supervision

10. Recovery timings 7 to 7.
11. Recall Notice before initiating any action
12. After repayment, securities must be released immediately (Not later than 7 days)
13. DP must be released within 24 hours of submission of stock statement
14. 60 days period is prescribed for implementation of rehabilitation programme.
15. 6 months period is prescribed for nursing of sub-standard account.

BCSBI & OMBUDSMAN

On the recommendation of SS Tarapore Committee, RBI took initiative. The Banking Codes
and Standard Board of India ( BCSBI) was been established as an independent and
autonomous body (society) under Indian Society Registration Act, to watch, monitor and ensure
that banking code and standards adopted by different banks in India are in accordance with the
prescribed standards and these are being adhered to in true spirit.

A Code Compliance Officer will be appointed in each bank to implement the scheme.

Objectives • To promote fair banking practices by setting minimum standards in dealing with
the customers.
• To enhance transparency so that better understanding between banker and
customer can be achieved.
• To encourage market forces through competition.
• To promote air and cordial relationship with the customers.
• To create confidence of the customers in the system.

Applicability Although it is a voluntary code, yet banks have adopted it for implementation so
that higher standards of Customer Service can be attained. This code underlines
the rights of a customer and their reasonable expectations from the bank.
Information The customer can get information on Notice Board, Telephone, Website or from
branch officials regarding: • Interest rates • Tariffs, fees and charges • Changes in
fees and charges • Terms and conditions and changes therein. The persons who
intend to become customers are also welcome to get information about our
products and services. For the existing customers, if bank has made any change
without notice, the same will be notified within 30 days.
Display Bank will display the following policies:
1. Cheque collection policy
2. Grievance Redressal Policy
3. Compensation Policy

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Change in If there is any change in the terms and conditions or there is any hike of charges,
terms and bank will notify within 30 days. If these are not acceptable to the customer, he/she
condition can close the account within 60 days without any penalty.
/charges
Lockers Lockers shall be issued to the customers to the extent of 80% of total on the basis
of First Come First Serve and the remaining 20% would be issued as per discretion
of the BM. All the applications received for issuance of lockers will be
acknowledged. Waiting list will be prepared and waiting list number be allocated to
the applicants as per the code approved.
Closure of If the customer makes request to transfer the account to another branch of our
Account bank, the bank will do so and ensure that the account may be operationalised
within 2 weeks.
Redressal of Every complaint of the customer must be acknowledged within a week’s time. Final
Grievances resolution of complaint must be provided within maximum period of 30 days from
receipt of complaint.
Banking Banking Ombudsman is a representative of RBI in the designation of GM/DGM
Ombudsman who receives analyses and takes decision in respect of complaints against PSBs,
Scheme 2006 Private Banks, Foreign Banks, and RRBs etc. BO is Quasi-judicial post.

There are 15 Ombudsman Offices in the country. The provisions of Banking

Ombudsman Scheme, 2006 are as under:
 Customer must represent bank authorities at least 30 days’ prior to lodging
of complaint with the Ombudsman.
 Complaint should be up to compensation/claim amount of Rs. 10.00 lac.
 Complaint should be made within limitation period of 1 year from date of
reply by the bank.
 If no reply is received from the banks, limitation period for lodging the
complaint is 1 year + 1Month.
 There must be deficiency of service regarding collection of cheque, Inward
and outward remittance, delay in issue of draft, Pension disbursement, loan
delays etc.
 Non-adherence of Code of Conduct by BCSBI may also attract complaint
with Ombudsman.
 Credit Card/Debit Card/ IBS related complaints may also be entertained.
 Complaint can be filed on plain piece of paper or on-line at the website.
Action by the Ombudsman
 Ombudsman calls information from bank. If not satisfied, can also call both
the parties on table.
 Ombudsman passes award after looking into all the aspects of the
complaint.
 Award has to be accepted by the complainant within 30 days.
 Bank has to pay within 30 days from date of acceptance.
 Otherwise, appeal can be filed with Dy. Governor, RBI within 30 days from
date of acceptance with prior approval of CMD/ED.

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 CHAPTER - 11
RECENT DEVELOPMENTS IN INDIAN FINANCIAL SYSTEM

Money Market Developments

DFHI – Discount Discount and Finance House of India was set up in 1988 by RBI to deal in
and Finance short term money market instruments. It aims at improving liquidity in the
House of India banks and FIs. Call Money, Notice Money, Term Money, Commercial Bills, T-
bills and Certificate of Deposits are traded in DFHI. DHFI acts both lender as
well as borrower in short term money market.

LAF - Liquidity Liquidity Adjustment facility was introduced in 2000. It consists of Repo and
Adjustment Reverse Repo.
Facility
Repo and Reverse Repo

It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later
date in order to Inject Liquidity. Presently, Govt. securities are dealt with. All
Repo transactions are routed through CCIL. RBI has permitted Repo in
Corporate securities for only “AA” rated companies. But the market is yet to
be activated.

Under Reverse Repo, RBI sells securities with a commitment to buy at a

later date in order to Contain Liquidity.
Repo and Reverse Repo transactions are generally conducted for Overnight
period through Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and
its multiples. Margin is normally 5%.

CBLO – Collateralized Borrowings and Lending Obligations:

Collateralized It is money market instrument launched by CCIL. Borrower can deposit G-sec
Borrowings and with CCIL and borrow funds from others who have surplus funds subject to re-
Lending purchase of securities. The tenure is 1 day to 1 year.
Obligations
CBLO as a product is conceived and developed by CCIL for the facilitating
deployment in a collateralized environment. As a product, CBLO aims to
benefit those entities who have been phased out of Call/ Notice money market
and / or those entities on restrictions have been placed on the borrowing /
lending in call / notice money market.
CCIL – Clearing
Corporation of CCIL - Repo and Reverse Repo transactions are cleared at CCIL. It also
India Limited deals with clearing and settlement of Forex deals amongst Primary dealers. It
mitigates settlement Risks.. Both counter parties should be members of CCIL.
It handles USD/INR deal settlements with netted amounts.

RTGS and NEFT Real Time Gross Settlement is a payment system for Interbank transfer with
minimum Rs. 2.00 lac. This system is managed by IDRBT (Institute of
Development and Research in Banking Technology), Hyderabad, which
connects all banks to Central server maintained by RBI. The network is
INFINET (Indian Financial Network)
Timings are:
R-41 transactions 8:00AM to 8:00PM

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 NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The timings
are: 8:00AM to 7:00PM. There are 12 batches daily. The time period is B+2.
MSF – Marginal The banks will use MSF to borrow overnight money from RBI only when they
Standing Facility have exhausted all other existing channels like CBLO and LAF. The features
of the scheme are as under:

 The eligible entities can avail overnight, up to 2% of their respective NDTL

nd
outstanding at the end of the 2 preceding fortnight.
 For the intervening holidays, the MSF facility will be for one day except on
Fridays when the facility will be for 3 days or more, maturing on the
following working day.
 Requests will be received for a minimum amount of Rs. One Crore and in
multiple of Rs. One Crore thereafter..

A margin of 5% will be applied in respect of GOI dated securities and Treasury

Bills. In respect of SDLs, a margin of 10 per cent will be applied
CP and CD
Commercial Papers – CP:
 CP is issued by Corporate with Net Worth minimum 4 Crore, Rating min
A3 and availing WC limit from any bank.
 CP is issued with tenure 7 Days to 1 year.
 CP is issued in multiples of Rs. 5.00 lac.
 CP is Promissory Note and is Negotiable and also attracts Stamp Duty.
 It is fairly active in Secondary market.
 It is in Demat form and the price is less than Face Value.

Certificate of Deposit – CD
 CD is issued by banks
 CD is issued with tenure 7 Days to 1 year.
 CD is issued in multiples of Rs. 1.00 lac
 CD is Promissory Note and is Negotiable and also attracts Stamp Duty.
 CD is not very active in Secondary market

Govt. Securities Market

Introduction of new Zero coupon bonds, Floating rate bonds & Capital Index bonds
instruments
Primary Dealers  Deal in Govt. securities./Borrowings.
 Facilitate Govt. Market.
 19 in number
 Out of which 11 are Bank PDS and 8 are NBFCs

Demat form of The institutions are:
securities NSDL (National Securities Depository Limited)
CDSL (Central Depository Services Limited)
SHCIL (Stock Holding Corporation of India Ltd.)
NSCCL (National Securities Clearing Corporation)
When Issued (WI) It is a conditional transaction because in WI transaction, security is
authorized and not issued. Treasury securities, stock splits, and new

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 issues of stocks and bonds are all traded on a when-issued basis. Prior
to a new issue's offering, underwriters solicit potential investors who
may elect to book an order to purchase a portion of the new issue.
These orders are made conditionally - "when issued" - because they
may not be completed, particularly in the event the offering is canceled.
Orders when issued are sometimes called orders "with ice" or orders
"when distributed." The term is short for "when, as and if issued."

Capital Market Developments

SEBI
Security and Exchange Board of India was established in 1988 and accorded
statutory powers through SEBI Act 1992 for the following purposes:
1. Protecting interest of investors
2. Promotion , Development and Regulation of Security Market
3. Registration of brokers, sub-brokers and underwriters
4. Prohibiting unfair practice
5. Inspection of books of companies

SEBI has same powers as that of Civil Court. It can:

 Suspend trading
 Restrain a person from assessing security market
 Attach bank account for maximum 30 days
 Impound proceeds of securities

SEBI has introduced rule of refund of allotment money if 90% subscription is

not received. It has also made compulsory completion of allotment procedure
within 30 days.

Requirements
of Public Issue  All listed Cos. Are required to publish unaudited results on quarterly basis.
 All publically issued Debt instruments are presently rated by credit rating
agencies.

ASBA
“Applications Supported by Block Amount” is a system of on-line application for
subscription of securities without parting with funds by the investor. The funds
remain in the account and are remitted only if allotment is made by the
company. Otherwise block is released when allotment is finalized and shares
are not allotted

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 Forex Market Developments

Capital and Capital account convertibility is a feature of a nation's financial regime that
Current centers on the ability to conduct transactions of local financial assets into
Account foreign financial assets freely and at country determined exchange rates.[1] It
Convertibility is sometimes referred to as capital asset liberation or CAC. Capital Account
Convertibility is partial in India.

Capital account convertibility allows local currency to be exchanged for

foreign currency without any restriction on the amount. This is so local
merchants can easily conduct transnational business without needing foreign
currency exchanges to handle small transactions.

Capital account convertibility in India is partial. Basically there are multiple

ways of investing in India in case of Capital Accounts - FDI , FII, FPI/QFI. It is
either through Automatic route or through Foreign Investment Promotion
Board (FIPB)
Current Account Convertibility (100%)
Current account convertibility means freedom to buy or sell foreign exchange
for the entire trade purposes.(e.g. buying and selling of goods, interest
payments etc..
This is fully allowed in India provided that initial permission is taken from RBI.
There is no need to take again and again permission from RBI permission for
every transaction
LERMS Liberalized Exchange Rate Mechanism
Exchange rate is determined by market forces which is linked with
international rates.
ECBs ( External External Commercial Borrowings are medium and long term loans as
Commercial permitted by RBI for the purpose of :
Borrowings  Fresh investments
 Expansion of existing facilities
 Trade Credit (Buyers’ Credit and Sellers’ Credit) for 3 years or more.
Automatic Rout
 ECB for investment in Real Estate sector , Industrial sector, Soft ware
sector and Infrastructure do not require RBI approval
 It can be availed by Companies registered under Indian Company Act.
 Funds to be raised from Internationally recognized sources such as
banks, Capital markets etc.
Approval Route
Under this route, funds are borrowed after seeking approval from RBI.
 The ECBs not falling under Automatic route are covered under
Approval Route.
 Under this route, Issuance of guarantees and Standby LC are not
allowed.
Funds are to be raised from recognized lenders with similar caps of all-in-cost
ceiling.

All in cost ceiling is :

6 M LIBOR+ 300 bps for ECB with average maturity of 3-5 years
6 M LIBOR +450 bps for ECB with average maturity above 5 years
6 M LIBOR +500 bps for ECB with average maturity of 10 years

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 Monetary limit of each transaction is 20 Million for each Current account
transaction and Maximum 750 million USD for Capital account transaction in
a particular financial year.
EEFC Exchange Earners Foreign Currency accounts can be opened by exporters.
100% export proceeds can be credited in the account which does not earn
interest but this amount is repatriable outside India for imports (Current
Account transactions).

Other
Remittances The scheme is meant for Resident Indians individuals. They can freely remit
abroad up USD 250000 (Previously 125000) per financial year in respect of any
current or capital account transaction without prior approval of RBI. The
precondition is that the remitter should have been a customer of the bank for
the last 1 year. PAN is mandatory.

RBI has clarified that Scheme can now be used for acquisition of IP
outside India.

Import and Export of Indian Rupees

Limit is Rs. 25000/- (Previously 10000/-) while leaving India and while coming
to India.

Advance AD Banks may remit advance payment of Imports subject to following

against conditions:
Imports  Up to USD 200000 or equivalent after satisfying about nature of
transaction, trade and standing of Supplier.

NRO accounts  Remittance allowed up to 1 Million USD or its equivalent per financial
year.
 NRO Accounts in the name of Bangladesh residents can be opened
without permission of RBI.
 Bangladeshi resident can now open NRO account.
 But Pak residents can open NRO account only with permission of RBI.
FDI (Foreign Foreign direct investment (FDI) is a direct investment into production or
Direct business in a country by an individual or company in another country, either
Investment) by buying a company in the target country or by expanding operations of an
existing business in that country. Foreign direct investment is in contrast
to portfolio investment which is a passive investment in the securities of
another country such as stocks and bonds.

FDI Limits in different sectors are as under:

%age of Net Owned Capital
Telecom Sector Raised from 74% to 100%
Defense Sector Raised to 49%
Insurance Sector Raised to 49%
Power Exchanges Remains at 49%
Civil Aviation Remains at 49%
Credit Information Companies 74%
Retail- Multi brand 51%
Retail Single brand 100%

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 Courier Service 100%
Foreign Banks in wholly owned 100%
subsidiary
Private Sector banks 74%
Public sector Banks 20%
 A citizen/Entity of Pakistan may participate in FDI with prior approval
of Government.
ODI It has now been decided:
(Overseas Direct
Investment ) a) To restore ODI up to 400% of Net Worth. Any financial commitment
exceeding 1 billion USD in a financial Year would require prior
approval of RBI even within overall limit of 400% of Net worth.

Payment and Settlement System

RBI has reduced paper based instruments from 60% of volume of total non-cash
transactions to 11% by introducing:
1. RTGS and NEFT
2. ECS – Electronic Clearing Service (New service NECS – National Electronic
Clearing Service)
3. RECS – It is miniature of NECS within jurisdiction of Regional Offices of RBI.
4. CCIL & CBLO
5. Prepaid Cards
6. Mobile Banking and IMPS
7. ATMs and POS transactions
NPCI National Payments Corporation of India (NPCI) was incorporated in December
(National 2008 by RBI. NPCI would function as a hub in all electronic retail payment
Payment systems which is ever growing in terms of varieties of products, delivery channels,
Corporatio number of service providers and diverse Technology solutions.
n of India)
 The Institute of Development and Research in Banking Technology (IDRBT),
Hyderabad had been providing ATM switching service to banks in India
through National Financial Switch. NPCI has deputed its officials to IDRBT
Hyderabad and NPCI has taken over NFS (National Financial Switch)
operations from December 14, 2009.
 Immediate Payment Service (IMPS) offers an instant, 24X7, interbank
electronic fund transfer service through mobile phones. IMPS facilitate
customers to use mobile instruments as a channel for accessing their bank
accounts and put high interbank fund transfers in a secured manner with
immediate confirmation features. This facility is provided by NPCI through its
existing NFS switch.
 NPCI is managing implementation of CTS (Cheque Truncation System).
DEAF Accounts------Account not operated for more than 10 years
Time Period of Preserving Records ----------5 years (Where refund received from Fund)
Time Period ------------Permanent (Where refund has not been received)

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 Sovereign Gold Bonds 2015-16

 Individuals, Trusts, Charitable Institution and University can apply for these
bonds.
 The bonds will be denominated in units of 1 gram of Gold.
 Minimum instrument will be of 2 grams and maximum up to 500 gram.
 Price will be in INR based on last weeks’s average price of 999 purity published
by IBJA (India Bullion and Jewelers’ Association Ltd.)
 Rate of Interest will be 2.75% p.a.
 Bonds are repayable after 8 years. Pre-mature redemption is permitted from 5
the year.

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 CHAPTER - 12
BANKER CUSTOMER RELATIONSHIP

Banker (As defined in Banking Regulation Act)

Banking means accepting of deposits for the purpose of lending or investment. The deposits are
repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.
------------------Sec 5(b) of Banking Regulation Act
 Only a firm or a company can constitute bank.
 Money lenders, Mahajans, Shahukars are not bankers
 Companies giving loans but not accepting deposits are not bankers.
 Other functions of bank are Discounting of bills, Collection of cheques, Remittances,
Safe custody, Lockers, Forex business, Merchant banking, Insurance business,
Factoring, Venture Capital Financing, Issuance of LC and LG.

Customer (As defined in KYC Policy)

A customer for the purpose of this policy is defined as: (i) a person or an entity that maintains an
account and / or has a business relationship with the Bank; (ii) one on whose behalf the
account is maintained (i.e. the beneficial owner); (iii) beneficiaries of transactions conducted by
professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors, etc. as
permitted under the law; and (iv) any person or entity connected with a financial transaction
which can pose significant reputational or other risks to the Bank.

Banker- Customer Relationship

 Limitation of Deposits is 3 years and it runs from date of demand.

Banker Customer
Deposits Debtor Creditor
Advances Creditor Debtor
Lockers/Safe Lesser Lessee
Deposit Vaults
Safe Custody Bailee Bailer
Remittance Agent Principal
Issue Of Indemnified Indemnifier
Duplicate Draft
Payment of Trustee Beneficiary
Draft
Pledge Pawnee Pawner
Mortgage Mortgagee Mortgager
Nomination Nominee acts as trustee of Legal Heir

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Anti MoneyLaundering - PML Act 2002
Money Laundering is a process whereby origin of funds generated by illegal means is
concealed e.g. Drug trafficking, Gun smuggling, corruption etc.
According to Section 3 of the act, the person who directly or indirectly attempts to indulge or
knowingly assists or is party i.e. guilty of offence is liable for Rigorous imprisonment of
 Not less than 3 years up to 7 years; or
 Fine up to Rs. 5.00 lac

Stages of Money Laundering

Placement: It is first stage of Money Laundering i.e. entering into financial transaction without
known source of Income
Layering: It refers to separation of illicit proceeds from their souce by creating complex layers of
transaction.
Integration; This is 3rd phase which means placing of laundered proceeds into legitimate
economy.

KNOW YOUR CUSTOMER: There are 4 Pillars

1. Customer Acceptance
2. Customer Identification
3. Risk Classification
4. Monitoring
Branch officials should satisfy themselves about the genuineness of the KYC documents at
the time of opening the account and the websites of different departments of Govt. of In
dia have been provided to the branches as per detail given below:

1. Customer Acceptance
Bank should not open account in the name of Benami/ fictitious person. Due diligence study will
be undertaken before opening account. Legal Capacity of the parties will also be considered
before opening account.

2. Customer Identification
The identity is to be verified for: (i) the named account holder; (ii) the beneficial owners; (iii)
the signatories to an account; and (iv) the intermediary parties from any of the following
Officially Valid Document:
a) Passport
b) Driving License
c) PAN Card
d) Voter Identity Card
e) Job Card issued NREGA duly signed by State Official
f) Aadhaar Card or letter issued by UIDAI containing details and Aadhaar number.

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Address Verification is done by obtaining any of the listed document such as Passport, Ration
Card, Aadhaar Card or Electricity Bill, Telephone bill etc.

If some document such as Passport, Aadhaar Card satisfies both conditions of Address proof
and Identity proof, One document can be relied upon.

A foreign student (other than from Pak) can open NRO account on the basis of Passport &
Visa provided he/she gives valid local address proof within 30 days. During this period, bank
cannot allow foreign remittance beyond 1000 USD.

Accounts of Proprietorship Firm: Any one of the following documents has to be obtained.
 Registration Certificate (If registered)
 License/certificate issued by Municipal Corporation
 Sales Tax/Income tax return
 CST/VAT certificate
 Certificate/Licensee issued by Registering authority like ICAI, ICSI etc.
 Utility bills such as Electricity bill, Water bill, Telephone bill etc. as proof of address.

Accounts of Partnership Firms

 Registration Certificate (If registered).
 Partnership Deed
 Power of Attorney to transact business
 Telephone bill in the name of firm/partner
 Officially valid document to establish identity of partner

Accounts of Companies
 Memorandum of Association
 Articles of Association
 „Certificate of Incorporation
 Resolution of Board of Directors
 Identification of authorized signatories
 Power of attorney to Manager/Official to transact the business
 PAN/TAN and Electricity/Telephone bill

Introduction

As per extant guidelines, Introducer must know and identify the customer & his profession; he
himself should have satisfactorily operated account for at least 6 months and in his account,
KYC norms must have been fulfilled.

The Revised guidelines the, antecedents of prospective customer have to be verified to the
satisfaction of the official authorized to allow opening the account, in addition to obtaining
documents as prescribed. Introduction by an existing KYC compliant customer need not
be insisted upon.

Photograph: A set of two photographs should be obtained from customer.

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Wherever applicable, information on the nature of business activity, location, mode of payments,
volume of turnover, social and financial etc. will be collected for completing the profile of the
customer. However it should be non-mandatory and be kept secret.

3. Risk Classification

Customers will be classified into three risk categories namely High, Medium and Low.
High Risk Category
 Politically exposed persons of foreign origin (individuals who are or have been entrusted
with prominent public functions in a foreign country
 Close relatives of the politically exposed persons.
 Customers with dubious reputation as per public information locally available or
commercially available
 Individuals and entities specifically identified by regulators, FIU and other competent
authorities as high-risk
 Customers based in high risk countries/ jurisdictions or locations (nationality is
irrelevant),
 Identified in FATF public statement, as having substantial money laundering and terrorist
financing (ML/FT) risks: and with strategic AML/CFT deficiencies as mentioned in
(www.fatf-gafi.org).
 Accounts of Embassies / Consulates; Off-shore (foreign) corporation/business
 Non face-to-face customers
 High net worth individuals [HNIs]
 Firms with 'sleeping partners'
 Companies having close family shareholding or beneficial ownership
 Trusts, Charities, (NGOs)/Non-Profit Organizations (NPOs)
 Gambling/gaming including “Junket Operators” arranging gambling tours
 Dealers in high value or precious goods (e.g. jewel, gem and precious metals dealers,
art and antique dealers and auction houses, estate agents and real estate brokers).

Medium Risk category

Medium Risk country (nationality is irrelevant);

 Current Account customers where credit or debit summations exceed Rs.50 lakh per
annum in their accounts but they do not provide sufficient documentary proof and Other
deposit account customers where credit or debit summations exceed Rs.10 lakh per
annum in their accounts but they do not provide sufficient documentary proof.
 Non-Bank Financial Institution, Stock brokerage, Import / Export Customer, Gas
Station, Electronics (wholesale), Travel agency, Used car sales, Telemarketers,
Auctioneers, Sole Practitioners or Law Firms (small, little known), Notaries (small, little
known), Secretarial Firms (small, little known), Accountants (small, little known firms),
Venture capital companies.

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Low Risk Category

 All customers not falling under the category of High / Medium Risks are to be classified
under Low Risk category. All borrowal customers, where due diligence is exercised at
the time of granting the credit facilities.

UCIC: Banks have been advised to allot Uniform Customer Identification Code (UCIC) to all the
customers of the bank while entering into new relationship with the bank.

4. MONITORING OF TRANSACTIONS

Periodic review of accounts be made and Enhanced Due Diligence measures be

adopted wherever required. Banks will update KYC for existing customers as under:

Low Risk Customers ------------- After 10 years

Medium Risk Customers --------After 8 years
Low Risk Customers-------------After 2 years

CASH TRANSACTION REPORT (CTR)

The branches would also be reporting a) all cash transactions of above Rs 10 lakh or its
equivalent in foreign currency and all series of cash transactions of Rs. 50000/- and
above or its equivalent in foreign currency and integrally connected to each other
aggregating above Rs. 10.00 lac where such transactions have taken place in one
month. The CTR will be submitted to FIU-India every month by 15th.

SUSPICIOUS TRANSACTION REPORT (STR)

Suspicious transaction means a transaction, comprising of deposit, withdrawal, transfer
of funds, whether or not made in cash which, to a person acting in good faith:
i. which gives rise to a reasonable ground of suspicion that it may involve the
proceeds of crime generally irrespective of the amount of transaction
ii. appears to be made in circumstances of unusual or unjustified complexity; or
iii. appears to have no economic rationale or bonafide purpose; or
iv. gives rise to a reasonable ground of suspicion that it may involve financing of the
activities relating to terrorism,
v. In some cases transactions are abandoned/aborted by customers on being
asked to give some details or to provide documents.
Bank will ensure furnishing of STR within seven days of arriving at a conclusion by the
Principal Officer of the Bank that any transaction whether cash or non-cash, series of
transactions integrally connected are of suspicious nature.

COUNTERFEIT CURRENY NOTE (CCR) Statement

 To be submitted to FIU within 15 days from close of month.

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MAINTENANCE & PRESERVATION OF RECORDS :
Banks should ensure that records pertaining to the identification of the customer and his
address e.g. copies of documents like passports, identity cards, driving licenses, PAN card,
Utility bills obtained while opening of the account and during the course of business relationship
are properly preserved for at least 10 years after the business relationship is ended. Recently
period has been reduced to 5 years.

SMALL DEPOSIT ACCOUNT

a. „Small account‟ means a saving account introduced in terms of Government of India,
Notification where :
i. the aggregate of all credits in a financial year does not exceed Rs. 1,00,000/-;
ii. the aggregate of all withdrawals and transfers in a month does not exceed Rs.10,000/-;
iii. the balance any point does not exceed Rs.50,000/-.

Other guidelines of Small Account

„Small Accounts‟ shall remain operational initially for a period of twelve months, and thereafter
for a further period of twelve months in case such account holder provides evidence to the bank
of having applied for any of the „officially valid documents‟ within twelve months of the opening
of the said account.

Basic Saving Bank Deposit Account (Zero Balance Account)

In a bid to increase the penetration of banking services to weaker sections of the economy,
Reserve Bank of India has advised all banks to convert all existing 'No-Frills' accounts which are
fully KYC compliant to Basic Saving Bank Deposit Account (BSBDA). The main features of
„Basic Saving Bank Deposit Account are as under.

1. Basic Saving Bank Deposit Accounts shall be opened for those customers who
cannot afford the regular savings accounts. These accounts basically would help that
population which is covered with Government social welfare schemes.

2. Existing no-frill account be converted into Basic Saving Bank Deposit Account and
provide zero balance facility in these accounts along with ATM-cum-Debit Cards
without any extra charge. Such Accounts would however be subjected Know Your
Customer (KYC)/ Anti Money Laundering (AML) guidelines issued from time to time.

3. There will be no limit on the number of deposits that can be made in a month.

4. Limited number of withdrawals (maximum 4 withdrawals Excluding ATM withdrawals) will

be allowed. An individual can hold one account only and will not be eligible to open any other
Saving Bank Deposit account in the same Bank

Recent Simplified KYC Measures By RBI

1. Single document containing proof of identity and address proof is sufficient for KYC
2. No separate proof is required for current address, if proof of permanent address is there.
3. No separate KYC is required in case a/c is transferred from one branch to another.
4. KYC of all members of SHG is not required. KYC will be done in respect of officials of
SHG.

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 5. Foreign students are allowed a time of ONE MONTH for furnishing proof of local
address.
6. Low Risk customer, if unable to submit KYC due to genuine reason, he can submit the
same within 6 months.

e-KYC It is process by which Biometrics and other particulars of a person can be

fetched from site of UIDAI. The customer provides only Aadhaar Number and
his request is submitted online at UIDAI site. The request is recognized by
UIDAI through his/her thumb impression. On receiving request, the UIDAI
sends photograph, address and other particulars to the bank which can be
viewed on-line. This process is called e-KYC.

Types of Deposits
Current Account
 No interest is pad on such accounts.
 It can be opened by individual and Entities.
 Freedom of number of transactions.
 FD interest is payable in Sweep type of current accounts.

Saving Bank Accounts

 Interest @ 4% is paid on daily product basis
 Deregulation of interest rates on SB deposits above Rs. 1.00 lac.
 SB accounts cannot be opened by Entities for business purpose.

Fixed Deposit accounts

 Interest is compounded quarterly.
 Tenure of FD can be from 7 days to 120 months.
 Penalty for pre-mature will be decided by bank.
 Interest rate on NRE FD will be decided by each bank.
 Interest on FCNR FD is linked with LIBOR.
 No TDS is deducted on NRE/FCNR Deposits
 TDS @10% is deducted on interest if the amount earned during financial year is 10000
or more. In the absence of PAN, rate of TDS will be @20%.
 If Income of the customer is not subject to tax, he may submit 15H (for senior citizens(
and 15G (for others) to exemption from TDS.
 Matured FD can be paid in cash if amount is less than 20000/-. TD maturing on Sunday
will be paid next day along with interest of one day.
 Interest is compounded quarterly.
 On case of joint account payable to E/S, the pre-mature payment can be made to both
because mandate of E/S is applicable on maturity.
 FD is not transferable. If FD matures on Sunday, payment will be made on next day with
extra interest of one day.
 Hybrid Deposits are combination of Demand and Time Deposits say SB and FD.

