Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Developed by
Prof. Raghu Palat
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe
2. Dr. B.P. Sabale
3. Prof. Dr. Vijay Khole
4. Prof. Anuradha Deshmukh
Group Director
Chancellor, D.Y. Patil University, Former Vice-Chancellor
Former Director
Welingkar Institute of Navi Mumbai
(Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Raghu Palat
A Biographic Sketch
Mr. Raghu Palat is one of India’s leading writers on banking, finance and
investments. He has written over forty extremely well received books on
subjects ranging from taxation, investments, finance, banking to soft skills.
3
CONTENTS
Contents
Chapter Page
Chapter Name
No. No.
Retail Banking
4
CONTENTS
34 Clearing 314-334
35 Truncated Cheque Clearance 335-352
36 Electronic Clearing Service 353-361
37 National Electronic Clearing Service 362-368
38 Speed Clearing 369-373
39 Asian Clearing Union 374-380
Payment Methods
5
CONTENTS
48 Cash 444-468
Electronic and Other Banking Channels
53 Telemarketing 525-533
54 Doorstep Banking 534-538
55 Safe Deposit Lockers 539-548
56 Safe Custody 549-553
Conclusion
57 Conclusion 554-555
6
RETAIL BANKING
Chapter 1
Retail Banking
Objectives
This chapter will explain the importance of retail banking and its growth in
recent years.
• Export of services.
• Special audit.
Structure
1.2 Growth
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RETAIL BANKING
The size of India’s retail loan market would cross the $400-billion mark if
the loan book of retail Non-banking Financial Companies (NBFCs)
like Housing Development Finance Corporation (HDFC), Bajaj
Finance, Indiabulls Housing Finance and Shriram Transport Finance were to
be included.
Analysts expect retail loans to sustain their growth trend, given their low
penetration in India and a growing network of retail banks and NBFCs.
India’s retail banks added $43.4 billion worth of assets during the 12
months ended September 2017, the second-highest among emerging
markets after China, whose banks’ retail assets were up nearly $1.1 trillion
during the period.
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RETAIL BANKING
Russian banks were slightly behind, as their retail loan book increased by
$40 billion during the 12 months ended September last year. The
corresponding number in other major emerging markets like Brazil,
Thailand and Mexico was $2.1 billion, $22.9 billion and $27.8 billion,
respectively.
Analysts, however, see a risk to India’s retail banking from the rising loan-
to-income ratio and slower-than-expected income growth in India. “The
number for listed companies suggests that income is growing at an
annualized rate of 6-7%, while retail loans are growing at 15-20% a year.
This hints at a rising leverage ratio among households which might not be
sustainable for long, unless economy and income pick up.
1.2 Growth
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RETAIL BANKING
The new generation banks are customer centric, focused and driven. They
want growth, market share and a dominant presence. This is being
achieved by creating specialist groups and developing expertise. As a
consequence banking has become functionally segmented – retail banking,
corporate banking, trade finance, merchant banking, private banking and
treasury.
During the last five years, in the name of inclusiveness, the Reserve Bank
has given licences to small finance banks and payments banks to reach out
to those who have little access to banking. In addition since the advent of
the BJP Government in 2014, individuals have been encouraged to open
bank accounts to avail of benefits and the likes. Additionally, the
demonetization of the currency let many to open accounts in order to
receive money and make payments.
There will in the years to come mergers and consolidation. There will be
greater use of technology. It will be an exciting period.
This book apart from discussing retail banking also includes clearing,
payments and remittances as these are inalienable from retail banking.
Cheques deposited have to be collected and cleared. Payments/remittances
have to be made. In addition the book also has services offered by banks
as these are offered to the retail customer. In addition, I have focused on
customer services and on other services.
10
RETAIL BANKING
11
RETAIL BANKING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
12
DEPOSIT ACCOUNTS
Chapter 2
Deposit Accounts
Objectives
Structure
2.1 Introduction
2.5 General
13
DEPOSIT ACCOUNTS
2.1 Introduction
The different types of deposit accounts a customer can place his money in
are:
1. Demand deposits;
14
DEPOSIT ACCOUNTS
2.5 General
2. It should be noted that banks cannot accept interest free deposits other
than in current accounts.
3. Banks do not need to obtain prior concurrence from RBI to launch new
domestic deposit mobilization schemes. This is subject to:
• The manner these accounts operate and their differences are detailed in
the ensuing chapters.
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DEPOSIT ACCOUNTS
2. What are Demand Deposits and what types of Demand Deposits are
there?
5. What are the criteria a Bank must ensure before launching a new
domestic deposit mobilization scheme?
16
DEPOSIT ACCOUNTS
17
DEPOSIT ACCOUNTS
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
18
OPENING OF DEPOSIT ACCOUNTS
Chapter 3
Opening of Deposit Accounts
Objectives
This chapter will explain to you the factors that you should consider and
the documents that you should procure to open an account.
Structure
3.1 Introduction
3.2 Opening of Deposit Accounts
3.3 Introduction to Open Accounts
3.4 Photographs
3.5 Address of Account holder
3.6 PAN (Personal Account Number)/GIR Number
3.7 Aadhar Card
3.8 Specimen Signature
3.9 Authorization
3.10 Completion of Formalities
3.11 Additional Precautions for Current Account
3.12 Savings Account Rules
3.13 Information from Clients
3.14 Nomination
3.15 Documentation
3.16 Self Assessment Questions
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OPENING OF DEPOSIT ACCOUNTS
3.1 Introduction
• An account can be opened by anyone who can enter into a valid contract.
Minors may open an account jointly with their guardians. Bankers may
allow minors above 12 to open savings accounts in their single name and
operate the account. These will be savings accounts and minors will not
be permitted to overdraw these accounts. This is to inculcate banking
habits.
• Deposits are opened by those who have funds in hand. These include:
– Individuals;
– Sole Proprietorships;
– Hindu Undivided Families (HUF);
– Partnerships (including Limited Liability Partnerships);
– Trusts;
– Associations/Societies and Clubs;
– Limited Companies.
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OPENING OF DEPOSIT ACCOUNTS
• The RBI also states that proper identification enables the bank to trace
the person later if required.
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OPENING OF DEPOSIT ACCOUNTS
• The banker will seek from the introducer comfort that the person being
introduced is a respectable person – that he is honest, with integrity and
morals. It should be noted that the introducer has only a moral
responsibility. He cannot be sued or otherwise taken to task if the person
he has introduced turns out to be an undesirable person.
• The RBI makes concessions regarding those who gets credits by way of
salary and makes payments by cheques to government, semi-
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OPENING OF DEPOSIT ACCOUNTS
• The RBI has also said the role of the introducers should be made more
specific. It is not adequate to say that he has known the person for a
sufficient length of time.
• There may be times when the introducer may be unable to visit the bank
to introduce the customer (introduction in absentia). The bank should
first verify the signature of the introducer with the specimen signature on
record. The bank should then send a letter to the introducer thanking
him for introducing the customer and the introducer must confirm in
writing that he has introduced the account. This is to satisfy the banker
that the introducer has indeed introduced the customer. Till the written
confirmation is procured, the bank should not collect cheques/drafts
through the newly opened account. The bank should also send a letter to
the customer and get his confirmation for opening the account. A cheque
book should be issued only after written confirmation is received from
both the customer and the introducer.
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OPENING OF DEPOSIT ACCOUNTS
• The RBI states that regarding customers whose income is from salary
and whose payments are by cheques to government/semi-government
agencies/individuals, simple introduction along with photograph, would
suffice.
• Banks should send a letter by post to the customer and the introducer
and seek confirmation of the account opening. Cheque books should be
issued only after this.
3.4 Photographs
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OPENING OF DEPOSIT ACCOUNTS
• For operations in the accounts, banks should not insist on the presence
of the account holder unless the circumstances so warrant.
• Banks must obtain full and complete address of depositors and record
these in the books and account opening documentation so that the
customers can be traced without difficulty.
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OPENING OF DEPOSIT ACCOUNTS
• Even in other cases, banks insist on a copy of the PAN Card of the
account holder/s.
• Since the introduction of the Aadhar Card, all banks insist on the
production of Aadhar Card of the account holders as proof of identity.
• Aadhar Card has, apart from the name of the individual, his date of birth,
biometrics and address.
• The specimen signature of the client has to be procured with the account
opening documentation, as it is on this signature that cheques and other
documents of instruction will be actioned.
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OPENING OF DEPOSIT ACCOUNTS
3.9 Authorization
• Banks must insist on a declaration from the account holder to the effect
that he is not enjoying any credit facility with any other bank or obtain a
declaration giving particulars of credit facilities enjoyed by him with any
other bank.
• The account opening bank must ascertain all the details and should
inform the concerned lending bank.
• The account opening bank should ensure branches do not open a current
account for a company enjoying credit facilities from another bank
without obtaining a no-objection from lending banks. Non-adherence to
this can be perceived to be abetting siphoning of funds. If a response is
received, the bank should assess the situation and arrive at a conclusion
based on the information received. If no response is received after a
fortnight the account may be opened.
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OPENING OF DEPOSIT ACCOUNTS
• Banks must ensure that information sought is relevant and not intrusive.
• If information is sought for purposes other than KYC, it should not form
part of the account opening form. This information must be collected on
a purely voluntary basis after explaining the objectives to the customer
and taking his express approval.
3.14 Nomination
• The bank must insist that the individual opening an account makes a
nomination.
• If the individual still refuses, the bank should ask for a letter from the
individual stating that he does not wish to make a nomination.
• If the individual refuses to give such a letter, this fact should be recorded
on the account opening form.
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OPENING OF DEPOSIT ACCOUNTS
3.15 Documentation
Individual
An individual should:
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OPENING OF DEPOSIT ACCOUNTS
❖ At the time of opening the account, the account holder and all those
authorized should sign their names on the specimen signature card. It
is this signature the banker will compare with when cheques are issued
on the account or instructions are given.
❖ If the signature is not attested the signature can be verified from the
person’s passport or by a self cheque or it can be verified by another
banker (if the individual has another account).
Minors
• Generally, the banks are reluctant to open deposit account in the name of
minor, with mother as a guardian. Presumably, reluctance to allow
mother as a guardian when the father is alive, is based on section 6 of
the Hindu Minority and Guardianship Act, 1956 which stipulates that,
during his lifetime, father alone should be the natural guardian of a
Hindu minor. The legal and practical aspects of the problem have been
examined by the Reserve Bank. If the idea underlying the demand for
allowing mothers to be treated as guardians related only to the opening
of fixed, recurring deposit and savings banks accounts, notwithstanding
the legal provisions, such accounts could be opened by banks provided
they take adequate safeguards in allowing operations in the accounts by
ensuring that minors’ account opened with mothers as guardians are not
allowed to be overdrawn and that they always remain in credit. In this
way, the minor’s capacity to enter into contract would not be a subject
matter of dispute. Further, in cases where the amount involved is large,
and if the minor’s is old enough to understand the nature of the
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OPENING OF DEPOSIT ACCOUNTS
transaction, the banks could take his acceptance also for paying out
money from such account.
• When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified.
• Where funds held by the intermediaries are not co-mingled at the bank
and there are ‘sub-accounts’, each of them attributable to a beneficial
owner, all the beneficial owners must be identified. Where such funds are
co-mingled at the bank, the bank should still look through to the
beneficial owners.
• Where the banks rely on the ‘Customer Due Diligence’ (CDD) done by an
intermediary, they should satisfy themselves that the intermediary is
regulated and supervised and has adequate systems in place to comply
with the KYC requirements. It should be understood that the ultimate
responsibility for knowing the customer lies with the bank.
ii. Proof of the name, address and activity of the concern, like registration
certificate (in the case of a registered concern), certificate/licence issued
31
OPENING OF DEPOSIT ACCOUNTS
iii. With effect from May 11, 2012, it has been decided to include the
following documents in the indicative list of required documents for
opening accounts of proprietary concerns:
Certain firms posing as Multi Level Marketing agencies for consumer goods
and services have been actually mobilising large amounts of deposits from
the public with promise of high returns. The representatives of such firms
had opened accounts at various bank branches to facilitate what was
essentially a deposit taking activity and the funds used apparently for
illegal or highly risky activities. Banks must be careful in opening such
accounts/undertake review of such accounts and ensure strict compliance
with Know Your Customer (KYC)/Anti-Money Laundering (AML) Guidelines.
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OPENING OF DEPOSIT ACCOUNTS
• Banks should verify the identity of the person and seek information about
the sources of funds before accepting the PEP as a customer. The
decision to open an account for PEP should be taken at a senior level.
This should be clearly spelt out in customer acceptance policy.
• The above norms may also be applied to the accounts of the family
members or close relatives of PEPs.
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OPENING OF DEPOSIT ACCOUNTS
• The RBI has stated that KYC guidelines should not be an excuse for
banks to keep the poor away from the banking system. Though the KYC
guidelines require an individual opening a new account to produce a
number of identification documents, these could be done away with for
lower income groups. The RBI has asked banks to ensure that the
inability of the lower income group to produce documents to establish
their identity and address does not lead to their financial exclusion and
denial of banking services. A simplified procedure could be provided for
opening of accounts in respect of those persons who do not intend to
keep balances above Rs. 50,000 and whose total credit in one year is not
expected to exceed Rs. 1,00,000.
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OPENING OF DEPOSIT ACCOUNTS
ii. Where the customer cannot even put his/her thumb impression and
also would not be able to be physically present in the bank, a mark
obtained on the cheque/withdrawal form which should be identified
by two independent witnesses, one of whom should be a responsible
bank official.
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OPENING OF DEPOSIT ACCOUNTS
• Reserve Bank has been advised by the National Trust for the Welfare of
Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities (the Trust) that a question had been raised as to whether the
banks and the banking sector could accept the guardianship certificates
in regard to persons with disabilities issued by the Local Level
Committees set up under the National Trust for the Welfare of Persons
with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities
Act, 1999. The Trust has mentioned that the above Act was specifically
passed by the Parliament in order to provide for appointment of legal
guardians for persons with disability that is covered under the said Act.
The above Act provides for appointment of legal guardians for persons
with disability by the Local Level Committees set up under the Act. The
Trust has opined that a legal guardian so appointed can open and operate
the bank account as long as he remains the legal guardian. It may also
be noted that the provisions of Mental Health Act, 1987 also allows
appointment of Guardian by District Courts. Banks are therefore advised
to rely upon the Guardianship Certificate issued either by the District
Court under Mental Health Act or by the Local Level Committees under
the above Act for the purposes of opening/operating bank accounts.
Banks may also ensure that their branches give proper guidance so that
the parents/relatives of the disabled persons do not face any difficulty in
this regard.
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OPENING OF DEPOSIT ACCOUNTS
• A HUF declaration that has been signed by all the coparceners affirming
the composition of the HUF, its karta and names and relationship of all
coparceners including minor sons and their dates of birth;
• The account is opened in the name of the karta or in the name of the
HUF business;
• Certified true copies of the IT Returns for the last two/three years.
Partnerships
• PAN Card;
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OPENING OF DEPOSIT ACCOUNTS
Association/Society/Club
38
OPENING OF DEPOSIT ACCOUNTS
❖ A certified true copy of the trust deed or the charter under which it is
operated;
❖ Its byelaws;
Limited Companies
❖ Proof of address.
39
OPENING OF DEPOSIT ACCOUNTS
General
c. Banks are advised to ensure that a proper policy framework on KYC and
AML measures is formulated and put in place with the approval of the
Board. While preparing operational guidelines, banks may ensure that
information sought from the customer is relevant to the perceived risk,
is not intrusive, and is conformity with the guidelines issued in this
regard from time to time. Any other information from the customer
should be sought separately with his/her consent and after opening the
account.
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OPENING OF DEPOSIT ACCOUNTS
41
OPENING OF DEPOSIT ACCOUNTS
j. It has been brought to the Reserve Bank’s notice that banks are not
promoting opening of ‘Small Accounts’ for greater financial inclusion.
The Reserve Bank has advised banks to open ‘Small Accounts’ for all
persons who so desire. It is reiterated that all limitations applicable to
‘Small Accounts’ should be strictly observed.
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OPENING OF DEPOSIT ACCOUNTS
n. When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified. Banks may hold ‘pooled’ accounts
managed by professional intermediaries on behalf of entities like mutual
funds, pension funds or other types of funds. Banks also maintain
‘pooled’ accounts managed by lawyers/chartered accountants or
stockbrokers for funds held ‘on deposit’ or ‘in escrow’ for a range of
clients. Where funds held by the intermediaries are not co-mingled at
the bank and there are ‘sub-accounts’, each of them attributable to a
beneficial owner, all the beneficial owners must be identified. Where
such funds are co-mingled at the bank, the bank should still look
through to the beneficial owners.
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OPENING OF DEPOSIT ACCOUNTS
r. With a view to ensuring that the banking channels are not used for
unlawful/illegal activities, it is reiterated that all banks must put in place
a system of periodic review of risk categorization of customers and
updation of customer identification data to ensure strict adherence to
the KYC/AML/CFT guidelines issued by Reserve Bank from time to time.
s. Banks are advised that KYC once done by one branch of the bank should
be valid for transfer of the account within the bank as long as full KYC
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OPENING OF DEPOSIT ACCOUNTS
procedure has been done for the concerned account. The customer
should be allowed to transfer his account from one branch to another
branch without restrictions. In order to comply with KYC requirements
of correct address of the person, fresh address proof may be obtained
from him/her upon such transfer by the transferee branch.
u. Banks may also accept rent agreement duly registered with State
Government or similar registration authority indicating the address of
the customer, in addition to other documents listed as proof of address.
w. KYC verification of all the members of Self Help Group need not be done
while opening the savings bank account of the SHG and KYC verification
of all the office bearers would suffice. As regards KYC verification at the
time of credit linking of SHGs, it is clarified that since KYC would have
already been verified while opening the savings bank account and the
account continues to be in operation and is to be used for credit linkage,
no separate KYC verification of the members or office bearers is
necessary.
45
OPENING OF DEPOSIT ACCOUNTS
5. Under what circumstances can the KYC guidelines be done away with?
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OPENING OF DEPOSIT ACCOUNTS
47
OPENING OF DEPOSIT ACCOUNTS
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
48
CURRENT ACCOUNT
Chapter 4
Current Account
Objectives
This chapter will tell you all that you need to know on current accounts.
Structure
4.1 Definition
4.2 Who Opens Current Accounts?
4.3 Opening of a Current Account
4.4 Credit Discipline
4.5 Nomination
4.6 Manner of Operation
4.7 Opening Deposit
4.8 Current Accounts Operation
4.9 Clean Overdrafts
4.10 Cheque Book
4.11 Stopping Operations
4.12 Interest
4.13 Precautions in Opening Joint Accounts
4.14 Monitoring Operations in New Accounts
4.15 Monitoring Operations in All Accounts
4.16 Inactive and Dormant Accounts
4.17 Charges
4.18 Deceased Depositor
4.19 Closing an Account
4.20 Prohibitions
4.21 Passbook/Statement
4.22 Self Assessment Questions
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CURRENT ACCOUNT
4.1 Definition
50
CURRENT ACCOUNT
❖ The banker cannot avail of the statutory protection under Section 131
of the Negotiable Instruments Act, if he collects a cheque, bill and the
likes on behalf of a customer who has no title to it or whose title is
defective.