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Recurring Deposits
 Fixed installment is paid every month.
 No interest is paid on advance installments. However penalty is charged on late deposit
of installment.
 TDS is deducted on interest earned in RD accounts if the amount exceeds 10000/- in a
particular financial year.
 Minimum period is 6 Months and maximum is 120 months.
ALL DEPOSITS ARE INSURED BY DICGC UP TO RS. 100000/- PER DEPOSITOR PER
BANK. INSURANCE PREMIUM IS 10 PAISA PER RS. 100/-
NRE Deposit Only non-resident Indians can open following NRE accounts with banks:
Accounts  Fixed Deposits & Recurring Deposits
 SB and CA Deposits

The other features are:

 Deposits are held in Indian currency.
 The Principal and Interest both can be repatriated.
 Account holder bears the risk of fluctuations in currency rates.
 Account will be opened with proceeds from abroad.
 Funds originating in India cannot be deposited.
 Interest rates Have since been deregulated by RBI..
 No lien is permitted to be marked against SB deposits.
 Joint account with Indians can be opened as Former or Survivor.
FCNR- B FCNRB accounts can also be opened by NRIs. The conditions of NRE
accounts deposits as explained above are also applicable on FCNR-B deposits with
the following additional features:
 Only FD 1-5 years tenure can be opened.
 The amount is kept in Foreign Currency and repaid in the Foreign
Currency.
 6 currencies i.e. GBP, USD, Euro, JPY, CAD. AUD are eligible
currencies for opening the account.
 No exchange risk for the customer. The bank bears the risk.
 The amount of Principle and Interest is freely repatriable
As part of efforts to rescue the sinking rupee, the Reserve Bank of India
freed interest rates on FCNR deposits. This allows banks to set their own
interest rates on FCNR fixed deposits to compete with each other by offer
high interest rates.
NRO accounts Non-Resident accounts can be opened:
 By any person resident outside India (other than a person resident
in Nepal and Bhutan) can open NRO account, maintain it for 6M
and can convert it into foreign currency after completion of stay
provided no local funds are credited to the account.
 Deposit may be held jointly with residents on F/S basis.
 Currency of Deposit is Indian Rupees
 Not Repatriable except for the following in the account - 1) Current
income 2) Up-to USD 1 Million per financial year.
 Type of Deposit may be Savings, Current, Recurring, Fixed Deposit.
 Existing accounts of residents are converted to NRO category
consequent upon their becoming NRIs.
 TDS called withholding Tax is applicable at 30% + Service Tax
+Education Cess.

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  Prior permission of RBI is required to open NRO account of
Pakistani national. However permission is not required for
opening NRO account of Bangladeshi citizen.
Merchant Banking
 It is managing IPOs (Initial Public Offer), FPOs (Further Public Offer, Right
Issues, Underwriting of IPOs/FPOs by Financial Institutions and related jobs of
Issue of shares, debentures. Merchant banking also includes advising/counseling
for Corporate.
Lease Financing
Leasing is allowing others to use capital assets like machinery on fixed payment of rent for a
specified period. Lesser is the person who purchases the assets for leasing out to others. The
person who enjoys usage of asset is called Lessee on payment of lease rent.

Finance arranged by Lesser to purchase an asset not for his own use, but for leasing out to
others, is called Leasing Finance. EMI is paid out of Lease Rent received by the lesser.

Plastic Money
Charge Card
Transactions of withdrawal/POS are undertaken by the card holder, but single accumulated
amount is debited/charged to his account generally once a month. Such type of card is called
Charge Cards.

Credit Card
These are issued after taking into consideration Income of the person. Credit is allowed up to
certain limit. In case of POS transactions, 20-50 days interest free credit is allowed. POS
transactions are done with Merchants. The bank which provides POS machines is called
Acquiring bank or Merchant Bank. Visa and MasterCard are the companies which run the show.

Debit Card
It is a card issued by bank to facilitate withdrawals from own account up to to certain limit in
days. POS transactions and utility payments are also allowed. Funds can be transferred from
one account to another. If another bank‟s ATM is used, 5 transactions are free of cost. In case,
payment is not disbursed by the ATM and account is debited, bank has to reimburse within 7
days, failing which penalty of Rs. 100 per day has to be paid to the customer.

Now a days, RuPay Card has been introduced which required PIN for e-commerce and POS
transactions. This is indigenously built card and cannot be operated out of India.

What is Money Mule: In Money mule transaction, individual with bank account is
recruited to receive cheques, deposits etc. and then transfer these funds to accounts
held on behalf of another person. He receives certain commission for this task.

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 CHAPTER - 13
SPECIAL CUSTOMER RELATIONSHIP

Normally, a customer operates the account himself. But sometimes, account of the customer is
operated by someone else with some authority – Mandate of Power of Attorney. This is called
Special Relationship.

Mandate Power of Attorney

It is an authority given to some 3rd person to It is a Stamped Document issued by a person
do certain acts on his behalf. (called Donor) in favor of other (called Donee)

Customer informs the bank that he has General PA is issued for acting in more than
authorized certain person to operate his one transaction. Special PA is for single
account. transaction/specific purpose.

Signatures of mandatory are authorized by the GPA empowers a person to sign cheques,
customer in the mandate letter. Stop payment or sign the borrowal documents.

Mandate is for short and temporary period.

Institutions cannot issue Mandate Institutions as well as individuals can issue PA

Mandate must be signed by all the joint PA holder must sign as ―Pre-pro_______
account holders/partners in a firm. Constituted Attorney.

Mandate can be withdrawn at any time. PA can be revoked at any time.

Mandate ceases to operate on Death, Insanity, It stands revoked on Death, Insanity,

and Insolvency of the account holder. Insolvency of the account holder.

Garnishee Order & Attachment Order

GARNISHEE ORDER
 Order issued by court on the banker (GARNISHEE) of the (JUDGEMENT debtor)
maintaining credit balance to pay the (JUDGEMENT creditor)
 Order nisi-direct to stop payment and asks the bank why the funds should not be paid to
the creditor
 Order absolute—Entire of specific balance attached

INCOME TAX ATTACHMENT ORDER

Issued under Sec.226 (3) of Indian Income Tax Act, 1961, by an Income Tax Officer upon
Assesses in Default asking the bank to attach the deposit amount of the customer.

It is not only debts due and payable (as is the case with a garnishee order), but also any
money held on account of assesses is attached by an Income Tax Attachment Order.

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Accordingly, it can attach: (I) Saving Fund and Current Account, (ii) Term Deposit (however,
amount is payable on maturity), (iii) Proceeds of Collection item not credited to account
Garnishee vis-à-vis I T attachment order
Particulars Garnishee IT attachment order
Authority Court Revenue/Tax authority
Amount May be specific Must be specific, else it is a not valid
order.
Applicable amount At the time of receipt of At the time of receipt of order and all
order credits thereafter
Joint Accounts Not applicable Applicable pro-rata
Order Single name

Single Account Applicable Applicable

Order Joint Names

Order in name of Partner, Not applicable Not applicable

Trustee, executor,
director etc
Deceased accounts Applicable Applicable
Insolvents Not applicable Applicable
Undrawn CC or OD Not applicable Not applicable
balances
Proceeds of Not attached Attached
cheques/Bills on
collection
Future Credits Not attached Attached
Right to set off Available Available
Both received Preference to Preference to attachment being State
simultaneously or attachment being State dues
pending for payment dues.
Limitation 12 Years being 30 years being Govt dues.
execution of decree

Right of Set Off

It is right of a bank as Debtor to adjust the debt owing to him owing to him by the same person
in the capacity of creditor. In simple words it is adjustment of loan account from credit balance in
some deposit account.
Essential of Right of Set Off

 Both the accounts must be in same Name and same Right.

 Same Right is not there if dues are in single name and Credit balance in joint name.
 Credit balance in a minor’s account in the capacity as Guardian is not in same right.
 Same Right is not there if dues are in the name of a partner and Credit balance in the
account of partnership firm. But reverse is true and Right of Set off can be exercised.
 Single account and Proprietor’s Account are in same right.

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  Amount must be certain and debt must be due and recoverable.
 All branches of a bank are considered as single entity.
 Automatic Right of set off is available in the following:
Death/Insanity and Insolvency of the borrower.
Insolvency of the partner or winding up of the company.
Garnishee order/Income Tax attachment order
Notice under SARFAESI Act
Dues against Guarantor only if Demand has been made from him.

NOTICE IS NOT COMPULSORY FOR EXERCISING RIGHT OF SET OFF.

LIEN

Sec 170 & 171 of Indian Contract Act, deal with Lien. Lien is a right of creditor to retain
possession of goods and securities owned by Debtor until Debt is repaid. Lien os of 3 types:
1. Particular Lien
2. General Lien
3. Negative Lien
General lien is Bankers’ lien which is also called Implied Pledge. Bank can adjust proceeds of
security not only for a particular loan account but for another loan which has fallen due for
payment. Under general lien, security can be sold without court’s intervention but after serving
proper notice. Security is under possession of the Lender bank.
Particular lien does not allow the creditor to sell the security for adjustment of dues. It entrust
right on particular security for particular debt. Security is under possession of the Creditor.
Negative lien casts upon binding upon the Debtor not to sell particular security until Debt is
repaid. Security is under possession of the borrower.

Right of Lien does not apply on:

 Goods kept with bank under Safe Custody
 Goods/Securities kept for some specific purpose
 Articles left by negligence
 Stolen goods
Both Lien and Set off cannot be exercised simultaneously.

Right of Appropriation
In case a customer has two loan accounts. The customer deposits money or cheque with
directions to credit proceeds in a particular account, bank has to follow. In the absence of
directions of customer (Debtor), Bank (Creditor) has right to appropriate in any of the two
accounts. This is called Right of appropriation.
Clayton’s Rule
It is a rule under which first item on debit side is discharged by first item on credit side and so on
chronologically. Amount is debited in the account on FIFO basis.

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 Ch-14
BANKING OMBUDSMAN SCHEME 2006 &
COPRA – CONSUMER PROTECTION ACT, 1986

INTRODUCTION:
 The Banking Ombudsman Scheme, 2006 enables resolution of complaints of bank
customers relating to certain services rendered by banks.
 The Scheme has come into force from January 1, 2006.
 The Banking Ombudsman is person appointed by the Reserve Bank of India to redress
customer complaints against certain deficiency in banking services.
 The Banking Ombudsman is a quasi judicial authority. It has power to summon both the
parties - bank and its customer, to facilitate resolution of complaint through mediation.
 As on date, 15 Banking Ombudsmen have been appointed with their offices located mostly
in the State Capitals. The addresses of the Banking Ombudsman offices have been
provided in the RBI website.
 All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-
operative Banks are covered under the Scheme.
 The new scheme also includes inter-bank disputes for arbitration up to an amount of
Rs.10.00 lac.
 Only those complaints are entertained by the Ombudsman, the compensation/award of
which does not exceed an amount of Rs.10.00 lac.

TYPES OF COMPLAINTS BEFORE BANKING OMBUDSMAN

Banking Ombudsman entertains any complaint pertaining to Routine, IT or loans where financial
deficiency is there and claim amount does not exceed Rs. 10.00 lac.

The Banking Ombudsman will also consider complaints from Non-Resident Indians having
accounts in India in relation to their remittances from abroad, deposits and other bank-related
matters.

APPLYING TO BANKING OMBUDSMAN Customer can file his complaint before the Banking
Ombudsman if the reply is not received from the bank within a period of one month (30 days) ,
after the bank concerned has received his representation, or the bank rejects the complaint, or
the complainant is not satisfied with the reply given to him by the bank.

Does the complainant have to fulfill any conditions before complaining to the Banking
Ombudsman?
For filing a complaint before the Banking Ombudsman, it is essential for a complainant to first
attempt to find a satisfactory solution directly with his bank by making a written representation to
the bank named in the complaint. The complaint should, however, be made after lapse of one
month from the date of lodging complaint with the bank and before expiry of period of one year
from date of reply by the bank.

 The complaint should not be for the same subject matter that was settled through the
office of the Banking Ombudsman in any previous proceedings.

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  The complaint cannot be made before a Banking Ombudsman on the same subject
matter for which any proceedings before any court.

 The Banking Ombudsman does not charge any fee for resolving customers’ complaints.

PROCEEDINGS BEFORE THE BANKING OMBUDSMAN

 If a complaint is not settled by an agreement within a period of one month, the Banking
Ombudsman proceeds further to pass an award. Before passing an award, the Banking
Ombudsman provides reasonable opportunity to the complainant and the bank, to
present their case.

AWARD GIVEN BY BANKING OMBUDSMAN

 After an award is passed, its copy is sent to the complainant and the bank named in the
complaint. It is open to the complainant to accept the award in full and final settlement of
his complaint or to reject it.

 If the award is acceptable to the complainant, he is required to send to the bank

concerned, a letter of acceptance of the award in full and final settlement of his
complaint, within a period of 30 days from the date of receipt of the copy of the award by
him.

 If the bank is satisfied with the award, within a period of one month (from the date of
receipt of letter of acceptance from the complainant of the award in full and final
settlement of his claim in the matter), the bank is required to comply with the award and
intimate the compliance to the Banking Ombudsman.

 If the complainant is not satisfied with the award passed by the Banking Ombudsman,
he can approach the appellate authority (Dy. Governor RBI) against the Banking
Ombudsmen’s decision 30 days of receipt of the award/rejection by the Ombudsman.

What if the Award is not acceptable to the bank?

The bank has the option to file an appeal before the appellate authority under the scheme within
a period of 30 days.

APPEAL AGAINST THE AWARD

Who is the appellate authority?

The appellate authority is the Deputy Governor in the Reserve Bank of India.

Is there any time limit for filing an appeal?

Either party aggrieved by the award may, within 30 days of the date of receipt of the award,
appeal against the award before the appellate authority. The appellate authority may, if he is
satisfied that the applicant had sufficient cause for not making an application for appeal within
time, also allow a further period not exceeding 30 days.
The banks can appeal only with the prior sanction of their Chairman or, in his absence, the
Managing Director or the Executive Director or the Chief Executive Officer or any other officer of
equal rank.

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 CONSUMER PROTECTION ACT, 1986

(Not applicable in J&K)

The act seeks to promote and protect the rights of consumers such as -

1. The right to be protected against marketing of goods and services which are hazardous
to life and property.

2. The right to be informed about the quality, quantity, potency, purity, standard and price
of goods, or services so as to protect the consumer against unfair trade practices

3. The right to assured, wherever possible, access to variety of goods and services at
competitive prices.

4. The right to be heard and be assured that consumers interest will receive due
consideration at appropriate forums.

5. The right to seek Redressal against unfair practices or restrictive trade practices or
unscrupulous exploitation of consumers.

6. The right to consumer education

The Act extends to the whole of India except the State of Jammu and Kashmir. The State of
Jammu and Kashmir has separate Consumer Protection Act on similar lines.

 As per Sec.24A of the Act, the limitation period for filing complaint before the
District Forum, State Commission or National Commission is two years from
the date on which cause of action has arisen.
 In terms of Section 27 of Consumer Protection Act, if any person fails or omits
to comply with any order made by a Forum/Commission, he shall be
punishable with imprisonment for a term, which shall not be less than one
month, but may extend to three years, or with fine, which shall not be less than
Rs. Two Thousand, but may extend to Rs. Ten Thousand, or with both.
 If the complaint instituted before a Forum/Commission is found to be frivolous
such Forum/Commission shall, for reasons to be recorded in writing, dismiss the
complaint and make an order that the complainant shall pay to the opposite
party(ies) such cost, not exceeding Rs. Ten Thousand, as may be specified in
the order.
 In the case of complaint, the record containing main files with original order sheet
shall be preserved for a period of five years.

Pecuniary Jurisdiction:

70
Forum Jurisdiction
1 District Forum Complaints in which the value of the
services and the compensation, if any, claimed
does not exceed Rs.20 lac

2 State Complaints in which the value of the

Commission services and the compensation, if any, claimed is
above Rs.20 lac but does not exceed Rs.1 Crore

3 National Complaints in which the value of service and

Commission the compensation, if any, claimed, is above Rs.1 Crore.

APPEAL

Any person aggrieved by an order passed by District Forum in the above regard may file an
appeal before State Commission. Similarly, the order passed by State Commission in an
original complaint and the National Commission in an original complaint can be appealed
against before the National Commission and the Supreme Court respectively within 30 days
from date of ORDER.

Internal Ombudsman

RBI advised all PSBs and some Private Sector banks and foreign banks to appoint an Internal
Ombudsman to be designated as CCSO (Chief Customer Service Officer). The CCSO should
not have worked in the bank in which he is appointed as CCSO.

71
 CHAPTER - 15
NEGOTIABLE INSTRUMENTS ACT 1881
 Came into force w.e.f. March 01, 1882.
 It has 147 sections and 17 chapters
 Section 138 to 142 were added in 1988 (came into effect from 1.4.1989). Section 143 to 147
were added in Dec. 2002
 This Act is applicable to entire India.

1. MEANING OF NEGOTIABLE INSTRUMENT

 As per Sec. 13 of the Act, Negotiable Instruments (NI) means and includes promissory note,
bill of exchange and cheque payable to order or bearer. Bank Draft finds mention in Sec-85(a)
of NI Act.
 Apart from the aforesaid instruments defined in the NI Act, following instruments satisfy the
features of Negotiable Instruments.

Instrument Possessing feature of

Certificate of A promissory note
Deposit
Commercial Paper A promissory note
Treasury Bill A promissory note
Share warrant A cheque
Dividend warrant A cheque

 Also u/s 137 of Transfer of Property Act, documents of title to goods are also negotiable, which
include:
 Bill of lading Railway Receipts
 Dock warrant Warehouse receipt
 GRs approved by IBA Wharfinger Certificate

2. CHARACTERISTIC FEATURES OF NEGOTIABLE INSTRUMENT

Negotiability

 A negotiable instrument possesses a unique characteristic called “Negotiability”.

Negotiability refer to following two features in an instrument:

(i) The instrument is freely transferable by delivery (if it is payable to bearer) and by
endorsement and delivery if it is payable to order; and

(ii) A person (i.e., transferee) taking the instrument bonafide for value (known as a holder
in due course) gets an absolute title to the instrument notwithstanding any defect in the title of
the transferor or any other prior party.

 Railway Receipt, Bill of Lading, Ware House Receipts, cannot be called negotiable
instruments because they satisfy the first feature of negotiability but not the second. Such
instruments are called Quasi Negotiable Instruments.
 Withdrawal slips used for drawing money from S.F. account are not negotiable instruments
(Reason: There is a condition that it must accompany the pass book). FD Receipt is also non-
transferable and as such cannot be called Negotiable Instruments.

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RESERVE BANK OF INDIA ACT & NEGOTIABLE INSTRUMENT PAYABLE TO BEARER

As per section 31 of Reserve Bank of India Act 1934, no person other than Reserve Bank or
Central Government, can draw, accept, make or issue any bill of exchange or promissory note
payable; to bearer on demand.

PROMISSORY NOTE (SEC 4 OF NI ACT)

 It is a written unconditional undertaking by the maker (drawer & drawee), to pay a certain sum
of money to or to the order of a certain person) (payee) or to the Bearer of instrument. (not
being a bank note / currency note)
 Promissory Note payable on demand (immediately) is called Demand Promissory Notes
(DPN) and those payable after a definite period of time are called Usance Promissory Notes
(UPN).
 Both demand and usance promissory notes need be stamped as per Indian Stamp Act and
Stamp duty on promissory note is same throughout India.
 Promissory Note in installments
 Promissory Notes containing an undertaking to pay the amount in installments are valid and a
provision can be made that on default in payment of one installment, the entire amount will
become due.
 General Public is prohibited from issuing demand or usance promissory notes payable to
bearer.
 As per Indian Currency Act (Sec. 21), Currency note is not a Negotiable instrument (though it
fulfills a number of conditions of Promissory Note).

BILL OF EXCHANGE (SECTION 5)

 Bill of Exchange is a written unconditional order by the maker (drawer), directing a certain
person (drawee) to pay a certain sum of money or to the order of certain person (payee) or to
the bearer of the instrument.
 As per Sec 31(1) of RBI Act, Bill of Exchange / Hundi cannot be made payable to bearer on
demand.
 A bill of exchange is an order to pay money while a promissory note is a promise/undertaking
to pay money.
 It must be accepted within 48 hours after presentment.
 Demand Draft issued by banks fall in the category of bill of exchange. A cheque is also a bill
of exchange.
 Bill of exchange drawn in vernacular language as per local use is locally called “Hundis”.
 Interest for delay in payment of Due Bill is calculated @18% if otherwise not mentioned.
 Drawee in case of Need is a person name in the bill who will honor the bill in case the
Drawee makes default.

CHEQUE (SECTION 6)
 A cheque is a bill of exchange, drawn on a specified banker and payable on demand.
 A cheque is a bill of exchange and satisfies all the requirements of a bill of exchange except
that:
- It cannot be drawn on any person other than a bank;
It cannot be drawn payable so many days after date or after sight as is the case with a bill of
exchange. It is always payable on demand.
 Stop Payment instructions can be given by drawer verbally or in writing. A telephonic message
is valid if the banker is able to recognize voice of the drawer. Payment can be postponed till
confirmation is received in writing.
 N.I. Act does not provide any standard format for a cheque. A cheque drawn on a simple piece
of paper should be honored. Amount can be mentioned in foreign currency as well, provided
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 the rate of conversion is stated or it is left to be decided as per market conditions. A cheque
written in two different handwritings or two different inks should be honored by the bank.
 Cheque can be written in Hindi and date can be written in Saka Calendar.
 Minimum balance required in the account can be applied towards payment of cheque.
 A cheque dt. 31st April is payable on 30th April.
 A cheque payable to Lord Krishna or bearer can be paid. However such type of order cheque
cannot be paid.
 Since a cheque is not a legal tender nobody can be compelled to accept cheque towards
settlement of his debt.
 In case of Mutilated cheques, Drawer‟s confirmation is required to pay the cheque. If torn at
the corner and no material fact is erased, can be paid.
 Payment of cheque should not be made if bank comes to know about Death of the customer
or filing of Insolvency Petition of the customer. Death or Insolvency of Director of a Company
has no effect and cheque signed by them can be paid.

DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE

Sr. Bill of Exchange Cheque

No.
1. Cannot be drawn payable to bearer on demand Can be done
2. Drawee of a bill can be any one Only a banker
3. Can be made payable on demand or after Only on demand
sometime
4. Provisions of crossing not applicable Cheques can be crossed
5. Usance bills need be accepted Cheques require no
acceptance
6. Usance bills qualify for 3 days‟ grace Not applicable to cheques

HOLDER (Section 8)
The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own
name to the possession thereof and to receive or recover the amount due thereon from the parties
thereto.

In order to become a holder:

1. He should have acquired title to the instrument lawfully and in a proper manner i.e. not through
fraud, coercion, undue influence or by any such illegal method.

2. He should not have stolen or found the instrument, which is lost.

3. He should be the payee or endorsee (if it is an order instrument) and bearer (if it is a bearer
instrument).

Actual possession is not essential legal right to possess is enough

HOLDER IN DUE COURSE (Section 9 of N.I. Act)

Holder in due course is a person (payee or endorsee or bearer) who must have the instrument in his
possession after satisfying the following three conditions:

 Consideration: He should have got the instrument for adequate and lawful consideration. (Not
by way of gift or no consideration.) A cheque issued in favour of charitable institution has no
consideration.
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  Before maturity: He should have become holder of the instrument before its maturity. This
condition is applicable to usance bills and promissory notes and not a cheque which is always
payable on demand. (A person taking an instrument after it is due has right only against his
immediate transferor (Sec.59).
 Good faith: He should have become holder of the instrument without having sufficient cause
to believe that any defect existed in the title of the person from whom he derived his title.

A Holder-in-due course gets a good title over the instrument notwithstanding any defective title of the
transferor.

Where a cheque is marked ”not negotiable” nobody can get a better title than that of the transferor as
these words expressly take away the feature of negotiability that transferee gets a better title than the
transferor:

 Forged Endorsement: Any person deriving his title through a forged endorsement
cannot claim himself as a holder in due course.

 Passes better title: Any person who derives his title through a holder in due course
also gets title free of defects (Sec 53).

There cannot be a holder in due course of:

 An inchoate instrument
 An overdue instrument
 A non-negotiable instrument

 A person taking inchoate (incomplete) instrument cannot claim to be a holder in due

course even if he completes it in terms of authority of Section 20. However, if the
instrument is endorsed, the endorsee becomes holder in due course.
 A person receiving cheque from some Charitable institution as a scholarship money
cannot be called Holder in Due Course.

MICR INSRTUMENTS
The code line contains the following information:
i) First 6 digits indicate cheque number
ii) Next 3 digits indicate city code
iii) Next 3 digits indicate bank code
iv) Next 3 digits indicate branch code
v) Last 2 digits indicate transaction code (Saving or Current)

HOLDER & HOLDER IN DUE COURSE

Aspect Holder Holder in due course

Consideration Not essential Essential
Good Faith Not essential NI Should have been obtained in
good faith
Title Same as that of transferor Transferee‟s get better title
notwithstanding any defect in
transferor‟s title
Time Before or after maturity Before maturity only
Possession of NI May / may not be Possession essential

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NEGOTIATION: (Sec. 14) is the transfer of any instrument from one person to another to convey title
and to constitute the transferee the holder thereof.

Negotiation of order instrument completes by endorsement & delivery (Sec. 48) whereas negotiation
of bearer instruments completes by mere delivery (Sec. 47)

ENDORSEMENTS
 Endorsement is defined in Sec. 15 of NI Act as “Where the maker or holder of a
negotiable instrument signs the same, otherwise than as such maker, for the purpose
of negotiation, on the back or face thereof, or on a slip of paper annexed thereto. He
is said to endorse the same, and is called the endorser”.

 According to (Sec.6 of the Indian Securities Act, 1886) an endorsement made on a

document, elsewhere than the back itself is not valid.

 Endorsement of part amount is NOT valid.

The endorser of a negotiable instrument, by act of endorsing, signifies the following to his endorsee
and any subsequent holder, that, when the instrument left his hand -

1) He had a good title to it.

2) It was genuine in all its particulars at the time of his endorsement.
3) All the previous endorsements were genuine. Thus Sec 122 of the NI Act provides that “no
endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be
permitted to deny signature or capacity to contract of any prior party to instrument”.
4) Further the endorser, by his act of endorsing, promises to indemnify the endorsee or any
subsequent holder for any loss suffered by them on the dishonour of the instrument, provided,
the procedure necessary on dishonour has been duly followed.
5) An endorsement carries with it a right of further negotiation to the endorsee, along with the
right of ownership.
 Sec 85 (2) of NI Act states “ Where a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment in due course to the bearer thereof, notwithstanding any
endorsement, whether in full or in blank appearing thereon, and not withstanding that any such
endorsement purports to restrict or exclude further negotiation”. This section implies “once a
bearer always a bearer”.

 Cheques payable to an illiterate person should be endorsed with his left hand thumb
impression, which should be witnessed by an individual well known to both the parties.

 A cheque in the name of the deceased person must be endorsed by his legal representative.

 Endorsement in the case of firms can be either in the name of the firm itself, or, it may be by an
authorized agent or by a legally authorized person on behalf of the firm. But the name of the firm
must be mentioned in full. The omission of the word “company” in the endorsement amounts to an
irregular endorsement.

 A cheque payable to impersonal payees, e.g. income tax, must be endorsed by the authority in
relation to the impersonal payee.

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 All endorsement must be done in ink only. Even though, endorsement in pencil is not prohibited
by law, the possibility of alteration/obliteration cannot be avoided in case of endorsement in pencil.

Who can endorse?

A Holder of an instrument, payee of a cheque or Promissory Note & drawer of an accepted bill.

Types of endorsement:

 Blank endorsement (16-1): endorser signs his name without adding any words or
direction. An order cheque or bill becomes payable to bearer, with the blank
endorsement (Sec. 54)
 Endorsement in full: Endorsement adds a direction to pay the amount to the order
of specified persons & signs the Negotiable Instrument.
 Restrictive Endorsement: (Sec. 50): Further negotiability is restricted – e.g. Pay
Ram Kumar only.
 Partial endorsement – (Sec. 56) Only a part time of Negotiable Instrument is
transferred (not valid for the negotiations)
 Sans recourse (Sec. 52) – endorser does not incur any liability i.e. Endorser says
that cheque is being transferred to Endorsee without recourse to him in case of
dishonor.
 Conditional Endorsement – conditions are stipulated. Paying bank is not bound to
verify fulfillment of such conditions. Conditions are binding between endorser &
endorsee only.
 Facultative Endorsement - Endorser reduces rights of receiving any Notice of
Dishonour i.e. Right Notice of Dishonour waived.
 Forged Endorsement –
o By a person other than the holder by signing the name of holder.
o Endorsee (including a holder in due course) or holder for value, subsequent to
forged instrument – do not derive any title.
o Paying bank gets protection (Sec. 85(1), if endorsement is regular
 Endorsement by minor - Minors can endorse, but not liable.

Regular Endorsement
 Spellings : Rajeev Kumar with correct spellings as Rajiv Kumar will endorse as under
Signatures as Rajiv Kumar
(Rajeev Kumar)
 Prefixes and Suffixes are to excluded
Mr. Dr. Er, Ar need not to be included in the endorsement. However, Major Raja Ram
may endorse as Raja Ram, Major and Dr. Luxmi Kanta Chwla may be endorsed as
Luxmi Kanta Chawla, (Doctor)
 Married Woman (Mrs RK Gupta) can endorse Prabha Gupta (wife of RK Gupta).
 Asha Rastogi can endorse as Asha Gupta (nee or formerly Asha Rastogi).