❖ If an overdraft has been given by mistake, the bank bears the risk of
loss if the overdraft is not repaid.
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CURRENT ACCOUNT
• At the time of opening an account, the RBI has stated that to maintain
credit discipline:
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CURRENT ACCOUNT
4.5 Nomination
• At the time the account is opened, the customer would mention how the
account should be operated. This is important for joint accounts or
accounts with multiple holders.
• This is also important should anything occur to the account holders. The
terms used are:
❖ Single;
❖ Joint;
❖ Either or survivor. In this case, should one of the account holders die,
the survivor can draw the balance in the account.
• At the time the account is opened, the customer should ideally open the
account with a cash deposit. An account should not be opened on a zero
balance (whenever possible) as the banker in this instance has not taken
on deposit any amount.
• However, the RBI permits account opening with a self cheque drawn on
another account with another bank.
53
CURRENT ACCOUNT
• An account holder will deposit cash or cheques into his account. The
details are entered in a paying in book/slip and then the book/slip along
with the cheques/cash is handed over to the teller.
• The teller verifies the amount and stamps the customer’s copy confirming
receipt.
• The customer has to be made aware that he has the option of dropping
cheques in the drop box or tendering them at the counters. Banks have
to display on the drop box a sign stating “Customers can also tender the
cheques at the counter and obtain acknowledgement on the pay in slips.”
This should be in English, Hindi and local regional language.
• Both the drop box facility and the facility for acknowledgement of
cheques at regular collection counters should be available to customers.
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CURRENT ACCOUNT
• The banker will compare the signature on the cheque, the amount,
whether the customer has sufficient balance and the date. If all are in
order payment will be made.
• The RBI states that clean overdrafts for small amounts may be permitted
at the discretion of the branch manager to customers whose dealings
have been satisfactory. Banks should work out schemes in this regard.
• Normally banks send new cheque books to customers by courier. The RBI
has stated that cheque books should be handed over to customers/their
representatives at the branch of the bank where they bank if they want it
given to them at the bank.
55
CURRENT ACCOUNT
• Banks may issue cheques with a large number of leaves if the customer
demands one. If a large number of cheque books are given, it should be
in consultation with the controlling office of the bank.
• All cheque forms should be printed in Hindi and in English. The customer
may write the cheque in English, Hindi or the concerned regional
language.
56
CURRENT ACCOUNT
4.12 Interest
• Banks pay interest on the balances in the current account standing in the
name of a deceased individual depositor/sole proprietorship concern from
the date of the depositor’s death till the date the account is closed at the
rate applicable to savings deposits.
• Banks may pay interest at a rate based on its discretion on the minimum
credit balance in the composite cash credit account of a farmer during
the 10th and the last day of each month at the savings account rate.
With effect from April 1, 2010 this is calculated on the daily balance at
the savings account rate.
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CURRENT ACCOUNT
In the case of too many joint account holders, the banks should keep the
following guidelines in view, while opening joint accounts and permitting
operations thereon:
58
CURRENT ACCOUNT
59
CURRENT ACCOUNT
The other important areas in the payment of cheques wherein due caution
need to be exercised are verification of drawer’s signature, custody of
specimen signature cards, supervision over issue of cheque books and
control over custody of blank cheque books/leaves. While need for
examining cheques for large amounts under Ultra Violet Ray Lamps is
recognized by all banks, in practice it is rarely done as there is often a
tendency to be lax in the matter resulting in avoidable loss. In addition,
due care should be exercised in regard to issue and custody of tokens,
movement of cheques tendered across the counter and custody of all
instruments after they are paid by the banks. Depositors/Customers should
be asked to surrender unused cheque books before closing/transferring the
accounts. Also safe custody of specimen signature cards is of utmost
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CURRENT ACCOUNT
• If there has been no customer initiated transaction for one year, the
account is classified as an inactive account.
• If there has been no customer initiated transaction in the account for two
years, the account will be designated a dormant account. Many banks
designate accounts as dormant if there are no customer-generated
transactions for six months.
• These are of two types – with very little balance and with a substantial
balance. It is the latter that is susceptible to fraud. Where the balance is
minimal, the amount automatically gets wiped out by the bank levying
charges for non-maintenance of the required balance.
4.17 Charges
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CURRENT ACCOUNT
• To close an account all the account holders should write to the bank
stating their intent to close the account. They must also submit all
unused cheques to the bank. Incorporated entities and associations
should also submit a copy of the resolution wherein it was agreed that
the bank account be closed.
• The bank usually asks the account holder/s to sign one cheque in blank.
This is the demand by the account holder for the balance in his account.
• All unused cheque leaves should be cancelled and returned to the bank.
• The bank may also request the customer to close his account if:
❖ The customer is no longer a desirable person.
❖ The account has not been operated for a long time.
4.20 Prohibitions
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CURRENT ACCOUNT
4.21 Passbook/Statement
• The Reserve Bank has stated that entries in passbooks should not be
inscrutable and that brief intelligible particulars must be entered.
• The statement must include the full address and telephone number of
the branch.
• To improve service the Reserve Bank has asked banks to ensure that the
full address and telephone number of the branch is mentioned on the
passbooks/ statements of account issued to account holders.
3. What is the credit discipline the RBI expects banks to adhere to when
opening a current account?
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CURRENT ACCOUNT
64
CURRENT ACCOUNT
65
CURRENT ACCOUNT
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
66
SAVINGS ACCOUNT
Chapter 5
Savings Account
Objectives
This chapter will explain to you everything you need to know about savings
accounts.
Structure
5.1 Definition
5.2 Those Who Opens Savings Accounts
5.3 Savings Accounts Operation
5.4 Addition/Deletion of Name of Joint Account Holders
5.5 Cheque Book
5.6 Passbook/Statement
5.7 Interest
5.8 Precautions in Opening Joint Accounts
5.9 Monitoring Operations in New Accounts
5.10 Monitoring Operations in All Accounts
5.11 Payment of Interest on Accounts Frozen by Banks
5.12 Inactive and Dormant Accounts
5.13 Charges
5.14 Nomination
5.15 Deceased Depositor
5.16 Transfer
5.17 Stopping Operations
5.18 Closing an Account
5.19 Prohibitions
5.20 Organizations that can have Savings Account
5.21 Financial Inclusion
5.22 Self Assessment Questions
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SAVINGS ACCOUNT
5.1 Definition
• With regard to those who intend to keep balances not exceeding Rs.
50,000 in all their accounts taken together and the total credit in all
advances taken is not expected to exceed Rs. 1,00,000, banks can open
accounts with:
❖ Introduction from another account holder who has been subject to full
KYC procedure. The introducer’s account must be at least six months
old and satisfactorily operated.
❖ Photograph of the person opening the account and his address must be
certified by the introducer or there must be some other acceptable
evidence of identity and address.
❖ The customer must be made aware that if his balances exceed Rs.
50,000 or his advances exceed Rs. 1,00,000 no further transactions will
be permitted till full KYC procedures are completed. The customer
should be made aware when either balance touches 80 percent of the
amount permitted.
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SAVINGS ACCOUNT
• The RBI has also asked banks to make available a “basic no frills
account” either with nil or very low minimum balances that would make
such accounts accessible to vast sections of the population. Banks have
been asked to give wide publicity to this. The nature and number of
transactions in these accounts can be restricted.
• Savings Bank rules must be annexed as a tear off portion to the account
opening form.
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SAVINGS ACCOUNT
• The teller verifies the amount and stamps the customer’s copy confirming
receipt.
❖ Both the drop box facility and the facility for acknowledgement of
cheques at regular collection counters should be available to
customers.
❖ The customer has to be made aware that he has the option of dropping
cheques in the drop box or tendering them at the counters. The
customer cannot be compelled to drop cheques in a drop box. Banks
have to display on the drop box a sign stating “Customers can also
tender the cheques at the counter and obtain acknowledgement on the
pay in slips.” This should be in English, Hindi and the regional
language.
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SAVINGS ACCOUNT
• The banker will compare the signature on the cheque, the amount,
whether the customer has sufficient balance and the date. If all are in
order payment will be made.
• With regard to customers who are too ill to sign a cheque or cannot be
physically present they can put their thumb impression or a mark on the
cheque and this must be identified by two independent witnesses known
to the bank.
• Banks will allow, at the request of all joint account holders, the addition
or deletion of name/s of joint account holders or allow an individual
depositor to add the name of another person as a joint account holder.
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SAVINGS ACCOUNT
• Normally banks send new cheque books to customers by courier. The RBI
has stated that cheque books should be handed over to customers/their
representatives at the branch of the bank where they bank if they want it
given to them at the bank.
• If a cheque is dishonored for the third time during a financial year. The
bank should issue a cautionary advice to the customer and tell him of the
stoppage of cheque facility if a cheque is dishonored for the fourth time
in the same account during the financial year. A similar advice should be
given if the bank intends to close the account.
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SAVINGS ACCOUNT
5.6 Passbook/Statement
• The passbook/statement must have the full address of the branch and
telephone number.
• Banks must offer pass book facility to all its customers. In case
statements are offered and the customer chooses statements, then
statements must be issued monthly.
• Whenever passbooks are held back for updation, a paper token indicating
date of receipt and date to be collected should be given. They should be
returned only against the tokens. Passbooks remaining n he branch
should be in the custody of named responsible officials. While in the
branch, they should be under lock and key overnight.
• Whenever passbooks are given for updation after a long period of time, a
printed slip requesting the depositor to tender it periodically should be
given.
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SAVINGS ACCOUNT
5.7 Interest
• The Reserve Bank stipulates the interest that may be paid on these
accounts. It is currently 3½% per annum.
• Scheduled banks with deposits of less than Rs. 25 crores are permitted
to give, at their discretion, an additional ½%.
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SAVINGS ACCOUNT
• If interest over Rs. 10,000 is paid, tax must be deducted at source. Tax
need not deducted if the depositor files form 15H or 15G or a certificate
under Section 197(1) of the Income Tax Act, 1961.
• Banks must give a uniform rate of interest on balances upto Rs. 1 lakh.
With regard to balances exceeding Rs. 1 lakh, a differential rate of
interest can be given.
In the case of too many joint account holders, the banks should keep the
following guidelines in view, while opening joint accounts and permitting
operations thereon:
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SAVINGS ACCOUNT
matter. Care should be exercised to ensure that the joint accounts are
not used for benami transactions.
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SAVINGS ACCOUNT
The other important areas in the payment of cheques wherein due caution
need to be exercised are verification of drawer’s signature, custody of
specimen signature cards, supervision over issue of cheque books and
control over custody of blank cheque books/leaves. While need for
examining cheques for large amounts under Ultra Violet Ray Lamps is
recognized by all banks, in practice it is rarely done as there is often a
tendency to be lax in the matter resulting in avoidable loss. In addition,
due care should be exercised in regard to issue and custody of tokens,
movement of cheques tendered across the counter and custody of all
instruments after they are paid by the banks. Depositors/Customers should
be asked to surrender unused cheque books before closing/transferring the
accounts. Also safe custody of specimen signature cards is of utmost
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SAVINGS ACCOUNT
• If there has been no customer initiated transaction for one year, the
account is classified as an inactive account.
• If there has been no customer initiated transaction in the account for two
years the account will be designated a dormant account. In some banks
an account is designated dormant if there are no customer generated
transactions for six months.
• These are of two types – with very little balance and with a substantial
balance. It is the latter that is susceptible to fraud. Where the balance is
minimal, the amount automatically gets wiped out by the bank levying
charges for non-maintenance of the required balance.
• Banks have a right to freeze these accounts. These are unfrozen only
after the account holder asks for it to be activated.
• The RBI has clarified that if fixed deposit interest is credited to savings
account as per the mandate of a client, it should be treated as a
customer induced transaction. The account would be treated as
inoperative only after two years from the last credit entry.
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SAVINGS ACCOUNT
5.13 Charges
5.14 Nomination
5.16 Transfer
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SAVINGS ACCOUNT
• To close an account all the account holders should write to the bank
stating their intent to close the account. They must also submit all
unused cheques to the bank.
• The bank usually asks the account holder/s to sign one cheque in blank.
This is the demand by the account holder for the balance in his account.
• The bank may also request the customer to close his account if:
❖ The customer is no longer a desirable person.
❖ The account has not been operated for a long time.
5.19 Prohibitions
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SAVINGS ACCOUNT
and permitted not to add to their names the words “Limited” or the
words Private Ltd.
Banks are advised to offer a ‘Basic Savings Bank Deposit Account’ which
will offer following minimum common facilities to all their customers:
b. This account shall not have the requirement of any minimum balance.
c. The services available in the account will include deposit and withdrawal
of cash at bank branch as well as ATMs; receipt/credit of money through
electronic payment channel or by means of deposit/collection of cheques
drawn by Central/State Government agencies and departments;
d. While there will be no limit on the number of deposits that can be made
in a month, account holders will be allowed a maximum of four
withdrawals in a month, including ATM withdrawals; and
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SAVINGS ACCOUNT
Holders of ‘Basic Savings Bank Deposit Account’ will not be eligible for
opening any other savings bank deposit account in that bank. If a
customer has any other existing savings bank deposit account in that bank,
he/she will be required to close it within 30 days from the date of opening
a ‘Basic Savings Bank Deposit Account’.
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SAVINGS ACCOUNT
1. Mr. K.K., aged 16 years, maintains a savings account at your branch and
desires to authorise his brother Mr. A.K. to operate the account on his
behalf. In this case, __________.
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SAVINGS ACCOUNT
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SAVINGS ACCOUNT
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85
FIXED DEPOSIT ACCOUNT
Chapter 6
Fixed Deposit Account
Objectives
This chapter will explain to you all everything you need to know about fixed
deposits.
Structure
6.1 Definition
6.2 Who Opens Fixed Deposits Accounts
6.3 Issue of Receipt
6.4 Interest
6.5 Payment of Interest on Accounts Frozen by Banks
6.6 Transferability
6.7 Tax Deduction
6.8 Nomination
6.9 Disposal of Deposit
6.10 Early or Premature Withdrawal
6.11 Renewal
6.12 Maturity
6.13 Renewal of Overdue Deposits
6.14 Advance on Fixed Deposits
6.15 Joint Holdings
6.16 Addition/Deletion of Name of Joint Account Holders
6.17 Precautions in Opening Joint Accounts
6.18 Monitoring Operations in New Accounts
6.19 Monitoring Operations in All Accounts
6.20 Splitting
6.21 Loss of Fixed Deposit Receipt
6.22 Repayment
6.23 Deceased Depositor
6.24 Conversion of Term Deposit
6.25 Recurring Deposit
6.26 Reinvestment Deposit
6.27 Deposit Schemes With Lock-In Period
6.28 General
6.29 Senior Citizens Savings Scheme, 2004
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FIXED DEPOSIT ACCOUNT
6.1 Definition
• Banks must disclose in advance the schedule of interest rates that they
offer on deposits.
• The maximum period a deposit may be placed is 120 months (IBA Code
for Banking Practices). Banks can accept deposits for a longer period if
ordered to do so by the courts (such as in the case of minors who have
more than 10 years to become majors). It is unusual for deposits to be
placed for more than 5 years.
• Banks should not offer deposit accounts with lock-in period where
premature withdrawal is not permitted and/or rates of interest that are
not in conformity with rates of interest on normal deposits.
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FIXED DEPOSIT ACCOUNT
• Those who have funds in hand open fixed deposits. These include:
❖ Individuals;
❖ Sole Proprietorships;
❖ Hindu Undivided Families (HUF);
❖ Partnerships (including Limited Liability Partnerships);
❖ Trusts;
❖ Associations/Societies and Clubs;
❖ Limited Companies.
• Banks should issue term deposit receipts indicating therein full details
such as:
❖ The date of issue;
❖ The due date;
❖ The amount;
❖ The rate of interest;
❖ The period of the deposit; and
❖ The amount at maturity.
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FIXED DEPOSIT ACCOUNT
6.4 Interest
• Banks are free to determine the rate of interest that may be paid on
fixed deposits. The rates must be approved by the board or a body to
whom the board has delegated this responsibility to.
• Banks are free to offer varying rates of interest for different sizes of
deposits above a cut-off point.
• Banks may offer deposits on a floating rate. These must be clearly linked
to an anchor rate. RBI stipulates that to offer transparency banks should
not use internal or derived rates while offering floating rate deposit
products. Only market based rupee bench mark rates which are directly
observable and transparent to the customer should be used by banks for
pricing their floating rate deposits.
• In leap years some banks have calculated interest on 366 days. The
Reserve Bank, in this instance, leaves it to the bank to determine how
interest is to be calculated.
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FIXED DEPOSIT ACCOUNT
• Scheduled banks with deposits of less than Rs. 25 crores are permitted
to give, at their discretion, an additional ½%.
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FIXED DEPOSIT ACCOUNT
• The Reserve Bank permits banks to offer senior citizens a higher rate of
interest on their deposits.
• In the case of reinvestment and recurring deposits the bank should pay
interest for the intervening Sunday/holiday/non-business day on maturity
value. On ordinary term deposits interest for the intervening period
should be on the original principal amount.
• Public sector banks may pay additional interest of 1.28% per annum over
the normal rate of interest on deposits over 2 years to Army Group
Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and
Air Force Group Insurance Society (AFGIS) if these deposits are not
linked with payment of insurance premia by the banks.
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FIXED DEPOSIT ACCOUNT
• If overdue period does not exceed 14 days on the date of receipt of the
request letter, renewal may be done from the date of maturity. If it
exceeds 14 days, banks may pay interest for the overdue period as per
the policy adopted by them, and keep it in a separate interest free sub-
account which should be released when the original fixed deposit is
released.
6.6 Transferability
• Tax need not be deducted if the depositor files Form 15H or 15G or a
certificate under Section 197(1) of the Income Tax Act, 1961.
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FIXED DEPOSIT ACCOUNT
6.8 Nomination
• In that case, the customer would have to request the bank to do so.
• The Reserve Bank states that penal interest should not be charged if the
deposit is reinvested in a fresh deposit immediately.
• The rate of interest that will be paid is the rate for the period the deposit
has been with the bank.
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FIXED DEPOSIT ACCOUNT
6.11 Renewal
❖ On the original deposit at the rate applicable to the period for which the
deposit has actually run.
❖ Interest for the period from the date of renewal will be allowed at the
rate prevailing on the date of renewal.
6.12 Maturity
• The deposit matures at the end of the period it has been placed for.
• On maturity, the depositor must instruct the bank to renew the deposit.
The bank cannot do so on its own.
• The depositor if he does not want to renew the deposit can ask for it to
be paid to him either by a cheque/draft or credited to an account he has.
This instruction would normally be in the account opening instructions.
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FIXED DEPOSIT ACCOUNT
• If the depositor does not renew or claim the deposit on maturity, the
deposit will be designated as an overdue deposit in the books of the
bank.
• The bank cannot close the deposit and repay the depositor if the
depositor does not make a demand.
• If a fixed deposit matures and proceeds are unpaid, the amount left
unclaimed with the bank will attract savings bank rate of interest.
• If the application for renewal is made after 14 days the rate of interest
should be the rate prevailing on the date of renewal of deposit.