CROSSING (SECTION 123 TO 131 OF NI ACT)

1. Crossing is a direction by the drawer to his banker to make payment of a cheque drawn by him. In
general crossing, payment can be made through any bank, while in special crossing; it can be
made only through a specified banker. However in any case, payment can be made through a
bank account only.

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  General Crossing: (Sec 123): Important aspect in a crossing is two parallel lines,
with or without the words “& CO., Not negotiable” etc

 Special crossing: (Sec 124): Where a cheque bears across its face, an additional
name of banker with or without transverse lines, cheque is deemed to be
crossed specially to that bank. Such cheques should be paid to that banker or to
his agent for collection (sec.126).

As per section 127, if cheque is crossed specially to more than one bank,(unless one bank is acting
as collecting agent to another)the payment shall be refused.

Not-Negotiable crossing (U/s 130):- This crossing does not restrict transferability; however, the
endorsees do not get a better title than the endorsers.

It is a direction to collecting banker that when the collection is for account of an endorsee instead of a
payee. Failure to ensure genuineness of the endorsement may amount to conversion. The cheque
bearing the “not-negotiable” crossing do not confer the special Privilege of the holder in due course

A/C payee crossing: It is not defined by NI Act. It is a direction to collecting banker, that such
cheques should be collected only for the named payee. This cheque cannot be endorsed further. RBI
has directed the banks (u/s 35-A of BR Act) to credit the proceeds of account payee cheques to the
account of named payee only else the payment will be treated as unauthorized.

A Crossing can be cancelled / special crossing can be converted to a general crossing only under the
signature of the drawer.

PAYMENT OF CHEQUES:
1) Duty of Banker: To honor customer‟s cheque up to balance held in his accounts as per the
mandate of the customer (Apparent Tenor). Bank has to compensate the drawer for any
loss or damage, caused by non-payment. The cheques should, however, be paid as per
mandate of the customer. (Sec 31)

2) Payment in due course (Sec-10):- A payment is considered in due course if it

satisfies the following conditions:

 Payment in accordance with apparent tenor of the instrument, in good faith and
without negligence, to the person who possesses the instrument, and is able to
give valid discharge.
 Payment must be made under circumstances which do not afford a reasonable
ground for believing that the person is not entitled to receive payment of the
amount.
 Payment must be made in money only.

3) STATUTORY PROTECTION TO PAYING BANKER (SEC-85)

Sec. of NI Act Conditions to be fulfilled for availing protection.

85(1) Regularity of endorsement i.e. no break in chain of endorsement. Paying bank not
concerned with genuineness.
No protection is available, if drawer‟s signatures are forged. If an order cheque,
without having any endorsement, is paid to someone else, banker would not get
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 protection.
85(2) Endorsement on bearer cheques A paying banker is not required to verify
endorsement on bearer cheques, even if, such endorsement restricts further
transferability of the instrument.
85(A) Protection available u/s 85(1), is also available to Crossed Bank drafts.

89 Cheques on which alteration is not apparent: - Where a cheque, promissory

note, or bill of exchange, has been materially altered, but does not appear to have
been so altered, payment thereof, shall discharge a banker from all liabilities
thereon.
128 Paying bank gets protection if the Payment of a crossed cheque is made in due
course.

COLLECTION OF CHEQUES & DUTIES OF COLLECTING BANKER:

Statutory protection against conversion( illegal interference in the property of another person
/collecting a cheque in customer‟s account on which customer has no title.) is available to the
collecting banker as per the section 131( for cheque) and section 131 (A) for the bank draft,
subject to fulfillment of three conditions:
 Collection is in good faith & without negligence. (The account should be properly
introduced. Collection of large amount cheques in new accounts without proper
scrutiny implies negligence.
 Payment is received for a customer.( protection will not be available if collection is
for a non-customer/not maintaining an account with the bank.)
 Cheque is generally or specially crossed before it is presented to the bank.

DUTIES OF COLLECTING BANKER:

 To present cheque within a reasonable time (else liable for damages under section 72
and 84 of NI Act., if customer is put to loss for the delayed presentation.
 To serve notice of dishonor on the customer.
 To handover the proceeds after realization without delay.

BANK DRAFT (SEC 85(A) OF NI ACT.)

 It is a bill of exchange, drawn by a bank on another bank or on it‟s another branch.
 As per sec 31 of RBI act, demand draft payable to bearer can be issued only by RBI.
 Bank‟s relationship with the purchaser of a demand draft is that of a debtor and creditor and when
the draft reaches the payee, its relationship with the payee is that of a trustee and beneficiary.

IMPORTANT GUIDELINES (Bank Draft):

 DD‟s/MTs/TTs Rs. 50000 & above should not be issued/paid against cash.
 Cancellation:- May be got cancelled by the purchaser before its delivery to the payee (draft
should not have any sign of negotiation.
 Stop payment:-Payment cannot be countermanded by the purchaser.
 Validity:
o All Drafts are valid uniformly for a period of 3 months.
o Validity can be extended further by the issuing branch on the request of the purchaser
or the payee.

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  Duplicate Draft : -
 Issued after getting indemnity from purchaser and consent from payee (if
stands delivered to payee)
 Drafts up to Rs.5000/-, may be issued without waiting for non- payment
advice from drawee branch.
 To be issued to a customer within a maximum period of 15 days; else the
banks should pay interest as applicable to FDR of corresponding maturity for
the period of delay beyond this stipulated period. (This period of fortnight is
applicable only if the request comes from either purchaser or beneficiary and
not the 3rd party endorsee)
 In case original and duplicate drafts are presented for payment, duplicate be paid
and original be returned with remarks about loss of draft /payment on collecting
bank‟s Guarantee.
 If draft was handed over to payee and lost thereafter, before making payment to
purchaser by issuing duplicate draft, consent of payee is required, as payee gets legal
right of payment once the draft has been handed over to him (including his agent i.e.
post office etc). The payee also can ask for duplicate draft in terms of section 45 of NI
Act.

Days of Grace: (Section 22): Every promissory note or bill of exchange which is not expressed to be
payable on demand, at sight or on presentment is at maturity on the 3rd day after the day on which it
is expressed to be payable. Grace days are not allowed if Due Date is already mentioned like in
CP/CD. If grace days are stated to be more than 3, it will be restricted to 3 days.

When day of maturity is a public holiday, the instruments shall be payable on the next preceding
business day (i.e. the previous business day.) Public holidays include Sunday and any other day
declared as Holiday U/s 25 of NI Act.

Interest rate: when interest rate is specified in the Bill of Exchange (BOE)/or Promissory Note (PN), it
will be charged accordingly.

If no interest is mentioned, Interest will be calculated @ 18% p.a. , as per section 80.

Due date calculation:-

a) If a bill is payable „certain number of days‟ after date, usance will commence from the date
following the date of bill, for example a bill dated 2 Feb 1988, payable 30 days after date, it will
be due for payment on 6 March 1988.( 27 Feb (leap year) + 3 March + 3 days of grace.) – Sec 24
b) If a bill is payable „certain number of months‟ after date, maturity will be the on the day of the
month which corresponds with the date of bill. For example due date of bill 2 Feb 1988, after
„two month sight‟ will be 5th April 1988. In cases where no corresponding date exists in that month,
bill shall fall due on last day of month. For example, if bill is dated 31 Jan, it will fall due on 3
March if it is one month after date.
c) When day of maturity is public holiday, the instrument shall be due on the next preceding business
day. Sec-25
d) Utmost care should be taken while calculating date of maturity when different dates i.e. date of bill,
date of sight/presentment, date of acceptance are given. Terms of payment should be taken care
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 of, whether these are „after date‟ or „after sight‟, and due date be calculated accordingly. If terms of
payment are „after date‟ due date be calculated from the date of bill and if terms of payment
are „after sight’, due date be calculated from the date of „sight‟ i.e. the date of acceptance of the
bill.

Dishonor of Bill:-
A bill may be dishonored either by way of non acceptance (Sec 91) or by nonpayment (Sec 92). In
case of dishonor, holder has to give notice of dishonor to all previous parties, to whom he wants to
make jointly liable (Sec 93). Notice is not required to drawee/ acceptor of a bill or maker of promissory
note. Notice must be given within a reasonable time,

Noting and Protesting:-

Noting and protesting is optional in case of inland bills but is compulsory in case of foreign bills.
Noting (Sec 99):- Noting is a process of collection of evidence of dishonor , under which the Notary
presents the bill again to the drawee and on dishonor, gives a noting on the bill, mentioning the date
and reasons of dishonor..

Protest (Sec-100)- is a certificate from a Notary Public containing facts of dishonour. Protest is
considered an authentic and satisfactory evidence of dishonor.

CRIMINAL LIABILITY FOR DISHONOR OF CHEQUES (NI ACT SEC 138 TO 142): Section 138 of
NI act (Amend-1988) provides for criminal liability on the drawer of dishonored cheque.
Relevant provisions are as under:

i) Consideration: Cheque should have been issued for discharge of any debt, either partly or
fully. (not as a gift). As per sec 139 until contrary is proved, it will be presumed that cheque
in question was issued for discharge of a debt.
ii) Validity: Cheque should have been presented with in its validity period or 3 months,
whichever is earlier - U/s 138(a).
iii) Dishonour:
a) Cheques should have been dishonored for insufficiency of funds.
b) As per sec 140, drawer himself is responsible to keep balance in account to take care
of all issued cheques.
c) The paying bank should return dishonored cheques presented through clearing houses
strictly as per the return discipline prescribed for respective clearing house in the
Uniform Regulations and Rules for Banker clearing Houses. The collecting bank on
receipt of a dishonored cheque should return it immediately to the payee/holder
iv) Notice: Payee or holder should give notice, demanding payment within 30 days of receiving
information for dishonor of cheque. Drawer can make payment within 15 days of receipt of
such notice.
v) Complaint: On a written complaint, either from payee or holder in due course, court of the
metropolitan or judicial magistrate shall try an offence. (Sec-142). The summons can be
served by speed post or by authorized courier services and if not accepted, will be treated as
duly served.

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vi) Sentence:
a) The drawer may be punished up to two year imprisonment, and/or fine up to twice
the amount of cheque, or both.
b) As per Sec 141, if a company sends a cheque that is dishonored, every person who at
the time of the offence was in charge of and was responsible to the company as well
as the company shall be deemed to be guilty. As per a recent Supreme Court
judgment, only those partner or director who were directly in control of the business
would be held responsible
c) Directors of the companies who are nominated directors in employment of
Central/State Govt or FIs owned or controlled by Center/State Govt are exempted from
prosecution.
d) Stopping of payment of a post dated cheque issued shall also attract penalty under this
section.
vi) Summary Trial: Provision of summary trial has been made applicable and efforts be made to
conclude the trial within 6 months. In case of conviction in a summary trial, the Magistrate has
been empowered to pass a sentence not exceeding one year imprisonment and fine not
exceeding Rs 5000. Further offence under the act has been made compoundable.
vii) Limitation: Complaint should be made within one month, of the date on which, cause of action
arise (U/s 142) i.e. after expiry of 15 days time given to make payment.
viii) Financial Discipline: To bring financial discipline among customers banks to introduce a
condition at the time of opening of account (in AOF itself) that in case cheque valuing Rs 100
lacs (25 lacs in PNB) and above (irrespective of any amount if issued in favor of Stock
Exchanges by the Stock Brokers) are dishonored for want of sufficient balance at 4 occasions
during a financial year, cheque book facility would be stopped. Banks, at their discretion may
even consider closure of the accounts. In case of advance accounts such as CC or OD,
decision for continuation or otherwise of such cases be taken one step higher than the
sanctioning authority. Branches should report such data to their controlling office and Banks
should place before their boards/MC the data regarding dishonor of cheque involving amount
of Rs 100 lacs ( 25 lacs in PNB) and above including transactions of stock exchange brokers.

CTS -2010 – Important guidelines

 Likely to replace the existing form of cheque in the entire country..
Mandatory Features were made applicable w.e.f 1.12.2010. Which are as under?

 Paper will have protection against alteration by having chemical sensitivity to acids, alkalis,
bleaches and solvents. It will not glow under UV light rather it will be UV dull.
 There will be Water mark “CTS-INDIA” in oval shape with dia 2.6 to 3.00 cm.
 VOID pantograph with hidden embedded “COPY” or “VOID” feature. This feature would be
clearly visible in photocopy of the cheque.
 Bank‟s logo will be printed in UV ink.
 Color of the cheque will be Light Pastel.
 No alteration or correction is to be carried out in the cheque.
 Cheques issued in current account and corporate customers should be issued with account
number field pre-printed.
 Courtesy Amount means amount in figures whereas Legal amount means amount in Words.

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Preservation of Physical image of the Truncated cheque
Banks will have to retain physical image of the cheque for at least 10 years which can be demanded
by the drawee of the cheque.

Practical examples:

1. Cheque dt. 20.2.12 presented on 20.5.12 is stale.

2. A cheque favoring Lord Krishna or order can be credited to the Trust in the name of Lord
Krishna or payment can be made to Drawer only.
3. A Bearer cheque having name of payee as Balbir Singh endorsed as Balveer Singh can be
paid because a cheque once a bearer is always a bearer.
4. A payee having lost the cheque requests to stop payment, caution can be marked in the
account and Drawer‟s formal instructions will be sought.
5. A customer signs the cheque differently from the record in different language can be paid
because it carries mandate of the customer.
6. A cheque DT. 5th Jan is presented for payment on 5th April owing to the fact that 4th Jan was
holiday; the cheque cannot be paid being stale cheque.
7. Where, there is difference in Words and Figures in amount of the cheque, amount in words
being legal amount can be paid U/S 18 of NI Act.

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 CHAPTER - 16
TYPES OF CUSTOMERS

MINORS

Minor is defined in Section 3 of Indian Majority Act, 1875 as “Every person domiciled in India
attains the age of majority on his completing the age of 18 years”

According to Sec 11 of Indian Contract Act, 1872, “ When the age of majority has been provided
by law to be 18 years, every person less than this age will be minor in law.”

MINOR’S AGREEMENT
 A minor is not competent to enter into a contract. All agreements with a minor are void ab-initio (i.e.
invalid from the very beginning)
 However, they can open deposit accounts in the name of minors, after taking necessary precautions. As
long as the account is in credit, the banks run no risk in such accounts.
 A person upon attaining majority cannot ratify a contract entered during his minority.

WHO IS THE GUARDIAN OF A MINOR?

The guardian to a minor can be a: (a) Testamentary Guardian, or (b) Legal Guardian, or (c) Natural
Guardian.
Testamentary Guardian
Guardian appointed by the will of the minor's father is called testamentary guardian.
Legal Guardian
Where there is no natural guardian, or testamentary guardian, the Court can appoint a guardian
i.e. legal guardian as per the provisions of Guardian and Wards Act, 1890.
Natural Guardian
 Father is always natural guardian and after his death, mother becomes natural guardian. In case
of a minor boy or unmarried girl, the father and after his death the mother shall be the guardian of
both person and property of the minor. Opening of Fixed Deposit, Recurring & Savings Deposit
account under the guardianship of mother has been allowed by RBI (provided accounts are not
allowed to be overdrawn).
 After the death of both father and mother, a minor can be represented only through a legal
guardian.
 Step father/step mother cannot act as natural guardian.
 For a minor married girl, her husband (if major) is the natural guardian. In case the husband is a
minor, her father (or mother, if the father is dead) may continue to be natural guardian.
 For a minor married girl, who has become a widow, her husband‟s father (mother, if father is
dead) is to act as natural guardian.
 In case of an illegitimate minor child, his/her mother is the natural guardian.
 The natural guardian of an adopted son is his adoptive father/mother.

For a Muslim minor, father is the natural guardian (for property only). After father, guardianship lies
with (i) executor appointed by father‟s will and after him (ii) father‟s father (iii) the executor appointed by
the will made by the father‟s father.

In case of Christians and Persons of other Religions, the father, and on his death, mother acts
as natural guardian. Where both are dead, a person appointed by Court can alone act as guardian.
.

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 TYPE OF DEPOSIT ACCOUNT FOR MINORS

Account can be opened in the name of a minor are broadly the following:
I. Minor‟s Account to be operated by guardian
II. Minor‟s Account to be operated by mother.
III. Minor‟s Account to be operated by himself/herself.

Minor’s Account Opened and Operated by Guardian

Single or Joint A/c.

The guardian can open a deposit account in sole name of the minor to be operated by him on
behalf of the minor. Alternatively he can open a joint account in the name of the minor and himself.

Guardian’s Power
 He can operate the account on behalf of the minor.
 He can foreclose the term deposit or avail loan against the same for the benefit of the minor.
 His power to operate account/foreclose deposit/borrow against deposit ceases as soon as the
minor attains majority.

Death of Minor: Balance is payable as a claim case.

Death of Guardian: The balance is treated as a Trust and is paid to the minor upon his attaining
majority. During his minority it can be paid only to his guardian appointed by Court.

Self Operated Minor Account

 Minors who have completed 10 years of age, who are literates and can sign uniformly are
permitted to open S.F. or F.D./RD account (not Current Account) in their own name and operate
the same.
 Cheque book can be issued provided the account is KYC compliant, because Minor can draw a
cheque, endorse a cheque and can also become payee
 Opening of Term deposits including R.D. can be allowed for any amount.
 Minor can bind everybody except itself
 No advance can be given to minors against such deposits.
 Joint Account with minor cannot be opened except with Guardian.

HINDU UNDIVIDED FAMILY (HUF)

There are two schools of thought – Dayabhag and Mitakshra. In Assam & Bengal, Dayabhag school of
Thought is applicable whereas in other parts of the country, MITAKSHRA school of thought is applicable.
In difference between the two is that in the former, even a son has no right in case father is alive.
Whereas under MITAKSHARA school of thought, all members of family including conceived child have
right to become coparceners and right in the property of the family.

 Hindus, Sikhs & Jains can form HUF

 Male/Female Members by Birth of adoption are coparceners
 Senior most member is the karta (Male or Female)
 Is not governed by partnership act
 Documents to be signed by the karta as „karta‟ and major coparceners in the personal capacity.
 Karta is liable personally as well as Jointly, but coparceners are not unless specifically agreed.…
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 Karta can
1. Compromise & refer to arbitration
2. Give valid discharge to debt and make part payment.
3. Enter into partnership & delegate authority to operate the account to any one
 Karta cannot revive a time-barred debt
 A coparcener cannot countermand a cheque unless specifically authorized.
 The death of a coparcener does not dissolve a HUF. The balance to be paid as claim case.
 In case of death, insolvency or insanity of a coparcener / Karta, fresh AOF & HUF declaration
should be taken.
 As per Hindu Succession Amendment Act, 2004, a female member can become Karta or
Coparcener.
 Bank gives loan only if documents are signed by Karta and all the major coparceners which make
all of these personally liable.

ILLITERATE PERSONS.

 Get introduction & witness.

 Photograph to be changed every 3 years
 Take identification marks
 Payment only in person through cashier only
 In case of any dispute or explanation of rules, take independent witness
 Noting „ILLITERATE A/C‟ to be made on ledger folio/A O F.
 Cheque Book cannot be issued.
 Current account is not opened.
Joint account of illiterate person with illiterate/ literate person

 Jointly with other illiterate person subject to compliance of KYC norms. No cheque book will
however be issued in the joint account of illiterate persons.
 Jointly with another literate person who is closely related to him which cab operated E/S or
F/S. Now cheque book has been allowed in such accounts.

BLIND PERSONS
 Get introduction & witness
 Photograph to be changed every 3 years
 Can open SB, FD, RD and Locker Account. Loan can also be given.
 Payment/ receipt to be got witnessed by an independent person which can also be a bank
employee other than the person who passes the payment.
 In case of any dispute or explanation of rules, take independent witness
 Noting BLIND PERSON to be made on ledger folio/A O F.
 Advised to open joint account
 Cheque book can be given to Blind after deleting the word “Bearer” and after affixing stamp “Blind
Person” on the face of each cheque. Only crossed cheques should be issued.

EXECUTORS & ADMINISTRATORS

 The person named in the will of the deceased person is the executor and account can be opened
on production of probate
 Person appointed by the court is an administrator and must produce letter of administration
 Payment can be stopped by any-one but withdrawal is possible when both join
 On death of one executor powers are vested in the surviving executor
 Can borrow for the immediate needs of the property
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LIQUIDATOR, OFFICIAL RECEIVER /ASSIGNEE.
 liquidator is appointed in case of a company in liquidation
 Official Receiver / Official Assignee to manage the property of an insolvent person
 Letter of probate/ administration to be taken
 Style & status to be mentioned in the Title of the account
 No loan can be granted.

TRUSTS
 Trust deed to be examined
 Insolvency of trustee does not affect trust property
 Transfer of funds from trust account to personal account of the trustee be investigated
 Allow loans only if allowed in the trust deed and after taking personal guarantee of the trustee
 Trustees must act jointly as they have no authority to delegate unless specifically mentioned
 On death of one trustee trust property passes to the other trustees, court order required
 Any trustee can stop payment.

SOCIETIES & CLUBS

 By-laws to be obtained and read carefully
 Registration certificate
 Resolution passed regarding opening & conduct of account
 In case of death of a authorized signatory operation stopped till new resolution is received
 Bank can open accounts of unregistered clubs, institutions, societies, association, schools etc after
satisfying themselves about reputation, responsibility & standing of the office bearers .

JOINT ACCOUNTS
 Either or Survivor/Former or Survivor/Anyone or Survivor or Joint Operation
 Appointment of an agent should be confirmed by all.
 Operations to be stopped in case of death, insolvency/ insanity of any one. Payment to be made to
survivors & a the legal heirs of the deceased
 Anyone can stop payment. But revocation of stop payment will be done by all.
 Alteration in a cheque drawn should be confirmed by the drawer itself (not other account holder)
 Operation in the account will be stopped in case of death, insolvency, insanity of any of the joint
holders in case of jointly operated account.

PARTNERSHIP FIRMS
 Max no of partners is 100 (Previously 20)
 Registration not mandatory, but only registered firms can file suits to enforce a contract.
 Minor can be admitted only to the benefits of the firm.
 A partner can bind the firm by doing usual business on behalf of the firm.
 A partnership is not treated as a separate entity from the partners
 Death of a partner/ admission of a partner dissolves the partnership firm
 Implied authority of the partner does not cover
1. Submission of a dispute to arbitration
2. Open a/c in his name for firm‟s business
3. Promise/ relinquish claim of the firm
4. Withdrawal of suit filed on behalf of the firm
5. Admit any liability in a suit against the firm
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 6. Acquire/ transfer immovable property
7. Enter into partnership on behalf of the firm
 While opening account, letter should be signed by all major partners along with instructions to
operate.
 Any of the partners even sleeping one can stop operations in the account.
 In case of death, insanity or insolvency of any of the partners, firm is dissolved, but account can
be continued if remaining partners confirm the balance.
 However on death, insolvency or insanity of any of the partners, if business is discontinued,
account should be closed to avoid Clayton‟s rule.

JOINT STOCK COMPANIES

 Private Limited Companies:

1. Min 2 and max 200 (Previously 50) shareholders,
2. Directors; min 2
3. Name must end with “private limited”
 Public Limited Companies
1. Min: Directors 3, share holders 7, max- no limit
2. Name must end with “Limited”
 Govt Companies; 51% or more share held by Govt.
 Documents reqd. for opening account
1. Memorandum of association
2. Articles of association
3. Certificate of incorporation
4. Certificate of commencement of business( Public ltd. (only)
 Third party cheques drawn by the company should not be collected/ credited to the personal
accounts of the directors.
 Insolvency/ death / insanity of a director does not affect the functioning of a company

NOMINATION
ENACTMENT
 The Banking Regulation Act was amended in 1983 and section 45ZA to 45ZF were added to the Act
for providing nomination facility in Banks.
SCOPE
 Banks can provide nomination facility for deposit accounts, safe custody of articles and safe deposit
lockers.
 Sec. 45ZA and 45ZB deal with the provisions for nomination deposit accounts section 45ZC and
45ZD for safe custody and section 45ZE and 45ZF for safe deposit lockers. .

NOMINATION FACILITY FOR DEPOSIT ACCOUNTS

 What Type of Accounts: Nomination facility is available only in respect of a deposit account held in
individual capacity as well as in joint accounts (including sole prop. CA account) of the depositor(s)
and not in any representative capacity. As such no nomination can be made in case of accounts in
the name of a company, firm HUF, association trust, etc.

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 Minor’s Account: Where the deposit is the name of a minor, the nomination will be made by his
legal guardian.
 Non-resident Accounts: Nomination facility is available.
 Joint Account: Nomination should be made jointly by all joint account holders even if the account is
operated by either or survivor or former or survivor.
Who can be appointed as nominee?
 Only Individuals can be appointed as nominee. Nomination cannot be made in favour of
firms/companies/HUF or any representative body.
 Only one person can be appointed as nominee; for a particular account. (This provision is different in
safe deposit locker accounts).
 A minor can be appointed as nominee. However in such cases another adult (not necessarily his/her
guardian or relative) must be named to receive the deposit on behalf of the minor, in case of the
death of depositor(s) during the minority of the nominee.
 Nonresidents including foreign nationals can be appointed as nominee. However, on the death of
depositor the deposit proceeds cannot be repatriated without obtaining prior permission from
Reserve Bank.
 A lunatic cannot be appointed as nominee.
How to Nominate
 In case of joint accounts all depositors must join together to nominate.
 Nomination is required to be made in Form DA1. In case the depositor(s) is illiterate the thumb
impression (in form DA1) must be attested by one witness.
 Separate nominations need be obtained in respect of different deposit accounts.
 The bank should brand the pass book/receipt and relative ledger folio with the stamp “NOMINATION
OBTAINED”.
 RBI has advised that at the written request of a customer the bank may mention the name of the
nominee in SB pass book/term deposit receipt.

Cancellation and Variation of Nomination

 An existing nomination can be cancelled by the sole depositor (or by all the depositors in a joint
account). The form to be used is DA 2(PNB-819 B)
 The variation of nomination can be made by all depositors, by using form DA3 (PNB-819 C)
 In case of the death of one of the joint depositors, the cancellation or variation can be made under
the signature of all surviving depositors/depositor.
Renewal of Deposit Account
 No fresh nomination need be made when a deposit account is renewed. The existing nomination
does not cease to operate merely by reason of the renewal of the deposit.
Change in the style of the account
 Where the style of the account is changed, or some addition/deletion in the name of depositors is
made, the nomination stands cancelled.
Payment to Nominee
 Nominee‟s right to receive payment arises only on the death of the sole depositor or on the death of
all depositors in a joint account.

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 Nominee has the only right to receive the deposit proceeds on the depositor‟s) death. He has no
right to operate the account, to renew the same or to avail loan against it or to substitute his name in
place of depositor or to add his name in the deposit.
 A term deposit can be paid (at the request of the nominee) before its maturity. No penalty (1%) need
be charged in case of such foreclosure.
 Before paying the amount to the nominee the bank must ask for the Death Certificate and take
identification of nominee on the prescribed form
Legal position on Payment to Nominee
 On the death of the depositor(s) the nominee is entitled to receive the balance. The bank need not
take into account any other notice or claim except the order of a competent Court.
 The nominee does not become the owner of the proceeds by virtue of his right to receive the
payment. Any person having a right over the balance can claim it from the nominee.

NOMINATION FACILITY IN SAFE DEPOSIT LOCKER ACCOUNTS

 The main points of difference between nomination facility in deposit account and that of Safe Deposit
Locker Account are the following:

Number of Nominees
 In case of safe deposit locker account in joint names (Joint Operation) more than one person can be
appointed as nominee. However, the maximum number of nominees will be restricted to 2 in joint
accounts (Jointly operated) as per IBA ground rules. However, in Joint account (E/S or F/S), Only 1
person can be appointed as nominee.
Forms to be Used
 Form SL 1 is to be used by a sole hirer for making nomination.
 Form SL 1A is to be used where the locker is hired in joint names.
 Form SL 2 is to be used for cancellation of nomination.
 Form SL 3 is to be used for variation of nomination by a sole hirer.
 Form SL 3A is to be used for variation of nomination by joint hirer.

ESCHEAT:
Escheat is a person who dies without legal heir.

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 CHAPTER - 17
ANCILLARY SERVICES

Demand Draft

Demand Draft is a bill of exchange in which Drawer and Drawee both are different branches of a
bank. It is valid for 3M. The other features are:

 After validity period, DD can be revalidated within 1 year from date of issue.
 A stale draft, if not revalidated within 1 year of its issue, can be cancelled.
 Purchaser of DD cannot stop payment after the same has been delivered to payee.
 However, bank is bound to exercise caution, after it has been reported lost.
 Draft can be issued or paid for cash below 50000/-.
 For duplicate draft, Indemnity bond has be obtained from purchaser or if it has been
delivered to payee, from payee also.
 Bank can pay the draft even if no officer has signed it. It is not the responsibility of the
customer or payee.
 Duplicate Draft can be issued without seeking non-payment advice from the Drawee
office up to the amount of Rs. 5000/- on the basis of indemnity only.
 Drafts of Rs. 20000/- and above should be issued with Crossing invariably.

Mail Transfer

 MT is called Money Transfer in which amount is directly credited to the account of the
beneficiary at request of the customer. Maximum prescribed period for credit is 7 days.
Since introduction of CBS, there is no requirement of MT these days.

Telegraphic Transfer

 Remittance advised by telegrams /telex is called TT. Maximum period for credit of the
amount is 2 days. Since introduction of CBS, there is no requirement of MT these days.

Travelers’ Cheques

 At the time of issuance, purchase puts its signatures. Again at the time of payment at
some other center, purchase puts signature. After tally, the payment is made to the
person who had purchased the same.
There is no validity period of traveler cheque.

RTGS and NEFT Real Time Gross Settlement is a payment system for Interbank transfer
with minimum Rs. 2.00 lac. This system is managed by IDBRT,
Hyderabad, which connects all banks to Central server maintained by
RBI. The network is INFINET (Indian Financial Network)
Timings are: 8:00 AM to 8:00 PM (Saturday: 9:00 to 3:30 PM)
NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The
timings are: 8:00AM to 7:00PM. There are 12 batches daily. The time
period is B+2.

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 SAFE DEPOSIT VAULTS (LOCKERS)

Lockers can be hired by Individuals, firms, companies or trusts. But nomination can be made in
case of individuals only. Other provisions are as under:

 According to Sec 45 of BRA, nominees can be more than 1 in case locker is hired by 2
or more persons.
 KYC has to be carried out before allotment of lockers.
 High Risk locker, if not operated for more than 1 year, can be broken open.
 Medium Risk locker, if not operated for more than 3 year, can be broken open.
 Locker cannot be allotted to minor.
 In case of non-payment of rent, locker can be broken open after serving due notice.
 In case of death, nominee can operate after producing Death certificate.
 In case of jointly operated lockers, after death of one person, locker will be operated by
survivor as well as legal heir of deceased jointly.
 If there is survivorship clause, after death of any one, locker can be operated by the
survivor.
 In the absence of nomination, if there is valid Will, locker can be operated by the
Executor/Administrator as the case may be after death of locker hirer.
 If, there is no Nomination and no Will, assess can be given to the Legal heirs after death.
Only Death certificate and proof of legal representative is required.
 Succession Certificate is not valid for delivery of articles to the legal heirs after death of
the hirer.
 Letter of Administration is required, if all legal heirs do not approach the bank.
 As per Indian Contract Act, the relation between bank and customer is that of lesser and
Lessee.

Portfolio Management

Portfolio is the basket of investments or securities in a combined form. There are two types of
Securities – Debt Securities and Equity. Debt securities yield interest whereas dividend is
received from Equity.

Portfolio management implies management of combination of above said securities to fetch

maximum return.

Basic Principals of Portfolio Management:

 Risk of Customers
 Long term investable funds of party.
 Minimum period for which funds are placed should be one year.
 Funds cannot be utilized for Call money market or Bill market.

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 Ch-18

Cash Management Service

Cash Management Service refers to providing facility to Business houses in the matter of
collection and disbursement from clients spread over the geographical boundaries.

Concept of CMS

A business firm/company makes sales and enters into dealings with numerous other parties
who are spread over the entire country or may be across the country. It cannot open different
accounts at different places for the purpose of collection. Moreover, liquidity cannot be managed
if there are many collection/disbursement accounts. The party requires some agency who
manages all the collections from various centres across the country and also keeps accounting
record of the same. The collection may be in Cash, Cheques, DDs or Bills. Out of the funds
collected, payments are also made on behalf of the party and record thereof is maintained. This
is called Cash Management Service and it is offered by almost all the banks whether PSUs or
Private Banks or Foreign Banks.

CMS has changes during last two decades either due to higher cost of capital or due to
technological developments in banking industry.

CMS has been popularized due to various initiatives taken by RBI in the recent past as under:

 MICR technology
 ECSS (Electronic Clearing Service Scheme).
 NEFT/RTGS through INFINET
 DvP (Delivery Vs Payment)
 CFMS (Centralized Fund Management System)\
 SSS (Securities Services System)
 SFMS

Importance of CMS

1. Saving of time
2. Decrease in cost of funds
3. Less work
4. Greater accounting accuracy
5. Faster electronic reconciliation
6. Reduces number of cheques issuance
7. Pro-active cash management

The CMS has also provided opportunities to banks who are in competition. Banks can serve the
customer in a better and retain the business. It also enhances non-interest income of the banks.

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Types of CMS

Banks are offering the following products under CMS:

 Cash Collection Service :

It improves efficiency in collections, reduces cost, minimizes risks and offers greater
security.
 Direct Credit by Fund transfer
Salary payments are made direct from the account. It manages payables, remittances
and other statutory payments.
 DD/Cheque drawing arrangement
DDs drawn under CMS are payable at par by other branches. Cheques issued by CMS
client are also payable at par.
 NEFT Payment Electronic channel
 Receivables management Cheque Collection
 Speed Clearing Service
 Auto Sweep Facility

Challenges and Issues of CMS

 Need to understand customer’s line of activity

 Provision of other advisory services
 Decisions regarding sourcing of software : Built in, Brought from others or Outsourced
 Special attention for Small and Medium companies
 A coordinating activity
 Security and Risk Management
 Operational reliability

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 CHAPTER – 19
PRINCIPALS OF LENDING

Adoption of Sound Lending policy is need of the hour. The important principals are as under:
1. Safety : 3 Cs – Character, Capacity and Capability
2. Liquidity
3. Profitability
4. Purpose
5. Diversification of Risks
6. Security

Types of Loans: Fund Based and Non- Fund based

Healthy loan portfolio of any bank contributes towards strengthening the asset side of its
balance sheet. The profitability of any of the Banking Institution depends on its quality of assets
and on minimizing the default of borrowers. It is therefore endeavor of the bank to make such
policies and procedures so that the loan portfolio is further strengthened.

There are two segments of loan portfolio – Fund based and Non-Fund based. Fund based
facilities include Term Loans, Cash Credit, Overdraft, Demand Loan and Bills purchased.

The Non-fund based facilities include Inland and Foreign Guarantees/ Letter of Credit, Deferred
Payment guarantees and Bill Acceptance facilities.

1. Term Loan
It a loan which is disbursed in lump sum but repayable in installments. Term loan is sanctioned
in favour of the borrower for purchase of Fixed Assets like Building, Land, Furniture, Machinery,
Vehicle and equipment to be purchased by individual , manufacturing / trading firm,
Professionals or Agriculturists.

2. Cash Credit
It is an advance in the shape of drawing against credit limit granted by the bank and the account
is opened in the same way as Current Account. The limit is granted against pledge or
hypothecation of stock, assignment of book debts or pledge of documents of title of goods.

3. Overdraft
It is an advance granted by the bank in Current account/Saving account over and above the
depositors’ credit balance. The limit of the overdraft may also be set against LIC policy or bank’s
own deposits. The amount allowed to be overdrawn in Salary accounts of the employees or No
frills accounts is also treated as Overdraft.

4. Demand Loan
Demand loan is an advance for the fixed amount disbursed in lump sum against bank’s own
deposits/LIC policies/other securities. No further debits except interest/charges are allowed in
the account. The amount is repayable in demand. At the time of maturity, the securities are
realized and the demand loan is adjusted.

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5. Bill Finance
These are advances in the form of limits sanctioned against Purchase of bills (ODD),
Discounting of Bills (BP) or Advance against bills (ABC) for genuine trade transactions. The
amount is released the bill is kept by the bank till due date. On due date, the bill is realized
when the drawee makes payment direct to the bank.

Non-Fund Based: Letter of Credit and Letter of Guarantee

Calculation of MBPF in LC

Example:

Credit purchase of Raw Material: 2400 lac per year

Time period for advising LC = 10 days
Time period for shipping = 20 days
Credit period agreed upon = 30 days
Total Time for realization = 10+20+30=60 days
Total rotations in a year = 360/60 = 6
Requirement of Raw material in a year = 2400 lac
Required limit for LC = 2400/6 = 400 lac

Working Capital

Working Capital is the amount of funds required for day to day working e.g. purchase of raw
material, finished goods, payment of wages, salaries, power expenses, other direct and indirect
expenses.

Working capital is the amount required for a cycle which begins from purchase of raw material,
converting it into finished goods, selling these goods and realization of cash.

Gross Working Capital is investment in total current assets. NWC is excess of Current Assets
over Current Liabilities.

Sources of Working Capital

Sundry Creditors (Trade Credits), Unsecured Loans, Bank borrowings like CC limit, Advance
payments from customers. Working Capital may also be sourced from Long term funds like
Issue of Capital etc.

Estimation of Working Capital

1. Operating Cycle Method

Working Capital is assessed on the basis of Operating Cycle. If production process
takes 2 months and thereafter period for effecting sales is 1 M and period of realization
of Debtors is 3 M. The requirement of Working Capital will be:

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Example:

Requirement of Raw Material = 2M = 1,00,000/-

Requirement of Payment of Direct Expenses = 2M = 20000/-
Funds will be blocked in finished goods =1M = 2,00,000/-
Realization of Debtors =3M = 3,00,000/-
Total Requirement = 6,20,000/-
Less Credit available from Creditors 2M = 2,20,000/-
Requirement of Working Capital = 4,00,000/-

2. Projected Turnover Method

NAYAK COMMITTEE RECOMMENDATIONS

Nayak Committee has provided a method to calculate Working Capital Requirement of unit. This
method is called Projected Turnover method and it is applicable in fund-based working capital
credit limits up to 200 lacs for other than SME up to 500 lacs for SME.

Such units be provided working capital limits computed as under:

a) Working capital requirement ------------- 25% of Projected Annual Turn-Over (PATO)

b) Less Margin----- 5% of PATO or Actual NWC (Whichever is higher
c) MBF (Maximum Permissible Bank Finance) or WC Limit = a – b (20% of PATO)

Practical example:

Q. Sales are Rs. 300 lac and Rs. 500 lac in the previous 2 years. Projected Sales for the next
year is Rs. 800 lac. What will be the amount of Working Capital limit as per Simplified
Turnover method of Nayak Committee presuming NWC less than 40 lac.
Ans. Working Capital Requirement = 800825/100=200 lac
Less Margin = 800*5/100= 40 lac
Working Capital Limit or MPBF = 200-40=160 lac
Q. Nayak Committee takes into consideration working capital requirement of unit for a
holding period of _________months.
Ans. 3 months

3. Tandon Committee’s 2nd Method Of Lending

Presently units covered under these guidelines are those having aggregate fund-based working
capital credit limits Above 200 lacs for other than SME Above 500 lacs for SME from the
banking system. The calculation is as under:

Find out Working Capital Gap: If Current Assets are Rs. 10.00 lac. Current Liabilities are Rs.
6.00 lac including bank borrowings Rs. 2.00 lac.

Working Capital Gap = CA – OCL = 10.00 lac – (6.00 -2.00) = 6.00 lac

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1st Method of lending:
Margin is 25% WCG i.e. -------------------------------------------1.50 lac
MPBF = 6.00 – 1.50 = 4.50 lac

2nd Method of lending:

Margin is 25% CA. i.e. -------------------------------------------2.50 lac
MPBF = 6.00 – 2.50 = 3.50 lac

3rd Method of lending:

Margin is 100% of Core Assets and 25% of remaining. Rest is same.

Presently, 2nd method is acceptable.

4. Cash Budget Method

Most of the banks have policy of using Cash Budget method for assessment of Working Capital
limit in excess of 10 crore. However, this method is used for Tea and Sugar Industry as well as
for seasonal type of industries.

Cash budget method is also used to assess Working capital needs in:
1. Opening of LC
2. Adhoc Working Capital limit
3. Bill Financing
4. Tea and Sugar Industry
5. Software activities
6. Coffee/Rubber/Rice Milling etc.
7. Other seasonal Industries.

Cash Budget is a statement of Cash Receipts and Cash Payments. It is substitute of Operating
Cycle method. It is a projection of future cash flows.

Base Rate System & Latest Concept of MCLR

 Base Rate is decided by individual bank by Asset Liability Committee (ALCO) of each.
 It is the minimum rate below which bank will not make advance except DRI advances,
Loans to staff and loans against Bank Deposits.
Recently, RBI has directed all the bank to determine Base Rate taking into account its Marginal
Cost of Funds. Now, w.e.f. 1.4.16, pricing of all loans will be done with reference to MCLR
(Marginal Cost of Fund Based Lending Rate). MCLR comprises of the following:
1. MCF- It includes MC on borrowings (92%) & Return on Net worth (8%)
2. Operating Cost
3. Negative carry on CRR
4. Tenor premium

MCF = Rates Offered on Deposits / Rates at which funds are raised

X Outstanding as on previous day

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Exposure Norms

1. Prudential Exposure norms as per RBI guidelines are :

Single 15% of Capital funds additional 5% for

infrastructure projects
Group 40% of Capital funds additional 10% for
infrastructure projects
Oil Companies 25% of Capital funds
 These limits can be exceeded up to 5% of Capital funds in case
of PSU borrower and AA rated borrowers

Types of Risks Risk is anticipated at Transaction level as well as at Portfolio level.

Transaction Level

Credit Risk, Market Risk and Operational Risk are transaction level risk
and are managed at Unit level.

Portfolio Level

Liquidity Risk and Interest Rate Risk are also transaction level risks but
are managed at Portfolio level.

CENTRAL REGISTRY

 Central Registry has been established by the Central Government and in terms of
section 20 of the SARFAESI Act. Bank has to ensure filing of charge in respect of all
equitable mortgages created in its favor.
 The same has to be filed within 30 days from the date of creation of security and on
payment of fees prescribed therein.
 Charges for creation are Rs. 50/- up to 5.00 lac and Rs. 100/- beyond 5.00 lac
 Filing of charge with Central Registry is in addition to the registration of charge with ROC
etc. Every modification/ satisfaction of charge also will have to be got registered with the
Central Registry.
 If the charge is not filed with the Central Registry within the stipulated time of 30 days,
the secured creditor shall be imposed penalty as under:
31st to 40 days--------------2 times the applicable fee
41st to 50 days--------------5 times the applicable fee
51st to 60 days ------------10 times the applicable rate

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 CH-20
PRIORITY SECTOR ADVANCES

Priority Sector Advances - Revised guidelines

The following categories are covered under Priority Sector.

 Agriculture
 Micro and Small Enterprises
 Export Credit
 Education Loans
 Housing Loans
 Social Infrastructure
 Renewable energy
 Others
The limits and details are discussed separately.

National Targets

Domestic Commercial Banks and Foreign Banks with

Foreign Banks with 20 branches and Less than 20 branches
above in India in India

Total Priority 40% of ANBC or Credit equivalent to Off 40% of ANBC or Off
Sector Balance Sheet exposure (Whichever is Balance Sheet Items
higher) Whichever is higher. To
be achieved in Phased
In case of Foreign banks with 20 or more manner by 2020.
branches, target of 40% is to be
achieved in Phased manner by 31.3.18..

Agriculture 18% of ANBC or Credit equivalent to Off Not applicable

Balance Sheet exposure (Whichever is
higher) Sub-target of 8% for Small and
Marginal Farmers (7% by 31.3.16 & 8%
by 31.3.17)

Micro and Small 7.5% of ANBC or Off Balance Sheet Not Applicable
Enterprises Items. (7% has to be achieved by March
2016 and 7.5% by March 2017)

Weaker Sector 10% of ANBC or Credit equivalent to Off Not Applicable

Balance Sheet exposure Whichever is
higher

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  For Foreign banks with 20 and above branches in India, Priority Sector targets have to
be achieved within 5 years.(Ist. April 2013 to 31st March 2018)
 ANBC means Bank Credit in India – Bills Rediscounted with RBI and other approved
institutions. + Investment in Non-SLR Bonds under HTM category + Other investments
eligible to be treated as Priority Sector.

Agriculture

Agriculture Credit will consist of following:

1. Farm Credit : A

 Loans to individual farmers including SHGs and JLGs directly engaged in

Agriculture and allied activities. This includes Crop loans, Medium and Long term
loans for implements, machinery, loans for irrigation and development activities.

 Loans against Pledge/Hypothecation of Agriculture up to Rs. 50 lac for period

not exceeding 12 months.

 Loans to distressed farmers indebted to non-institutional lenders.

 Loans to Small and Marginal farmers for purchase of land for agriculture purpose

2. Farm Credit : B: Loans to Corporate farmers, organizations, Companies of individual

farmers, firms and cooperative societies engaged in Agriculture and allied activities up
to Rs. 2.00 crore per borrower.

3. Agriculture Infrastructure: It includes loans for construction of storage facility

(Warehouses, market yards and Silos), Soil conservation and water shed development,
Plant tissue culture and Agri bio-technology, Seed production, Production of bio-
pesticides, bio fertilizers and Vermi composting. (Aggregate limit is Rs. 100 crore per
borrower from banking system )

4. Ancillary Activities :

 Loans up to 5.00 crore to Cooperative Societies for disposing of produce of members.

 Loans foe setting up of Agri clinic and Agri-business centres.
 Loans for Food and Agro processing up to Rs. 100 crore per borrower from banking system.
 Bank loans to PACS, FSS and LAMPS for on-lending to Agriculture.
 Bank loans to MFIs for on-lending to Agriculture.
 Outstanding deposits under RIDF/other eligible funds of NABARD.

Marginal farmers are those who have land holding up to 1 hector and Small Farmers are those
who own land more than 1 up to 2 hectors.

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Micro and Small Enterprises

Units having investment in P/M up to 25.00 lac (service Units having investment in Equipment
up to 10.00 lac) are defined as Micro Units. Units with investment more than 25 lac up to 5.00
crore (Service Units- more than 10 lac up to Rs. 2.00 crore) are classified under Small
Enterprises.

 Manufacturing Enterprises : It includes Micro, Small and Medium enterprises engaged

in manufacturing of goods.
 Service Enterprises: Bank Loans up to Rs. 5.00 crore per unit to MSE and Rs. 10.00
crore to Medium Enterprises engaged in providing and rendering services.
 Khadi and Village Industries Sector: All loans to units in KVI sector will be eligible.
 Others: It includes
 Artisans/Village and Cottage Industries entities engaged in supply of inputs and
marketing of output.
 Loans to cooperatives of produces viz. artisans, village and cottage industries.
 Loans to MFIs for on-lending to MSME sector
 Loans outstanding under GCC (including ACC, LUCC etc.)
 Outstanding deposits with SIDBI on account of PS shortfall.

MSMEs will continue to enjoy the PS status up to 3 years after these grow out of MSME
sector.

Export Credit: Export credit extended as below will be categorized under PS

Domestic Banks Foreign banks with 20 or Foreign banks with less

more branches than 20 branches

Incremental credit over Incremental credit over Export credit allowed up to

previous year up to 2% of
ANBC or OBI (whichever is
higher) subject to sanctioned
limit of Rs. 25 crore per
borrower to unit having
turnover of 100 crore.
previous year up to 2% of 32% of ANBC or OBI
ANBC or OBI (whichever is (whichever is higher)
higher)
(Effective from 1.4.17)

(Effective from 1.4.15)

Education Loans

Loans to individuals for educational purposes including vocational courses up-to Rs 10.00 lakh
irrespective of sanctioned limit will be treated as Priority Sector Advances.

Housing

1. Loans to individuals up to Rs 28 lakh in metropolitan centres with population ten lakh

and above and Rs 20 lakh in other centres for purchase/construction of a dwelling unit

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 per family provided overall cost per dwelling unit does not exceed 35 lac and 25 lac
respectively. Staff HL is excluded.
2. Loans for repairs to the damaged dwelling units of families up to Rs 5 lakh in
Metropolitan Centres and Rs.2.00 lac at other centres.
3. Bank loans to any governmental agency for construction of dwelling units or for slum
clearance and rehabilitation of slum dwellers subject to a ceiling of Rs 10 lakh per
dwelling unit.
4. The loans sanctioned by banks for housing projects exclusively for the purpose of
construction of houses only to economically weaker sections and low income groups, the
total cost of which do not exceed Rs10 lakh per dwelling unit. For the purpose of
identifying the economically weaker sections and low income groups, the family income
limit of Rs 2,00,000 per annum, irrespective of the location, is prescribed.
5. Bank loans to Housing Finance Companies for on-lending for
purchase/construction/Reconstruction up to Rs. 10.00 lac per borrower. However
eligibility of such loans for PS will be restricted to 5% of the bank’s total PS lending.
6. Outstanding Deposits with NHB on account of PS shortfall.

Social Infrastructure

 Loans up to Rs. 5.00 crore per borrower for building Social Infrastructure for Schools,
Health care facilities, Drinking Water and Sanitation facilities in Tier II to Tier VI Centres.

Renewable Energy

 Loans up to Rs. 15.00 crore per borrower for Solar Power units, Bio mass Power
generators, Wind Mills, Micro Hydal Plants and non-conventional energy based public
utilities.

 For individual households, the loan limit will be Rs. 10 lac per borrower.

Others
 Loans, not exceeding Rs 50,000 per borrower provided directly by banks to individuals and their
SHG/JLG, provided the borrower’s household annual income in rural areas does not
exceed Rs1,00,000/- and for non-rural areas it should not exceed Rs1,60,000/-.
 Overdrafts extended by banks up-to 5,000/- in PMJDY accounts will be eligible for classification
under priority sector provided the borrowers household annual income does not
exceed `1,00,000/- for rural areas and 1,60,000/- for non-rural areas.
 Loans sanctioned to State Sponsored Organizations for Scheduled Castes/ Scheduled Tribes for
the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of
the beneficiaries of these organizations.
Weaker Sector

 Small and Marginal Farmers – It include Farmers with land holding up to 1 hector
(Marginal Farmers) and with land holding more than 1 hector but up to 2 hector. It also
includes Landless laborers, Tenant Farmers, Share croppers and Oral Lessees.
 Artisans, Village and Cottage Industries where individual credit limit does not exceed
100000/-
 Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), now National Rural
Livelihood Mission (NRLM)

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  SCs/STS, DRI beneficiaries, SJSRY & SRMS beneficiaries, Self Help groups.
 Distressed farmers indebted to non-institutional money lenders.
 Distressed persons having credit exposure not exceeding 100000/- to prepay debts of
non-institutional lenders.
 Loans to individual women beneficiaries up-to Rs 1,00,000 per borrower.
 Loans sanctioned under above to persons from minority communities as may be notified
by Government of India from time to time.
 Persons with Disabilities.
 Overdrafts extended by banks up-to 5,000/- in PMJDY accounts will be eligible for classification
under priority sector provided the borrowers household annual income does not
exceed `1,00,000/- for rural areas and 1,60,000/- for non-rural areas.

Following investments are also eligible for classification under respective categories of priority
sector (direct or indirect).

 Investments by banks in securitized assets.

 Transfer of Assets through Direct Assignment /Outright purchases.
 Inter Bank Participation Certificates bought by Banks
 Priority Sector Lending Certificated bought by banks

Monitoring of PS Lending Targets: Monitoring of PS lending compliance will be done

Quarterly basis instead of annual basis. Quarterly data will have to be furnished for the purpose.

Non- Achievement of Targets All Scheduled commercial banks having shortfall in lending to
overall priority sector target/agriculture target and weaker sections target shall be allocated
amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with
NABARD or Funds with NHB/SIDBI/other Financial Institutions, as specified by the Reserve
Bank from time to time.

Priority Sector Common Guidelines

 Rate of Interest will be decided by DBOD of RBI from time to time.

 No loan related and Adhoc Service charges should be levied on PS advances up to
25000/-
 Electronic record of Receipt and Disposal of loan applications will be kept by bank.
 Each loan application will be acknowledged and time limit will be prescribed.

Priority Sector Targets for RRBs

 Total PS ------75% of total outstanding

 Agriculture –18% of total outstanding
 SF & MF------8% of total outstanding
 Micro Enterprises---7.5% of total outstanding
 Weaker Sector ---15% of total outstanding

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 CHAPTER - 21
AGRICULTURE - SCHEMES & GUIDELINES
INDIAN AGRICULTURE
Agriculture plays a pivotal role in the Indian economy. Although its contribution to gross domestic
product (GDP) is now very less, it provides employment to nearly 60 per cent of the Indian workforce.
Also, the forward and backward linkage effects of agriculture growth increase the incomes in the non-
agriculture sector. The growth of some commercial crops has significant potential for promoting exports
of agricultural commodities and bringing about faster development of agro-based industries. Agriculture
thus not only contributes to overall growth of the economy, but also reduces poverty by providing
employment and food security to the majority of the population in the country.

Short Term Loans: Loans repayable up to 18 M are called Short term loans. These loans are production
credit and include crop loan and KCC limit.

Medium and Long Term Loan: These loans are repayable in 36 M or more. Loans for Tractor, Farm
Machinery, Plantation, Horticulture, allied activities such as Dairy farming, Poultry, Fishery etc. are
generally Medium and Long term loans.

TYPE OF FARMERS:
 Landless Farmer / Agriculture Labourer: who has no land holding, have a homestead, derive more
than 50% income from Agriculture wages.
 Marginal Farmer: Farmers with landholding of up to 1 hectare is considered as Marginal Farmers.
 Small Farmer: Farmers with a landholding of more than 1 hectare but less than 2 hectares are
considered as Small Farmers.
 Other Farmer: who’s main source of income from agriculture and does not fall under the category of
Landless Farmer. Marginal farmer & small Farmer. Owns more than 2.00 hectare of land.

INDIAN CROPS ARE BROADLY DIVIDED INTO THREE GROUPS:

 Kharif Crop: This crop is sown in the month of July and harvested in the month of Oct every year. It
includes Rice, Jowar, Bajra, Maize, cotton, Sugarcane, soya bean, groundnut.
 Rabi Crop: This crop is sown in the month of Oct and harvested in the month of March / April every
year. It includes Wheat, Gram, Tur, Rapeseed and Mustard.
 Zaid Crop: In some part of the country, an additional crop is grown during March to June every year,
which is called Zaid crop. It includes Watermelon, vegetables, Cucumber, Melon etc.

THE MEANING OF SCIENTIFIC TERMS UNDER IN AGRICULTURE:

Sr. no Term Meaning/Relates to

1 Apiculture
2 Floriculture
3 Horticulture
4 Sericulture
5 Sylviculture
Bee- keeping.
Cultivation of Flowers.
Cultivation of Flowers, Fruits & Vegetables
Cultivation of Silk.
Cultivation of Trees.

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6 Plasticulture Use of plastic in farming
7 Dairy Farming Cattle rearing for milk and its various products
8 Pisciculture Fish Farming
9 Apriculture Mushroom Cultivation
10 Blue Revolution Increase in Fishery production & development
11 Green Revolution Increase in Agriculture Production
12 White Revolution Increase in Milk Production

PROCEDURAL GUIDELINES FOR AGRICULTURE FINANCING:

MARGIN NORMS
Amount of Loan Production/
Investment Credit
(Purchase of Tractor
/transport vehicle/M.
Irrigation /Allied
Agriculture Scheme etc
Up to Rs. 100000/- NIL
Above Rs.100000/- to Rs.2 5%
lac.
Above Rs.2 lac to Rs. 5 lac 10% -----do------
Above Rs. 5 Lac 25% -----do------

SECURITY NORMS
Production credit /Investment Credit
Amount Norms
Up to Rs. 100000/- Hypothecation of Crops/assets created out of Bank Loan
Above Rs.1,00,000/- Hypothecation of crops/assets created out of bank loan;
AND
Charge on land as per Agricultural Credit Operations and Miscellaneous
(Provisions) Act of the State concerned/Mortgage of agricultural land valued at
100% of amount of loan for other farmers and 75% of the loan amount for small
farmers/marginal farmers;
OR
Alternate security, viz., charge/lien over liquid securities such as term
deposits/NSCs/KVPs, etc., which may be considered adequate.
OR
Suitable third party guarantee.

OBTAINING OF NO DUES CERTIFICATE:

Requirement of obtaining No Dues Certificate/Affidavit has been dispensed with for small loan upto Rs
100000/- for all farmers However, for loans above Rs.1,00,000/-, obtaining of Affidavit in lieu of "No Dues
Certificate" is allowed.

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APPLICATION OF INTEREST IN AGRICULTURE LOANS:

• The rate of interest should be charged as per loan and advances circular issued by HO from time
to time.
• The payment of interest should be insisted upon only at the time of repayment of loan instalments
as fixed.
• The Interest on current dues should not be compounded.
• The interest in the agriculture loan should be applied at the end of half year but should not be
debited to account instead it should be debited to a separate account.

TIME SCHEDULE FOR DISPOSAL OF LOAN APPLICATIONS:

Extent of Loan Time Schedule

(Maximum)
(i) Upto Rs.25000/- : 2 weeks
(ii) Above Rs.25000/- and upto Rs.5 lakh : 3 weeks
(iii) Above Rs.5 lakh :
At Branch Level 4weeks
By controlling office : 6-7 weeks

AGRICULTURE FINANCE SCHEMES

KCC (Kisan Credit Card) – Revised Scheme

The scheme has been revised as under:

Eligibility:
All farmers – Individual and Joint owners of land, Tenant farmers, and Oral Lessees and Share
croppers are eligible to apply. The oral tenants are eligible only if Land owners agree to become co-
borrowers. The staff members are also eligible if they are cultivating owners. Landless laborers,
Share Croppers, Tenant farmers and Oral Lessees can be issued KCC up to 50000/- on the basis of
Affidavit.
Purpose:
 Short Term Credit for cultivation of crops, Post Harvest expenses, Produce Marketing
purposes, Consumption purpose and Working Capital requirements for Farm Assets as well
as Allied Agriculture activities like Dairy Farming and Inland Fishery etc.
 Long term Investment Credit for Agriculture land and allied activities like digging of pump set,
sprayers and Dairy animals.