• Banks are free to determine the rate of interest between the date of
maturity and the date of renewal.
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FIXED DEPOSIT ACCOUNT
• Banks are free to charge a rate of interest without reference to its base
rate if the advance is given and the deposit is in the name of the
borrower (singly or jointly), one of the partners of a firm and the loan is
to the firm, the proprietor of a proprietary concern, a ward whose
guardian is borrowing on behalf of the ward. If the term deposit is
withdrawn before completion of the prescribed minimum maturity period
it should not be treated as an advance against the term deposit and
interest should be charged at the rates prescribed by the RBI.
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FIXED DEPOSIT ACCOUNT
• NRE deposits should be held jointly with NRE holders only. NRO accounts
may be held by non-residents jointly with residents.
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FIXED DEPOSIT ACCOUNT
• Banks may at the request of all the account holders allow addition/
deletion of names of joint account holders or allow an individual
depositor to add name of another person as a joint account holder.
In the case of too many joint account holders, the banks should keep the
following guidelines in view, while opening joint accounts and permitting
operations thereon:
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FIXED DEPOSIT ACCOUNT
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FIXED DEPOSIT ACCOUNT
officials from the Reserve Bank during the course of their inspections will
also be looking into the statements submitted by the branches.
6.20 Splitting
A bank can, at its discretion and at the request of all joint account holders,
allow the splitting of a joint deposit, in the name of the joint account
holders provided the period and the aggregate amount of the deposit does
not undergo any change.
• If the receipt is lost, customers will ask for a duplicate. This is because
banks insist on fixed deposit receipts to be discharged and surrendered
before payment is affected.
• For a duplicate receipt, all the holders should request for one in writing
and execute a letter of indemnity. A note must also be made in the
bank’s records that a duplicate has been issued.
6.22 Repayment
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FIXED DEPOSIT ACCOUNT
• Interest should be paid on the term deposit without reducing the interest
by any penalty provided the deposit remains with the bank after
reinvestment for a period longer than the remaining period of the original
contract.
• Depositors can save a recurring amount every month for the period
selected.
• Deposits where interest (as and when due) is reinvested at the same
contracted rate till maturity. This interest is withdrawable with the
principal amount on maturity.
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FIXED DEPOSIT ACCOUNT
c. Rates of interest offered on these deposits are not in tune with the rates
of interest on normal deposits and
6.28 General
• Term deposit receipt received for collection from another bank should not
be renewed by the deposit issuing bank and delivered to the customer.
The receipt issuing bank can either pay the collecting bank or return the
instrument if there are valid reasons not to pay.
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FIXED DEPOSIT ACCOUNT
Eligibility
• The senior citizen scheme is for senior citizens. Minimum eligible age for
investment is 60 years (55 years for those who have retired on
superannuation or under a voluntary or special voluntary scheme). The
retired personnel of Defence Services (excluding Civilian Defence
Employees) shall be eligible to subscribe under the scheme irrespective
of the age limit of 60 years subject to the fulfillment of other specified
conditions.
• “Retirement benefits” for the purpose of SCSS Rules have been defined
as ‘any payment due to the depositor on account of retirement whether
on superannuation or otherwise and includes Provident Fund dues,
retirement/superannuation gratuity, commuted value of pension, cash
equivalent of leave, savings element of Group Savings linked Insurance
scheme payable by employer to the employee on retirement, retirement-
cum-withdrawal benefit under the Employees’ Family Pension Scheme
and ex-gratia payments under a voluntary retirement scheme’ (Rule 2(a)
of the Senior Citizens Savings Scheme (Amendment) Rules, 2004 notified
on October 27, 2004).
• In case an investor has attained the age of 60 years and above, the
source of amount being invested is immaterial. However, if the investor is
55 years or above but below 60 years and has retired under a voluntary
scheme or a special voluntary scheme or has retired from the defence
services, only the retirement benefits can be invested in the SCSS.
❖ persons who have attained the age of 55 years or more but less than
60 years and who retired under a voluntary retirement scheme or a
special voluntary retirement scheme on the date of opening of an
account under these rules, subject to the condition that the account is
opened by such individual within three months of the date of
retirement.
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FIXED DEPOSIT ACCOUNT
• Non Resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu
Undivided Family (HUF) are not eligible to invest in the accounts under
the SCSS, 2004. If a depositor becomes a Non-resident Indian
subsequent to his opening the account and during the currency of the
account under the SCSS Rules, the account may be allowed to continue
till maturity, on a non-repatriation basis and the account shall be marked
as a Non-Resident account.
Tenure
• The deposit can be prematurely withdrawn after one year of holding but
with penalty.
• The Finance Act 2008 has added deposits to this scheme in the basket of
tax saving instruments under Section 80C of the Income Tax Act.
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FIXED DEPOSIT ACCOUNT
Investment
Other Features
• Accounts can be held both in single and joint holding modes. Joint
holding is allowed but only with spouse. The spouse need not be a senior
citizen.
• If the spouses are senior citizens both the spouses can open individual
and/or joint accounts with each other with the maximum deposits upto
Rs. 15 lakhs each, provided both are individually eligible to invest under
relevant provisions of the Rules governing the scheme.
• A senior citizen can get application forms from post offices and
designated branches of 24 nationalized banks and one private sector
bank.
• The rule that a depositor cannot open more than one account in the
same month at the same office has been removed. In May 2007, the
Government regularized multiple accounts opened at the same branch by
merging the accounts subject to the proviso that deposits under the
merged accounts shall not earn any interest for the period from the
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FIXED DEPOSIT ACCOUNT
• NRIs and persons having dual citizenship (Indian and other) can be
nominees under the scheme. However, if the depositor dies, they can
neither continue the account nor can they repatriate the proceeds of the
account.
Nomination
• Nomination may be made by the depositor at any time after the opening
of the account but before its closure.
• Nomination can be made in joint account also. In such a case, the joint
holder will be the first person entitled to receive the amount payable in
the event of death of the depositor. The nominee’s claim shall arise only
after the death of both the joint holders.
• A person holding the Power of Attorney cannot sign for the nominee in
the nomination form.
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FIXED DEPOSIT ACCOUNT
• If both the spouses have opened separate accounts under the scheme
and either of the spouses dies during the currency of the account(s), the
account(s) standing in the name of the of the deceased depositor/spouse
shall not be continued and such account(s) shall be closed.
Loans
• The facility of pledging the deposit/account under the SCSS, 2004 for
obtaining loans, has not been permitted since the account holder will not
be able to withdraw the interest amount periodically, defeating the very
purpose of the scheme.
Premature Withdrawal
❖ If the account is closed after one year but before expiry of two years
from the date of opening of the account, an amount equal to one and
half% of the deposit amount shall be deducted.
❖ If the account is closed on or after the expiry of one year from the date
of opening of the account, an amount equal to one% of the deposit
shall be deducted.
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FIXED DEPOSIT ACCOUNT
❖ However, if the depositor is availing the facility under Rule 4(3), then
he can withdraw the deposit and close the account at any time after
the expiry of one year from the date of extension of the account
without any deduction.
❖ If the depositor dies before the maturity of the deposit and the
nominee/legal heir approaches the bank for closure of the deposit, the
nominee/legal heir is entitled to the savings bank rate from the date of
death of the depositor to the closure of the account.
2. What is the interest on fixed deposits and who determines this interest?
7. Let us assume that Ravi and Raman have a joined fixed deposit for Rs.
1,00,000 maturing on October 3 20XX. On July 1, they ask you to split
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FIXED DEPOSIT ACCOUNT
the deposit in two – one in the name of Ravi for Rs. 60,000 and the
balance in the name of Raman. What would you do?
(a) Half-yearly
(b) Quarterly
(c) Monthly
(d) Yearly
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FIXED DEPOSIT ACCOUNT
110
FIXED DEPOSIT ACCOUNT
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111
CERTIFICATES OF DEPOSIT
Chapter 7
Certificates of Deposit
Objectives
Structure
7.1 Definition
7.2 Eligibility
7.3 Aggregate Amount
7.4 Minimum Size of Issue and Denominations
7.5 Investors
7.6 Maturity
7.7 Discount/Coupon Rate
7.8 Reserve Requirements
7.9 Transferability
7.10 Trades in CDs
7.11 Settlement
7.12 Loans/Buy-Backs
7.13 Format of CDs
7.14 Payment of CDs
7.15 Security Aspect
7.16 Payment of Certificate
7.17 Issue of Duplicate Certificates
7.18 Standardized Market Practices and Documentation
7.19 Self Assessment Questions
112
CERTIFICATES OF DEPOSIT
7.1 Definition
7.2 Eligibility
7.5 Investors
113
CERTIFICATES OF DEPOSIT
7.6 Maturity
The maturity period of CDs issued by banks should not be less than 7 days
and not more than one year, from the date of issue.
CDs may be issued at a discount on face value. Banks/FIs are also allowed
to issue CDs on floating rate basis provided the methodology of compiling
the floating rate is objective, transparent and market-based. The issuing
bank/FI is free to determine the discount/coupon rate. The interest rate on
floating rate CDs would have to be reset periodically in accordance with a
pre-determined formula that indicates the spread over a transparent
benchmark. The investor should be clearly informed of the same.
7.9 Transferability
All OTC trades in CDs shall be reported within 15 minutes of the trade on
the FIMMDA reporting platform.
7.11 Settlement
All OTC trades in CDs shall necessarily be cleared and settled under DVP I
mechanism through the authorized clearing houses {National Securities
Clearing Corporation Limited (NSCCL), Indian Clearing Corporation Limited
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CERTIFICATES OF DEPOSIT
7.12 Loans/Buy-Backs
Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-
back their own CDs before maturity. However, the RBI may relax these
restrictions for temporary periods through a separate notification.
There will be no grace period for repayment of CDs. If the maturity date
happens to be a holiday, the issuing bank/FI should make payment on the
immediate preceding working day. Banks/FIs, therefore, should fix the
period of deposit in such a manner that the maturity date does not coincide
with a holiday to avoid loss of discount/interest rate.
115
CERTIFICATES OF DEPOSIT
Since CDs are transferable, the physical certificates may be presented for
payment by the last holder. The question of liability on account of any
defect in the chain of endorsements may arise. It is, therefore, desirable
that banks take necessary precautions and make payment only by a
crossed cheque. Those who deal in these CDs may also be suitably
cautioned.
116
CERTIFICATES OF DEPOSIT
117
CERTIFICATES OF DEPOSIT
118
CERTIFICATES OF DEPOSIT
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119
NOMINATION
Chapter 8
Nomination
Objectives
This chapter will explain on how account holders may nominate persons.
Structure
8.2 Operations
120
NOMINATION
❖ Release contents of the safe deposit locker to the nominee of the hirer
in the event of the death of the hirer after making an inventory.
• A single depositor can, in the event of his death, nominate the person
who should be paid the balance lying to his credit in his account.
• With regard to a joint account all the depositors together may nominate
a person to whom in the event of their death the amount to their credit
in the joint account may be paid.
• Nomination confers upon the nominee the right to receive the deposit
from the bank.
121
NOMINATION
• On making payment to the nominee the bank is fully discharged from its
liability regarding the deposit.
• Following an Allahabad High Court decision the RBI has stated that banks
should insist that the person opening an account in single name makes a
nomination. If he declines to do so the bank should explain the
advantages. If he still does not want to make a nomination the bank
should ask him to give a letter stating that he does not want to make a
nomination. If he declines to give a letter, the bank should record the
fact on the account opening form and open the account (if found
eligible). Under no circumstances should a bank refuse to open an
account solely on the ground that the person refused to make a
nomination.
• In case of a joint deposit account the nominee’s right arises only after
the death of all the depositors.
• Rules 2(9), 3(8) and 4(9) of the Banking Companies (Rules) 1985
requires banks to acknowledge in writing to depositors the filing of the
relevant duly completed form of nomination, cancellation and/or variation
of the nomination.
122
NOMINATION
8.2 Operations
• Nomination facility is available for saving bank accounts opened for credit
of pension.
• Banks are advised to generally insist that the person opening a deposit
account makes a nomination. In case the person opening an account
declines to fill in nomination, the banks should explain the advantages of
nomination facility. If the person opening the account still does not want
to nominate, the banks should ask him to give a specific letter to the
effect that he does not want to make nomination. In case the person
opening the account declines to give such a letter, the bank should
record the fact on the account opening form and proceed with opening of
the account if otherwise found eligible. Under no circumstances, a bank
should refuse to open an account solely on the ground that the person
opening the account refused to nominate. This procedure should be
adopted in respect of deposit accounts in the name of Sole Proprietary
Concerns also.
• It is clarified that the various nomination forms (DA1, DA2, and DA3 for
Bank Deposits, Forms SC1, SC2 and SC3 for articles in safe custody and
Forms SL1, SL1A, SL2, SL3 and SL3A for Safety Lockers) prescribed
under the Nomination Rules, 1985, only Thumb-impression(s) shall be
attested by two witnesses. The signatures of the account holders need
123
NOMINATION
124
NOMINATION
125
NOMINATION
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126
UNCLAIMED DEPOSITS
Chapter 9
Unclaimed Deposits
Objectives
Structure
127
UNCLAIMED DEPOSITS
• Within 30 days from the close of a calendar year banks should submit, a
return to the RBI, a list of all accounts that have not been operated for
10 years.
• Banks can write to customers informing them that there has been no
operation and ascertain the reasons for this. If non-operation was due to
shifting from the locality, customers could be asked to provide details of
new accounts to which balances can be transferred.
• If letters are returned unanswered, there should be an enquiry to find
out whereabouts of customers or their legal heirs in case they are
deceased.
128
UNCLAIMED DEPOSITS
129
UNCLAIMED DEPOSITS
1. How soon after the end of a calendar year does a list if unclaimed
deposits have to be filed with the Reserve Bank?
(a) Fifteen days (b) Thirty days
(c) Sixty days (d) Ninety days
130
UNCLAIMED DEPOSITS
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131
DECEASED DEPOSITORS
Chapter 10
Deceased Depositors
Objectives
Structure
132
DECEASED DEPOSITORS
❖ The bank has exercised due care and caution in establishing identity of
survivor/nominee and death of account holder (through documentary
evidence).
❖ There is no court order restraining the bank from making the payment.
❖ The RBI has stated that in these cases insistence on production of legal
representation is superfluous and unwarranted. Banks should not ask
for succession certificates, letter of administration or probate. Banks
should not seek to obtain any bond or indemnity.
• Where the deceased depositor has not made any nomination or the
account does not have a survivor clause banks are expected to follow a
simplified procedure for repayment to legal heirs without inconveniencing
them.
133
DECEASED DEPOSITORS
• If the death takes place before maturity and the deposit is claimed after
the maturity, interest is to be paid at the contracted rate upto maturity
and then at the savings account rate. The Ministry of Finance has
reiterated that in cases where the depositor has expired before the
maturity of the deposit and the nominee/legal heir approaches the
banker for closure of the deposit account, the nominee/legal heir is
entitled to the savings bank rate commencing from the date of death of
the depositor to the date of closure of the account.
• If the bank agrees to split the deposit and issue two or more receipts it
should not be construed as early withdrawal of the deposit if the period
and aggregate amount is unchanged.
134
DECEASED DEPOSITORS
• In the case of NRE deposits, when the claimants are residents, the
deposit on maturity should be treated as a domestic rupee deposit and
interest should be paid for the subsequent period at a rate applicable to a
domestic deposit of similar maturity.
• Banks should settle claims and release payment within 15 days from
receiving claim along with documents such as proof of death of depositor.
• The documents that should be submitted along with the claim form are:
135
DECEASED DEPOSITORS
For dealing with the requests from the nominee(s) of the deceased locker-
hirer/ depositors of the safe-custody articles (where such a nomination had
been made) or by the survivor(s) of the deceased (where the locker/safe
custody article was accessible under the survivorship clause), for access to
the contents of the locker/safe custody article on the death of a locker
hirer/depositor of the article, the banks are advised to adopt generally the
foregoing approach, mutatis mutandis, as indicated for the deposit
accounts.
3. If the bank agrees to split the deposit and issue two or more receipts
should it be construed as early withdrawal of the deposit if the period
and aggregate amount is unchanged?
136
DECEASED DEPOSITORS
2. If the death takes place before maturity and the deposit is claimed after
maturity interest is to be paid __________.
a. At the savings account rate till it is claimed
b. At the contracted rate up to maturity and then at the savings account
rate
c. At the contracted rate till it is claimed
d. At the savings account rate up to maturity and then at the contracted
rate
3. In cases where the depositor has expired before the maturity of the
deposit and the nominee/legal heir approaches the banker for closer of
the deposit account, the nominee/legal heir is entitled to the
__________.
a. Contracted rate commencing from the date of the deposit to the date
of closure of the account
b. Savings bank rate commencing from the date of deposit to the date
of closure
c. Savings bank rate commencing from the date of death of the
depositor to the date of closure of the account.
4. If a bank agrees to split the deposit and issue two or more receipts, it
should not be construed as early withdrawal of the deposit if
__________.
a. The period is changed but the aggregate amount is the same
b. The period is not changed but the aggregate amount is changed
c. The period and aggregate amount is unchanged
137
DECEASED DEPOSITORS
138
DECEASED DEPOSITORS
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139
SETTLEMENT OF CLAIMS IN RESPECT OF MISSING PERSONS
Chapter 11
Settlement of Claims in Respect of Missing
Persons
Objectives
Structure
140
SETTLEMENT OF CLAIMS IN RESPECT OF MISSING PERSONS
• The Reserve Bank has stated that the settlement of claims in respect of
missing persons would be governed by the provisions of Section 107/108
of the Indian Evidence Act, 1872:
• The Reserve Bank has asked banks to formulate a policy which would
enable them to settle the claims of a missing person after considering the
legal opinion and taking into account the facts and circumstances of each
case. Further, keeping in view the imperative need to avoid
inconvenience and undue hardship to the common person, banks are
advised that keeping in view their risk management systems, they may
fix a threshold limit, up to which claims in respect of missing persons
could be settled without insisting on production of any documentation
other than (i) FIR and the non-traceable report issued by police
authorities and (ii) letter of indemnity.
141
SETTLEMENT OF CLAIMS IN RESPECT OF MISSING PERSONS
2. What must the nominee provide to the bank for the claim to be settled?
4. Banks may upto a thresh hold limit settle claims regarding missing
persons if the claimants submit __________.
(a) FIR (b) Non-traceable report issued by the Police
(c) Letter of indemnity (d) All of the above
(e) (a) and (b) (f) (b) and (c)
142
SETTLEMENT OF CLAIMS IN RESPECT OF MISSING PERSONS
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143
GENERAL ACCOUNT MONITORING AND OPERATIONS
Chapter 12
General Account Monitoring and Operations
Objectives
Structure
144
GENERAL ACCOUNT MONITORING AND OPERATIONS
• The banks should have a system of closely monitoring cash deposits and
withdrawals for Rs. 5 lakh and above not only in deposit accounts but
also in all other accounts like cash credit/overdraft, etc. The banks/
branches should also maintain a separate register to record details of
145
GENERAL ACCOUNT MONITORING AND OPERATIONS
individual cash deposits and withdrawals for Rs. 5 lakhs and above. The
details recorded should include, in the case of deposits, the name of the
account holder, account number, amount deposited and in the case of
withdrawals, the name of the account holder, account number, amount of
withdrawal and name of the beneficiary of the cheque.