Extent of limit:
Maximum Rs. 20.00 lac (Now raised to 50.00 Lac)
Fixation of Limit
Production Credit for farmers raising single crop:
(Amount as per scale of Finance X Extent of Area ) + 10% of limit for post harvest requirement and
Consumption requirements + 20% of limit towards Repair and maintenance of Farm Assets + +
10% cost escalation for 2nd , 3rd, 4th and 5th year + Estimated Term Loan Component during 5 years +
Crop Insurance, PAIS (Personal Accidental Insurance Scheme) and Asset Insurance

Production Credit for farmers raising more than one crop

Amount of Limit will be arrived at by combining requirement of two or more crops as per proposed
cropping pattern. 10% cost escalation is to be provided for and calculation is similar as given above.
It is presumed that same cropping pattern will continue during 4 years.
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Maximum Permissible Limit
Short term loan limit arrived for the 5th year plus estimated long term loan requirement during 5 years
will be Maximum Permissible Limit and will be treated as Kisan Credit Card Limit.

MARGIN
Production Credit -----NIL
Term Loan -------------NIL up to 1.00 lac, 5% (1-2 lac), 10% (2-5 lac) and 25% (5-20 lac). Subsidy, if
available will be treated as margin.

Security
Hypothecation of crops up to 1.00 lac. In addition EM of IP if the limit exceeds Rs. 1.00 lac.

Other Features
 Both CC and Reducing Term Loan may be disbursed in Cash and no Bills/Receipts
are required.
 Reducing Term Loan will be disbursed in stages and will be repayable in a period of 5
years.
 Interest will be levied on current dues without compounding.
 Interes@7% will be charged in regular production credit component up to Rs. 3.00 lac.
 Cheque book facility be provided to all KCC holders
.

Farm Mechanization

PURPOSE :  Purchase of New Tractors (of Approved Make & Model) & matching
implements such as cultivator, harrow, and disc ploughs, trolleys, etc.
(Minimum three, unless borrower already possesses the same.)
 New Power Tiller
 Second hand tractor
 Small tractor (40 HP, G.O.I. Scheme)
 Agricultural Machinery
 Repair & renovation of tractor
ELIGIBILITY : Minimum 2.5 acres of perennially irrigated land for tractors or corresponding
acreage as prescribed for different categories of land under the State Land
Ceiling Act.
Min.1.5 acres for power tillers (owned singly or jointly).
For second hand tractor, it should not be more than 5 years old.

REPAYMENT :  Tractor: 7 -9 years

 2nd hand tractor: 5 years
 Power tiller: 7 year.
 Other Farm machinery: 7 years ( small & marginal farmers),
 5 years (other Farmers)

Margin Norms  Upto 1 lac Nil
 Above 1- 2 lac 5%
 Above 2- 5 lac 10%
 Above5 lac 25%

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 Minor Irrigation

PURPOSE: Purchase of pumpsets, Deepening of wells /repairs to wells, borewell,

shallow tubewell, sprinkler sets/drip irrigation sets/solar pumps / wind mills/
lift irrigation / generator sets for energisation of pumpsets, etc..
ELIGIBILITY:  A borrower intending to implement a minor irrigation project including
sprinkler / drip irrigation projects must have a holding of at least 1
acre of land.

EXTENT OF LOAN : Need based.

REPAYMENT : Pumpsets: 9 Years
Deepening of wells /Persian wheels/Rahat: 5 years
Linking of Water course /Field Channels : 9-15 years
Sprinkler/Drip Irrigation: 10-15 years

PURPOSE : For meeting working capital credit requirement of agriculture/allied

agricultural activities /non-farm activities either singly or in combination with
other activities.
Krishak Saathi Scheme

PURPOSE : Providing finance to the farmers to redeem their outstanding dues to

moneylenders.
ELIGIBILITY: All farmers including small & marginal farmers, tenant farmers, oral lessees,
sharecroppers, agriculture labourers, etc, who are indebted to non-institutional
money sources.The requirement of obtaining a certificate of moneylender
discharging the borrower from total liability has been dispensed with.
EXTENT OF LOAN: Maximum Rs. 1,00,000/- as term loan.
REPAYMENT : The loan shall be repaid by the farmers in 5-7 years including a maximum
moratorium period of 12 months with half-yearly/yearly instalments.
Margin Nil

Security Norms No security.

KRISHI BHU-SWAMI YOZNA

PURPOSE Term loan to small/marginal farmers including share croppers/tenant cultivators

to purchase agricultural land as well as fallow and wasteland to develop and
cultivate it with a view to increasing production/ productivity.
ELIGIBILITY Small and marginal farmers, share croppers/tenant farmers, who own/ cultivate
and Entrepreneurs with agriculture back ground (If state laws permits)
maximum of 5 acres of unirrigated land or 2.5 acres of irrigated land including
the land to be purchased. The total land holding of the borrower after the
purchase of the not to exceed 2.5 acres of irrigated land or 5 acres of
unirrigated land or equivalent.
NATURE OF TERM LOAN
Loan

EXTENT Of Maximum 10 lacs (subject to valuation assessed by branch, circle

Loan rate/guidance value fixed by state or registration value whichever is lower+

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 value of stamp duty, registration charges for sale etc.

Other Schemes

Horticulture Fruit Orchards & Fruit Mangos, Chikoo,

Crops Grapes, apple etc.
Poultry Farming Broilers & Layers Laying Period Superior birds lay 272-
farming. commences around 21st 300 eggs in a year
week and considered
Under Broilers, One day economical up to 72
chicks are grown and weeks
sold for meat.
Dairy Farming Buffaloes – milk yield is Lactation period is 270- A small unit of 2 cattle is
5-6 liters. 300 days. considered viable for
Animal to be purchase small farmer.
after 30 days of first or Dry days 150-180 days Loan can be paid within
2nd calving. 3 lactations
Sericulture For Silk production in 4 phases are as under:
agro industries 1. Cultivation of Host plant
2. Rearing of silk worms
3. Reeling of cocoons into filaments(raw silk)
4. Silk Processing and weaving
Vermi Culture Vermi means earth worm. From Vermi culture, we get decomposed Worms
which get multiples and used as manure for crops. The excess worms can be
converted into vermin protein (Poultry feed, fish feed etc.) or vermi wash
(spray on crops).

Minimum Support Price

It is fixed by GOI to enable the farmer to sell their crops at assured price. It is the guarantee price below
which the produce will not be purchased.
 GOI announces MSP at commencement of growing crop.
 FCI is the nodal agency.
 Now, MSP is announced for 25 crops every year.
 For setting MSP, Govt. takes into consideration recommendations of CACP (Commission for
Agriculture Costs and Prices), views of State Govt. and related ministry.
 CACP recommended to consider the following before announcing:
1. Demand and Supply
2. Cost of production’
3. Price trends
4. Likely implications.
 MSP for Oil seeds and Pulses is declared through NAFED (National Agriculture Co-operative
Marketing Federation of India Ltd.). NAFED and CCI (Cotton Corporation of India) are nodal
procurement agencies for Oil Seeds and pulses.

NAIS (National Agriculture Insurance Scheme)

Crop Insurance helps the farmers to cover risk of loss of agriculture produce due to unfavourable
weather, floods , draughts or any other reasons. Dr. Rajinder Prasad, first President of Indias, assured to
bring legislation in this regard. Crop Insurance bill and model scheme was introduced in 1965. First Crop

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Insurance Scheme was launched in the year 1972. GIC introduced pilot Crop insurance Scheme in
1979 but inclusion of states was voluntary.

From Rabi season 1999, PCIS was discontinued and replaced by NAIS (National Agriculture Insurance
Scheme). This scheme is being implemented by AIC (Agriculture Insurance Co. of India) which took
over from GIC in April 2003.

Coverage
 All farmers growing notified crops and availing seasonal loans are covered on
compulsory basis.
 Other farmers growing notified crops are covered on voluntary basis.
Risks to be covered
 Natural fire and Lightening
 Storm, Hailstorm, Cyclone etc.
 Flood and Landslide
 Draught and Dry spells
 Pests/Deseases etc.
Losses on account of war, nuclear risks, and other preventable risks are not covered.

Sum Assured
 It may extend to value of Threashold Yield (TY) at the option of insured farmer. Farmer
has option to get coverage up to 150% of average yield of notified area.
 In case of lonee farmers, threashold yield must be equal to the amount of advance.
 Indemnity will be calculated as under:
Indemnity = Shotfall in yield X Sum Assured/TY
Shortfall in yield = TY – Actual yield
Premium
Kharif
Bajra and Oil Seeds ---------------3.5% of SI (Sum assured) or Actuarial rate which is less
Other crops--------------------------2.5% of SI (Sum assured) or Actuarial rate which is less.
Rabi
Wheet--------------------------------------1.5% of SI (Sum assured) or Actuarial rate which is less
Other crops-------------------------------2.00%of SI (Sum assured) or Actuarial rate which is less

AIC is in the process of bringing crops of Sugarcane, Tea, Basmati Rice and other crops under the ambit
of Crop Insurance Scheme.

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 CHAPTER - 22
MSME FINANCE
OVERVIEW OF MSME

The Government of India enacted MSMED Act in June 2006 and the provision of the Act came
into force w.e.f. 2nd October 2006. This act has been passed with a view to provide a new
category of Micro, Small and Medium Enterprises with well defined limits for investment in Plant
& Machinery/Equipment.

As per MSMED Act, a Micro Enterprise has been defined as under:

1. Enterprises engaged in the manufacturing or production, processing or preservation of

goods where investment in plant and machinery does not exceed ` 25 lakh

2. Enterprises engaged in providing or rendering of services whose investment in equipments

(original cost excluding land and building and furniture, fittings and other items not directly
related to service rendered or as may be notified under the MSMED Act 2006) does not
exceed `10 lakh

Micro, Small and Medium Enterprises

The limits for investment in plant and machinery/equipment for manufacturing / service
enterprise, as notified by Ministry of Micro Small and Medium Enterprises, vide, S.O.1642(E)
dated September 9, 2006 are as under:-

Manufacturing Sector Service Sector (Investment

Investment in P/M in Equipment)
Micro Max. Rs. 25 lac Max. Rs. 10 lac
Small Max. Rs. 5.00 crore Max. Rs. 2.00 crore
Medium Max. Rs. 10.00 crore Max. Rs. 5.00 crore

Bank loans to micro and small enterprises both manufacturing and service are eligible to be
classified under priority sector as per the following:

Direct Finance

Manufacturing Enterprises

The Micro and Small enterprises engaged in the manufacture or production of goods to any
industry specified in the first schedule to the Industries (Development and regulation) Act, 1951.
The manufacturing enterprises are defined in terms of investment in plant and machinery.

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Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises,
provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as
provided in MSMED Act, 2006.

Service Enterprises

Bank loans up to Rs 5 crore per unit to Micro and Small Enterprises engaged in providing or
rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

Export credit to MSE units (both manufacturing and services) for exporting of goods/services
produced by them.

Disposal of Loan Applications within the prescribed time limit is to be ensured as under:

Upto 25000 4 Working Days

Above 25000 up to 2.00 lac 8 Working Days
Above 10 lac up to 5.00 crore 12 Working Days
Over 5.00 crore 20 Working Days

RBI has advised that banks should mandatorily acknowledge all loan applications, submitted
manually or online, by the MSME borrowers and ensure that a running serial number is
recorded on the application form as well as on the acknowledgement receipt.

DELAYED PAYMENTS
Buyer of SME unit shall make payment within 45 days or else pay compensation with interest 3
times of Bank Rate for the period of delay.

CGTMSE

CREDIT FACILITY ELIGIBLE UNDER THE SCHEME

The Trust shall cover credit facilities (Fund based and/or Non fund based) extended by
Member Lending Institution(s) to a single eligible borrower in the Micro and Small
Enterprises sector for credit facility (i) not exceeding ` 50 lakh (Regional Rural
Banks/Financial Institutions) and (ii) not exceeding ` 100 lakh (Scheduled Commercial
Banks and select Financial Institutions) by way of term loan and/or working capital
facilities on or after entering into an agreement with the Trust, without any collateral
security and\or third party guarantees.
Loan Up To Rs 10.00 Lac Has Mandatory Coverage Under CGTMSE And Collateral
Cannot Be Accepted In Such Cases By The Bank

EXTENT OF GUARANTEE

CGTMSE has decided to increase the guarantee cover to 85% of credit facility upto `.5 lakh
sanctioned to micro enterprises with effect from 2nd January, 2009. Consequently, with effect
from 2nd January, 2009, the Trust shall provide guarantee as under :

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 Category Maximum extent of Guarantee where credit facility is
Upto ` 5 lakh Above ` 5 lakh Above ` 50 lakh
upto ` 50 lakh upto ` 100 lakh
Micro Enterprises 85% of the 75% of the amount 37.50 lakh plus 50%
amount in default in default subject to of amount in default
subject to a a maximum of above ` 50 lakh
maximum of ` 37.50 lakh subject to overall
` 4.25 lakh ceiling of 50.00 lakh
Women 40 lakh plus 50% of
entrepreneurs/ amount in default
Units located in 80% of the amount in default subject to above ` 50 lakh
North East Region a maximum of `. 40 lakh subject to overall
(incl. Sikkim) (other ceiling of 50.00 lac
than credit facility
upto `.5 lakh to
micro enterprises)
All other category of 75% of the amount in default subject to 37.50 lakh plus 50%
borrowers a maximum of ` 37.50 lakh of amount in default
above ` 50 lakh
subject to overall
ceiling of ` 50.00 lakh

CGTMSE has decided that all Member Lending Institutions to make payment of Guarantee Fee
and Annual Service Fee in a composite form known as “Annual Guarantee Fee” instead of
separate payment of Guarantee Fee and Annual Service Fee per year as under:-

Annual Guarantee Fee at specified rate

(a) Currently 1.00% in the case of credit facility upto Rs. 5 Lakh and also in above Rs. 5
Lakh and upto Rs. 100 Lakh
(b) 0.75% in the case of credit facility upto Rs. 5 Lakh and 0.85% in the case of credit
facility above Rs. 5 Lakh and upto Rs. 100 Lakh sanctioned to units in North Eastern
Region including (State of Sikkim) of the credit facility sanctioned shall be paid upfront to
the Trust by the Bank availing of the guarantee cover within such period as may be
specified by the Trust.

TIME LIMIT FOR LODGEMENT OF CLAIM:

Claims are to be lodged within a maximum period of two years from the date of
NPA, if NPA is after the lock-in period or within two years of expiry of lock-in period, if
account became NPA during the lock-in-period. Lock in period is 18 months.
Reimbursement of Credit Rating Fee to SME units
Micro and Small units get reimbursement of Rating fee in respect of rating got done from
empaneled agencies like CRISIL, India Ratings, ICRA, ONICRA, SMERA, BRICKWORK. Rate
of reimbursement is as under:
Turnover of SME unit Reimbursement of fee
Up to 50.00 lac 75% of fee or Maximum Rs. 25000/-
Above 50 up to Rs. 200 lac 75% of fee or Maximum Rs. 30000/-
Above Rs. 200 lac 75% of fee or Maximum Rs. 40000/-

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CLCSS (Cluster Based Approach in Financing MSMEs)
Certain industries with similar type of opportunities and threats form a cluster. Cluster is a
concentration of economic enterprises producing a typical product or service within a particular
geographical area. Banks cater to the needs of the cluster. Location of such enterprises can
span over few villages, within a city or surrounding the city.

 Cluster can have economies of scale.

 Collective benefits are achieved
 Specialized technical services can be provided.
 Inter firm cooperation is encouraged.

Banks also encourage cluster based approach to financing by providing Extended Banking
services, providing information, Risk Management, facilities for exporters etc. Separate
packages and services can be planned for a particular cluster. MSME focused branches can be
opened in clusters.

UNIDO (United Nations Industrial Development Organization) has identified 388 clusters
spread over 21 states in India.

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 Chapter - 23
Govt. Sponsored Schemes
PMEGP (01.04.2008)

 Merger of two schemes – PMRY/REGP

 Only New project. One person from family.
 EDP Essential. Task Force DIC/KVIC/KVIB/Banks.
 Purpose: Provide employment
 Project Cost: 25 lac (Mfg) & 10 lac (others)
 Margin: 10% ( 5% for SC/ST,Women, OBC, PH, Ex,NER, Hill/Border etc.)
 Collateral Security: Upto 10 lac: NIL
 Subsidy: General: Urban: 15% Rural 25%
Special: Urban: 25% Rural 35%
 Educational Qualification: No criteria up to a loan of Rs. 10 lac for mfg and 5 lac for
business/service.
o Over this amount: Minimum 8th passed
 No income criteria Repayment: 3 to 7 years.
 50% cases should be from Rurual areas

DAY - NRLM (Deen Dayal Antodya Yojna -National Rural Lively hood Mission)
(Previous Name: SGSY (Swaran Jayanti Gramin Swarozgar Yojana)
 Purpose: To bring rural people above poverty line:
 Applicable in Rural Areas.
 Eligible SHG: Women SHG(ncluding the SHGs and their Federations at village and higher
levels) of 10-15 persons with more than 70% BPL or rurual poor.
(In difficult areas, groups with disabled persons or groups of Tribal people,
number of persons can be 5 or more)
 Loan amount is through repeat doses as under:
1st dose---4-8 times of proposed corpus (savings) during year or 50000/- whichever is
higher.
2nd dose----5-10 times of existing corpus or proposed savings during next 12 M or Rs.
1.00 lac whichever is higher.
3rd dose---Minimum Rs. 2.00 lakhs based on credit plan of SHG
4th dose—Loan can be 5-10 lakhs based on credit plan of SHG
(Corpus is inclusive of revolving funds, if any, received by that SHG, its own savings and funds
from other sources in case of promotion by other institutes/NGOs)
Financial Assistance through RF (Revolving Funds)
DAY-NRLM would provide Revolving Fund (RF) support to SHGs in existence for a
minimum period of 3/6 months and follow the norms of good SHGs, i.e. they follow –
‘Panchasutra’ i.e. Regularmeetings, regular savings, regular internal lending, regular
recoveries and maintenance of proper books of accounts. Only such SHGs that have not
received any RF earlier will be provided with RF, as corpus, with a minimum of ` 10, 000
and up to a maximum of ` 15,000 per SHG. The purpose of RF is to strengthen their
institutional and financial management capacity and build a good credit history within the
group.
Community Investment support Fund (CIF)
CIF will be provided to the SHGs in the intensive blocks, routed through the Village level/
Cluster level Federations.
Other Provisions.
 No collateral required up to Rs. 1000000/-

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  Reservation :50% to SC/ST, 15% to minorities and 3% to disabled
 No Capital Subsidy
 Only Interest subsidy for over and above 7%
 Additional subsidy of 3% for SHG and Women
 SHG must have minimum 5 members (70% from Rural poor). Under SHG, Project cost
can be up to Rs. 10.00 lac. There will be no Collateral and the loan will be covered under
CGTMSE.

DAY - NULM (Deen Dayal Antodya Yojna -National Urban Lively hood Mission)
(Previous Name: SJSRY (Swaran Jayanti Sahri Rozgar Yojana)

 Purpose: To bring urban population above poverty line by providing employment

(residing 3 years)---Term Loans and WC loans can be sanctioned.
 Identification of borrowers by Urban Local Body.
 Extent: Project Cost: Upto 2,00,000/- per individual
 No project ceiling for women groups
 Repayment: 5-7 years
 Margin: NIL up to 50000/- AND 5% above 50000/-
 Collateral Security: NIL
 Women groups: 35% max.3.00 lac (60000/- per individual)
 Reservation: SC/ST: According to population, 30% for Women and 3% for Disabled.
 No Capital Subsidy
 Only Interest subsidy for over and above 7%
 Additional subsidy of 3% for SHG and Women
 SHG must have minimum 5 members (70% from Urban poor). Under SHG, Project cost
can be up to Rs. 10.00 lac. There will be no Collateral and the loan will be covered under
CGMSE.

DIFFERENTIAL RATE OF INTEREST (DRI), 1972

 Purpose: To assist poorest of poor.

 Income Criteria: 18000/- in rural areas.
o 24000/- in other areas.
 Land Holding: Should not exceed 1 acre if irrigated and 2.5 acre if non irrigated. (Not
applicable for SC/ST)
 Extent: 15000/-, 5000/- additional to PH for artificial limbs etc and 20000/- for
housing(IAY).
 No subsidy, No margin, No collateral security
 Repayment: 5 years including 2 yrs moratorium
 Interest: 4% p.a.
National Target = 1% of Total Advances of previous year; out of which
 Minimum 40% (2/5th should go to SC/ST ; and
 2/3rd of advances must be routed in rural/semi urban branches.

Pradhan Mantri Awas Yojana- Housing for All (Urban)

The Mission is being implemented during 2015-2022 and provides central assistance to Urban
Local Bodies (ULBs) and other implementing agencies through States/UTs for:

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 1. In-situ Rehabilitation of existing slum dwellers using land as a resource through private
participation
2. Credit Linked Subsidy
3. Affordable Housing in Partnership
4. Subsidy for beneficiary-led individual house construction/enhancement.

Credit linked subsidy component is being implemented as a Central Sector Scheme while other
three components as Centrally Sponsored Scheme (CSS).

A Technology Sub-Mission under the Mission has been set up to facilitate adoption of modern,
innovative and green technologies and building material for faster and quality construction of
houses. Technology Sub-Mission also facilitates preparation and adoption of layout designs and
building plans suitable for various geo-climatic zones. It will also assist States/Cities in
deploying disaster resistant and environment friendly technologies.

Credit Linked Subsidy Scheme CLSS

The Mission, in order to expand institutional credit flow to the housing needs of urban poor will
implement credit linked subsidy component as a demand side intervention. Credit linked subsidy
will be provided on home loans taken by eligible urban poor (EWS/LIG) for acquisition,
construction of house.

 Beneficiaries of Economically Weaker section (EWS) and Low Income Group (LIG)
seeking housing loans from Banks, Housing Finance Companies and other such
institutions would be eligible for an interest subsidy at the rate of 6.5 % for a tenure of 15
years or during tenure of loan whichever is lower.

 The credit linked subsidy will be available only for loan amounts up to Rs 6 lakhs and
additional loans beyond Rs. 6 lakhs, if any, will be at nonsubsidized rate. Interest
subsidy will be credited upfront to the loan account of beneficiaries through lending
institutions resulting in reduced effective housing loan and Equated Monthly Installment
(EMI).

 The carpet area of houses being constructed under this component of the mission
should be up to 30 square meters and 60 square meters for EWS and LIG, respectively
in order to avail of this credit linked subsidy. The beneficiary, at his/her discretion, can
build a house of larger area but interest subvention would be limited to first Rs. 6 lakh
only.

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 CHAPTER - 24
SELF HELP GROUPS

A self-help group (SHG) is a village-based financial intermediary usually composed of 10–20

local persons. However, in difficult areas, SHG can be formed by even 5 members. Most self-
help groups are located in India, though SHGs can also be found in other countries, especially
in South Asia and Southeast Asia. The movement was first started in Bangladesh by Prof
Mohd. Yunus who founded Gramin Bank in 1976.
Members make small regular savings contributions over a few months until there is enough
capital in the group to begin lending. Funds may then be lent back to the members or to others
in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery
of microcredit.

Structure of SHGs

A Self-Help Group may be registered or unregistered. It typically comprises a group of micro

entrepreneurs having homogenous social and economic backgrounds, all voluntarily coming
together to save regular small sums of money, mutually agreeing to contribute to a common
fund and to meet their emergency needs on the basis of mutual help. They pool their resources
to become financially stable, taking loans from the money collected by that group and by making
everybody in that group self-employed. The group members use collective wisdom and peer
pressure to ensure proper end-use of credit and timely repayment. This system eliminates the
need for collateral and is closely related to that of solidarity lending, widely used by micro
finance institutions.[1] To make the book-keeping simple enough to be handled by the
members, flat interest rates are used for most loan calculations.

Goals of SHGs

Self-help groups are started by non-governmental organizations (NGOs) that generally have broad anti-
poverty agendas. Self-help groups are seen as instruments for a variety of goals including empowering
women, developing leadership abilities among poor people, increasing school enrollments, and improving
nutrition and the use of birth control. Financial inter mediation is generally seen more as an entry point to
[2]
these other goals, rather than as a primary objective. This can hinder their development as sources of
village capital, as well as their efforts to aggregate locally controlled pools of capital through federation, as
was historically accomplished by credit unions.

NABARD's 'SHG Bank Linkage' program[

Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program,
borrow from banks once they have accumulated a base of their own capital and have
established a track record of regular repayments.
This model has attracted attention as a possible way of delivering microfinance services to poor
populations that have been difficult to reach directly through banks or other institutions. "By

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aggregating their individual savings into a single deposit, self-help groups minimize the bank's
transaction costs and generate an attractive volume of deposits. Through self-help groups the
bank can serve small rural depositors while paying them a market rate of interest."[3]
NABARD estimates that there are 2.2 million SHGs in India, representing 33 million members,
that have taken loans from banks under its linkage program to date. This does not include
SHGs that have not borrowed.

Credit Linkage and Quantum of Credit: Minimum 6 months existence is required.

Stages Period of formation Savings to Loan

Ist Stage 6M from formation 1:4
2nd stage 1 yr. from formation 1:7
3rd stage 1 yr. from date of 2nd financing 1:10

 Advance is clean and unsecured

 Margin is Group Savings
 Repayment period is 3 years
 Classification in Weaker sector
 No collateral up to 5.00 lac (or Rs. 1.00 lac per member.

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 CHAPTER - 25
CREDIT CARDS, HOME LOAN AND PERSONAL LOAN

Credit Card

Global Credit Card  This is unsecured type of Advance.


th
- Classic Cash Age criteria are 21-65 years and minimum education is 10 .
Withdrawal limit is  Banks must adhere to Fair Practice Code for Lending operations.
30% of Card limit.  KYC requirements must be complied with before issuance of Credit Cards.
 Banks and NBFCs must assess Credit Risk before issuance of Credit
Global Credit Card Cards.
– Gold Cash  Minimum Income criteria must be ensured for salaried class as well as
Withdrawal limit is Business class.
40% of Card limit.  Card limit for cash from ATM and POS transactions must be specified while
issuance of Credit card.
 There is 1 reward point for Rs. 100/- shopping and minimum 500 points are
redeemed.
 Interest free credit for 20-50 days.
 Balance transfer facility & EMI facility available.
 Copy of PAN Card/Income proof or Form 60/61 required.
 Can be issued in Urban and Semi Urban areas.
 Card limit is more in Gold Card as compared to Classic card.
 Wrong billing should not be there. Bills/Statements must be provided to
customers at regular intervals.
Protection of Customers’ Rights
 Right to Privacy.
 Limits should not be upgraded unilaterally
 Customers’ confidentiality.
 Fair practice in Debt collection.
 Right to approach Ombudsman, if complaint is not redressed within 30
days.
 CIBIL Data must be verified before issuance of credit card.
 CIBIL data must also be updated from time to time.
 Any Change in terms or charges require 1 Month Notice.
HOUSING LOAN
Individual & Joint Owners. HUF is not considered as Joint owner.

Purpose  Need based amount can be financed for

 Purchase of Plot or Built House
 Construction of House or
Repair/Renovation/Furnishing
 Earnest Money Deposit

REVISED LTV AND RISK WEIGHTS

Housing RBI has directed to rationalize the prudential norms on risk-weight,

Loans – CRE provisioning and LTV ratio for individual housing loans, CRE (Commercial
(Commercial Real Estate) and CRE-RH (Commercial Real Estate – Residential

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Real Estate) Housing) exposures, as under
and
Loan Category LTV Ratio Risk Weight
Commercial Individual HL
Real Estate Up to 30 lac If LTV < 80 35%
Residential If LTV >80 < 90 50%
Housing
(CRE-RH) Above 30 up to 75 lac If LTV < 75 35%
If LTV> 75< 80 50%

Above 75 lac LTC < 75 75%

CRE-RH NA 75%
CRE NA 100%

 Bank’s Exposure for 3rd House will be treated as CRE exposure.

 LTV should not exceed prescribed limits in cases of fresh sanction.
 If currency LTV ratio is higher, efforts be made to bring it down up to
prescribed level.

Other Conditions

 Maximum 25-30 years including Moratorium period of 18 months

 Margin may vary from 20% to 25%. Generally higher margin is obtained on Plot.
 Installment can be fixed up to maximum age of 70 years.
 Repayment of loan for repair/renovation/addition/alteration restricted to 15 years
including moratorium period of 6M.
 Likely Rental Income may also be considered for determining repaying capacity.
 The Income of spouse and earning children can be taken into account provided they are
made co-borrowers.
 Father/mother can also be made co-borrowers in cases where property is in the single
name of his/her son and also clubbing of their income is permitted for determining
eligibility criteria.
 Minimum 24 advance cheques should be obtained. As and when, 6 cheques remain,
fresh lot be obtained. Out of 24, 23 cheques should be of installments and 1 cheque
should be of the amount equal to the balance amount.

Security and Guarantee

In general, no guarantee is to be asked for. But while preparing RBL score sheet, if score is less
than 50%, then 3rd party guarantee can be obtained to raise score of the applicant.

Equitable Mortgage of Property is created in favour of bank before release of Housing Loan.

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Priority Sector Guidelines

1. Loans to individuals up to Rs 28 lakh in metropolitan centres with population ten lakh and
above and Rs 20 lakh in other centres for purchase/construction of a dwelling unit per
family provided overall cost per dwelling unit does not exceed 35 lac and 25 lac
respectively. Staff HL is excluded.
2. Loans for repairs to the damaged dwelling units of families up to Rs 5 lakh in
Metropolitan Centres and Rs.2.00 lac at other centres.
3. Bank loans to any governmental agency for construction of dwelling units or for slum
clearance and rehabilitation of slum dwellers subject to a ceiling of Rs 10 lakh per
dwelling unit.
4. The loans sanctioned by banks for housing projects exclusively for the purpose of
construction of houses only to economically weaker sections and low income groups, the
total cost of which do not exceed Rs10 lakh per dwelling unit. For the purpose of
identifying the economically weaker sections and low income groups, the family income
limit of Rs 2,00,000 per annum, irrespective of the location, is prescribed.

Loan cannot be granted

 For construction in Un-authorized colonies

 If property is to be used for commercial purpose
 Without approved Map
( In Compliance of Delhi High Court Orders)

 Banks will not charge foreclosure charges/pre-payment penalties on housing Loan for
floating interest rates in terms of guidelines contained in

Education Loan Scheme

Eligibility  Indian National

 Secured Admission in India and Abroad after +2 through Entrance
Test/Merit based selection

Age of student There is no restriction with regard to age of student for being eligible for the
loan.

Income Criteria No Income criteria is prescribed for the parents. However amount of loan be
decided by judging Income of the parents.

Priority Sector Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.

Risk Weight As per BASEL-II 75%

Margin Upto Rs. 4.00 lac’ NIL

Above Rs. 4.00 lac In India----5%
Abroad---15%
(Scholarship/assistance may be included in the margin)

Security NIL Up to Rs. 4.00 lac

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 3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac
EM of IP or other Coll. Security for loans above 7.50 lac
Hypothecation of assets if created out of loan amount.

(RBI has directed to cover all Education loans up to 7.50 lakhs under
CGFSEL where there is no Guarantee and no Collateral)

Co-obligation of students’ parents as well as assignment of future income of

student in loan above Rs. 7.5 lac. For married persons, co-obligator can be
spouse or parents or parents-in-law. Grand parents can also become co-
obligants.

Repayment 10 years ------ For loans up to 7.50 lac

15 years ------ For loans above Rs. 7.50 Lac
Holiday Period Moratorium period equal to Course period + 1 year or 6
months after getting job whichever is earlier
Calculation of Simple interest is to be charged during moratorium period and kept in a
interest separate account. The accrued interest during repayment holiday will be
added to Principal for fixing of EMI.

Interest 1% interest concession is allowed if it is serviced during holiday period.

concession
0.5 % Interest concession for Girl students

Personal Loan

Eligibility  These are loans given against personal security.

 There is no tangible security and are treated as unsecured.
 Examples are Salary Loan, Pensioner Loan and Loans to
Professionals.
 Check off facility is there in case of salary loan.
 Purpose is to meet personal needs of the borrower.
 Minimum and maximum amount of loan is fixed keeping in view the
amount of salary/pension drawn in a month/year.
 Minimum take home pay should range from 40% to 50%.
Margin & Margin is NIL
Process Fee Processing Fee is different in Different banks (say 1%)

Repayment TL – 36 to 60 EMIs (differ bank to bank)

OD- Reducing DP spread over 60 M.

Guarantee Suitable 3rd party guarantee. RM/CM may waive

RBL Sheet Score system will be applicable and the applicant will have to score at least
50% marks to avail loan.

Other  In case of Army personnel, a copy of authority letter be sent to

Requirements Controller of Defense Account (CDAO) Pune so that salary is remitted
till liquidation of loan

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  Statement of account for at least 6 m. be obtained.
 Affidavit that no other loan from other bank is availed be obtained.
 Copy of IT return for previous 3 years be obtained. Form 16 be taken if
loan is granted to employee.
 A Registered letter be sent to the employer informing about details of
loan raised by the employee.
Documents - 1. Application-cum-appraisal-cum-sanction form for personal loan
simplified 2. Term Loan Agreement for personal loan
3. Overdraft Agreement for personal loan
4. DPN (Demand Promissory Note), if it is OD limit.
Risk Weight 125%

CONSUMER LOAN

Eligibility  Target group is Salaried Class, Pensioners, Self Employed ,

Business persons and personal with regular income.
 Check off facility is there in case of salaried person.
 Purpose is to purchase Consumer goods.
 Minimum and maximum amount of loan is fixed keeping in view the
amount of salary/pension drawn in a month/year.
 Minimum take home pay should range from 40% to 50%.
 It is non- priority Advance
Margin & Normally 10 to 20%
Processing Processing Fee is different in Different banks (say 1%)
Fee

Repayment TL – 36 to 60 EMIs (differ bank to bank)

Advance cheques signed by the borrower along with letter of deposit be

obtained. Obtention of advance cheques is applicable where check off
facility is not available.

Guarantee Suitable 3rd party guarantee. RM/CM may waive

RBL Sheet Score system will be applicable and the applicant will have to score at least
50% marks to avail loan.

Other  Statement of account for at least 6 m. be obtained.

Requirements  Affidavit that no other loan from other bank is availed be obtained.
 Copy of IT return for previous 3 years be obtained. Form 16 be
taken if loan is granted to employee.
 A Registered letter be sent to the employer informing about details
of loan raised by the employee.
Risk Weight 125%

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 \
PRADHAN MANTRI MUDRA YOJANA (PMMY)

MUDRA, Full form “Micro units Development and Refinance Agency Ltd.” is an institution that has
been set up by Indian Government in the leadership of PM Sh. Narendra Modi. MUDRA Bank has been
set up with only one goal in mind – Fulfilling all the Funding needs of Non Corporate Small Businesses.

Responsibilities of MUDRA Bank –

 Preparing and Launching the Policy Guidelines

 Registration and Regulation of MFI Entities.

Note – MFI Stands for Micro Finance Institution

 Running a Credit Guarantee Scheme

 Creating a Good Architecture for serving Micro business by Providing them Loan

Eligibility:

 All “Non farm enterprises”

 under “Micro Enterprises” and “Small Enterprises” segment
 engaged in “income generating activities”
 engaged in “manufacturing, trading and services“ and
 whose “credit needs are up to Rs.10.00 lacs”

Credit Facilities:

 Any type of Fund Based or Non Fund Based facility.

 No Minimum amount. Maximum Amount - Rs.10.00 lacs.

Categorization of MUDRA Loans:

Category Stipulated Credit limits

SHISHU Loans sanctioned under the scheme up to Rs.50000

KISHORE Loans sanctioned under the scheme from Rs.50001 to Rs.5.00 lacs
TARUN Loans sanctioned under the scheme from Rs.5,00,001 to Rs.10.00 lacs

Processing Charges: Nil

Security:
No Collateral Security

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 CHAPTER - 26
DOCUMENTATION

Agreement between the Banker and The Borrower is important. Particular charge can be
created through documents only. Some documents require Stamping and Registration as per
provisions contained in Indian Contract Act, Indian Partnership Act and Company Act etc.
Registration Act and Indian Stamp Act are also applicable. The guidelines are as under:

 Documents must be executed on or before date of sanctioning loan.

 Parties must be competent to enter into contract. Minors, Insolvents and Insane people
cannot execute Documents.
 There must be Free Will to execute documents.

Important Documents are:

1. DPN (Demand Promissory Note

It is Promissory Note as per Sec 4 of NI Act. It attracts Stamp Duty as per Stamp Act which
is uniform throughout India. Unstamped or under stamped DPN cannot be rectified and
produced in court of law even by paying penalty.

2. Agreement

It must be in conformity with Indian Contract Act. Amount of loan, Rate of Interest/penal
interest, margin, period of repayment, security etc. must be part of the agreement. Stamp
Duty varies from state to state. Different type of agreement is made for Pledge,
Hypothecation, Lien or Guarantee agreement.

3. Forms

Separate forms are obtained for different purposes. Authorization Form in case of joint loan
or Authorization from the borrower to make payment direct to supplier is obtained on
separate form.

STAMPING AND REGISTRATION

Stamping of documents
Non judicial stamp paper should be attached with the documents before or at the time of
execution. If it is under stamped, the same can be admitted in court by paying penalty/fee of
Rs. 5/- or up to 10 times the under stamping (whichever is higher.) But promissory note and bill
of exchange cannot be admitted by paying penalty in case the same are under stamped.

Stamps must be cancelled, otherwise, document will be treated as unstamped. Refund of

stamps can also be claimed from Treasury/District Collector within 12 months.

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Uniform Rates of Stamp Duty

Receipts of money or property, the amount of 1.00

which exceeds Rs. 5000/
Letter of Credit 1.00

Transfer of shares 0.25

Demand bill of exchange NIL
Demand Promisory Note
Up to Rs.250/- ------------------------------------------ 0.05
>250 up to 1000---------------------------------------- 0.10
> 1000----------------------------------------------------- 0.15
Usance Bills of Exchange Advalorem
 Advalorem means stamp duty according to period and amount of bill.

Documents executed outside India:

These will be stamped Again in India within 3 months of arrival.

More than one state:

Difference to be paid and Stamp duty of the state in which it is higher is applicable. In J&K full
duty has to be paid again.

Registration of Documents
• Registration: within 4 months from date of execution with Registrar of Assurances
(Sub-Registrar) under whose jurisdiction, the property falls. Period can be extended by
another 4 months.

• If executed outside India- within 4 months of arrival in India.

• Non-registered documents cannot be admitted in court of law for evidence.

• In case of advance to Limited Companies, charge must be registered with ROC within
30 days from date of execution. This period can be extended by another 30 days.

Documents requiring Registration

 Mortgage Deed
 Written memorandum of deposit of title deeds for creating Equitable
mortgage.
 Lease deed of IP, if period of lease is one year or more.
 Sale deed in respect of property.
 Gift Deed

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 LIMITATION

Period of Limitation: 3 years against personal liability from the date as under:

 D/L: date of documents

 C/C: date of documents
 T/L: 3 yrs from due date when each installment becomes due.
 Limitation against the Guarantor runs from the date of Demand from him/her.
 In Mortgage, limitation period is 12 years
 Redemption/Foreclosure: 30 years
 Day on which documents were executed or BC letter obtained to be excluded
 Period of foreign stay to be excluded
 In case of holiday, suit may be filed on the next date when court opens
 Limitation may be extended by part payment or acknowledgement of debt (part or full)
but before expiry

Revival of Time Barred Debts

In case a loan has become time barred, it implies that suit cannot be filed in the court. That
means recovery through legal recourse is not possible. However, if the borrower makes
fresh promise in writing, limitation is revived and it runs from the date when fresh promise is
made. Fresh promise does not require any fresh consideration.

SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002) SARFAESI Act is applicable throughout India including J&K. The
provisions are not applicable in respect of following:

 Lien/Pledge;
 Security interest created for securing repayment not exceeding Rs.1 lac;
 Any security interest created in agriculture land;
 Where the amount due is less than 20% of the principal plus interest.
 IPs charged to the Bank by way of mortgage is shown as agricultural land in the revenue
records but the same is not being used for agriculture purposes, are not eligible for
Exemption as per the decisions of HC/SC.

HOW TO PROCEED FOR ACTION UNDER SARFAESI U/S 13(4)

 Account must have been classified as NPA.

 On behalf of the secured creditor bank, action can be taken by ‘Authorized Officers’
which will be in Scale IV and above.

POSSESSION NOTICE

 After recall, the Authorized Officer shall give 60 days’ Possession Notice U/S 13(2) to
borrower/guarantor/ mortgagor demanding to discharge full liability within 60 days.
 On issue of such a notice, if the borrower/guarantor raises objections by way of
representation under section 13 (3A), bank has to give explanation/suitable reply within
15 days from the date of receipt of the objections/representation.

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TAKING OVER POSESSION

 After completion of 60 days from the service of notice, the authorized officer can take
possession of the property by delivering a possession notice to the borrower and by
affixing the possession notice on the outer door or at such conspicuous place of the
property. Possession is of two types:
1. Symbolic Possession
2. Actual Possession

30 DAYS’ SALE NOTICE

 The authorized officer shall serve upon the owner of the asset concerned a notice of 30
days. The notice is to be mandatorily served upon the person concerned.

MODE OF SALE

 By obtaining quotation from persons dealing in the similar assets;

 By inviting tenders from public.
 By holding public auction.
 By private treaty.

FILING OF APPLICATION AND APPEAL UNDER SECTION 17 AND 18 F THE ACT

 Any person (including borrower) may make an application to the DRT within 45 days
from the date on which such action had been taken.
 The Act stipulates a time period of 60 days for deciding the application filed
before DRT U/s 17(1).
 However, DRT may further extend the time after recording reasons in writing but the
period so extended shall not exceed 4 months from the date of the application.

SPV – Special Purpose Vehicle

It is fund created by Securitization Companies to acquire/purchase non-performing assets. The

Fund manages the assets for the purpose of realization or holds them as investments till
maturity. SPV issues consideration of transfer price to the Originator bank in the form of cash,
debentures, bonds as mutually agreed.

SPV is created by SCRC (Securitization and Reconstruction Companies. These companies

raise resources from QIBs (Qualified Institutional Buyers). Security Receipt is issued to QIBs by
SCRC in lieu of amount contributed by them.

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 CHAPTER – 27
TYPE OF CHARGES

1. First charge/exclusive
2. Second charge
3. Pari passu charge
4. Floating charge

Creation of Charge under Tranfer of Property Act, 1882

 MORTGAGE (SECTION 58) - IP

 ASSIGNMENT (Section 130) - ACTIONABLE CLAIMS (Unsecured Debts) Book
Debts/FD/NSC/LIC
Creation of Charge under Indian Contract Act 1872

 PLEDGE ( SECTION 172) – GOODS

 LIEN (SECTION 170 & 171) – GOODS & SECURITIES
SARFAESI ACT, 2002 (Section 2-n)

 HYPOTHECATION – GOODS & VEHICLES

LIEN

Sec 170 & 171 of Indian Contract Act, deal with Lien. Lien is a right of creditor to retain
possession of goods and securities owned by Debtor until Debt is repaid. Lien os of 3 types:

1. Particular Lien
2. General Lien
3. Negative Lien

General lien is Bankers’ lien which is also called Implied Pledge. Bank can adjust proceeds of
security not only for a particular loan account but for another loan which has fallen due for
payment. Under general lien, security can be sold without court’s intervention but after serving
proper notice. Security is under possession of the Lender bank.

Particular lien does not allow the creditor to sell the security for adjustment of dues. It entrust
right on particular security for particular debt. Security is under possession of the Creditor.

Negative lien casts upon binding upon the Debtor not to sell particular security until Debt is
repaid. Security is under possession of the borrower.

Right of Lien does not apply on:

 Goods kept with bank under Safe Custody

 Goods/Securities kept for some specific purpose
 Articles left by negligence
 Stolen goods Both Lien and Set off cannot be exercised simultaneously.

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PLEDGE-: It is defined u/s 172 of Indian Contract Act. It is bailment of goods as security for
payment of a debt or performance of a promise. Bailment means delivery of goods for some
purpose

ACTUAL POSESSION IS GIVEN TO THE LENDER THOUGH OWNERSHIP REMAINS WITH

PLEDGER(BORROWER)

RIGHTS OF PLEDGEE

 Retain the goods

 Sell the goods after notice
 Recovery charges for preserving

DUTIES OF PLEDGEE

 To refund goods with accruals

 To take care of goods

HYPOTHECATION

 Hypothecation is defined under Sec 2 of SARFAESI Act.

 It is a charge on any movable property, existing or future, created by a borrower in
favour of a secured creditor without delivery of possession of the movable property , as
security for financial assistance

 Neither possession nor ownership is given

 Sale of goods cannot be done without taking legal action.

ASSIGNMENT

 Defined under Sec 130 of Transfer of Property Act.

 Assignment is transfer of actionable claim, which may be existing or future.
The transferor is called the Assignor and transferee is called Assignee.
 Actionable claims are Right in property or Debt e.g. LIC Policy, Book Debts, Money due
from Govt. Department etc.
 Assignment is of two types: Legal and Absolute.
 In Legal assignment, absolute transfer of actionable claim must be in writing and signed
by assigner. Due notice of assignment is given to debtor.
 Equitable assignment is handing over the possession of document representing
actionable claim without observing the above formalities
 No particular form or consideration is essential.

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MORTGAGE

Mortgage is transfer of interest on a specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future debt or the
performance of an engagement which may give rise to pecuniary liability.

 Mortgager, Mortgagee and mortgage money

 Limitation: 12 years
 Right of foreclosure and redemption (limitation: 30 years)

TYPES OF MORTGAGE

1. Equitable or Mortgage by Deposit of Title Deeds

2. Simple or Registered Mortgage
3. Usufructury Mortgage
4. English Mortgage
5. Mortgage by Conditional Sale
6. Anomalous Mortgage.

EQUITABLE MORTGAGE or MORTGAGE BY DEPOSIT OF TITLE DEEDS

• Handing over of title deeds.

• Possession as well as ownership remains with the borrower.
• It is affected in Notified areas declared by state govt.
• In other areas, mortgage can be created by other branch situated in notified areas.
• There must be intention to create security.
• Equitable Mortgage is not registered and therefore it attracts no stamp duty.

SIMPLE/REGISTERED MORTGAGE

 Mortgage deed to be executed.

 Possession as well as ownership remains with the borrower.
 Registration within 4 months with registrar of assurance
 No power to sell the property without intervention of court
 Mortgagor personally liable.

ENGLISH MORTGAGE

 Mortgage deed to be executed.

 Registration within 4 months with Registrar of Assurance
 Absolute transfer of property subject to re-transfer if the debt is repaid.
 Possession remains with the borrower.
 Mortgagee can sell the property without court intervention.
 Personal liability to pay on specified date.

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MORTGAGE BY CONDITIONAL SALE

 Mortgagor ostensibly sells the mortgaged property on condition that on default, the sale
shall become absolute or sale shall become void if amount is paid.
 Mortgagee can sue for foreclosure
 Possession is generally transferred to the mortgagee.

USUFRUCTUARY MORTGAGE

 Mortgagor hands over possession of property to the mortgagee

 Mortgagee can recover his dues out of income from property without any time limit
 Sale is not allowed. Recovery suit is not filed.
 No personal liability of mortgagor.
 Borrower (Mortgager) has Right of Redemption i.e. he can get the property redeemed
by making payment of loan and the period of limitation for this is 30 years.
 Lender (Mortgagee) can exercise Right of Foreclosure that means he can apply to court
to debar the borrower from rights of the property since the loan has been adjusted within
time bound schedule. Limitation period for this purpose is also 30 years.

REVERSE MORTGAGE

Senior citizen can avail loan in installments on the basis of mortgage of their property with the
bank. Since installments are paid by the bank on the basis of value of property mortgaged with
the bank, it is called Reverse Mortgage.

General Guidelines

 Loan sanctioned in Kolkata, Mortgage can be affected in Jaipur provided it is notified

centre.
 Mortgage becomes effective from date of its creation and not from date of registration.
 No charge is registered for Equitable Mortgage.
 No personal liability is there in case of Usufructury Mortgage and Recovery suit cannot
be filed.

Right of Subrogation

Surety gets all the rights of the creditor against Principal Debtor upon meeting his
liability under the Contract.

Right of Set Off

It is right of a bank as Debtor to adjust the debt owing to him owing to him by the same person
in the capacity of creditor. In simple words it is adjustment of loan account from credit balance in
some deposit account.

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Essential of Right of Set Off

 Both the accounts must be in same Name and same Right.

 Same Right is not there if dues are in single name and Credit balance in joint name.
 Credit balance in a minor’s account in the capacity as Guardian is not in same right.
 Same Right is not there if dues are in the name of a partner and Credit balance in the
account of partnership firm. But reverse is true and Right of Set off can be exercised.
 Single account and Proprietor’s Account are in same right.
 Amount must be certain and debt must be due and recoverable.
 All branches of a bank are considered as single entity.
 Automatic Right of set off is available in the following:
 Death/Insanity and Insolvency of the borrower.
 Insolvency of the partner or winding up of the company.
 Garnishee order/Income Tax attachment order
 Notice under SARFAESI Act
 Dues against Guarantor only if Demand has been made from him.

NOTICE IS NOT COMPULSORY FOR EXERCISING RIGHT OF SET OFF.

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 CHAPTER - 28
TYPES OF COLLATERALS

Security is of two types: Primary and Collateral. Primary Security is the item purchased out of
bank loan.

Collateral is an additional security offered by the borrower or guarantor for the purpose of
securing loan. This security is offered over and above the Primary Security.

Different types of collateral are as under:

Advance against Charge Important points

Land and Building Mortgage  Title must be verified and certified in search
report by Lawyer.
 Title deed should be original.
 NEC normally for 13 years must be obtained
from Registrar office.
 Valuation from approved valuer. In Leasehold
property, terms of Lease should allow the loan.
Goods Hypothecation  Nature of account will be Open Cash credit
or Pledge (Hypothecation)or Key Cash credit (Pledge).
 For Working Capital requirements (1 Year)
 Goods should not be obsolete or perishable.
 Stock must be paid for. If creditors are > Debtors,
net amount should be deducted from Value of
Stock.
 Periodical inspection of stock be done.
 Stock audit is required in case limit is at-least
5.00 crore.
 Valuation of stock is done at cost price or market
price (whichever is lower).
 In Pledge, bank can sell the goods after serving
reasonable notice.
 In Hypothecation, goods cannot be sold without
converting the charge into Pledge.
 Under Sarfaesi, bank can take into possession
the hypothecated goods and sell them.
Documents of Pledge  These documents are RR/GR/Bill of Lading,
Title of Goods Warehouse keeper’s certificate/Delivery order
(Defined in Sale etc.
of Goods Act)  These are quasi negotiable instruments and are
transferable through endorsement and delivery.
 Goods must be paid for.
 Genuineness of documents must be ensured.
 Whenever, these documents are released
without payment, a receipt is obtained, which is
called Trust Receipt.
LIC Policies Assignment  It may be accepted as Primary or Collateral
Security.
 Policy must be in force and update premium

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 paid.
 Original, Stamped and Signed by Issuing
Authority.
 Latest premium receipt must be obtained and
kept on record.
 Age must be admitted by Insurer.
 Assignment should be obtained on separate
Stamp paper. It must be witnessed.
 Nomination is automatically cancelled at the time
of assignment.
Shares Pledge  DL or OD can be availed against Shares.
 Margin of 50% is obtained.
 Shares in Demat form are preferred.
 No banking Co. can hold shares in any Co. of an
amount exceeding 30% of paid up capital of the
Co. or 30% of its own paid capital and reserves
(whichever is lower). --- Sec 19(2) of BRA
 Bank’s exposure in Capital market should not
exceed 5% of total advances.
 Loan should not exceed 10 lac against Shares/
debentures in physical form and 20 lac in Demat
form.
 Banks can make advance to employees to
purchase shares under ESOS up to 90%
(maximum amount Rs. 20.00 lac).
Book Debts Assignment  Finance against Accounts Receivables and Bills
Receivable.
 Trade transaction must be ensured by the bank.
 Notice of Assignment must be served upon every
Debtor.
 Debtors should not older than 6 Months.
 Factoring and Forfaiting is also same type of
advance.
 Transactions with sister concerns, transactions of
capital expenditure and advance payments must
be excluded.
Term Deposits Pledge  Lending up to 90% against bank’s own FD.
 Amount of FD plus accrued interest is taken.
 Rate of interest is decided by bank which is
normally 1-2 % higher than FD rate.
 Deposits in the name of minor cannot be taken
as security.
 However bank may consider loan to guardian for
the necessities of minor.
 Receipt must be discharged by all the account
holders
 No loan can be granted against deposit held
under Capital Gain Scheme.
 Loan to Partner against FD of the firm is treated
as 3rd party loan, but loan to Prop is not as such
treated as 3rd party loan.

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Gold Pledge  For agriculture and non-agriculture purpose.
 Generally allowed for 1 year.
 TL or Overdraft facility is provided.
 Purity of Gold is verified.
 Loan is subject to NPA norms.
 Presently restriction imposed by RBI – 50 Gms.
Supply Bills Assignment  Bill in relation to transaction with Govt.
Department and PSU is Supply bill.
 Supplier will submit Bill (Invoice) and it must be
accompanied by Inspection Note from the
concerned department.
 The proof of delivery of goods at the department
i.e. No. of RR/Bill of Lading must be incorporated
in the Note.
 These bills are not Negotiable Instruments and
are in the nature of Debts. Therefore, charge is
assignment.
 Bank will obtain letter from the supplier
addressed to the department to pay directly to
the bank.
Two types of bills are as under:
Interim Bills: against which govt. pays 80-85% a
Final Bill: It includes remaining amount which is paid in
due course after verification.

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 CHAPTER - 29
Asset Classification
One of the important recommendations of Narsimham Committee was to adopt International
Accounting Practices and Accounting Standards with an objective of bringing transparency in
the Balance Sheet.

The major source of Income in the banks is in the from Interest on loans, which is booked
initially and recovered later on i.e. on Accrual basis. If the same is not recovered within
reasonable time, the Income should not be recognized as per International Standards.

Narsimham Committee suggested as under:

1. Classification of assets into 4 categories:

 Standard Assets: The loan account which is not NPA.
 Sub-standard Assets: The loan account which is classified as NPA.
 Doubtful assets: The loan account which remains NPA for >1year
 Loss Assets: The loan account in which security is not available.
How and when the account becomes NPA?

Type of Account Period

TL becomes NPA if Interest/Principal remains Overdue More than 90 days
CC/OD becomes NPA if it remains out of order More than 90 days
The account is treated as out of order: if
 Outstanding balance is continuously above DP
 There are no credits in the account for >90 days
 Credit is not enough to cover interest during same period
Bill becomes NPA if it remains Overdue for More than 90 days
Agriculture Loan account becomes NPA if overdue After 2 crop seasons
In case of Long duration crops After 1 crop season

KCC Account will be treated as NPA if it is out of order:

A KCC account will be treated as out of order in the following circumstances:

 There are no credits in the account continuously for two crop seasons/one crop season
(as the case may be) as on the date of balance sheet.
 The outstanding remains continuously in excess of the limit for two crop seasons/one
crop season (as the case may be) as on the date of balance sheet.
 The credits in the account are not sufficient even to cover the interest debited in respect
of the account for two crop seasons/one crop season (as the case may be).

Projects Under Implementation Involving Time Overrun

DCCO (Date of Commencement of Commercial Operations) for all project loan should be fixed.
If it fails to commence commercial operations within 1 year, even if regular, will be treated as
NPA. For infrastructure Projects, the time period is 2 years.

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Asset Classification
Loan Account remains in Sub-standard category for 1 year
Loan becomes Doubtful after remaining 1 year in D1 category for 1 year
Substandard category). D2 category for next 2 years
(The account is transferred to Doubtful category directly if D3 category beyond 3 years after
security loss is 50% or above) it became doubtful
Loan becomes Loss Asset If Loss of security is either 100%
or 90% or more.

Non- Financial reasons for account becoming NPA

1. Stock Statement not received for 3 Months.
2. Limit is overdue for renewal for 6 M.

Up-gradation of NPA into Standard Category

The account is upgraded on same day when the recovery is made.

Implications of Accounts after becoming NPA

1. Interest is not charged and not credited to Income head.
2. Interest accrued and credited to Income account but not recovered during corresponding
previous year will be reversed.
3. Provision is made for NPAs (Bad and Doubtful debts) from the current year’s profits.
Asset Classification – Borrower wise and not Facility wise
It means if one account of the borrower is classified as NPA, other accounts will also be
treated as NPAs even if these are regular.
Advances under Consortium
Each bank will take view of transferring account to NPA category on the basis of its own
recovery.
PROVISIONING NORMS

In terms of Monetary policy 2011-12, the revised norms of provisioning are as under:
Standard Assets

Classification Rate of provision

Direct SME and Direct Agriculture 0.25%
General including DCCO revised up 0.40%
to 2 years
Commercial Real Estate (RH) 0.75%
Commercial Real Estate 1%
Teaser Housing Loans 2%
Restructured accounts classified as 5%
standard advances:

Non-Performing Assets

Sub-standard Advances:

 Secured Exposures 15%

 Unsecured Exposures (abnitio unsecured) 25%

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  Unsecured Exposures in respect of 20%
Infrastructure loan accounts where certain
safeguards such as escrow accounts are
available.
Doubtful Advances – Unsecured Portion 100%

Doubtful Advances- Secured Portion

 For Doubtful up to 1 year 25%

 For Doubtful>1 year and up to 3 years 40%
 For Doubtful >3 years 100%
Loss Assets : These are identified by auditors 100%
where security is eroded up to 90%

Provisioning for non-reporting to CRILC

Secured SS up to 6M--------------15%, 6-12 M------------25%
Unsecured SS up to 6M----------25%, 6-12 M-----------40%
Secured DB -1-----------------------40% DB2---------------100%

Some Important Equations:

1. Net NPAs = Gross NPAs – (Provision +DICGC/ECGC cover).
2. Provisioning Coverage Ratio = NPA Provision X 100
Gross NPAs
3. Provisioning Coverage Ratio should not be less than 70% of Gross NPAs as per bank
guidelines.
4. Amount of ECGC/DICGC guarantee cover must be excluded while calculating provision
in respect of Doubtful assets. But in case of Sub-standard assets, this cover need not to
be deducted.
5. In case of Doubtful Assets, Secured portion and Un-secured portion (Security reduced
subsequently) will be segregated and provision will be calculated accordingly.
6. Advances against NSCs/KVPs/FDs/LIC Policies need not to be classified as NPAs
provided adequate margin is available. However, advances against Gold and Govt.
Securities are not covered under the exemption.