146
GENERAL ACCOUNT MONITORING AND OPERATIONS
• In case the cheque book is issued against a requisition letter, the drawer
should be asked to come personally to the bank or cheque book should
be sent to him under registered post directly without being delivered to
the bearer.
• Loose cheques should be issued to account holder only when the account
holder comes personally with a requisition letter and on production of
passbooks.
• The accounts which have not been operated upon over a period two
years should be segregated and maintained in separate ledgers. The
relative ledger(s) and the specimen signature cards should be held under
the custody of the Manager or one of the senior officials. The first
withdrawal in such segregated accounts should be allowed only with the
approval of the Manager.
• The account transfer form with enclosures may be handed over to the
customer in a sealed cover if he desires for delivery to the transferee
office/branch. However, the transferee office/branch should also be
separately supplied with a copy of the account transfer letter.
147
GENERAL ACCOUNT MONITORING AND OPERATIONS
electronic means in case it has not received the balance and/or other
related papers.
❖ Where the customer cannot even put his/her thumb impression and
also would not be able to be physically present in the bank, a mark
obtained on the cheque/withdrawal form which should be identified by
two independent witnesses, one of whom should be a responsible bank
official. In such cases, the customer may be asked to indicate to the
bank as to who would withdraw the amount from the bank on the basis
of cheque/withdrawal form as obtained above and that person should
be identified by two independent witnesses. The person who would be
actually drawing the money from the bank should be asked to furnish
his signature to the bank.
148
GENERAL ACCOUNT MONITORING AND OPERATIONS
• To close an account all the account holders should write to the bank
stating their intent to close the account. They must also submit all
unused cheques to the bank. Incorporated entities and associations
should also submit a copy of the resolution wherein it was agreed that
the bank account be closed.
• The bank usually asks the account holder/s to sign one cheque in blank.
This is the demand by the account holder for the balance in his account.
• All unused cheque leaves should be cancelled and returned to the bank.
• The bank may also request the customer to close his account if:
149
GENERAL ACCOUNT MONITORING AND OPERATIONS
• Banks are advised to give wide publicity and provide guidance to deposit
account holders on the benefits of the nomination facility and the
survivorship clause. Illustratively, it should be highlighted in the publicity
material that in the event of the death of one of the joint account
holders, the right to the deposit proceeds does not automatically devolve
on the surviving joint deposit account holder, unless there is a
survivorship clause.
• It may be noted that the Prize Chits and Money Circulation Schemes
(Banning) Act, 1978 (No. 43 of 1978) imposes a total ban on the
promotion and conduct of prize chit scheme except by charitable and
educational institutions notified in that behalf by the State Governments
concerned. The lottery falls within the expression “prize chit” under the
Act referred to above. Further, sale of lottery tickets on bank counters
could be open to abuse and avoidable complaints from members of
public. Therefore, the banks should not associate themselves directly or
indirectly with lottery schemes of organisations of any description.
150
GENERAL ACCOUNT MONITORING AND OPERATIONS
• Banks are required to submit to the Reserve Bank, a return in Form VIII
showing unclaimed deposit accounts in India which have not been
operated upon for 10 years or more, as at the end of each calendar year.
In order to ensure accuracy and timely reporting, it is desirable to
maintain a separate register for this purpose at all the branches of each
bank.
• The branches may also be advised that entries therein may be made in
respect of deposit accounts not operated upon for 10 year. A separate
folio may be opened in the register for different types of deposit
accounts.
Banks are prohibited from paying brokerage on deposits in any form to any
individual, firm, company, association, institution or any other person.
151
GENERAL ACCOUNT MONITORING AND OPERATIONS
Joint Accounts
Benefits of Survivorship
152
GENERAL ACCOUNT MONITORING AND OPERATIONS
As stated above, the survivor can give a valid discharge to the bank. If the
legal heirs claim the amount, the bank can inform them that unless they
obtain and have served on the bank an order of competent court
restraining the bank from effecting payment to the survivor, the bank will
be within its rights to do so.
In a joint term deposit account which has been opened in the style of
either or survivor/any one or survivors or survivor, the bank often receives
a request, on the death of one of the joint account holders, from the
surviving depositors) to allow premature encashment or the grant of a loan
against the term deposit receipt. It would be in order to accede to the
request of the surviving depositors) for premature payment if (i) there is
an option included in the contract of deposit to repay before maturity and
(ii) “either/any one or survivorship” mandate has been obtained from
original depositors. Requests for loans from surviving depositor(s) could
also be considered in special cases, though in the case of such loans, the
bank may face a possible risk if the legal representatives of the deceased
depositor lay an effective claim to the deposit before it is paid on maturity.
In such an event, the bank will have to look to the borrower(s) for
repayment. This position for premature payment or grant of loan is
applicable also in respect of a joint account (in the style of either or
survivor/any one or survivors or survivor), where all the account holders
are alive.
153
GENERAL ACCOUNT MONITORING AND OPERATIONS
In the case of these term deposits, the intention of the owner depositor
(former/latter) is to facilitate repayment of the term deposit to the survivor
only in the event of his death. He (the owner depositor) is in a position to
retain with him at all times, the right to dispose of the monies until his
death or maturity of the deposit receipt, whichever is earlier. There should,
therefore, be no objection to the bank permitting premature payment of
such deposits or granting advances against them at the request of the
former/latter without insisting on the production of a consent letter from
the other party/parties to the term deposit receipt. Here also it is
preferable to make this position explicit to the joint depositors, by
incorporating suitable clause in the term deposit account opening or
application form.
T h e B a n k m a y, o n r e c e i p t o f w r i t t e n a p p l i c a t i o n f r o m S h r i
-------------------- the former/the latter/the first name the second name
etc. of us or Either or Survivor of us, in its Any one or Survivors of Survivor
of us, absolute discretion and subject to such terms and conditions as the
Bank may stipulate, (a) grant a loan/advance against the security of the
term deposit receipt to be issued in our joint names or (b) make premature
payment of the proceeds of the deposit to the former/the latter/the first
named of us/either the second or survivor of us, etc., named of us/any one
of us or survivors or survivor of us”.
154
GENERAL ACCOUNT MONITORING AND OPERATIONS
Further, the said Act provides that every association referred to in sub-
section (1) of Section (6) may, if it is not registered with the Central
Government, accept any foreign contribution only after obtaining prior
permission of the Central Government.
There are also certain organisations of a political nature, not being political
parties (including their branches/units) specified by the Central
Government under Section 5(l) of the Act. These organisations require
prior Permission of the Central Government for accepting any foreign
contribution. In this regard, the banks should take the following
precautions:
155
GENERAL ACCOUNT MONITORING AND OPERATIONS
g. In case any cheque/demand draft has been tendered to the bank for
realisation of its proceeds and credit to the account of the association/
organisation by an association or organisation which is not registered or
which requires prior permission, as the case may be, the concerned
branch of the bank may approach the Ministry of Home Affairs for
further instructions. In no case the banks should credit the account of
association/organisation of a political nature, not being a political party,
as specified by the Central Government and of an unregistered
association, unless the association/organisation produces a letter of the
Ministry of Home Affairs conveying permission of the Central
Government to accept the foreign contribution.
For the above purpose, appropriate systems should be devised within the
bank to ensure meticulous compliance with these instructions and
completely eliminate instances of non-compliance. The system so devised
may be intimated to all the branches of the bank for proper
156
GENERAL ACCOUNT MONITORING AND OPERATIONS
157
GENERAL ACCOUNT MONITORING AND OPERATIONS
158
GENERAL ACCOUNT MONITORING AND OPERATIONS
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159
PROHIBITIONS
Chapter 13
Prohibitions
Objectives
This chapter explains matters banks are prohibited from doing with respect
to deposit accounts.
Structure
13.1 Prohibitions
160
PROHIBITIONS
13.1 Prohibitions
No bank:
• May pay a rate of interest higher than that stipulated from time to time
by the Reserve Bank of India (savings and fixed deposits).
• May discriminate in the matter of interest paid between one deposit and
another accepted on the same date and for same maturity except for
schemes specifically for resident Indian senior citizens offering higher
and fixed rates of interest as compared to normal deposits of any size,
and single term deposits of Rs. 15 lakhs and above on which varying
rates based on size of deposits may be permitted. The permission to
offer varying rates of interest will be subject to the following conditions:
161
PROHIBITIONS
door deposits under a special scheme. Banks may use the services of
Non-Governmental Organizations (NGOs)/Self Help Groups (SHGs)/Micro
Finance Institutions (MFIs) and other Civil Society Organizations (CSOs)
as intermediaries in providing financial and banking services including
collection of deposits through the use of business facilitator and business
correspondent models and pay reasonable commission and fees.
• Should accept interest free deposit other than in current account or pay
compensation indirectly.
162
PROHIBITIONS
• Can prematurely repay the term deposits of their customers on their own
at their option as it is a contract between the bank and the customer.
However, a term deposit can be paid prematurely at the request of the
customer subject to the terms of the contract, including penalty if any.
However:
• Inexpensive gifts costing not more than Rs. 250/- may be given.
1. Mention three instances where the bank may not pay interest.
163
PROHIBITIONS
4. Raman came to your bank with the fixed deposit receipt for Rs. 200,000
that he has with Bank A. How much can be advanced against the
security of this deposit?
(a) Rs. 0 (b) Rs. 200,000
(c) Rs. 150,000 (d) Rs. 100,000
(e) Rs. 50,000 (f) It is upto the bank.
164
PROHIBITIONS
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DEPOSIT INSURANCE
Chapter 14
Deposit Insurance
Objectives
This chapter explains the manner and extent deposits are insured.
Structure
14.1 Introduction
14.10 Limitation
166
DEPOSIT INSURANCE
14.1 Introduction
167
DEPOSIT INSURANCE
• In the event of a bank failure, DICGC protects bank deposits that are
payable in India.
• The DICGC insures all deposits such as savings, fixed, current, recurring,
etc., except the following types of deposits: (i) Deposits of foreign
Governments; (ii) Deposits of Central/State Governments; (iii) Inter-
bank deposits; (iv) Deposits of the State Land Development Banks with
the State co-operative bank; (v) Any amount due on account of deposit
received outside India; (vi) Any amount, which has been specifically
exempted by the Corporation with the previous approval of Reserve Bank
of India.
• There is a move in a new FRDI Bill to raise the insured amount of Rs.
1,00,000.
• The DICGC insures principal and interest upto a maximum amount of Rs.
One lakh. For example, if an individual had deposit(s) with principal
amount of Rs. 95,000 plus accrued interest of Rs. 4,000, the total
amount insured by the DICGC would be Rs. 99,000. If, however, the
principal amount is Rs. One lakh, the accrued interest would not be
insured, not because it was interest but because the amount was over
the insurance limit.
• All funds held in the same type of ownership at the same bank are added
together before deposit insurance is determined. If the funds are in
different types of ownership or are deposited into separate banks they
would then be separately insured.
168
DEPOSIT INSURANCE
• If there are deposits with more than one bank, deposit insurance
coverage limit is applied separately to the deposits in each bank.
Therefore funds from each bank would be insured separately, regardless
of the date of closure.
• If a person opens in his name more than one account in a bank, for
example Mr. K.A. Iyer opens one savings account and one or more fixed
deposit accounts, all the accounts are considered in the same right and
same capacity and insurance coverage is limited to a maximum of
Rupees one lakh. But if Mr. K.A. Iyer opens a joint account, the joint
account is considered in a different right and different capacity and
insurance coverage is provided separately. Each joint account is insured
separately from any deposits individually owned by the joint depositors.
Deposits held in two separate joint accounts in combination of say “A”
and “B” and “B” and “A” will be treated as two separate accounts and
each category of the joint account will be entitled to claim upto Rs. 1
lakh. Similarly a joint account of “X”, “Y” and “Z” will be treated as
different from the joint account of “Y, “Z” and “X” and “Z”. “X” and “Y” for
the settlement of claims and claims in each category will be paid upto Rs.
1 lakh.
• Banks have the right to set off their dues from the amount of deposits.
The deposit insurance is available after netting of such dues.
169
DEPOSIT INSURANCE
170
DEPOSIT INSURANCE
171
DEPOSIT INSURANCE
14.10 Limitation
• The DICGC pays only if the bank goes into liquidation. If RBI tries to
prevent winding up and tries to revive it, DICGC will not pay.
4. If there are deposits with more than one bank how is the Deposit
Insurance coverage determined?
5. If a bank goes into liquidation what is the amount DICGC is liable to pay
to each depositor?
172
DEPOSIT INSURANCE
173
DEPOSIT INSURANCE
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RETAIL LOANS
Chapter 15
Retail Loans
Objectives
Structure
15.1 Introduction
175
RETAIL LOANS
15.1 Introduction
Retail loans are those that are given to individuals to meet their needs as
opposed to corporates to meet business or commercial imperatives.
These may be secured or unsecured.
A secured loan is one that is given on the security of some asset. The
security for a housing loan would be the mortgage of the house; the
security for a loan to buy a car would be the hypothecation of the car. A
fixed deposit receipt is pledged when a loan is given against the security of
a fixed deposit. The retail loans that are usually secured are:
• Educational loans;
• Loans to professionals and self employed persons;
• Loans against shares and debentures;
• Vehicle loans;
• Housing loans.
Unsecured loans are those given to customers without taking any security.
This may be because of the reputation of the person or because of the
nature of the loan. Loans given to individuals to meet medical expenses or
holiday expenses are usually unsecured. Unsecured retail loans include:
• Personal loans;
• Some loans to professionals and self employed persons;
• Some educational loans.
The Reserve Bank has not stipulated (apart from housing, loans against
shares and education loans) on aspects of these loans. The general
features of these loans are detailed in the next few chapters. These may, of
course vary from bank to bank in some degree.
176
RETAIL LOANS
177
RETAIL LOANS
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PERSONAL LOANS
Chapter 16
Personal Loans
Objectives
This chapter will explain to whom personal loans are given and the manner
the loans are given.
Structure
16.2 Eligibility
16.7 Security
179
PERSONAL LOANS
• Personal loans are loans advanced to individuals for a need. These could
be to meet marriage expenses, hospitalization/medical costs, costs for a
holiday or for some other need.
16.2 Eligibility
• These loans are advances to persons over the age of 18/21 who have
sufficient disposable income to repay the loan in monthly installments.
• Usually these loans are not advanced to individuals who are likely to
retire in one to two years.
180
PERSONAL LOANS
• The amount that is advanced is usually based on the nature of the loan,
the take home and disposable income of the person seeking the loan.
These loans are between Rs. 50,000 to Rs. 2,00,000. The amount does
vary from bank to bank.
16.7 Security
181
PERSONAL LOANS
2. These loans are advances to persons over the age of 18/21 who have
sufficient disposable income to repay the loan in monthly installments.
(a) Housing loans (b) Personal loans
(c) Vehicle loans (d) Educational loans
3. Usually, these loans are not advanced to individuals who are likely to
retire in one to two years.
(a) Housing loans (b) Personal loans
(c) Vehicle loans (d) Educational loans
182
PERSONAL LOANS
183
PERSONAL LOANS
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184
CONSUMER DURABLE LOANS
Chapter 17
Consumer Durable Loans
Objectives
Structure
17.2 Eligibility
17.5 Interest
17.6 Security
185
CONSUMER DURABLE LOANS
Consumer durable loans are for the purchase of consumer durables such as
washing machines, dish washers, mobile phones, refrigerators, cooking
ranges, music systems, televisions and the like.
17.2 Eligibility
• These loans are normally extended to persons over the age of 18 who
have sufficient disposable income to repay the loan in monthly
installments.
• These loans are not large and are usually below Rs. 1,00,000.
• As the amounts are usually not large, normally 90% of the value (and in
some 100%) is advanced.
17.5 Interest
17.6 Security
186
CONSUMER DURABLE LOANS
2. _________ loans are not large and are usually below Rs. 100,000.
(a) Personal loans
(b) Educational loans
(c) Consumer durable loans
(d) None of the above
187
CONSUMER DURABLE LOANS
188
CONSUMER DURABLE LOANS
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189
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
Chapter 18
Loans To Professionals And Self Employed
Persons
Objectives
This chapter will tell you of the loans granted to professionals and self
employed persons.
Structure
18.2 Quantum
18.5 Security
190
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
191
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
18.2 Quantum
• The amount advanced will depend on the amount required, the nature of
the expense and the earnings of the professional.
• To qualify within this category it should not exceed Rs. 10 lakhs of which
working capital finance should not exceed Rs. 2 lakhs. This can vary from
bank to bank. In some cases, it can be more.
192
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
18.5 Security
• These loans are secured by the asset purchased with these loans.
1. Name some of the reasons that loans are advanced to Professionals and
Self-employed Individuals?
193
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
194
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
195
LOANS TO PROFESSIONALS AND SELF EMPLOYED PERSONS
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196
EDUCATION LOANS
Chapter 19
Education Loans
Objectives
Structure
19.1 Scope
19.2 Eligibility Criteria
19.3 Expenses Considered for Loan
19.4 Quantum of Finance
19.5 Margin
19.6 Security
19.7 Documentation
19.8 Rate of Interest
19.9 Appraisal/Sanction/Disbursement
19.10 Repayment
19.11 Insurance
19.12 Follow-up Monitoring
19.13 Processing Charge
19.14 Capability Certificate
19.15 Sanction of Loan to More Than One Child from the Same Family
19.16 Minimum Age
19.17 Top-up Loans
19.18 Joint Borrower
19.19 Other Conditions
19.20 Disposal of Loan Application
19.21 Priority Sector Advance
19.22 Self Assessment Questions
197
EDUCATION LOANS
19.1 Scope
The Indian Banks Association has suggested a model scheme and the
Reserve Bank has suggested that banks adhere to it as much as possible
while developing their own scheme.
The Reserve Bank suggests that the main emphasis should be to ensure
that every meritorious student though poor is provided with an opportunity
to pursue education with financial support from the banking system with
affordable terms and conditions and that no deserving student be denied
an opportunity to pursue higher education for want of financial support.
Those eligible for loans are Indian nationals who have secured admission to
professional/technical courses in India or abroad through entrance test/
merit based selection process. These institutions should be accredited by
the country of delivery. In India, institutes should be AICTE or UGC
recognized. There is no need to have secured a minimum qualifying mark.
The courses that are eligible in India and abroad for a loan are:
Eligibility Criteria
Student eligibility:
198
EDUCATION LOANS
Courses eligible:
• The Madras High Court (Justice K. Suguna) directed the ICICI Bank to
extend an educational loan to S. Yoganathan a scheduled caste student
who had obtained admission in an MBA course in a private college
stating, “Educational loans are welfare measures to enable poor students
to pursue higher studies with the assistance of loan facilities provided by
banks.” In this instance the student had fulfilled all the requirements laid
down by the RBI. ICICI Bank could therefore not deny him loan saying
that he is not a meritorious student as that is not an RBI requirement.
199
EDUCATION LOANS
Notes:
1. The above list is indicative in nature. Banks may approve other job
oriented courses leading to technical/professional degrees, post
graduate degrees/ diplomas offered by recognized institutions under this
scheme.
2. Courses other than the above offered by reputed institutions may also
be considered on the basis of employability.
Studies abroad:
200
EDUCATION LOANS
Notes:
*** It is likely that expenditure under Item Nos. vi, vii & viii above may
not be available in the schedule of fees and charges prescribed by the
college authorities. Therefore, a realistic assessment may be made of the
requirement under these heads. However, the maximum expenses included
under vi, vii & viii may be capped at 20% of the total tuition fees payable
for completion of the course.
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EDUCATION LOANS
Need based finance to meet the expenses that are eligible will be
considered taking in to account margins mentioned subject to the following
ceilings:
Note:
The ceilings fixed for studies in India and Abroad correspond to the limits
fixed by the RBI for treatment as priority sector lending. Banks may
consider higher quantum of loan on course to course basis, (e.g., courses
in IIMs, ISB, etc). It may also be noted that even loans in excess of
Rs. 10 lakhs qualify for interest subsidy under Central Sector Interest
Subsidy Scheme for loans up to Rs. 10 lakhs.
19.5 Margin
202
EDUCATION LOANS
19.6 Security
19.7 Documentation
• The loan documents should be executed by both the student and the
parent/guardian as joint-borrower.
203
EDUCATION LOANS
Note: Servicing of interest during study period and the moratorium period
till commencement of repayment is optional for students. Accrued interest
will be added to the principal amount borrowed while fixing EMI for
repayment.
19.9 Appraisal/Sanction/Disbursement
• In the normal course, while appraising the loan, the future income
prospect of the student only will be looked into.
• Students may submit their loan applications either at the bank branches
near to the residence of parents or to the educational institution.
However, after the loan is sanctioned, the cases be transferred to the
bank branch near to the institution for follow up with student/institution.
The KYC compliance for the purpose has to be done by the branch
nearest to the residence of parents.
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EDUCATION LOANS
19.10 Repayment
If the student is not able to complete the course within the scheduled time,
extension of time for completion of course may be permitted for a
maximum period of 2 years. If the student is not able to complete the
course for reasons beyond his control, sanctioning authority may at his
discretion consider such extensions as may be deemed necessary to
complete the course. In case the student discontinues the course midway,
appropriate repayment schedule will be worked out by the bank in
consultation with the student/parent.
205
EDUCATION LOANS
19.11 Insurance
Banks may, with the consent of the student, arrange for life insurance
policy on the students availing Education Loan. Individual Banks may work
out the modalities with insurance companies.
Banks can also issue the capability certificate for students going abroad for
higher studies. For this purpose financial and other supporting documents
may be obtained from applicant, if required.
206
EDUCATION LOANS
207
EDUCATION LOANS
• Banks should not pass on loan applications to other banks for reasons
such as applicant not falling within the area of a particular bank.
• In case of receipt of application for more than one loan for a student
borrower from a family, the family as a unit has to be taken into account
for considering the loan and security in relation to the quantum of
finance disbursed subject to repayment capacity of the parent/student.
• The Reserve Bank has stated that banks should not refuse to process a
loan because the applicant is not within the area of operation of a
particular branch or if the domicile of the applicant falls under the service
area of another bank or if the applicant is overage, etc.
208
EDUCATION LOANS
209
EDUCATION LOANS
210
EDUCATION LOANS
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211
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
Chapter 20
Loan for Vocational Education and Training
Objectives
Structure
20.1 Eligibility
20.2 Courses Eligible
20.3 Minimum Age
20.4 Quantum of Finance
20.5 Expenses Considered for Loan
20.6 Margin
20.7 Rate of Interest
20.8 Processing Charges
20.9 Security
20.10 Moratorium Period
20.11 Repayment
20.12 Insurance
20.13 Prepayment
20.14 Other Terms and Conditions
20.15 Self Assessment Questions
212
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
20.1 Eligibiliy
213
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
Banks may, at their discretion, consider limits upto Rs. 75,000/- for
courses with duration upto 1 year and limits upto Rs. 2 lakhs courses with
duration above one year for specific courses offered by reputed institutions
having regard to the nature of such courses and employability (ability to
repay out of job earnings).
1. Tuition/course fee.
2. Examination/Library/Laboratory fee.
3. Caution deposit.
4. Purchase of books, equipments and instruments.
5. Any other reasonable expenditure found necessary for completion of the
course. (As such courses are localized boarding, lodging may not be
necessary. However, wherever it has been found necessary, the same
could be considered on merits).
20.6 Margin
Nil
Notes:
• Servicing of interest during study period and the moratorium period till
commencement of repayment is optional for students.
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LOAN FOR VOCATIONAL EDUCATION AND TRAINING
Nil
20.9 Security
20.11 Repayment
The loan will be repaid after the moratorium period in Equated Monthly
Instalments (EMIs) as follows:
20.12 Insurance
20.13 Prepayment
The borrower can repay the loan any time after commencement of
repayment without having to pay any prepayment charges.
215
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
2. The quantum of need based finance to meet expenses under loan for
vocational training for courses of duration above I year is __________.
(a) Rs. 1,50,000 (b) Rs. 2,00,000
(c) Rs. 50,000 (d) Rs. 5,00,000
216
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
217
LOAN FOR VOCATIONAL EDUCATION AND TRAINING
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218
VEHICLE LOANS
Chapter 21
Vehicle Loans
Objectives
Structure
21.2 Eligibility
21.5 Repayment
21.6 Security
21.7 Insurance
21.8 Guarantor
219
VEHICLE LOANS
21.2 Eligibility
• Most banks expect the applicant to be at least 21 years of age and not
more than 60 years old.
• As a safety criteria to satisfy themselves that the person has the ability
to repay other aspects may be looked at such as for how long the person
has been employed, other assets and the like.
• While this may vary, usually the loan is up to 80% (in case of both new
and old vehicles; but not older than 5 years) of the cost/invoice value of
the vehicle including accessories and registration expenses in the case of
new vehicles. With regard to new cars, it can be upto 90% of the cost.
220
VEHICLE LOANS
21.5 Repayment
21.6 Security
21.7 Insurance
21.8 Guarantor
• The Kolkata High Court has held that an owner’s right to a vehicle is lost
if he defaults on EMIs and that financiers are not guilty of flouting right
to property if they repossess the vehicles. (GE Transportation Financial
Services Ltd).
• The Finance Ministry along with the RBI is finalizing a proposal which
allow lenders to re possess vehicle in case of repayment defaults. Cars
and two-wheelers may be brought under the ambit of the Securitization
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act.
221
VEHICLE LOANS
222
VEHICLE LOANS
223
VEHICLE LOANS
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224
LOANS AGAINST SHARES AND DEBENTURES
Chapter 22
Loans Against Shares and Debentures
Objectives
This chapter will tell you how loans can be advanced for the purchase of
shares and debentures.
Structure
22.1 Introduction
22.5 Interest
22.6 Prohibitions
22.7 Ceiling
225
LOANS AGAINST SHARES AND DEBENTURES
22.1 Introduction
b. Loans against the security of shares, debentures and PSU bonds should
not exceed the limit of Rs. 10 lakhs per borrower if the securities are in
physical form and Rs. 20 lakhs per borrower if the securities are in
dematerialized form.
f. Each bank should formulate with the approval of the board a lending
policy for grant of advances to individuals against shares/debentures/
bonds keeping in view the general guidelines given by the Reserve
226
LOANS AGAINST SHARES AND DEBENTURES
227
LOANS AGAINST SHARES AND DEBENTURES
b. Banks should be concerned with what the advances are for, rather than
what the advances are against. While considering grant of advances
against shares/ debentures banks must follow the normal procedures
for the sanction, appraisal and post sanction follow-up.
22.5 Interest
Banks are free to determine the rate of interest without reference to the
Bank’s base rate.
22.6 Prohibitions
• Banks cannot sanction loans against the equity shares of the banking
company to its directors.
228
LOANS AGAINST SHARES AND DEBENTURES
22.7 Ceiling
• A bank’s total exposure including both fund based and non-fund based to
the capital market in all forms (including advances to individuals) must
not exceed 5% of its total advances as on March 31 of the previous year.
• Within this ceiling the bank’s direct investment should not exceed 20% of
its net worth.
1. What is the extent of the loan that can be granted against shares,
debentures and bonds of public sector undertakings?
3. What are the guidelines that a bank must follow when granting loans
against units of mutual funds?
229
LOANS AGAINST SHARES AND DEBENTURES
4. A bank’s total exposure, both fund based and non-fund based to capital
market in all forms, must not exceed _________ of its total advances as
on March 31 of the previous year
(a) 10% (b) 2%
(c) 3% (d) 5%
5. Within the ceiling, the bank’s direct investment should not exceed
_________ of its net worth.
(a) 10% (b) 25%
(c) 5% (d) 20%
230
LOANS AGAINST SHARES AND DEBENTURES
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231
HOUSING FINANCE
Chapter 23
Housing Finance
Objectives
This chapter will tell you how loans are advanced to purchase houses.
Structure
232
HOUSING FINANCE
The Reserve Bank has stated that banks are free to evolve their own
guidelines with the approval of their boards on aspects such as security,
margin, age of dwelling units, repayment schedule, etc.
The following types of bank finance are considered direct housing finance:
• Banks may consider requests for additional finance within the overall
ceiling for carrying out alterations/additions/repairs to the house/flat
already financed by them.
• In the case of individuals who might have raised funds for construction/
acquisition of accommodation from other sources and need
supplementary finance, banks may extend such finance after obtaining
233
HOUSING FINANCE
234
HOUSING FINANCE
This is extended when the applicant owns land and approaches the bank
for a loan to construct a house. The bank should:
• Have the construction at its various stages certified by the bank’s own
architects (appointed by the bank).
• No loan should be given for properties meant for residential use but
which applicant intends to use for commercial purposes and declares so
while applying for the loan.
235
HOUSING FINANCE
23.10 Eligibility
• Those eligible are all individuals above the age of 18 years with adequate
income to repay the loan in equated monthly installments.
• Housing loans are not normally extended to individuals who are above 58
years of age as they would retire in a short while.
23.11 Quantum
• The quantum will vary from bank to bank. Banks would normally
stipulate a minimum of Rs. 1,00,000. The maximum would depend on
the bank and could vary from Rs. 10 lakhs to Rs. 2 crores or more.
• The loan amount for repairs would normally be less – usually around Rs.
10 lakhs.
• The amount advanced will be based on the individual’s gross pay or take
home pay or net disposable income – the criteria differs from one bank
to another.
Earlier the LTV ratio in respect of housing loans was not exceed 80 per
cent. However, for small value housing loans, i.e., housing loans up to Rs.
20 lakh (which get categorized as priority sector advances), the LTV ratio
was not to exceed 90 per cent.
With effect from June 21, 2013 these norms have been revised and the
following LTV ratios have to be maintained by banks in respect of individual
housing loans.
236
HOUSING FINANCE
The LTV ratio should not exceed the prescribed ceiling in all fresh cases of
sanction. In case the LTV ratio is currently above the ceiling prescribed for
any reasons, efforts should be made to bring it within limits.
The RBI has noticed that banks adopt different practices for deciding the
value of the house property while sanctioning housing loans. Some banks
include stamp duty, registration and other documentation charges in the
cost of the house property. As this overstates the realizable value of the
property as stamp duty, registration and other documentation charges are
not realizable, the margin stipulated gets diluted. Accordingly, RBI has
stated banks should not include these charges in the cost of the housing
property they finance so that the effectiveness of LTV norms is not diluted.
• The term is dependant on the age of the buyer – the intent being that it
should be repaid before the person retires.
23.15 Repayment
237
HOUSING FINANCE
23.16 Security
238
HOUSING FINANCE
3. In case of direct housing finance for purchase of old house, the house
should not be older than __________.
(a) five years
(b) ten years
(c) fifteen years
(d) No restriction as such but left to the discretion of the bank
239
HOUSING FINANCE
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240
REVERSE MORTGAGE LOANS
Chapter 24
Reverse Mortgage Loans
Objectives
This chapter will tell you of the factors that should be considered while
reverse mortgage loans.
Structure
24.1 Introduction
24.2 Purpose
24.3 Eligibility
24.4 Maximum Amount
24.5 Margin
24.6 Option to Adjust Payments
24.7 Maintenance
24.8 Repayment of Loan
24.9 Rate of Interest
24.10 Security
24.11 Tenure
24.12 Insurance
24.13 Self Assessment Questions
241
REVERSE MORTGAGE LOANS
24.1 Introduction
24.2 Purpose
24.3 Eligibility
242
REVERSE MORTGAGE LOANS
24.5 Margin
The margin kept is usually 20%. Therefore for a house of Rs. 1 crore, the
loan advanced will not exceed Rs. 80 lakhs.
The Bank normally keep the option to revise periodic annuity amount, if
lump-sum payment is taken or at the interval of every 5 years based on
valuation of the property.
24.7 Maintenance
The borrower is expected to maintain the property and pay taxes, etc.
The loan becomes due and payable when the last surviving borrower dies
or would like to sell the home/permanently moves out of the home for
aged care to an institution or relatives. The loan will then become due for
recovery and payable.
This could be at Fixed Rate Option (subject to re-set clause after every 3/5
years) or at Floating Rate Option.
243
REVERSE MORTGAGE LOANS
24.10 Security
24.11 Tenure
This is usually 15 years. The tenure may further be extended till survival of
the borrower/s subject to advance value of the property.
24.12 Insurance
2. Who is eligible for a reverse Mortgage Loan and what is the maximum
amount of loan that will be granted to him?
244
REVERSE MORTGAGE LOANS
3. The Bank keeps the option to revise periodic annuity amount, if lump-
sum payment is taken or at the interval of every _________ based on
valuation of the property.
(a) 3 years (b) 5 years
(c) 10 years (d) 15 years
245
REVERSE MORTGAGE LOANS
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246
RETAIL CREDIT ANALYSIS
Chapter 25
Retail Credit Analysis
Objectives
This chapter will tell you of the factors that should be considered while
advancing retail loans.
Structure
25.3 Characteristics
25.4 Dangers
247
RETAIL CREDIT ANALYSIS
• Lending is fraught with risk as the loan may not get repaid.
• The cost of a bad loan is high. If a bank lends Rs. 1,00,000 and the
bank’s earning (rate of interest charged less cost of funds) on it is 5%,
the bank would need to lend Rs. 20,00,000 for one year if the loan goes
bad.
• Additionally, in retail credit the risk is that the loan is usually given to an
individual and often there is no information on the credit worthiness of
the person easily available. In corporate lending one has balance sheets,
profit and loss accounts and other data.
25.3 Characteristics
248
RETAIL CREDIT ANALYSIS
25.4 DANGERS
• The individual is a risk. The person may not want to repay. As a rule
employed persons are better risks than self-employed/unemployed
persons. Women are better risks than men.
• The class of society the person comes from has an effect on the risk.
Middle-class persons are better risks than affluent/poor people.
• The area a person stays is significant. Certain areas have a higher rate of
default.
• Sales are being done by direct selling agents. The risk in this instance is
that they have a vested interest in the loan being disbursed (as they are
remunerated on the number of loans sourced).
249
RETAIL CREDIT ANALYSIS
• Identity.
• PAN card.
• Aadhar Card
• Salary slips if employed or financial statements for atleast two years if
self employed.
• Address.
• Credit card/loan repayment history.
• Bank statements.
• Income Tax Assessment
• Documents supporting assets owned such as house.
• Address verification.
• Office verification.
• House owner.
• Loan will be repaid before retirement.
• Borrower has adequate resources to repay.
• Good loan record.
• Credit card holder with no history of default.
250
RETAIL CREDIT ANALYSIS
4. Which of the following are safety indicators for a bank to check before
disbursement of a loan?
(a) Good loan record
(b) Credit card holder with no history of default
(c) Borrower has adequate resources to pay
(d) All of the above
(e) None of the above
251
RETAIL CREDIT ANALYSIS
252
RETAIL CREDIT ANALYSIS
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253
FAIR PRACTICES CODE FOR LENDERS
Chapter 26
Fair Practices Code for Lenders
Objectives
This chapter will tell you the fair practices code that banks are required to
adhere to.
Structure
26.1 Introduction
26.6 General
254
FAIR PRACTICES CODE FOR LENDERS
26.1 Introduction
255
FAIR PRACTICES CODE FOR LENDERS
b. The lender should convey to the borrowers the credit limit along with
the terms and conditions thereof and keep the borrower’s acceptance of
these terms and conditions given with his full knowledge on record.
c. Terms and conditions and other caveats governing credit facilities given
by banks/financial institutions arrived at after negotiation by lending
institution and the borrower should be reduced in writing and duly
certified by the authorised official. A copy of the loan agreement along
with a copy each of all enclosures quoted in the loan agreement should
be furnished to the borrower. It is reiterated that banks should
invariably furnish a copy of the loan agreement along with a copy each
of all enclosures quoted in the loan agreement to all the borrowers at
the time of sanction/disbursement of loans.
256
FAIR PRACTICES CODE FOR LENDERS
257
FAIR PRACTICES CODE FOR LENDERS
lenders are entitled to retain the securities till the relevant claim is
settled/paid.
26.6 General
Fair Practices Code based on the above should be put in place in respect of
all lending. Banks and financial institutions will have the freedom of
drafting the Fair Practices Code, enhancing the scope of the guidelines but
in no way sacrificing the spirit underlying the above guidelines. For this
purpose, the Boards of banks and financial institutions should lay down a
clear policy.
The Board of Directors should also lay down the appropriate grievance
redressal mechanism within the organization to resolve disputes arising in
this regard. Such a mechanism should ensure that all disputes arising out
of the decisions of lending institutions’ functionaries are heard and
disposed of at least at the next higher level. The Board of Directors should
also provide for periodical review of the compliance of the Fair Practices
Code and the functioning of the grievances redressal mechanism at various
258
FAIR PRACTICES CODE FOR LENDERS
The adoption of the Code, printing of necessary loan application forms and
circulation thereof among the branches and controlling offices should also
be duly completed. The Fair Practices Code, which may be adopted by
banks and financial institutions, should also be put on their website and
given wide publicity. A copy may also be forwarded to the Reserve Bank of
India.
1. In case of the rejection of a loan below Rs. 2 lakhs what is the bank
required to do?
259
FAIR PRACTICES CODE FOR LENDERS
1. Which of the following should form part of Fair Practice Code for Lenders
as per the guidelines issued by Reserve Bank?
a. While lending, banks/FIs should not discriminate on grounds of sex,
caste and religion.
b. While recovering loans, banks/FIs should not resort to undue
harassment, viz., persistently bothering the borrowers at odd hours,
use of muscle power for recovery of loans, etc.
c. If request for transfer of borrowal account is received either from the
borrower or from a bank/FI, which proposes to take over the account,
the consent or objection, if any should be conveyed within 21 days
from the date of receipt of request.
d. All of the above
260
FAIR PRACTICES CODE FOR LENDERS
4. Banks should invariably furnish a copy of the loan agreement along with
a copy, each of all enclosures quoted in the loan agreement to all the
borrowers at the time of sanction/disbursement of loans.
a. Not necessary
b. To be given only on request from the borrower
c. Should be furnished even if the same is not requested by the
borrower
261
FAIR PRACTICES CODE FOR LENDERS
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262
RECOVERY AGENTS
Chapter 27
Recovery Agents
Objectives
This chapter will explain all matters relating to recovery agents utilized by
banks.