GOVT. GUARANTED ACCOUNTS

 STATE GOVT: It will be declared NPA as in other loan cases.
 CENTRAL GOVT: Continued to be Standard Assets till repudiation of guarantee by the
Central Govt. However interest would not be taken into income unless actually received

Exposure in Weak Accounts

All irregular/weak accounts shall henceforth be classified as Special Mention Assets
(SMA) with sub-categories as under;

Sub-Category Basis for Classification

SMA-0 Principal or interest overdue up to 30 days
SMA-1 Principal or interest overdue between 31-60 days
SMA-2 Principal or interest overdue between 61 days to 90
days

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 CDR (Corporate Debt Restructuring)
CDR is Creditor Debtor arrangement under which Creditors will not demand payment till
standstill period and Debtors will pay immediately as per arrangement. It is restructuring of
Debts outside the purview of BIFR, DRT and other legal proceedings. Following are eligible:

 Who enjoy credit facility from more than 1 bank i.e. multiple/consortium advances
 Whose total exposure is 10.00 crore and above.

There are two categories of CDR: Category 1 and Category 2.

Category 1 CDR:
 Standard and Sub-standard accounts are covered.
 Reference can be made by any or more creditor having minimum 20% share
 Minimum 75% of creditors by value and 60% by number agree to this package
 Standstill period is 90-180 days.
 Limitation will extend by undertaking from borrower.
 Additional finance can be provided.
Category 2 CDR:
 Doubtful accounts are covered.
 Reference can be made by any or more creditor having minimum 20% share
 Minimum 75% of creditors by value and 60% by number agree to this package
 Standstill period is 90-180 days.
 Limitation will extend by undertaking from borrower.
 No Additional finance can be provided.
Non Co-operative Borrowers
Definition of Non Cooperative Borrower (NCB):
A non-cooperative borrower is one who is Defaulting in timely repayment of dues while
having ability to pay, not providing necessary information sought, Denying access to assets
financed / collateral securities and Obstructing sale of securities, etc. In case of a company
will include, besides the company, its promoters and directors (excluding independent
directors and directors nominated by the Government and the lending institutions). And in
case of business enterprises (other than companies), non-cooperative borrowers would
include persons who are in-charge and responsible for the management of the affairs of the
business enterprise.
Cut-off Limit for NCB:
The cut off limit for classifying borrowers as non-cooperative shall be those borrowers having
aggregate fund-based and non-fund based facilities of Rs. 5 crore and above from our bank.

The bank may classify such borrowers as non-cooperative borrowers, after giving them due
notice, if satisfactory clarifications are not furnished. RBI has setup a Central Repository of
Information on Large Credits (CRILC) to collect, store and disseminate credit data of
borrowers.

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 CHAPTER – 30
FINANCIAL INCLUSION
(BUSINESS FACILITATORS & BUSINESS CORRESPONDENTS)

Financial Inclusion

Presently, the biggest challenge before Commercial banks is to take banking services to
the underprivileged and to cover the villages which are still unbanked. India achieved
self-sufficiency in food-grains with the support of banking sector. The high rate of
economic growth is also the result of sound Commercial banking in India. In order to
sustain the growth rate and achieve economic stability, it is need of the hour to narrow
the gap between rich and poor. Commercial banks can do it by including the poor and
downtrodden in the fold of banking.

It is estimated that only 27% of Indian farmhouse holds have access to institutional
credit as on to-day. Another 22% access the money lenders. The remaining 51% do not
have any access to institutional credit. The customer reach from banks is still far from
satisfactory as for every 16000 people in India; there is only one branch of a
Commercial bank. Recently, the Union Finance Minister has exhorted that each bank
branch may open at-least 250 new accounts each year. This will enable the banks to
open 12.5 million accounts in a year.

1. Business Facilitators

Bank has taken up the financial inclusion as a Mission. This is why we call it “Mission
Empowerment”. Business Facilitators (BFs) are the intermediaries which will be active
in the field for financial counseling, making surveys and support to bank in opening
accounts, processing of loan applications and formation of Self Help Groups/Farmer
clubs. The other functions of BFs are identification of prospective borrowers,
determining suitability of activities, helping in filling up loan applications and Post-
sanction follow-up.

Eligibility Criteria

Both individuals and institutions can be appointed as Business Facilitators. These

individuals can be honorably retired bank employees/Post masters/Teachers/Ex-
servicemen/Govt. employees/MFIs (Micro Finance Institutions) with good track and
working record in rural areas. Students, Insurance agents, Contact farming account
holders, Progressive farmers of Farmers’ clubs and Kisan Bandhus/Vikas Bandhus
engaged by FTCs.

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Besides above, various organizations like NGOs, Farmer Clubs, Self Help Groups, Co-
operatives, Sugar mills, Rice mills, dealing with our bank, Post offices, well functioning
Panchayats, Agri clinics, Agri business centers, Kristi Vigyan kendras Krishi Vigyan
Kendra, KVIC/KVIB units, FTCs and IT enabled rural outlets are also eligible.

VILLAGE SARPANCH IS NOT ELIGIBLE

Qualification and other requirements

Individual BFs should be minimum 10th pass, preferably resident of local area, with no
major illness and should not be having criminal record. The SHGs should be well
established and existing for the last two years.

2. Business Correspondents

Among individuals, Only Retired Bank employees, Govt. employees and Ex-servicemen
are eligible to become Business Correspondents. Among institutions NGOs, MFIs,
Registered societies, Companies, POs, Insurance agents, Krishi Vigyan Kendras,
Registered village organizations and KVIC/KVIB units can act as Business
Correspondents. Recently, banks have been allowed to appoint Medical Chemists and
Kirana merchants, PCOs agents of small saving schemes, Insurance agents as BCs

Activities of BFs Activities of BCs (Besides activities of BFs)

Opening of No frills Account/SHG account Receipt and Payment of small value cash
through terminal machines
Identification of borrower and collection of Enrollment and capturing of Basic data of
preliminary information/processing of loan customers and Biometric/photograph.
application and verification of primary Liaison between IT vendors and bank.
data
Post-sanction Documentation and follow- Disbursement of credit through POS
up for recovery.
Recovery in Identified NOAs Recovery, collection of cheques, sale of
micro insurance, mutual funds products,
pension products.
Recovery in written off accounts Receipt and delivery of small value
remittance and other services/products
introduced by the bank.
Conduct of counseling for at least 25 Managing POS machines.
persons
Promotion, nurturing and linkage of Assisting bank in adhering to KYC
SHGs and Joint Liability Groups procedure
 Compliance of KYC is ultimate responsibility of the bank
 BC can be of more than one bank.

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NO FRILS ACCOUNTS

 Zero Balance Account

 No QAB and no penalty
 KYC relaxed as introduction can be waived.
 Address proof not required
 Maximum balance Rs. 50000/-
 Maximum credit in a year – Rs. 100000/-
 Maximum withdrawals in a month – Rs. 10000/-

Small Account is one in which KYC norms are relaxed and Balance in the account is restricted
to 50000/-, Credit in a year not exceeding 100000/- and withdrawals in a month not exceeding
10000/- . Banks have been allowed to open Small Accounts without KYC provided:

 Customer applies for KYC proof within 1 year

 KYC proof is received and deposited in a branch within 2 years.

Basic Saving Bank Account

Reserve Bank of India has advised all banks to convert all existing 'No-Frills' accounts which are
fully KYC compliant to Basic Saving Bank Deposit Account (BSBDA). The main features of
‘Basic Saving Bank Deposit Account are as under:

 All individuals (singly/jointly), minors (self operated/under guardianship), Illiterates and

Blind can open account.
 Minimum balance is not the requirement.
 Account will be KYC compliant.
 20 cheque leaves in a year are free of cost.
 No limit on number and amount of deposit.
 Maximum 4 withdrawals in a month.
 ATM withdrawals are not included in counting minimum withdrawals.
 ATMs are issued free of cost. However Annual Maintenance charges are applicable.
 Account holder will have only one SB account in a bank.
 Existing No-frill accounts will be converted to Basic Saving Bank account after
completion of KYC formalities.

Mobile Banking and Financial Inclusion

Mobile service is available in BSBD account over SMS or through GPRS or through USSD. One
can transfer funds and pay utility bills through mobile banking in any of the following method:

1. SMS mode
2. Thin Client mode : P2P, P2A & P2M
3. USSD - Unstructured Supplementary service data
Under this method, Dial *99# and avail account view and fund transfer services on
mobile without enabling GPRS

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Mostly BSBA is being operated by Smart Card which contains all the particulars of account.
Smart Card is secures because its operations requires biometric authentication. Offline and
online transactions can be done. It encourages paperless banking.

Operation of account through Business Correspondent

BC requires Mobile phone, a figure print scanner and small printer to provide banking services
to the customer. Following conditions must be satisfied:

1. It is Basic Saving Bank Deposit account

2. It is opened by individual in single name.

FINO, India’s largest Business Correspondents company FINO=Financial Inclusion Network

and Operations. It has launched small machines through which poor people are able to operate
their accounts in the Financial inclusion model.

Financial Literacy
It is the process by which people improve their knowledge about financial products and
services.

RBI has udertaken Project Financial Literacy to educate the people about financial
products at schools, colleges and other public places.

RSETI (Rural Self Employment Training Institute)

At the initiative of MoRD (Ministry of Rural Development), RSETI came into existence.
The objective is to impart training and skill upgradation for Rural youth. These are
managed by banks with active cooperation of GOI and State Government. The
objectives of RSETI are as under:
 Rural BPL youth to be identified and trained for self employment
 Area of training will be decided by assessment of aptitude of the candidate
 Credit linkage with bank after training.
MoRD provided grant of Rs. 1.00 crore to lead bank in every district. Land is provided
by State Govt. free of cost. Building will be constructed by the concened bank. Each
RSETI will arrange 30-40 skill development programmes in a financial year. The
programmes will be of short duration say 1-6 weeks.At least 70% of trainees must be
from BPL families certified by DRDA. Ideal size of batch should be 25-30 candidates.

Sukanya Samridhi Yojna

It is deposit account for girl up to the age of 10 years. The features are as under:
 One account per child is allowed.
 Maximum two accounts per family
 Intital deposit Rs. 1000/-. Rest in multiples of 100/-.
 Minimum Rs. 1000/- and maximum Rs. 150000/- per financial year.
 Deposit can be made till completetion of 14 years of age.
 Account matures on completion of 21 years from date of opening.
 After 18 years’ age, pre-mature withdrawals are allowed on account of marriage
or higher studies.

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PPF Accounts

 Accounts can be opened by individuals with minimum of Rs. 500/- and maximum
150000/- per year.
 Period is 15 years which can be extended by another 5 years.
 Principal and interest are exempt from IT.
 Withdrawal after 6th year subject to maximum 50% of the balance at the end of
2nd preceding financial year. Nomination of one or more persons is allowed.

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 CHAPTER - 31
BANK COMPUTERIZATION

CBS Core Banking Solution

DRS Disaster Recovery Site
Operating Unix
System
Data Base RDBMS (Relational Data Base Management System)-------Oracle
 Terminals have limited powers
 Processing is done through Central Machine
C. Rangarajan Computerization in India started in the year 1984 on the recommendations of C.
Committee Rangarajan Committee.
Need for  Customer Service betterment
Computerization  Better Housekeeping
 Quick Decision Making
 Productivity and Profitability
Phases of  Stand alone Computers
Computerization  Multiuser System
 Multiuser Networking
Languages COBOL, C, BASICS etc.
Connectivity 1. Lease line: It is dedicated Telephone line having bandwidth 128 kbps for
each sol.
2. ISDN: Integrated Service Digital Network. It is Dial up connection
3. V-SAT – Very Small aperture terminal.
4. Radio Link
RAM Random Access Memory: It is Volatile. But Hard Disk is not Volatile.

ROM Read Only Memory

Measurement of Binary System

Memory 1 Bite = 8 Bits
1 Kb = 1024 Bites
1 Mb = 1024 Kb
1 Gb = 1024 Mb
1 Tb = 1024 Gb

Speed of transfer of Data is measured in Kbps

What is It is range of frequency expressed in hertz (Cycle/sec)
bandwidth
UPS Uninterrupted Power Supply. There are two types of UPS
Online UPS
Main 230V input current is converted into 48 V DC and from battery charger, it is
converted to 230 V AC. In case of power failure, 48V DC is supplied by
batteries.
Offline UPS
Battery charger and inverter are two separate parts. Power is available through
main. In case of failure of power supply, inverter acts as stand-by.
ISP Internet service Provider
Protocol It is set of rules for communication between similar modules of processes,
usually in different nodes.

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 Network protocols depend on the adapters. Some of the commonly used types
of adapters are Ethernet and Token-RING. Ethernet cards share a common wire
by transmitting only when channel is clear.
Network Various network devices used in LAN are
devices i) NICs (Network Interface cards
ii) Hubs
iii) Switches
iv) Bridges
v) Routers
vi) Gateways
vii) Firewalls
viii) WAPs
ix) Modems
Network It is the process in which certain computers are set up as Hosts or servers and
Operating other computers as Clients of these hosts.
System
FTP File transfer protocol
http Hyper text transfer protocol
Html Hyper text Markup Language
URL Uniform Resource Locator
IP Internet Protocol
VOIP Voice over Internet Protocol
BIOS Basic Input Output System
LAN Local area Network- LAN will not extend beyond 150 meters
WAN Wide Area Network
MAN Metro Area Network
WWW World Wide Web
Gateway It acts as a bridge between two networks. In other words, it connects two
networks.
Router It connects two different types of networks. In other words, it diverts traffic.

Modem In converts digital signals of computer into analogue signals and reconverts
analogue signals into digital signals at the receiving end. Two computers
connected through telephone lines need modem at each end.

VIRUS Vital Information Resource under Seize

Firewall It protects networking
IP spoofing Access to other systems
Nod Each independent system is called Nod
Topology It is a way in which devices are inter connected.
Bus Topology
All devices are connected to single continuous cable. If one station fails, it will
not affect the rest.
Ring Topology
Devices are connected in a close loop and information is passed from one to
another in one direction. Breakdown of one station results in failure of Complete
LAN system.
Star Topology
Central Nod is master. Other nods are joined to it. Failure of one nod will not
affect others.
Mesh Topology

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 Nods are connected to Central Node as well as each connecting nod.
Multiplexer It is receiving signals from several connecting lines and passing on to one and
vice versa.
BPR Business Process Re-engineering
It helps in the following tasks:
 To realign the existing business processes in tune with benefits by new
technology.
 Taking advantage of best business practices
 Value added services to the customers
PIXEL Resolution of Screen
OCR Optical Character Recognition
MICR Magnetic Ink Character Recognition
1. 6 digit code pertains to cheque number
2. 9 digit codes represent 3 digits of city, 3 digits of bank and remaining 3
digits of branch.
3. 2 digits represents transaction code SB/CA
CD Compact Disc
It is 120 mm in diameter
It is 1.22 mm in thickness

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 Chapter - 32
Payment System and Electronic Banking

ATM and Various types of Cards

Automated Teller Machine: C. Rangarajan Committee recommended use of plastic money and
round the clock payment through ATMs.

Following types of cards can be used on ATM:

1. Debit Card
2. Credit Card
3. Charge Card
4. Smart Card
5. Rupay Card
Other features of ATM are as under:
 24 hour accessibility
 Any where any bank.
 All ATMs are connected with NFS (National Financial Switch) located at IDRBT,
Hyderabad.
 NPCI took over NFS operations from 2009.
 Transfer transactions, Mini Statement, Tax payment, Utility Bill payments and Cheque
book Requisition services are available on ATMs.
 5 transactions (Financial and non-financial transactions are free in a month from other
bank‟s ATM. The number has reduced to 3 in metro cities.
 Maximum 10000/- can be withdrawn from other bank‟s ATM in one go.
 Failed ATM transactions: If money is not dispensed with and the account is debited,
money has to be refunded within maximum period of 7 days otherwise penalty of Rs.
100 per day will have to be paid.
Four types of ATMs are working:
1. On line
2. Off line
3. Stand alone
4. Net worked
5. Biometric
Components of ATM with Customer interface:
 VDM (Video Display Monitor)
 Keyboard
 Touch Screen
 Slots: Cash Reader, Cash Dispenser, Envelop Dispenser, Deposit Slot
White Label ATMs: ATMs installed by companies other than banks. These are independent
ATMs. TCPCL(Tata Consultancy) is the first company to install WLA.

HAWK
It is intelligent Auto Teller and Netware Management System with following benefits:
 24 hour availability and on-line auto recovery
 Anytime anywhere banking service
 Low cost and easier to use
 Enhanced security and audit control.
 One stop auto banking
 Works even in absence of reliable communication network.

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 NPCI National Payments Corporation of India (NPCI) was incorporated in December
(National 2008 by RBI.
Payment
Corporation Presently, there are ten core promoter banks (State Bank of India, Punjab
of India) National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of
India, ICICI Bank, HDFC Bank, Citibank and HSBC).

NPCI would function as a hub in all electronic retail payment systems which is
ever growing in terms of varieties of products, delivery channels, number of
service providers and diverse Technology solutions.

 The Institute of Development and Research in Banking Technology

(IDRBT), Hyderabad had been providing ATM switching service to banks
in India through National Financial Switch. NPCI has deputed its officials
to IDRBT Hyderabad and NPCI has taken over NFS (National Financial
Switch) operations from December 14, 2009.
 Immediate Payment Service (IMPS) offers an instant, 24X7, interbank
electronic fund transfer service through mobile phones. IMPS facilitate
customers to use mobile instruments as a channel for accessing their
bank accounts and put high interbank fund transfers in a secured manner
with immediate confirmation features. This facility is provided by NPCI
through its existing NFS switch.
 Automated Clearing House system is known as Electronic Clearing
Service (ECS) in India. NPCI proposes to build, implement and manage
an Automated Clearing House (ACH) system with built-in security features
and multiple level data validation facility accessible to all participants
across the country.
 NPCI has a mandate to create a domestic card scheme. The Brand name
finalized for the same is RuPay.
 NPCI is managing implementation of CTS (Cheque Truncation System).
RuPay Card – Our bank has launched RuPay card, the name RuPay is derived from the
new product words „Rupee‟ and „Payment‟. RuPay is a new card payment scheme
launched by launched by the National Payments Corporation of India (NPCI) to fulfill RBI‟s
NPCI vision to offer a domestic, open-loop, multilateral system which will allow all
Indian banks and financial institutions in India to participate in electronic
payments.

SALIENT FEATURES :

 This RuPay card will be magnetic strip card.

 This Rupay enabled debit card can be used only in India.
 Cash withdrawal will be through all the RuPay enabled ATMs only.
 Card can be used at selected PoS terminals identified by NPCI.
 Card cannot be misused as PIN will be required at both ATM and PoS
terminals for operation of the card.

RuPay card can be used for :

a. Cash Withdrawals at ATMs : Upto Rs. 25,000/- per day
b. POS Transactions : Upto Rs. 60,000/- per day

Now NPCI provides secured password called “RuPay Secure” for all types of
e-commerce transactions.

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Credit Card These are issued after taking into consideration Income of the person.
Credit is allowed up to certain limit. In case of POS transactions, 20-50
days interest free credit is allowed. POS transactions are done with
Merchants. The bank which provides POS machines is called Acquiring
bank or Merchant Bank. Visa and MasterCard are the companies which
run the show.

Debit Card It is a card issued by bank to facilitate withdrawals from own account up to
certain limit in days. POS transactions and utility payments are also allowed.
Funds can be transferred from one account to another. If another bank‟s ATM
is used, 5 transactions are free of cost. In case, payment is not disbursed by
the ATM and account is debited, bank has to reimburse within 7 days, failing
which penalty of Rs. 100 per day has to be paid to the customer.
Dimensions are 8.5 cm X5.5 cm
 The validity of Signature Based Card is 7 years
 These are international cards and can be used anywhere across the
world.
 2 Add on Cards can be issued and Maximum 3 accounts can be
attached.

KCC Card  To be issued against CC limit

 Only one account can be linked.
 Card is valid for 5 years.
 Account must be opened under scheme code “CCAKC”.
No restriction on withdrawal beyond district.
Charge Card Transactions of withdrawal/POS are undertaken by the card holder, but
single accumulated amount is debited/charged to his account generally
once a month. Such type of cards is called Charge Cards.
Visa and Master Companies run credit card operations, capture all deals and
settle all dues among different intermediaries.
Smart Card A card with integrated Circuit (IC chip) inside is called Smart Card. IC chip
carries memory, processes the data and communicates with the external
world. Smart cards also recognize the user from figure prints etc.

Thus Smart Card can be protected from fraudulent operations. These cards
are of two types:
1. Intelligent Memory Chip
2. Micro Processing Cards
 Micro Processing Cards are most suitable for financial transactions as
these cards carry processor also.
 Smart card may have multiple PINs for different purposes for security
reasons.
It may also have following Security Features
1. Dynamic signature verification
2. Fingerprint verification
3. Voice recognition system
4. Hand Geometry
5. Retinal pattern verification
6. Vein recognition Visual recognition

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Member Card Exclusively used for members of a club or a Hotel. For example, Taj Card is
used for patrons of Taj Hotel and is exclusive used by them.
Electronic These is space in the card for several electronic purses; each for storage of
Purse amount. These purses are used for different accounts of the user. In addition,
there is space for User‟s address, account and branch and space for last 30-
50 transactions.
Telebanking The customer receives SMS automatically. Alerts are received by the
customer from time to time through Tele banking
IBS Internet Banking Service is latest and Quickest Alternate delivery channel.
Two types of IBS is there:
1. Retail or Personal
2. Corporate
Through IBS, customer can operate the account for the following purposes:
 Branch to Branch transfer
 RTGS & NEFT
 On line tax payments & Utility payments
 On line view of 26AS (Account statement of tax deposited.
 24 hours service
Mobile Banking IMPS Immediate Payment
Service
Mobile Banking of our bank has been integrated with NPCI (National Payment Corporation of
India) server for enabling IMPS. Previously, the fund transfer facility was available on Thick Client
service. But now, funds can be transferred through SMS as well as through Thin client Variant.
The procedure is as under:

SMS Variant Customer can remit funds up to 5000/- per day through SMS. The process is as
under:
 Type MMID and send SMS to 5607040. Instantly, 7 digit MMID is received in reply SMS.
 Then type <IMPS><Beneficiary Mobile no.><Beneficiary‟s MMID><Amount><IMPSPIN>
 IMSPIN is a 7 digit number combination of 4 digit SMS password and 3 digit Remitters‟
debit MMID.
 The funds get transferred instantly.
Thin Client Variant Inter-bank and Intra-bank transfers up to 50000/- per day can be made
through Thin Client. The procedure is as under:

 One Time Password (OTP) is generated using OTP link from “Application”.
 Select “Funds Transfer” option under IMPS for remitting funds. Select Debit account
number and fill Mobile number, MMID of beneficiary, Amount to bo transferred and Click
“Transfer”.
 Details entered by the customer are displayed and OTP is entered. Press OK and
“Success” message is displayed. Confirm through SMS.
 OTP can be used for 1 transaction only within 10 minutes.
Three Types of Payments through IMPS
1. P2P (Person to Person) ----Interbank transfer of funds using MMID (Mobile Money
Identifier)
2. P2A (Person to Account ) -----Interbank transfer of funds using IFSC
3. P2M (Person to Merchant) ----For e-commerce transactions
E-Commerce These are the payments made on line through IBS for Railway reservations,
transactions Payment of electricity bills, mobile bills, landline bills, on-line shopping or
payment of fees etc.
These transactions are allowed on line through Debit Card, Credit Card and

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 IBS. Master Card and Visa Card can enables the person to remit outside India
also foe e-commerce transactions.
CTS CTS -2010 – Important guidelines
 Truncation can be done by using MICR data as well as using image
processing.
Mandatory Features were made applicable w.e.f 1.12.2010. which are as
under:
 Paper will have protection against alteration by having chemical
sensitivity to acids, alkalis, bleaches and solvents. It will not glow
under UV light rather it will be UV dull.
 There will be Water mark “CTS-INDIA” in oval shape with die 2.6 to
3.00 cm.
 VOID pantograph with hidden embedded “COPY” or “VOID” feature.
This feature would be clearly visible in photocopy of the cheque.
 Bank‟s logo will be printed in UV ink.
 Color of the cheque will be Light Pastel.
 No alteration or correction is to be carried out in the cheque.
 Courtesy Amount means amount in figures whereas Legal amount
means amount in Words.
MICROFICHE Periodic back up of data base is required to be taken on external media for
security reasons. Data cartridges do not serve the purpose as there longevity
is doubtful.
Therefore, storage of data is made on Microfilm or Microfiche come.
CMS Cash Management System
It is a system of collection of cheques and other payments in the account of
the client and keeping record of all receipts along with returns, if any.
ECS Electronic Clearing Service
BCP Business Continuity Plan
SWIFT Society for Worldwide Interbank Financial Tele-communications
 Located at Belgium (Brussels City).
 24 hour service
 Non-profit organization
ASBA Applications Supported by Blocked Amount
ASBA relates to investing in public issues where amount is not paid by
applicant while applying for shares, but amount in marked lien in the bank a/c
and same is remitted to issuer at the time of allotment to the extent the shares
are allotted.
Pre-Requisites
The customer should have the following in order to assess ASBA online:
1. IBS facility in the account, if facility is to be used on-line
2. Demat Account with NSDL or CDSL
UPI (Unified This is advance version of IMPS which facilitates Interbank/Within bank
Payment Payments/Collections. All accounts with same mobile number are connected.
Interface) Procedure is as under:
 Create Virtual address (VA) e.g. abc@pnb
 VA is communicated to sender and amount is remitted.
 Account Number/IFSC/MMID is not to be disclosed.
 App can be downloaded by non-customers also.
 Service is available on all days 24 hours.

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 Chapter - 33
Data Communication Network & EFT System

RTGS and Real Time Gross Settlement is a payment system for Interbank transfer with
NEFT minimum Rs. 2.00 lac. This system is managed by IDBRT, Hyderabad,
which connects all banks to Central server maintained by RBI. The network
is INFINET (Indian Financial Network)
Timings are:
8:00AM to 8:00PM

NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The timings
are: 8:00AM to 7:00PM. There are 12 batches daily. The time period is B+2.

NEW RTGS Two new features have been added:

SYSTEM 1. Hybrid System
EFFECTIVE  Offsetting after every 5 minutes.
FROM  The transactions with normal priority would be settled in off-
14.7.2014 setting mechanism within maximum 2 attempts.
 Maximum time a transaction would be in normal queue is 10
minutes.
 If transaction with normal priority is unable to be settled on
offsetting mode within 10 minutes, it would be automatically
converted to Urgent.
2. Future Value Transactions
Value Dated transactions would enable the customers/participants to initiate
RTGS transactions 3 working days in advance for setting in RTGS on
Value Date
Major Networks INET : Set up Department of Telephone in 1991
in India NICNET : Set up by NIC (National Informatics Centre
BANKNET : Set up by RBI in 1991
RBI NET : Set up by RBI
INFINET: On the recommendations of Saraf Committee, RBI set up this
network at Hyderabad for inter bank transactions.
Data There are 3 data communication components:
Communication 1. Transmission devices and Interface equipment
Network Modem converts digital signals of computer into analogue signals and
reconverts analogue signals into digital signals at the receiving end. Two
computers connected through telephone lines need modem at each end.

2. Transmission Medium
Data has to travel through some medium during its transmission. These are:
a) Terrestrial cable: Writing techniques
These are Twister pair, coaxial cable and Optical fiber.
b) Microwave system: High frequency radio signals used in telephone
transmission.
c) Communication satellite:
Data communication between computers. Speed of satellite is equal
to speed of earth.
3. Transmission Processors

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 Message switches
Multiplexer
Front and Processor
CHIPS, CHAPS, CHIPS – New York
FEDWIRE , Clearing House Inter Bank Payment System.
TARGET & CHIPS are major payment system in USA with 48 members. The
RTGS Plus participants use the system throughout the day for sending and receiving
electronic payment instructions. These are netted at end of the day and net
position is debited or credited to Nostro account of Federal Reserve.
It is used for Foreign Exchange Inter bank settlements and Euro Dollar
Settlements.
FEDWIRE -USA
It is US payment system being operated by Federal Reserve Bank. It
handles majority of domestic payments. All US banks maintain account with
Federal Reserve Bank and are allotted ABA numbers to identify senders and
receivers of payments.
CHAPS – London
Clearing House Automated Payment System
It is UK based Settlement System. It handles receipts and Payments in UK.
It has 16 member banks and 400 Indirect members.

TARGET
The full form of TARGET is Trans-European Automated Real-Time Gross
Settlement Express Transfer System. It is Euro Payment System which
comprises of 15 national RTGS systems working in EUROPE. It process
high value payments from 30000 participating institutions across Europe.

RTGS-plus
RTGS plus has over 60 participants. It is a German Hybrid clearing system
and operating as a European oriented RTGS and Payment system.

CHATS
Clearing House Automated Transfer System. It is Inter-bank fund transfer
system located in Hong Kong.

Bank wire
Bank wire is a pioneer Private sector electronic telecommunication network
owned by association of banks in USA.
Transmission It is data communication between two points. Communication Processors
Processors can be categorized as :
1. Message Switches: Storing and Forwarding data to a large number
of terminals over single communication channel.
2. Multiplexer: It is device that enables more than one signal to be sent
simultaneously to one and vice versa.
3. Front and Processor: It is dedicated communication system that
interprets and handles communication activities for the host
computer.
Modes of Simplex: Transmission of data in one direction. Sender cannot receive and
Transmission Receiver cannot send.
Half Duplex: Transmission of data in both directions, but in one direction at

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 a time. Modem is an example of Half Duplex.
Full Duplex: Transmission of data in both directions simultaneously.
SWIFT Society for Worldwide Interbank Financial Tele-communications
 It enables international payments and messages
 Wholly owned by member banks
 Located at Belgium (Brussels City).
 24 hour service
 Non-profit organization
 All banking locations in India are connected with SWIFT Regional
Processor at Mumbai.
 Transmission of messages to any part of the world immediately.
 All messages are acknowledged.
 Standard Message formats are developed by SWIFT for DC, Fund
transfer, Cash Management , collection etc.
 Encryption is the security control for data confidentiality.
 Checksum provides to prevent any change of data during
transmission.
Electronic There are two types of ECS – Debit and Credit
Clearing
Service (ECS) 1. Debit ECS: A company desires to pay interest to its Debenture holders
in bulk. The Company authorizes the bank to debit account of the
company and credit interest to the accounts of persons spread over
different banks in the country. This is called Debit ECS.
Single Debit and Multiple Credit is Debit ECS
2. Credit ECS: BSNL accepts authority from the connection holders to
collect monthly rent from their accounts and credit the same to the
account of BSNL. Single Credit and Multiple Debit is called Credit ECS.