Structure
263
RECOVERY AGENTS
• To recover monies due on retail loans advanced banks have been using
recovery agents. The methods these agents have been using are
questionable and often intimidating.
• In view of the rise in the number of disputes and litigations against banks
for engaging recovery agents the Reserve Bank has issued guidelines on
recovery agents engaged by banks.
• In view of the rise in the number of disputes and litigations against banks
for engaging recovery agents in the recent past, The RBI felt that the
adverse publicity would result in serious reputational risk for the banking
sector as a whole. As a consequence the RBI has issued guidelines
regarding engagement of recovery agents by banks in India.
• Banks have been advised to take into account the following specific
considerations while engaging recovery agents (including agencies
engaged by the bank and the agents/employees of the concerned
agencies).
• Banks should ensure that the agents engaged by them in the recovery
process carry out verification of the antecedents of their employees,
which may include pre-employment police verification, as a matter of
abundant caution. Banks may decide the periodicity at which re-
verification of antecedents should be resorted to.
264
RECOVERY AGENTS
authorization letter from the bank along with the identity card issued to
him by the bank or the agency firm/company. Additionally, where the
recovery agency is changed by the bank during the recovery process, in
addition to the bank notifying the borrower of the change, the new agent
should carry the notice and the authorization letter along with his identity
card.
• The notice and the authorization letter should, among other details, also
include the telephone numbers of the relevant recovery agency. Banks
should ensure that there is a tape recording of the content/text of the
calls made by recovery agents to the customers, and vice-versa. Banks
may take reasonable precaution such as intimating the customer that the
conversation is being recorded, etc.
265
RECOVERY AGENTS
• It is understood that some banks set very stiff recovery targets or offer
high incentives to recovery agents. These have, in turn, induced the
recovery agents to use intimidatory and questionable methods for
recovery of dues. Banks are, therefore, advised to ensure that the
contracts with the recovery agents do not induce adoption of uncivilized,
unlawful and questionable behaviour or recovery process.
• The Reserve Bank has stated that banks are advised to ensure that the
contracts with the recovery agents do not induce adoption of uncivilized,
unlawful and questionable behaviour or recovery process.
• Bank must ensure that agents engaged by them for debt collection
refrain from action/s that could damage the integrity and reputation of
the bank.
• The RBI has also stated Banks are advised to strictly adhere to the
guidelines/code mentioned above during the loan recovery process.
266
RECOVERY AGENTS
• Banks should ensure that, among others, the recovery agents are
properly trained to handle with care and sensitivity, their responsibilities,
in particular aspects like hours of calling, privacy of customer
information, etc.
267
RECOVERY AGENTS
• The Supreme Court (Justices Tarun Chatterjee and Dalveer Bhandari) has
stated that banks cannot deploy musclemen to recover loans from
defaulters, thus forcing them to end their lives. In this case the bank
involved was asked to pay costs.
268
RECOVERY AGENTS
Code of conduct for Direct Sales Agents formulated by the Indian Banks
Association (IBA) could be used by banks in formulating their own codes
for Recovery Agents. Banks should ensure that Recovery Agents are
properly trained to handle with care and sensitivity, their responsibilities
particularly aspects like soliciting customers, hours of calling, privacy of
customer information and conveying the correct terms and conditions of
the products on offer, etc.
The bank and their agents should not resort to intimidation or harassment
of any kind either verbal or physical against any person in their debt
collection efforts, including acts intended to humiliate publicly or intrude
the privacy of the debtors’ family members, referees and friends, making
threatening and anonymous calls or making false and misleading
representations.
• Following the Supreme Court suggestion, the Reserve Bank has stated
that defaults/disputes on personal loans, credit card loans and housing
loans with less than Rs. 10 lakh should be referred to Lok Adalats
organized by Civil Courts for recovery of loans.
269
RECOVERY AGENTS
• It is expected that banks would, in the normal course ensure that their
employees also adhere to the above guidelines during the loan recovery
process.
270
RECOVERY AGENTS
1. Banks should ensure that the agents engaged by them in the recovery
process carry out verification of the antecedents of their employees,
which may include _________, as a matter of abundant caution.
(a) pre-employment police verification
(b) health and fitness tests
(c) both of the above
(d) none of the above
271
RECOVERY AGENTS
4. Banks are advised to strictly adhere to the _________ during the loan
recovery process.
(a) BCSBI Code (b) BCBA Code
(c) CBCC Code (d) All of the above
5. Following the Supreme Court suggestion, the Reserve Bank has stated
that defaults/disputes on personal loans, credit card loans and housing
loans with less than _________ should be referred to Lok Adalats
organized by Civil Courts for recovery of loans.
(a) Rs. 10 lakhs (b) Rs. 40 lakhs
(c) Rs. 70 lakhs (d) Rs. 100 lakhs
272
RECOVERY AGENTS
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273
MUTUAL FUNDS
Chapter28
Mutual Funds
Objectives
Structure
274
MUTUAL FUNDS
• On March 21st, 1924 the first official mutual fund was born when three
Boston securities officers pooled their money together. It was called the
Massachusetts Investors Trust. In one year, the Massachusetts Investors
Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with
around 200 shareholders).
• These investors buy the units of a fund that best suits their needs.
• The fund then invests the pool of money (called a corpus) in securities –
this could be shares, debentures, money market instruments, etc.,
depending on the constitution and objective of the scheme.
275
MUTUAL FUNDS
276
MUTUAL FUNDS
28.5 ADVANTAGES
277
MUTUAL FUNDS
28.6 Disadvantages
• An investor managing his own portfolio can separately sell those shares
that have gone up and buy those whose price has decreased but when he
buys or sells a unit in a mutual fund he, in effect, buys or sells every
share/security in his fund’s portfolio whether he is making a profit or a
loss by trading at that time. Thus individual discrimination is not
available to investors in mutual funds, it is either all or none trading the
fund's portfolio.
• Open-ended schemes;
• Close-ended schemes;
• Equity schemes;
• Income schemes;
• Balanced funds;
• Sector funds;
• Money market funds;
• Gilt funds;
• Bond funds;
• Index Funds.
278
MUTUAL FUNDS
• Open-ended schemes are not listed on the stock exchanges. Units are
purchased and sold directly through the mutual fund.
279
MUTUAL FUNDS
• Balanced funds are funds that invest both in shares and fixed income
securities in the proportion indicated in their offer document. The returns
to investors provided by these schemes are moderate and at a moderate
risk. A typical equity/debt mix in a balanced fund could be 40:60.
280
MUTUAL FUNDS
• An index fund is a fund that has the objective of tracking one of the
popular stock market indices. Thus, the returns on an index fund will
approximate the changes in the index that is used as the base. Of all the
investment options, an index fund is one of the more passive avenues.
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MUTUAL FUNDS
28.18 Price
• When units are purchased in an initial offer, they are priced at par value
─ normally Rs. 10 per unit. A load factor is usually incorporated if it is an
equity fund or the bulk of investments are in equity.
• When units are purchased at a time other than the initial issue, the
purchase price is the Net Asset Value (NAV) plus (wherever applicable) a
front-end load.
8. What are the things that one should take care of before investing in a
Mutual Fund?
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MUTUAL FUNDS
283
MUTUAL FUNDS
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284
DEMATERIALIZATION OF SHARES
Chapter 29
Dematerialization of Shares
Objectives
Structure
29.1 Dematerialization
29.6 Precautions
29.7 Others
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DEMATERIALIZATION OF SHARES
29.1 Dematerialization
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DEMATERIALIZATION OF SHARES
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DEMATERIALIZATION OF SHARES
a. Shares of companies can only be traded if they are dematted. SEBI has
made demat mandatory on most of the traded scrips, and therefore
electronic transaction will be the only way everyone can trade.
g. Shares bought are transferred to the buyer’s name on the very next day
of pay out. In case of physical shares, transfer of ownership takes 30
days or sometimes even more.
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DEMATERIALIZATION OF SHARES
29.6 Precautions
• Holdings in those securities that have not yet been admitted for
dematerialization by NSDL cannot be dematerialized. List of securities
admitted for dematerialization should be verified before defacing the
securities.
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DEMATERIALIZATION OF SHARES
29.7 OTHERS
• SEBI has now stated that only dematerialized shares may be traded/sold
in the stock exchange. Therefore it is incumbent for all shares of listed
companies to be dematted.
3. What is a depository?
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DEMATERIALIZATION OF SHARES
3. A depository is _________.
(a) An organization which buys shares from brokers
(b) An organization where at the request of a shareholder his
securities are held in electronic form through the medium of a
depository participant
(c) An organization for listing your shares on the stock exchange
(d) None of the above
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DEMATERIALIZATION OF SHARES
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292
BANCASSURANCE
Chapter 30
Bancassurance
Objectives
Structure
30.1 Introduction
30.2 Detail
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BANCASSURANCE
30.1 Introduction
30.2 Detail
• The most important reason for banks to offer these products is that their
sale improves their ROI (Return on Investment) as it is non-fund based
fee income. Banks that effectively cross-sell financial products can
leverage their distribution and processing capabilities for profitable
operating expense ratios.
• Also another important factor that banks have over traditional insurance
distributors is the lower cost per sales lead made possible by their sizable
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BANCASSURANCE
customer base. Banks also enjoy significant brand awareness within their
geographic regions. This results in a lower per-lead cost when advertising
through print, radio and/or television.
1. What is Bancassurance?
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BANCASSURANCE
4. The most important reason for banks to offer these products is that
_________.
a. Their sale improves their ROI (Return on Investment) as it is non-
fund based fee income
b. The banks can leverage their distribution and processing capabilities
for profitable operating expense ratios
c. Both of the above
d. None of the above
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BANCASSURANCE
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297
BANK DRAFTS
Chapter 31
Bank Drafts
Objectives
Structure
31.1 Introduction
31.2 Details
298
BANK DRAFTS
31.1 Introduction
31.2 Details
• Drafts of Rs. 50,000 or more must be issued only against another cheque
or by debiting the purchaser’s account.
• A draft should be uniformly valid for three months and procedure for
revalidation after three months should be simplified.
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BANK DRAFTS
• Drafts for small amounts against cash should be issued to all irrespective
of whether the individual has an account or not.
• Bank’s counter staff must not refuse to accept small denomination notes
from customers (or non-customers) for issuance of drafts.
• The purchaser cannot have the draft cancelled after it has been delivered
to the payee.
• A bank cannot ordinarily refuse to pay the amount unless there is some
doubt on the identity of the person presenting the draft.
• Banks may, however, put a ceiling of Rs. 25,000 for payment of drafts
against passport/postal identification.
• If a draft is lost before it is handed over to the payee and is without any
endorsement, the bank can refuse payment. The bank must inform the
drawee branch about the loss.
• Duplicate drafts can be issued if the bank is satisfied that the draft has
been lost//mutilated and a confirmation is received from the drawee
bank that the draft has not been paid. The purchaser should furnish an
indemnity bond before a duplicate draft is issued
• Duplicate draft in lieu of lost draft upto and including Rs. 5,000 may be
issued to the purchaser on the basis of adequate indemnity and without
seeking non-payment advice from drawee office.
• In respect of lost drafts, duplicate drafts for amounts above Rs. 10,000
(in cases where there is no reason to doubt the bonafides of the
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BANK DRAFTS
• For issue of duplicate drafts upto Rs. 10,000 requirement of the relative
non-payment certificate from the other branch is waived. For issue of
duplicate drafts below Rs. 1,000, only indemnity letter will be necessary.
The customer should inform the issuing branch promptly of loss of
demand draft giving full particulars thereof in order to prevent misuse
thereof.
• If after a draft is lost and a duplicate draft is issued and encashed, the
first draft is presented to the bank by a holder in due course, technically
the bank cannot refuse to pay it. This is why bank drafts must always be
crossed account payee only. This is to avoid this possibility. In addition
banks also take an indemnity from the purchaser before issuing a
duplicate draft.
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BANK DRAFTS
1. The relationship between the purchaser of the draft and the banker is
that of _________.
(a) Banker and Customer (b) Creditor and Debtor
(c) Bailor and Bailee
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BANK DRAFTS
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303
PAY ORDERS
Chapter 32
Pay Orders
Objectives
Structure
32.1 Definition
32.2 Details
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PAY ORDERS
32.1 Definition
32.2 Details
• A pay order is like a bank draft but it is issued by the issuing office upon
itself unlike a draft which is payable by another office/branch of the
bank.
• As pay orders are not included in the definition of a bank draft in the
Negotiable Instruments Act, bankers cannot claim protection under
Section 131 of the Act if they make payment of a pay order bearing a
forged endorsement. The bank will also be answerable to the true owner
if the bank collects the pay order for a person who is guilty for its
conversion.
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PAY ORDERS
3. A customer comes into the branch and requests that the bank issues a
payment instrument payable to his landlord who lives in the vicinity. The
bank would issue a _________.
(a) Bank draft (b) Pay order
(c) Cheque (d) Voucher
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PAY ORDERS
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307
TRAVELLER’S CHEQUES
Chapter 33
Traveller’s Cheques
Objectives
Structure
33.1 Introduction
33.2 Details
33.3 Benefits
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TRAVELLER’S CHEQUES
33.1 Introduction
• Sometime between 1888 and 1890, J.C. Fargo took a trip to Europe and
returned frustrated and infuriated. At Paris, despite the fact that he was
President of American Express and that he carried with him traditional
letters of credit, he found it difficult to obtain cash anywhere except in
major cities. In frustration, Mr. Fargo complained to a colleague Marcellus
Flemming Berry and asked him to create a better solution than the
traditional letter of credit. Mr. Berry created the American Express
Traveller’s Cheque which was launched in 1891 in denominations of $10,
$20, $50, and $100.
33.2 Details
• They are for the convenience of travellers and are considered safer than
money since if these are lost the issuing company will issue fresh
travelers cheques on being intimated of the loss.
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TRAVELLER’S CHEQUES
• Travellers’ cheques upto Rs. 50,000 can be purchased in cash. Above this
amount, a person can purchase them only against a cheque/draft or by
debit to his account.
• Travellers’ cheques were once are widely accepted not only at banks but
at shops, hotels and other outlets. However, with the advent of credit
cards and their being used extensively when one travels, travellers’
cheques are seldom purchased by individuals. Additionally, it is often
very difficult to encash them at retail outlets.
• Travellers’ cheques are usually in the form of a pay order drawn by the
issuing organization on itself. They are made payable to the order of a
payee to be named. The payee’s name is left blank at the time of issue of
the cheques and when they are encashed the payee’s name is inserted.
The holder may also enter his own name as payee. In such a situation if
the holder wants to give good title to another he has to endorse it and
hand it over.
• There is no expiry date for travellers cheques and they never go stale.
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TRAVELLER’S CHEQUES
33.3 Benefits
• They are safer than cash. Cash once stolen or lost cannot be replaced.
Traveller’s cheques can be – usually within 24 hours.
• They are easy to use. To encash them all that the purchaser has to do is
sign the cheque at the time of encashment.
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TRAVELLER’S CHEQUES
312
TRAVELLER’S CHEQUES
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313
CLEARING
Chapter 34
Clearing
Objectives
The chapter explains how cheques were cleared earlier before the
introduction of the Cheque Truncation System (CTS) which is now the
manner cheques are cleared. CTS is explained in the next chapter. The
manner of clearing is still relevant in smaller cities where CTS is yet to be
introduced.
Structure
34.1 Introduction
34.2 Clearing-House
34.3 Clearing in India
34.4 Types of Clearing
34.5 Time Taken for Clearing
34.6 Time Lag
34.7 Settlement
34.8 Other Functions of the Clearing House
34.9 Inter Branch Clearing
34.10 Counter Return
34.11 Cheque Purchase
34.12 Purchase of Local Cheques, Drafts, etc. during Suspension of
Clearing
34.13 Cheques Lost in Transit/in Clearing Process
34.14 Dishonour of Cheques
34.15 Magnetic Ink Character Recognition
34.16 Self Assessment Questions
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CLEARING
34.1 Introduction
34.2 Clearing-House
• The Reserve Bank of India when constituted in 1935 took over the
clearing-house function.
• In those cities that the Reserve Bank has a presence, the Reserve Bank
manages the clearing-house.
• In other cities and towns the State Bank of India and its associates
manage clearing. In some locations a public sector bank (where the
State Bank and its associates do not have a dominant presence)
manages clearing.
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CLEARING
❖ All banks including state co-operative banks and general post offices
are eligible to become members of the clearing-house.
❖ In India the clearing system is local and restricted to all the banks and
branches situated in the area under a particular zone.
These are the instruments that are deposited by customers for collection.
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CLEARING
• Outward clearing.
• Inward clearing.
Outward Clearing
• Branches normally collect all the local cheques and other instruments
deposited by customers and after ensuring they have all the relevant
details send them to their service branch. The service branch then
presents these at the clearing-house. Cheques deposited at a bank
branch counters/in collection box within the branch premises before the
specified cut-off time will be presented for clearing on the same day.
Those deposited after the cut-off time will be presented in the next
clearing cycle.
❖ Others hand over the instruments to a large bank that has branches in
multiple locations for collection.
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CLEARING
❖ If there are delays banks are expected to pay interest for the period of
delay at the rate stated in the Bank’s policy or at the rate applicable for
a fixed deposit for the period of delay beyond the stipulated days. If
the delay is abnormal then penal interest at the rate of 2% above the
fixed deposit rate has to also be paid. This has also been held by the
National Consumer Disputes Redressal Commission in 2008.
• There is often considerable delay in the payment transaction both for the
recipient of the funds as well as the banks involved.
• With regard to cheques payable in foreign countries, the bank may send
it to its branch in that country or if it does not have a branch, to its
correspondent in that country. If it does not have a branch/
correspondent in the country, the cheque would be sent to the bank
directly with a request that the proceeds be credited to a nostro account
it maintains with a correspondent bank. Payment is usually released after
21 working days from the value date and the rate used would be the rate
applicable on the date of credit to the customer’s account.
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CLEARING
Inward Clearing
• The service branch will collect cheques drawn on the bank and the
cheques would then be checked for completeness – signature, whether
there is adequate balance, date and the likes.
Return Clearing
• Bank’s must develop a policy (in line with IBA’s deposit policy) on the
following that includes instructions on:
• The policy should clearly lay down liability of bank for interest payments
for non-compliance with standards set down by banks,
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CLEARING
320
CLEARING
• For local cheques credit and debit should be given on the same day or at
most the next day of their presentation for clearing.
• In the interest of the customer the Reserve Bank had directed that banks
should give immediate credit for all outstation instruments upto Rs.
15,000 to individuals who are maintaining satisfactory accounts.