Digital E-commerce transactions originating from bank branches require

Signatures authentication which is done by putting digital signatures. In fact, digital
signature is not the replica of manual signatures, but it is a key and must be
applied in a manner to ensure authenticity and integrity.

Private key is used by signer to create the digital signatures. The public key
is used by relying party to verify the digital signatures.
Delay in Attracts penalty @ Repo+2%
Remittance of
Electronic
funds

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 CHAPTER - 34
ROLE OF TECHNOLOGY UP-GRADATION AND ITS IMPACT ON BANKS

Data Vasudevan Committee recommended implementation of Data ware hosing for

Warehousing banks.

This is an emerging trend amongst banks. To create space in the live system,
Data warehouses are created where data from the live system is transferred
and stored through application of latest IT techniques. The features are:
1. It is customer oriented. Storage of information can be useful for
different requirements of customers.
2. There are no inconsistencies with the live data.
3. The data is Non-Volatile that means, it can be assessed but cannot be
amended or up dated.
4. It is time variant. Time zone is longer say 5-10 years.
Data Mining Data Mining is a method/technique to extract the hidden information from
Data warehouses.

It is a process of automatically finding patterns and relations of large data

basis.
Data Mining Techniques are applied in :
1. Risk Performance in loans
2. Credit Risk Analysis
3. Analysis of stock Portfolio (Securities of capital Market)
4. Risk analysis by Insurance Companies and Banks.
5. Data analysis about Demographic information about customers.

EDW Enterprise Wide Data Ware House

It has been established by almost all the banks for better control and
Management Information System. EDW provided sufficient space for storage
which enables the banks to solve operational difficulties.
Data and Computers facilitate processing of data whereas Communication technology
Message helps in transmission of data. Therefore, following are required to combine the
transferring both i.e. processing and communication:
1. Computer
2. Telephone line i.e. Lease line or V-sat
3. Modem which is used to connect
E-mail is an example of combination of processing and communication which
is called Data formation and Message transferring.

Banks also process the data and transmit the same through modem and data
server with the support of communication system.

EDI Electronic Data Interchange

(Electronic
Data Inter When messages (financial or non-financial) are exchanged between different
charge) institutions using standard formatted data and similar Computer applications.

For example VSNL provides gateway for SWIFT messages..

NEFT, RTGS, ECS are other examples.

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 EDI guidelines require minimum communication standards such as :
 Type of electronic envelops to be used.
 Transmission speed and protocols on which messages are to be
interchanged.
 Time Slots during the day for accepting and receiving messages.

Corporate Internet provides opportunity to banks to popularize through different

Websites websites. Banks are having their own websites for the following purposes:
1. Dissemination of Information
2. Financial advice
3. Highlighting non-banking activities
4. E-commerce transactions
5. Selling financial products
6. Gateway to Internet
7. Account services
MIS Management Information system
(Management  It is transformation of data into information.
Information
System)
Impact of IT Change in organizational Structure is the impact of IT on banks:
on banks  Banks have shifted from 3-tyre to 2-tyre structure
 Control Mechanism has improved
 Information System has been fastened
Service Quality in the banks has improved:
 Customer Satisfaction
 Aspirations of customers
 Quick and Efficient Dealing
Role It is redefining of work which manifests itself in the following manner:
Transition  Job profiles and role definitions have changed.
 Shift in Decision making powers to the point of information.
 Competition has increased and technically literates are able to survive.
Impact on Data privacy assumes two dimensions:
Privacy and 1. Authority to access data
Confidentiality 2. Authority to use data only for specific purposes.
of Data
Public Key It is a pair of keys used in case of Electronic signatures:
and Private Public Key
Key It is used to encrypt data by verifying Private Key in electronic signatures.
Private Key
It is kept secret. It is used to decrypt the information.

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 CHAPTER - 35
SECURITY CONSIDERATIONS

Risk 1. Accidental damages

Concerns – 2. Environment Hazards
Major Threats 3. Human Errors and Omissions
of IT 4. Unreliable System
5. Malafides
6. Interruption of services
7. Frauds
Control
Mechanism Physical Control
 Control over hardware
 Control over access of persons

Internal Control
 Dual aspects of accounting
 Verification and verification at administrative level

Operational Control
 Audit Trials
 Checksum
 Data encryption and Data Decryption

IS Audit Information System Audit

1. Audit through Computers
2. Audit around computers

Controls to be evaluated through IS audit

Deterrent control
Control exercised to deter people i.e. to demonstrate the people so that
unauthorized access can be avoided.
Preventive Control
Proper checks are introduced in the system to prevent unauthorized access
and avoid frauds.
Detective controls
It is set of measures taken to detect frauds from the system
Corrective Control
It is set of measures adopted to correct wrong doings in the system

Objectives of IS Audit
 Confidentiality
 Integrity

Methods of Control for IS Audit

 Secret User ID and Password
 Authorization
 Access Control
 Alternative authentication control: Biometric assess.

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Threats to IS E-mail Virus: Antivirus software scans any attachment before opening e-mail.
Security Suspicious e-mails should not be opened.
Phishing Attacks: Attackers steel sensitive information. It uses spam mail to
deceive the customers to disclose their credit card numbers, bank account,
information, passwords and other information. E-mail provides link to bank’s
website and ask customers to click the link
How to identify Genuine website?
Website address should start with https://
Security lock should appear. Click security lock and see digital certificate

Vishing Attacks: If we receive e-mail or phone call asking to call back, it is

suspicious. Mostly Vishing scammer calls and asks for personal details.

Smishing Attacks: It uses cell phone text messages to lure the customers in.
The phone number often has automated voice response system. Smishing
artist asks for return SMS containing User Id, Password, ATM PIN etc.

How to get  Change passwords regularly

safe  Do not use public computers to login
 Do not share details with any one
 Disable remember password option: Go to Tools, Internet options,
Content, Auto Complete, Setting. Uncheck “User names and
passwords on forms” and “Clear password”. Go to “General”. Under
“Borrowing History” click “Delete”
 Always use Licensed anti-virus soft ware.
 Disconnect internet connection when not in use.
 Create strong password
 Secure your computer by turning on Firewall
 Log out properly
Disaster External Factors
Recovery Plan Cause Remedy
Breakdown of fire Fire Extinguisher
Floods/Tsunami Location
Earthquake Safety measures
Power Failure UPS
Connectivity Failure Alternatives

Data Corruption/Non availability factors

Disaster due to lack of Due control Mechanism
data access
Lack of data consistency Updation of data under authentication
Earthquake Safety measures
Data warehousing Back up

Failure of Networking
Breakdown of server Disaster Recovery Plan
Hardware Breakdown Up gradation of hardware
problems
Loss of connectivity Multi LAN and inter LAN environment

Arising out of Technological changes

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 Arising Out of Human Errors

Legal Frame IT Act 2000

Work Purpose of having separate IT Act is to provide legal recognition to the
transactions carried out through electronic media..The Act deals the following
issues:
1. EDI (Electronic Data Interchange) ,
2. Electronic records and
3. Electronic signatures.

Following crimes have been established under the Act:

 Intentionally concealing/Tempering/destroying electronic records
 Hacking
 Obscenity
 Govt. can declare any system protected
 Misrepresentation through digital signatures
 Breach of confidentiality/privacy

Following Acts are amended to exercise control over electronic transactions.

1. IPC Act, 1860.
2. Indian Evidence Act, 1872.
3. Bankers’ Books Evidence act, 1891
4. RBI Act, 1934
5. Negotiable Act, 1881.
Gopalakrishna A working Group of IS Security, Banking Technology, Risk Management and
Committee Tackling Cyber frauds was set up under chairmanship of G. Gopalakrishna
Report who submitted report in the year 2011. There are nine chapters in his
recommendations:
1. IT Governance
2. Information Security
3. IT Operations
4. IT Services outsourcing
5. IS Audit
6. Cyber Frauds
7. Business Continuity Plans
8. Customer Education
9. Legal Issues

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 CHAPTER – 36
MARKETING – AN INTRODUCTION

Market
It implies a situation where buyers and sellers of a commodity interact. It is coming together of
buyers and sellers of same or similar product. It need not necessarily a geographical area.
Classification of Market
 Geographical market -----area wise e.g. Sarabha Nagar Market, BRS Nagar Market
 Product Market-------------commodity wise e.g. Silver market, Gold Market etc.
 Transaction Market ---- --Cash Market, Spot Market, Future Market
 Volume Market ------------Wholesale or Retail Market

Need, Want and Demand

 Desire to possess an item is called need
 Desire to have and capacity to pay constitute Want.
 Capacity and Willingness to pay converts it into Market Demand.

What constitutes Marketing?

Chartered Institute of Marketing defines marketing as a Process of
 Identifying the needs of consumer,
 Anticipating their requirement
 Supplying efficiently and profitably

What constitutes Marketing Management?

It constitutes Analysis, Planning, Implementation and Control
Philip Kotler has defined Marketing Management as :
 Art and science of choosing target markets
 Getting, keeping and growing customers
 Through creating, delivering and communicating
 Superior customer values of management

Selling Vs Marketing
Selling
It is operational activity
It is Product Focused
It fulfills needs of seller
It is profitable opportunity
Aims at maximizing Sales & Profit
Marketing
It is process of identification of needs & consumer satisfaction
It is Consumer Focused
It fulfills needs of customer
It converts customer needs into profitability
Aims at maximizing customer satisfaction and thereby profits

What can be marketed?

Products Services
Products are Tangible Services are Intangible
Production and Distribution of products Services are inseparable from service provider
Core Value of product can be stored Perishable and Core Value cannot be stored
Products are Homogenous Services are Heterogeneous
Transfer of Ownership No such transfer

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What is Servuction Process?
 It is the process of producing and consuming simultaneously
 Servuction is combination of services and production
 Direct contact between service provider and consumer
 Customer A may be Affected by presence of customer B & C.

Marketing of Financial Services

Types of Financial Markets
 Money Market, Capital Market, Debt Market, Stock Market, Insurance Market, Mutual
Fund Market, Consumer finance market, Credit Market etc.
 Financial services add Fiduciary Responsibility upon the service provider.

Banking Services
 Are financial in nature
 With Commercial and Social Objective
 Customers and their needs are important
 Major factors are competitiveness, Efficiency and effectiveness
 Customer Satisfaction and Customer Delight is the main objective.

Marketing Mix
It is set of marketing tools that a firm uses to pursue its market objectives:

MacCarthy popularized Four Ps

Product, Price, Place and Promotion
Boom and Bitner 3 additional Ps
popularized People, Physical Evidence and Process
Robert Kotler Four Cs
popularized Customers’ Needs, Cost to Customer, Convenience, Communication
Prof Jagdish Sheth & Four As
Prof Sisodia popularized Accessibility, Acceptability, Affordability and Awareness

Brand Image
Brand image is the view of the customers about the product. The main image of positive brand
image are :
 Brand name
 Logo
 Trade mark
Image Building and Brands
Banks have to re-build image to retain customers. New Private sector banks have built their
brand image with latest technology and customer satisfaction. Whereas Nationalized banks are
losing brand image due to lackadaisical approach towards customer service.

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How Brand Image is built
 Quality
 Positioning
 Strong communication
 Time and consistency
 Innovation
 Customer satisfaction
 Early entry in the market

Logo – representation of brand name

Institutions select logo with a difference and it carries certain meaning. For example Syndicate
bank’s logo is Dog which is symbol of loyalty. Dena Bank’s logo is Goddess Luxmi which is
symbol of prosperity for its customers.

Colours play important role in Logo

Orange-------Colour of dynamism, responsive to market conditions & customers’ needs
Blue-----------Colour of Truth and Depth
Maroon-------Colour of warmth that goes beyond basics to understand customers
Grey----------Colour of stability
White---------Colour of ethics within the organization

Slogans Make Big difference

Polo-------The mint within hole
Coca Cola-------Thanda matlab Coca Cola
Idea-----------An idea can change your life
Sarf---------------Daag Ache hain

Slogans of some banks

SBI---------------Banker to every Indian
Allahabad Bank-----A tradition to trust
Bank of Baroda-------------India’s International Bank
Bank of India------------Relationship beyond banking
ICICI Bank---------Hum Hai Na

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 CHAPTER – 37
Social Media Marketing

Social Marketing is the technique which focuses on social media like Face Book, Twitter, You
Tube etc. This allows business to become more approachable and friendly in the eyes of
customers. Scope of Social media is bright. Consumers prefer to buy on-line. Products and
brands are discussed on social media. It influences the buyers

Social Marketing is all about Planning, Implementing and Evaluating offerings to voluntarily
change behavior. It allows the customers to interact. Social Media marketing is growing fast.

Social Media Vs. Traditional Media

Social Media Traditional Media

Readers and viewers are passive
It is spread across variety of channels
It is dynamic and flexible
It calls from different kinds of participation from
marketers
It gives direct access to the prospective
customers
Viewers interact, discuss and take decision
It operates with limited channels
It is traditional
Customized advertisements are focused on
traditional media
It’s impact is indirect

Popular Social Media Networks

1. Twitter : Over 1 million users and over 3 million messages every day.
2. Face Book: Till 2013, it had 1.06 billion monthly active users. Its users constitute world’s
3rd largest population after China and India
3. Pinterest : It has crossed 10 million unique visitor mark
4. Google+: Very heavily used. Popular among youngsters
5. Linkedin: Very often used by job seekers
6. YouTube

Reason of Social Media Impact on Marketing

 Brand recognition
 Community
 Repeat Exposure
 Authorirt
 Influence
 Website Traffic

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Benefits of Social Media

 Improved Social signals

 Company Branding
 Improved brand awareness
 Word-of-mouth advertising
 Increased customer loyalty
 Improved audience reach and influence

Banks and Social Networking

 A study was undertaken to calculate presence of banks on media. HDFC ranked first
with social media grade of 3.06 on the scale of 5. SBI ranked first among PSBs with
grade of 1.68.
 Private sector banks are more active on Social media
 ICICI rules on-line conversations.

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 CHAPTER - 38
CONSUMER BEHAVIOR

Consumer is king of the market. Success of marketing lies if desired product is sold at
appropriate place for acceptable price so as to win the faith of the consumer. Study of consumer
behavior is important for implantation of marketing techniques.

Maslow’s Hierarchy of Needs

1 Physiological needs Food, Drink, Oxygen and sleep

2 Safety needs Protection and economic security
3 Social needs Friendship, sense of belongingness
4 Esteem needs Recognition, Status, Success
5 Self actualization Self fulfillment

Family Life Cycle

Bank offers products according to age profile of the customer which can be studied as
under:
Young Bachelor: No dependents. Per Capita Income is high. This target group requires
Credit Cards, Vehicle loans and low cost banking services.
Half nest : This target group requires Mortgage loan, OD and Housing Loans etc.
Full nest (Old Couple): The target group requires Pension Loan, Loan for repair and
renovation of house etc.
Empty nest (Older couple): The target group may require Social security services,
Reverse Mortgage loans and Interest bearing deposits.

Customer Relationship Management in Banks

 Long term retention
 Relationship with external markets
 Integrated marketing activities
 Transaction banking Vs Relationship banking

Activities under CRM

 Maintaining Customer Database
 Planning customer contact points
 Analyzing Customer feedback.
 Conducting customer satisfaction survey
 Managing communication programmes
 Hosting special events
 Auditing and reclaiming lost customers

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Gap Analysis
It is study of Gap between Customers’ perceptions and Expected Services. This gap is studied
and filled with improvement in the service to achieve customer’s entire satisfaction and come up
to the expectations of the customer.

Products
Every product has core features, basic product, expected product and augmented/potential
product. The products offered by bank has following features

Core feature --------------Operational Convenience & Interest Earning

Associated Features----Cheque book, ATM Card
Expected product--------Money on Demand and application of correct interest
Augmented product-----CBS/IBS
Potential product---------ECS

Product Items: These are the items having core feature e.g. Deposits and Advances
Product Lines: These are the types of various products offered by bank e.g. Retail loans,
Corporate Loans, Fixed Deposits, Recurring Deposits etc.
Product Mix: These are other services offered by the bank besides main product items e.g.
Lockers, Remittance facilities, Safe Custody etc.
Product Life Cycle: It is stage of the product e.g.
 Introduction : Net Banking and Mobile Banking
 Growth :RTGS & NEFT
 Maturity :CBS
 Decline: Issue of DD and Pay Orders
Product Elimination: After decline stage, product is not seen in the market , which is called
product elimination.
Product Development
 Branding
Brand Name, Brand Mark, Trade Mark
Benefits to consumer: Product identification, Quality & Status symbol
 Packaging
Product Identification, products, fit for use and product promotion
 Labeling
Description, Information, Grading, Promotion
Diversification of Product:
When any concern starts producing different product, it is called diversification. Diversification
of following 3 types:
1. Concentric: If target group is different e.g. Audio Tape manufacturing company
introduces video tape and target group of customers is different.
2. Horizontal: When target group is same, it is called Horizontal diversification. E.g. Audio
tape manufacturing co. produces Cassette Stands.
3. Conglomerate: When target group is altogether different, it is called conglomerate
diversification. E.g. Audio tape manufacturing co. starts manufacturing Fax machines.

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 CHAPTER – 39
PRICING

Importance of Pricing
Price Strategy is important to retain the old customers, create new ones and also to achieve
desired level of profits. Wrong pricing policy may lose customer base and also affect the
reputation of the business. Price serves two basic purposes:
 Allocation of purchasing power by buyers
 Information to customers

What is included in Price?

 Fixed Costs
 Variable Costs
 Profit

Objectives of Pricing
 Profit: In short term, objective is maximization of profits. But in the long run, objective is
Profit Optimization.
 Return: In short run, return is calculated on sales whereas in long run, return is
calculated on turnover.
 Survival: Coverage of at-least Variable cost.
 Market Share : Share in the volume of business in the market
 Cash flow : Generation of desired level of revenue
 Status Quo : Stabilization of Demand and Supply
 Product Quality
 Communicating image

Factors influencing prices

Internal External
Corporate objectives Market Demand
Characteristics of product Competition
Life Cycle Stage Govt. Policy
Usage Characteristics Social Responsibility
Price Elasticity Bargaining
Costs etc.

Pricing Methods

Method of Pricing Details

Mark up pricing Floor price, Ceiling price
Absorption cost price Full cost is covered
Target Return Price Rate of return on
Investments
Perceived value price On perception of

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 customers
Value pricing Full Value of money
Going Rate price Market trends
Auction Pricing
Group Pricing
Dynamic Pricing Bid Price
Marginal Cost pricing

Pricing Strategies
 Geographical price strategy
 Discounts and Allowances strategy
 Psychological pricing strategy : Price is set at odd number rather than round figure.
Higher prices are set to attract customers who want to purchase costly products.
 Promotional pricing strategy
 Discriminating strategy
 Market Skimming Strategy: Product is initially offered at higher price because other
competitors have yet to enter the market.
 Market Penetration prices: Some products are offered at lower prices at initial stage to
penetrate the market. Later on, prices of the product tend to rise.

Bank Pricing
 Interest cost
 Sacrificing cost

Factors
 Risk and return
 Monetary policy
 Capital adequacy
 Cost benefit analysis

ALCO – It is Asset Liability Committee which is responsible for determining prices of Loan
and Deposit products.

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 CHAPTER - 40
DISTRIBUTION

Importance of Distribution- Place

It is important in the process of marketing that how the goods are being distributed. Marketing
strategies must include proper channel of distribution. Thus success of marketing lies in
selection of appropriate channel of distribution. One of the 4 Ps is Place which is suitable for
distribution to both Consumers and Sellers/Producers.

What are distribution Channels?

It is chain of entities through which distribution takes place and goods are ultimately received by
the consumers. These channels are required to perform the following functions:
1. Market information 6. Product Information
2. Promotion 7. Physical distribution
3. Contact 8. Financing
4. Matching the needs with supply 9. Risk Rating
5. Negotiation

Channel Types
Ch-1 Zero Level: Under zero level channel, there is no intermediary and there is direct
distribution by the manufacturer.
Ch-2 One Level: Under this channel, Manufacturer sells only to Distributor. Therefore, only
one channel is there for distribution.
Ch-3 Two level: Under this channel, Manufacturer sells to Distributor and Distributor further
sells to Retailer. There are two channels : Distributor and Retailer.
Ch-4 Three Level : Under this channel, Manufacturer sells to Wholesaler and then goods are
sold to Jobber and from jobber, these are sold to Retailer. Therefore, 3 channels are there,
Wholesaler, Jobber and Retailer.

Factors affecting Channel selection

 Product Characteristics –goods are perishable or not.
 Market characteristics – Local, Regional or National
 Consumer Characteristics – Sex, Income group etc.
 Company Resources
 Competition
 Product lines

Channels for Banking Services

 Branches – General, Specialized.
 BFs and Bcs
 Tele-banking
 ADCs – ATM , IBS, Call Centers
 Plastic Cards
 Virtual branches
 Intermediaries – BCs/BFs, Dealers etc.

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Internet Banking
It provides platform for on-line fund transfer, payment of taxes, payment of utility bills, issuance
of FD and on-line view of 26AS. On-line trading is also undertaken with net-banking.

Financial services on Internet

RTGS and NEFT are possible on-line on internet through network called INFINET. INFINET is a
WAN using VSAT technology was jointly set up by RBI and IDRBT in 1999.

Process of reforms gained momentum with start of NDS, CFMS and SFMS. SFMS provides
platform for sending and receiving messages on-line. LC and LG is issued on-line through
SFMS operated by IDRBT (Hydrabad).

Security Concerns
 Authentication – assurance of identity of a person (SMS Alerts)
 Authorization—Password, OTP etc..Privacy and Confidentiality
 Data Integrity
 Non-repudiation
Risks associated with Net Banking
 Operational Risk
 Security Risk
 Reputational Risk
 Legal Risk

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 CHAPTER – 41
CHANNEL MANAGEMENT

Types of Channels: To reach the target market, marketer uses 3 types of channels as under:
1. Communication Channels
2. Distribution Channels
3. Service Channels

What is Marketing Channel System?

Marketing channel is set of intermediaries which include:
1. Merchants
Wholesalers, Retailers. These people purchase, get title and sell to others.
2. Agents
These people sell on behalf of Principal.
3. Facilitators
Transport Companies, Independent Warehouses, Banks, Agencies
4. Chanel Level
Zero level, One level, Two level, & 3 level

Channel Dynamics:
VMS : Vertical Marketing System in which Goods are sold from producer to wholesaler
and then to Retailer.
HMS: Horizontal Marketing System when distribution is made through Super markets,
Exhibitions and Fairs etc.
MMS: Multi Channel Marketing System. For example, in banks, services are distributed
through ATMs/IBS, BCs/BFs

Benefits of Channel Management

 Increased market coverage
 Lower channel cost
 More customized selling

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 CHAPTER - 42
PROMOTION

Promotion is 4th and Last P. But it is not least important. Traditionally, promotion was a
communication process. Now, it has become a process of influencing customers. Promotion
strategy plays important role in marketing.

Role of Promotion in Marketing

1. Persuasion
(Persuade the Customer To Buy)
2. Information
(Inform the customer about uses of an item)
3. Reminding
(Remind the customer about offering of the form)
4. Re-enforcing
(Creating confidence and faith among existing customers)

Bank organizes seminar on Health or Human behavior. Sometimes bank people talk about tax
concession schemes with the purpose of promoting its product.

Promotion Mix
 Advertising
 Personal selling
 Sales Promotion –launching of campaigns, allowing rebate, discount, gifts, lucky draw,
Sampling, refund etc.
 Public Relations – press statements, sponsoring of cultural programs, blood donation
caps etc.
 Direct Marketing – Immediate, interactive and customized. Providing catalogue,
teleshopping and e-shopping are the examples of Direct Marketing.

Promotion Mix strategies

Push Strategy------Induce the channel members
Pull Strategy--------Induce the customers directly

In banks, we use Pull strategy to promote our products.

Factors affecting Promotion Mix

a) Type of Product
Consumer goods require advertisement followed by sale promotion, personal selling and
public relations as tools of Promotion. But, in case of industrial goods, personal selling is
more important than advertisement. Then comes Sales promotion in the case of
Industrial goods.

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 b) Buyers’ Readiness stage
The stages of buyer are:
Awareness—Knowledge----Liking-----Preference----Conviction
In the early stages of product, ad and public relations are must to create awareness and
knowledge among consumers. At a later stage, personal selling is used as a tool of
promotion so that consumers prefer the particular item.
c) Product Life Cycle
New product: advertisement and public relations are required.
Trade intermediaries: Personal selling is required.

Limitations of Advertisement
 Adds to cost
 Undermines social values
 Confuses the buyers
 Encourages sale of inferior products

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 CHAPTER - 43
DIRECT SELLING AGENTS

Direct Selling
It is selling directly through agents/salesmen. Door to door sales are made. The agents visit the
residence or work place of the consumers to sell their products. In other words sale through
intermediaries is called Direct Selling.

Direct Marketing
It is also called multi-level selling or network marketing. The marketer reaches the consumer
directly through CD (Consumer Direct Channels) without using middlemen. Direct mail, TV
channels Kiosks and Websites are support for Direct Marketing.

Marketing in Banks
BM is direct selling agent or direct marketing agent. He delivers service, creates awareness and
becomes customer friendly to market its product.

Channels of Delivery in a bank

ATM counters On-line trading

Net Banking CMS – Cash Management system

Phone banking Linking banking and Insurance

products.
Mobile Banking Credit Card and Debit Card

RTGS/NEFT Kiosk

Single Window System Sweep facility

Benefits of Direct Marketing

 Saving of time
 Convenient
 Real time Marketing
 Reduces Opportunity Cost
 Saves manpower.

Outsourcing through Service Providers

While outsourcing, banks must ensure that DSA/DNA does not misuse the powers. The
following factors count while outsourcing. Bank has to see the regulatory requirements. Senior
Management is responsible for risks involved. Management should review the policy from time
to time. Key risks associated with outsourcing are as under:
 Strategic risk
 Reputational risks
 Compliance risks

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  Operational risks
 Legal risks

Code of Conduct for DSA

1. Tele calling a prospective customer from 9:30 to 7:00 PM.
2. No inconvenience to customer and privacy be respected.
3. Leaving messages and contacting persons other than prospective.
4. No misleading statement
5. Etiquettes
6. Gifts/bribes

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 CHAPTER - 44
MARKETING INFORMATION SYSTEM

MKIS: It is a system which serves as a tool for dealing with data pertaining to marketing
management. MIS (Market Information System), CIS (Computer Information System and MKIS,
all are tools of DSS (Decision Support system).
The Data base helps the marketers to take timely decisions. DSS – Decision Support system

Process of MKIS
1. Collecting and assembling data
Collection is done from internal reports, news papers, journals and market research
agencies.
2. Processing of data
Information is classified, summarized and tabulated so that it can be in a presentable
form for critical analysis.
3. Analyzing the data
Data is analyzed in a meaningful manner.
4. Storage of data
Data must be stored for future references and it can be readily available.
5. Dissemination of Information:
Information is sent to concerned so that it can reach the people who are decision makers
and deal with marketing problems.

Components of MKIS
1. Internal record system
Sales turnover, cost of production and Debtors/Creditors turnover
2. Market intelligence system
Consumption pattern of a target group
3. Market Research system
Research on specific problems or Consumer behavior
4. Market management
Various channels of distribution and Competition

Qualities of good MKIS

 Unified and Centralized
 Support system for decision makers
 Matching with level of progress of the firm
 Cost effective
 Selective information
 ‘Proving information regularly and quickly
 It should be computer assisted

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Satisfying one segment of society and dissatisfaction for other Marketing problem
Selecting & analyzing a target market & creating appropriate market mix Marketing Strategy
Sudden increase in no. of farmers seeking Insurance due to fear of flood Marketing opportunity
Change in min. drinking age in UK can add to the sales of a wine company Marketing environment
Inventing a brand of cigarette with low tar – more suitable to women Target market
Educating customer about usefulness of the product Market Promotion
Evaluating Market performance and comparing with established standards Market Control
Economy with high level of GDP and Per Capita Income Ecological Market
Environment
Method of comparing internal capabilities of the organization with external SWOT Analysis
environment
As family Income rises, percentage of spending of food declines Eagle’s Law
Marketers are always interested to know Disposable Income
Large number of buyers, sellers, homogeneous product and same price Perfect Competition
Product with no close substitute Monopoly
Large number of buyers, sellers, differentiated product and different price Monopolistic
competition
Few sellers Oligopoly
Rising Prices Inflation
Falling prices Deflation
Slack season, Overproduction, Less Demand Recession
Extremely high unemployment, low wages, lack of confidence in economy Depression
Thereafter people start working at low wages, demand starts rising slowly Recovery
Customer Relationship Management CRM
Prospective customer who is more likely to avail bank’s products Lead
Most powerful promotion element for services Personal Selling
Positive differential value with a strong brand Brand Equity

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