Customers would have to bear service and postal charges. If a customer
deposits two outstation cheques below Rs. 15,000, he may draw only
upto Rs. 15,000. The bank’s exposure is thus limited to Rs. 15,000. In
the event of the cheque being returned unpaid, the customer would have
to pay interest for the period the funds were utilized. This is applicable
only where there is no speed clearing. Satisfactory in this connection is
an account opened atleast six months earlier complying with KYC norms
conducted satisfactorily, no irregular dealings and no cheques for
immediate credit which have been returned unpaid. However, to an
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CLEARING
• The total clearing cycle including the return clearing introduces a time lag
in the payments process. The need for physical presentment of the
cheque at the branch where it is drawn on requires the movement of
cheques from one place to another. As a result, the recipient of payment
has to wait until the collecting banker is fully satisfied that the cheque
has been paid.
• This time lag will exist as long as the physical presentment of the cheque
is necessary.
34.7 Settlement
• The account the bank maintains with the Reserve Bank of India is then
either credited or debited (depending on whether monies are due to the
bank or due from it).
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CLEARING
❖ Settlements of claims;
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CLEARING
• Cheques drawn on different branches of the same bank need not be sent
to the clearing-house.
• The service branch acts as the settlement branch for the branches.
• There are times, when banks are unable, because of the volume of
transactions to return the cheque received in inward clearing (from
another bank). Technically, if the cheque is not returned, it means that
the cheque is honored.
• If the cheque is not returned and the client does not have enough funds,
the bank can take it to the collecting bank and return it at their counters.
If the bank has not released money on the assumption that the cheque
had been honoured, the collecting bank will issue a draft to the bank (as
the collecting bank would have been paid) for the value of the cheque
returned at its counter.
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CLEARING
• The bank must immediately bring this to the notice of the account holder
so that the account holder can inform the drawer to record stop payment
and take care that other cheques issued by him are not dishonoured due
to non credit of the amount of the lost cheques instruments.
• The onus of the loss lies with the collecting banker and not the account
holder.
• The bank should reimburse the account holder for expenses incurred in
obtaining duplicate instruments and also interest for reasonable delays.
• If the cheque has been lost at the paying bank’s branch, the collecting
banker should have a right to recover the amount reimbursed to the
customer for the loss of the cheque/instrument from the paying banker.
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CLEARING
• Banks should also have a Board approved policy with regard to frequent
dishonour of smaller cheques.
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CLEARING
• Cheques to facilitate clearing, have critical data such as the location, city,
amount and type of transaction printed with a special ink which can
recognize characters. This is by the imbedding of metal in the ink.
• Until then all cheques deposited were separated into banks and then
machine totaled to determine the amount due from a bank. This then
had to be agreed to the amount actually credited to deposit accounts.
There were many errors and considerable time was spent in reconciling
figures.
a. The cheques are printed by approved printers. Not all printers are
permitted.
b. The MICR has a distinct code structure:
• The code line is divided into five fields with distinct separations.
• The first six numeric digits (numbers) is the cheque serial number.
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CLEARING
• In the next band there are nine numbers. These are as follows:
c. The next three numbers represent the branch (each branch has
a distinct number).
• When a new bank opens, it may not have the volume to be admitted as a
member of the clearing-house. In these cases, it becomes a sub member.
These banks would have the code number of the sponsoring bank
followed by the branch code.
• The next six numeric digits are optional. Some banks write the account
number. On others these represent the customer identification number).
In regard to Government cheques issued by the RBI alone these are
seven digits. Government accounts are 10 digits in length – 7 digits
occurring in the account number field and 3 in the transaction code field.
• The transaction code field comprises of two digits (except for government
cheques which have three).
• The last field represents the amount field and consists of 13 digits. The
amount is encoded in paise without the decimal point.
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CLEARING
560 Bangalore
700 Kolkata
600 Chennai
682 Kochi
400 Mumbai
110 New Delhi
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CLEARING
330
CLEARING
IFSC Code
• Indian Financial System Code (IFSC) is the addressing code in the user-
to-user message transmission and is used in RTGS (Real Time Gross
Settlement) and others for routing purposes. Banks have been asked to
allot IFSC to all their branches. The IFSC of the branch is to be printed
just above the MICR band on the cheques preferably above the serial
number of the cheque.
• The great benefit is that this code helps focus on the branch.
Cheques Deposited
• The amount of the cheque is coded onto the cheque in the area
designated (the last field).
• The cheques are then put through a reader/sorter that lists amounts,
differentiates between banks and reads all the other fields and prepares
a listing that details the number of cheques, the banks they relate to and
the amount.
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CLEARING
1. Define Clearing.
2. What is a Clearing house?
3. What are the instruments that can be presented at a Clearing house?
4. What are the different types of Clearing? Explain them in brief.
5. What is the normal time taken for Clearing?
6. What are the functions of a Clearing house?
7. What is MICR?
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CLEARING
333
CLEARING
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334
TRUNCATED CHEQUE CLEARANCE
Chapter 35
Truncated Cheque Clearance
Objectives
The chapter will explain how cheques are Truncated and Cheques are
cleared.
Structure
35.1 Introduction
35.2 Cheque Truncation
35.3 Why Cheque Truncation in India
35.4 Introduction of Truncation in India
35.5 Eligibility
35.6 How the Quality of the Images will be Ensured?
35.7 How the Image and Data Trasmitted over the Network is Secured?
35.8 What Type of Cheque can be Presented in the CTS?
35.9 What are the Precautions Required to be taken by the Bank Customer
to Avoid Frauds?
35.10 Change in the Process for the Customers
35.11 How Does it Work?
35.12 Benefits
35.13 Other Important Information
35.14 Risks in Cheque Truncation
35.15 Legal Issues
35.16 Key Challenges
35.17 Options Available to the Customer to see Physical Cheques
35.18 Self Assessment Questions
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TRUNCATED CHEQUE CLEARANCE
35.1 Introduction
• The cheque is currently the most visible and significant mode of payment
in India. In view of the importance of cheque to the retail segment,
Magnetic Ink Character Recognition (MICR) technology was introduced by
the Reserve Bank of India. MICR technology enabled the banking system
to handle the growth in the cheque volumes and to provide faster and
efficient clearing services to customers and to do straight through
processing using MICR data. Over a period of two decades, a number of
MICR clearing-houses have evolved.
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TRUNCATED CHEQUE CLEARANCE
337
TRUNCATED CHEQUE CLEARANCE
338
TRUNCATED CHEQUE CLEARANCE
35.5 Eligibility
In respect of banks who are not members of the INFINET, the following
alternatives are available:
b. Such banks may use the infrastructure of the other banks having
INFINET membership without being the INFINET members
themselves and there clearing settlement can be done either directly
or through the member through whom they are participating.
339
TRUNCATED CHEQUE CLEARANCE
• Triple DES (3DES, TDES) symmetric encryption with 168 bit key length
340
TRUNCATED CHEQUE CLEARANCE
All the local cheques can be presented in the CTS. Banks may also present
cheques on banks situated outside the NCR, but such banks have branches
in the NCR region. The CTS also supports the intercity clearing and
specialized clearing like high value clearing, etc. The on-us instruments
where both presenting and drawee banks are same are not allowed in the
CTS. Images of such instruments would be stopped at the Clearing House
Interface itself.
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TRUNCATED CHEQUE CLEARANCE
Bank customers should use image friendly cheques. They should preferably
use dark coloured ink while drawing the instruments. Care should be
exercised in the use of rubber stamp, so that it could not interfere with the
material portions of the cheque. The date of the cheque, payees name,
amount and signature are the basic features which are essential in a
cheque. The use of rubber stamps, etc. should not overshadow the clear
appearance of these basic features in image. In order to ensure that all
essential elements of a cheque are captured in an image during the
scanning process, bank customers have to exercise appropriate care in this
regard.
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TRUNCATED CHEQUE CLEARANCE
• Only 2 legs will be imaged. The return leg is kept out. Physical cheques
will remain at the branch.
• In the pilot cheque truncation project the current paper based clearing
will be replaced by image and data clearing for outward and inward and
only data for return item processing. Cheque data and images will be
stored in image archives for outward and inward items.
• The archive at the clearing-house will retain all the clearing images and
data for eight years. The paper instruments are required to be retained
for eight years till further instructions on the subject are evolved.
• The size and the configurations of the systems to be used for outward
and inward processing is a function of the banks’ business requirements
and is to be worked out by the banks based on the volume of inward and
outward instruments of the bank, the period of retention of such inward
and outward images and MICR data by the bank and size of the images
of the cheques. The exact size of the three prescribed images of each
image may vary according to the source instrument of the different
banks. However, for the purpose of sizing, banks could choose
conservatively 75 (seventy-five) KB as the size of the three prescribed
images along with the digital signature. The point of truncation and the
retention period shall have a bearing on the storage requirements and
banks need to suitably work out the storage requirements of their
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TRUNCATED CHEQUE CLEARANCE
The image quality of the grey scale will be 8 bits/pixel (256 levels)
• The drawee can ask for physical instrument if the image quality is not
good enough for payment processing.
• The Reserve Bank will provide only the Clearing-House Interface (CHI)
application software to the member banks. The member banks have to
purchase (i) appropriate hardware, (ii) systems software and (iii)
networking infrastructure. The CHI will act as a gateway for outward and
inward MICR data and the images of the instruments to be sent to/
received from the clearing-house over the network/media. The clearing-
house interface is a windows based software with embedded oracle
relational database to be loaded on the gateway server. The gateway
shall be deployed using the public key infrastructure for all its
communication with the clearing-house. The clearing-house interface
shall aggregate the images and MICR data received from the branches
for outward presentation and will deliver the inward images and MICR
data drawee bank branch-wise to the respective clearing-house
interfaces. The images have to pass the required Image Quality
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TRUNCATED CHEQUE CLEARANCE
❖ The background color should be light to enhance the text and dark
colors in the background may be avoided.
❖ High availability.
❖ Must meet the clearing window and recovery procedures with the CHI.
❖ Images and data to meet the IQA/IQU and security and other
specifications from RBI.
❖ Provide web-interfaces at the branches for marking returns and
printing of images.
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TRUNCATED CHEQUE CLEARANCE
❖ Track and monitor the sending and receiving of the items from the
various points of truncation.
35.12 Benefits
• The main advantage is reducing the delay, high costs and risk of fraud
inherent in the paper based clearing system.
• Faster clearing cycle. Bank customers would get their cheques realized
faster as T (transaction) +0 local clearing and T + 1 inter-city clearing is
possible in cheque truncation system (CTS). As straight through
processing and automated payment processing are enabled by CTS faster
realization is accompanied by a reduction in costs for the customers and
the banks. It is also possible for banks to offer innovative products and
services based on CTS. The banks have additional advantage of reduced
reconciliation and clearing frauds.
• Elimination of float.
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TRUNCATED CHEQUE CLEARANCE
• If the payment has been made on an altered cheque and the alteration is
not apparent, payment is deemed to have been made in due course.
Where the cheque is an electronic image of a truncated cheque, any
difference in tenor of such electronic image and the truncated cheque
shall be a material alteration. The bank or clearing-house must ensure
the exactness of the apparent tenor of the electronic image of the
truncated cheque while truncating and transmitting the message. A bank
or clearing-house receiving a transmitted electronic image of a truncated
cheque shall verify from the transmitting party that the image is exactly
the same.
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TRUNCATED CHEQUE CLEARANCE
• The introduction of the truncation process will change the roles and the
responsibilities of the various participants in the truncation process and
may lead to introduction of certain risks that will have to be mitigated.
These are documented below:
❖ The clearing-house will have to assume that the data given by the
banks is the data meant for that day’s clearing and will have to arrive
at the settlement based on this assumption. If the MICR data given by
the bank is not matching with the day’s image the bank has sent for
collection, it may lead to erroneous settlement and large returns.
• The drawee bank has to verify the signature on the image of a cheque. If
a drawee bank chooses to verify signatures on the images of cheques
above a cut-off amount only, then it runs the risk of paying some forged
instruments.
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TRUNCATED CHEQUE CLEARANCE
• Protests have to be lodged per the timings of the existing return cycle.
• Cheque volumes will continue to increase for the next 5-7 years. The
need to ensure speedy clearance of these cheques would be a challenge.
Move to cheque truncation will ease this concern.
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TRUNCATED CHEQUE CLEARANCE
• With RTGS and cheque truncation, banks will potentially lose large
income leverage.
• Loss of float.
2. What is Truncation?
4. How long do the archives at the clearing-house retain all the clearing
images and data?
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TRUNCATED CHEQUE CLEARANCE
351
TRUNCATED CHEQUE CLEARANCE
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352
ELECTRONIC CLEARING SERVICE
Chapter 36
Electronic Clearing Service
Objectives
Structure
36.1 Introduction
36.3 Advantages
36.8 Concern
36.10 General
353
ELECTRONIC CLEARING SERVICE
36.1 Introduction
• The system works on the basis of one debit transaction triggering a large
number of credit entries.
354
ELECTRONIC CLEARING SERVICE
• Electronic clearing has been facilitated by MICR and the fact that several
companies issue cheques that are payable at par at many locations (such
as dividend cheques).
• ECS credit can only be given to customers who have accounts in banks
that participate in this form of settlement.
• The magnetic tape/floppy is the basis for the sponsor bank to debit the
user's account and the destination banks to credit the destination
account holder's accounts.
36.3 Advantages
• Effortless receipt. There is no need for visiting the bank to deposit the
dividend/interest warrant.
355
ELECTRONIC CLEARING SERVICE
• Under the existing system for collection of electricity bills and telephone
bills, customers/subscribers are required to go to the collection centres/
designated banks and stand in long queues for payment of bills/dues.
There would not be any cash transaction or payment through cheques in
the new system.
356
ELECTRONIC CLEARING SERVICE
• After due validation of the data, the local clearing house processes the
same and arrives at the inter-bank settlement. It also generates bank-
wise/branch-wise reports (hard copies).
• NCC debits the destination banks’ accounts with clearing house and
simultaneously affords a consolidated credit to the sponsor bank’s
account and furnishes the bank-wise and branch-wise reports to the
service branches of destination banks.
357
ELECTRONIC CLEARING SERVICE
• Automatic debiting to the accounts once the mandates are given by the
customers. This cuts down procedural delay.
358
ELECTRONIC CLEARING SERVICE
36.8 Concern
36.10 General
• RBI has stated that from August 1, 2008, all payments of Rs. 10 lakhs
and above between RBI regulated entities (banks, primary dealers and
NBFCs) and RBI regulated markets (money market, government
securities market and foreign exchange market) should be routed
through the electronic payment mechanism such as RTGS, NEFT and
ECS.
359
ELECTRONIC CLEARING SERVICE
4. Under ECS inward, the maximum value of an item should not exceed
__________.
(a) Rs. 25,000 in a day
(b) Rs. 50,000 in a day
(c) Rs. 100,000 in a day
(d) Rs. 250,000 in a day
360
ELECTRONIC CLEARING SERVICE
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361
NATIONAL ELECTRONIC CLEARING SERVICE
Chapter 37
National Electronic Clearing Service
Objectives
Structure
37.1 Introduction
362
NATIONAL ELECTRONIC CLEARING SERVICE
37.1 Introduction
363
NATIONAL ELECTRONIC CLEARING SERVICE
• The Clearing House (CH) is responsible for processing the input data
submitted by the Sponsor Bank on behalf of its User and supply of
relevant clearing details to the Sponsor Bank, Destination Banks and
Settlement Agency for accounting of the Clearing Settlements.
• CH has a Steering Committee comprising not more than 10 and not less
than 5 member banks to aid and advise it on operational issues. The
Committee is constituted by the CH and its term shall be one year. The
Committee meets at least once in a half-year.
364
NATIONAL ELECTRONIC CLEARING SERVICE
• On Day-0 CH would generate the output data files for the Destination
banks. The description and the record lay out of the output file.
• The output data and the report file, as indicated above, would be made
available to the Destination Bank through web-server.
365
NATIONAL ELECTRONIC CLEARING SERVICE
366
NATIONAL ELECTRONIC CLEARING SERVICE
367
NATIONAL ELECTRONIC CLEARING SERVICE
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368
SPEED CLEARING
Chapter 38
Speed Clearing
Objectives
Structure
38.4 Charges
369
SPEED CLEARING
Speed Clearing aims to reduce the time taken (7/10/14 days for
Metropolitan centres/state capitals/other locations) for realization of
outstation cheques.
• Government cheques and demand drafts are not eligible for collection
under speed clearing.
370
SPEED CLEARING
• Speed Clearing facilitates the clearing of such cheques locally without the
need to move the cheques to the Drawee centre.
38.4 Charges
371
SPEED CLEARING
372
SPEED CLEARING
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373
ASIAN CLEARING UNION
Chapter 39
Asian Clearing Union
Objectives
Structure
39.1 Introduction
39.2 Operation
374
ASIAN CLEARING UNION
39.1 Introduction
• The Asian Clearing Union (ACU) was established with its head quarters at
Tehran, Iran on December 9, 1974 at the initiative of the United Nations
Economic and Social Commission for Asia and Pacific (ESCAP), as a step
towards securing regional co-operation.
• The ACU is a system for clearing payments among the member countries
on a multilateral basis.
• Authorized dealers can open ACU Dollar Accounts in the names of all
banks, in all member countries, including Pakistan, without the prior
approval of Reserve Bank of India.
375
ASIAN CLEARING UNION
39.2 Operation
• The Asian Monetary Unit is the common unit of account of ACU and is
equivalent in value to one U.S. dollar. The Asian Monetary Unit may also
be denominated as ACU dollar.
376
ASIAN CLEARING UNION
• Reserve Bank of India undertakes to receive and pay U.S. dollars from/to
authorised dealer for the purpose of funding or for repatriating the
excess liquidity in the ACU dollar accounts maintained by the authorised
dealer with their correspondents in the other participating countries.
Similarly, the Reserve Bank of India has also been receiving and
delivering U.S. dollar amounts for absorbing liquidity or for funding the
ACU dollar (vostro) accounts maintained by the authorised dealers on
behalf of their overseas correspondents.
• Transactions that are eligible to be made through the ACU are payments:
377
ASIAN CLEARING UNION
• Payments between Nepal & India and Bhutan & India, exception being
made in the case of goods imported from India by an importer resident
in Nepal who has been permitted by the Nepal Rashtra Bank to make
payments in foreign exchange. Such payments may be settled through
the ACU mechanism;
2. What is the common unit of account of ACU and what is it equivalent to?
378
ASIAN CLEARING UNION
379
ASIAN CLEARING UNION
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380
STANDING INSTRUCTIONS
Chapter40
Standing Instructions
Objectives
Structure
40.1 Introduction
40.2 Details
381
STANDING INSTRUCTIONS
40.1 Introduction
40.2 Details
• The customer can, at any time, instruct the bank, to stop payment.
• The bank is not bound to make payment if the customer does not have
an adequate balance. The assumption is that the payment will be made
provided the customer keeps the account adequately funded.
• RBI has stated that standing instructions should be freely accepted on all
current and savings bank accounts.
• The RBI has also stated that the scope should be enlarged to include
payments on account of taxes, school/college fees, licenses, etc.
382
STANDING INSTRUCTIONS
3. Is the bank liable for loss sustained by the customer for non-compliance
to the customer’s instructions?
1. Nikhila wants the bank to pay her rent of Rs. 20,000 per month to her
landlord. She will issue a _________.
(a) Monthly
(b) Quarterly
(c) Daily
(d) Half-yearly
(e) Annually
(f) All of the above
(a) True
(b) False
383
STANDING INSTRUCTIONS
(a) Yes
(b) No
384
STANDING INSTRUCTIONS
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385
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
Chapter 41
Mail and Wire/Telegraphic Transfers
Objectives
Structure
386
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
• The remitter deposits the amount with a bank and gives the name and
address or account number of the payee to whom the money is to be
paid.
• The receiving bank or branch sends an advice to the payee asking him to
collect the amount either through a bank or directly by establishing his
identity.
• Mail transfers are used for both internal and international remittances.
387
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
• Cross-border transfer means any wire transfer where the originator and
the beneficiary bank or financial institutions are located in different
countries. It may include any chain of wire transfers that has at least one
cross-border element.
• Domestic wire transfer means any wire transfer where the originator and
receiver are located in the same country. It may also include a chain of
wire transfers that takes place entirely within the borders of a single
country even though the system used to effect the wire transfer may be
located in another country.
388
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
(iii) Exemptions
389
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
• An ordering bank is the one that originates a wire transfer as per the
order placed by its customer. The ordering bank must ensure that
qualifying wire transfers contain complete originator information. The
bank must also verify and preserve the information at least for a period
of ten years.
390
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
(a) Payment cannot be stopped once the mail transfer advice has
been despatched by the issuing branch
(b) Payment can be stopped any time before the beneficiary actually
withdraws the money from his account
(c) Payment can be stopped provided it is not credited to the
payee’s account
(d) None of these
391
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
(a) The beneficiary must have an account with the paying branch
(b) The remitter must have an account at the remitting branch
(c) The remitter as also the beneficiary must have account in the
bank
(d) The remitter and the beneficiary need not necessarily have
accounts in the bank
392
MAIL AND WIRE/TELEGRAPHIC TRANSFERS
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393
MONEY TRANSFER SERVICE SCHEME
Chapter 42
Money Transfer Service Scheme
Objectives
This chapter will explain how Money Transfer Service Scheme works.
Structure
42.1 Introduction
42.8 Training
394
MONEY TRANSFER SERVICE SCHEME
42.1 Introduction
b. The applicant should have minimum Net Owned Funds of Rs. 50 lakh.
395
MONEY TRANSFER SERVICE SCHEME
b. A cap of US$ 2,500 has been placed on individual remittance under the
scheme. Amounts up to Rs. 50,000/- may be paid in cash to a
beneficiary in India. Any amount exceeding this limit shall be paid by
means of account payee cheque/demand draft/payment order, etc., or
credited directly to the beneficiary's bank account only. However, in
exceptional circumstances, where the beneficiary is a foreign tourist,
higher amounts may be disbursed in cash.
396
MONEY TRANSFER SERVICE SCHEME
The Overseas Principle should have a good rating from one of the
international credit rating agencies.
Indian Agents can enter into Sub Agency agreements with entities, fulfilling
certain conditions, for the purpose of undertaking money transfer business.
Sub Agents
A Sub Agent should have a place of business, and whose bonafides are
acceptable to the Indian Agent. Indian Agents are free to decide on the
tenor of the arrangement as also the commission or fee through mutual
agreement with the Sub Agent. The audit and on-site inspection of
premises and records of the Sub Agent by the Indian Agent to be
conducted at least once in a month and in a year respectively.
The Indian Agents and the Overseas Principles should undertake the
following minimum checks while conducting due diligence of the Sub
Agents, other than ADs Cat-I, ADs Cat-II, Scheduled Commercial Banks,
FFMCs and the Department of Posts.
397
MONEY TRANSFER SERVICE SCHEME
• Conduct certificate of the Sub Agent from the local police authorities.
(certified copy of Memorandum and Articles of Association and Certificate
of Incorporation in respect of incorporated entities).
The Indian Agents are free to select centers for operationalising the
Scheme. However, this may be advised to the Reserve Bank.
42.8 Training
The Indian Agents would be expected to impart training to the Sub Agents
as regards operations and maintenance of records.
398
MONEY TRANSFER SERVICE SCHEME
(a) quick and easy way of transferring bank remittances from abroad to
beneficiaries in India
(b) quick and easy way of transferring personal remittances from
abroad to beneficiaries in India
(c) Is a quick and easy way of transferring personal remittances from
India to beneficiaries abroad
(a) Foreign
(b) Inward
(c) Outward
399
MONEY TRANSFER SERVICE SCHEME
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400
REAL TIME GROSS SETTLEMENT
Chapter 43
Real Time Gross Settlement
Objectives
This chapter will explain how Real Time Gross Settlement works.
Structure
43.1 Introduction
43.3 Checks
43.4 Advantages
43.9 General
401
REAL TIME GROSS SETTLEMENT
43.1 Introduction
• As money transfer takes place in the books of the RBI, payment is final
and irrevocable.
• This is the fastest possible money transfer system through the banking
channel.
• If the money is not credited for any reason, it has to be returned in two
hours to the remitting bank.
• RTGS is for large value transactions. The minimum amount is Rs. 1 lakh.
There is no maximum limit.
402
REAL TIME GROSS SETTLEMENT
❖ Credit risk. Since final funds transfer takes place in real time, the
payment leg (final transfer of funds) can be coordinated with the
delivery leg (final transfer of assets) such that one takes place only if
the other also takes place. This ensures that the system is safeguarded
against credit risk and is very beneficial in securities and foreign
exchange transaction settlements.
• The main essence of RTGS system is its deviation from the erstwhile net
settlement system where transmission, processing is done for a set of
transactions (cheque clearing, Electronic funds transfer or sale/purchase
of securities, call lending/ borrowing etc.) at a particular point of time
403
REAL TIME GROSS SETTLEMENT
• In Real Time Gross Settlement system (RTGS), both processing and final
settlement of funds transfer instruction takes place simultaneously and
continuously.
• The RTGS solution provides for a separate transaction type which can be
used to transmit the customer information along with the payment
message to the beneficiary's bank in a structured format.
404
REAL TIME GROSS SETTLEMENT
❖ Amount to be remitted;
❖ Account to be debited;
❖ Name of the beneficiary bank and account number;
❖ Name of beneficiary customer and account number;
❖ Sender to receiver information;.
❖ – IFSC code of receiving branch.
• Remitting bank will get a message from RBI that money has been
credited. Based on this remitting bank can advise customer that money
has been delivered.
• The RBI has stated that banks should open windows commensurate to
RBI business sessions.
• The RBI has urged banks to make its entire branch network RTGS
enabled.
405
REAL TIME GROSS SETTLEMENT
• RBI has stated that banks should give SMS alerts on fund transfers
(debit/credit).
• From August 1, 2008, all payments of Rs. 10 lakhs and above between
RBI regulated entities (banks, primary dealers and NBFCs) and RBI
regulated markets (money market, government securities market and
foreign exchange market) are to be routed through the electronic
payment mechanism such as RTGS, NEFT and ECS.
43.3 Checks
43.4 Advantages
406
REAL TIME GROSS SETTLEMENT
• RTGS will reduce the systemic risk that exists in the present settlement
systems like cascading affect on banks due to failure of one bank to meet
its settlement commitments.
• Customers can get new banking services based on reliable high value
funds transfer system.
• All scheduled banks, including scheduled co-op. banks and local area
banks.
407
REAL TIME GROSS SETTLEMENT
• Clearing organizations.
• Each member will have net settlement interface software from RBI.
• Special institutions.
408
REAL TIME GROSS SETTLEMENT
• Normally by the End Of the Day (EOD), this support should be liquidated
and made nil.
• If any member fails to repay the IDL by day end, the securities against
which such IDL has been availed of will get transferred to the RBI’s
investment account, i.e., the current account the participant holds under
the present system at deposit account department, RBI, Mumbai.
• On the next working day, the member will have to repurchase the
securities from the RBI’s investment account, before the RTGS start of
the day.
• The member will not be supported for IDL till the repurchase.
• If the member does not repurchase the above securities within the
stipulated period of time, it will be seriously viewed by RBI.
• Additionally, the member will also be liable for suspension from RTGS
membership.
Transaction Types
409
REAL TIME GROSS SETTLEMENT
1. Under RTGS, the debit is initiated first and there is no instrument like
cheque, DD, or banker’s cheque as in the case of high value clearing.
7. In the outgoing the sender is able to get details of the total messages
sent and messages pending for authorization in the queue.
410
REAL TIME GROSS SETTLEMENT
43.9 General
A bank customer receiving RTGS credit must be provided with the name of
the remitter in his accounts statement/pass book.
Important Terminologies
PI Participant interface
411
REAL TIME GROSS SETTLEMENT
comments from the members of public on the need for making the
payment transactions of Rs. 1 crore and above between Reserve Bank
regulated entities through electronic payment systems mandatory. The
comments received from the stake holders were examined. As the proposal
has been found to be generally acceptable, it has been decided that large
value payments of Rs. 10 lakhs and above be mandatorily routed through
electronic payment mechanism with time frame.
3. What is the minimum and maximum value for Real Time Gross
Settlements?
412
REAL TIME GROSS SETTLEMENT
413
REAL TIME GROSS SETTLEMENT
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414
ELECTRONIC FUNDS TRANSFER
Chapter 44
Electronic Funds Transfer
Objectives
Structure
44.1 Introduction
44.4 Limit
415
ELECTRONIC FUNDS TRANSFER
44.1 Introduction
Step 1: The remitter fills in the EFT application form giving the particulars
of the beneficiary (city, bank, branch, beneficiary’s name, account type and
account number) and authorizes the branch to remit a specified amount to
the beneficiary by raising a debit to the remitter’s account.
Step 2: The remitting branch prepares a schedule and sends the duplicate
of the EFT application form to its service branch for EFT data preparation.
If the branch is equipped with a computer system, data preparation can be
done at the branch level in the specified format.
416
ELECTRONIC FUNDS TRANSFER
Step 3: The service branch prepares the EFT data file by using a software
package supplied by RBI and transmits the same to the local RBI (national
clearing cell) to be included for the settlement of 12 noon, 2 pm and 4 pm.
Step 4: The RBI at the remitting centre consolidates the files received
from all banks, sorts the transactions city-wise and prepares vouchers for
debiting the remitting banks on Day-1 itself. City-wise files are transmitted
to the RBI offices at the respective destination centres.
Step 5: RBI at the destination centre receives the files from the originating
centres, consolidates them and sorts them bank-wise. Thereafter, bank-
wise remittance data files are transmitted to banks on day Day-1 itself.
Bank-wise vouchers are prepared for crediting the receiving banks’
accounts the same day or next day.
Step 6: On Day 1/2 morning the receiving banks at the destination centres
process the remittance files transmitted by RBI and forward credit reports
to the destination branches for crediting the beneficiaries’ accounts.
The primary modes of funds transfer at present are demand draft, mail
transfer and telegraphic transfer. The demand draft facility is paper based.
The remitter, after purchasing demand draft from a bank branch,
dispatches it by post/courier to the beneficiary. The beneficiary, in turn,
lodges the draft in his/her bank for collection and clearing. The time taken
for completing the process is about 10 days. In the case of telegraphic
transfer, funds reach the beneficiary either on the same day or the next;
but both the remitter and the beneficiary would have to be account holders
of the same bank. If they are customers of different banks, a good deal of
paper processing is required.
On the other hand, RBI EFT system is an inter-bank oriented system. RBI
acts as an intermediary between the remitting bank and the receiving bank
and effects inter-bank funds transfer. The customers of banks can request
their respective branches to remit funds to the designated customers
irrespective of bank affiliation of the beneficiary.
417
ELECTRONIC FUNDS TRANSFER
44.4 Limit
418
ELECTRONIC FUNDS TRANSFER
• Reconciliation is automatic.
• Banks can make use of the EFT infrastructure for introducing new
payment/cash management products to their customers.
2. What are the advantages of EFT over other forms of money transfer
offered by banks?
3. Iyer goes into his bank in Patna at 1.00 PM on Monday and asks for an
EFT to be made to his brother in Chennai. His brother will receive the
money on _________.
(a) Monday (b) Tuesday
(c) Wednesday (d) Thursday
419
ELECTRONIC FUNDS TRANSFER
4. The earliest the beneficiary can get funds under EFT is _________.
(a) Next day
(b) Same day
(c) After two days
420
ELECTRONIC FUNDS TRANSFER
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421
NATIONAL ELECTRONIC FUNDS TRANSFER
Chapter 45
National Electronic Funds Transfer
Objectives
This chapter discusses National Electronic Funds Transfer (NEFT) and what
it entails.
Structure
45.1 Introduction
45.3 Operation
45.4 General
422
NATIONAL ELECTRONIC FUNDS TRANSFER
45.1 Introduction
• The beneficiary gets credit the same day or the next day depending on
the time of settlement.
• Walk in customers who do not have a bank account can also deposit cash
and transfer funds to a beneficiary. For this a separate transaction code
(50) has been allotted.
423
NATIONAL ELECTRONIC FUNDS TRANSFER
45.3 Operation
• The remitter fills in the NEFT form giving the relevant details. This
includes the beneficiary details such as the beneficiary name & account
number and the name & IFSC of the beneficiary bank branch.
• The service centre forwards the SFMS to the local RBI to be included in
the next settlement. There are 126 settlements on weekdays and 63 on
Saturdays. Timings are 8.00 AM, 8.30 AM, 9.00 AM, 9.30 AM, 10.00 AM,
10.30 AM, 11.00 AM, 11.30 AM, 12.00 PM, 12.30 PM, noon, 1.00 PM,
1.30 PM, 2.00 PM, 2.30 PM, 3.00 P.M, 3.30 PM, 4.00 PM, 4.30 PM, 5.00
PM, 5.30 PM, 6.00 PM, 6.30 PM, 7.00 PM on weekdays and 8.00 AM, 8.30
AM, 9.00 AM, 9.30 AM, 10.00 AM, 10.30 AM, 11.00 AM, 11.30 AM, 12.00
PM, 12.30 PM, 1.00 PM and noon on Saturdays.
• The beneficiary can expect to get credit on the first 4 batches on week
days and first two batches on Saturdays. For transactions settled in the
last two batches on week days and the last batch on Saturdays
beneficiaries can expect to get credit either on the same day or on the
next working day morning (depending on the type of facility enjoyed by
the beneficiary with his bank).
• The RBI at the clearing centre sorts the SFMS bankwise and prepares
accounting entries for net credit/ net debit for passing onto the banks.
After this bankwise remittance messages are transmitted to banks.
• The receiving bank processes the remittance messages received from the
RBI and effects the credit to the beneficiary’s account.
424
NATIONAL ELECTRONIC FUNDS TRANSFER
• The remitting customer can track the remitting transaction through the
remitting branch only, as the remitting bank is informed about the status
of the remitted transaction.
• NEFT can be used to pay credit card dues to card issuing banks.
45.4 General
• NEFT can be used only for remitting Indian rupees among participating
banks within the country and Nepal. Remittances abroad (other than
Nepal) cannot be sent though NEFT. However, subject to the provisions of
FEMA, one can send/receive funds from/to NRI accounts.
• All payments of Rs. 10 lakhs and above between RBI regulated entities
(banks, primary dealers and NBFCs) and RBI regulated markets (money
market, government securities market and foreign exchange market)
have to be routed through the electronic payment mechanism such as
RTGS, NEFT and ECS.
425
NATIONAL ELECTRONIC FUNDS TRANSFER
1. What is NEFT?
5. What is IFSC?
6. Does the bank levy a charge for the use of the NEFT facility?
426
NATIONAL ELECTRONIC FUNDS TRANSFER
(a) Facilitate transfer of funds from any branch to any other branch of
any other bank branch
(b) Fastest option available for inter city transfers
(c) No restrictions of centres or any geopgraphical areas inside the
country
(d) The beneficiary gets credit the same day or the next day depending
on the time of settlement
(e) Can receive foreign remittances or send remittances abroad
(f) All of the above
(g) (a), (c) and (d)
5. All payments of Rs. 10 lakhs and above between RBI regulated entities
have to be routed through the electronic payment mechanism such as
_________.
(a) RTGS (b) ECS
(c) NEFT (d) All of the above
427
NATIONAL ELECTRONIC FUNDS TRANSFER
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428
SWIFT
Chapter 46
Swift
Objectives
Structure
46.1 Introduction
46.5 Precautions
429
SWIFT
46.1 Introduction
• S.W.I.F.T (SWIFT) is the acronym for the Society for Worldwide Interbank
Financial Telecommunications.
• Its fundamental operating procedure and rules were laid down in 1975
and the first message was sent in 1977.
• Apart from a hub in Brussels, SWIFT has hubs in New York and in the
Netherlands.
• The society functions round the clock for operational services of its
members globally.
430
SWIFT
• This address is circulated by the society to its members and only then
can the new member participate in the SWIFT system.
• SWIFT enables banks and institutions (its members) to send secure and
reliable messages, since the entire transmission of messages is system
based, with uniformity in language and format and authenticated at
every level.
• Where such correspondent bank’s services are availed, the message will
need the details of such correspondent bank.
431
SWIFT
• In case the receiving participant is not on, the messages are arranged in
queue at the FIN center and whenever the receiver “logs in” the
interface, the messages are pumped in from the SWIFT hub to the
beneficiary’s interface.
• SWIFT messages that are normally exchanged between banks have been
divided into categories such as:
❖ Customer transfers and cheques.
❖ Financial institution transfers.
❖ Financial trading.
❖ Collections and cash letters.
❖ Documentary credits (L/C) and guarantees.
❖ Securities.
❖ Precious metals and syndications.
❖ Travellers’ cheques.
❖ Cash management and customer status.
❖ Supporting system messages.
• The serial number given against each category is known in SWIFT as the
CATEGORY CODE.
432
SWIFT
❖ Sender.
❖ Receiver.
❖ Transaction reference number.
❖ Related reference.
❖ Date (YYMMDD).
❖ Currency code.
❖ Amount.
❖ Narrative.
46.5 Precautions
• The sender should use the format prescribed for different purposes. The
relevant columns in the format should be correctly filled in.
• The sender, when he receives ACK copy from the SWIFT-FIN center, gets
legal protection for any disputes, if any, in future.
433
SWIFT
• The SWIFT Customer Service Centres (CSC) are open 24 hours a day,
seven days a week.
• SWIFT assumes financial liability for the accuracy and timely delivery of
all validated messages from the point they enter the network to the point
they leave the network.
434
SWIFT
435
SWIFT
436
SWIFT
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437
INDO-NEPAL REMITTANCE FACILITY SCHEME
Chapter 47
Indo-Nepal Remittance Facility Scheme
Objectives
Structure
47.1 Introduction
47.2 Documentation
47.3 Transactions
438
INDO-NEPAL REMITTANCE FACILITY SCHEME
47.1 Introduction
47.2 Documentation
47.3 Transactions
439
INDO-NEPAL REMITTANCE FACILITY SCHEME
If the beneficiary’s account details are available, Nepal SBI would make
arrangements for credit of the account. Other-wise the beneficiary has to
get in touch with the outlet of the Money Transfer agency, after getting the
UTR number from the remitter. He has to produce details of the remitter
and a photo identity document, (generally citizenship certificate) to prove
his/her identity.
If the beneficiary does not approach the money transfer agency even up to
one week, the money transfer agency would make arrangements for return
of the remittance to the originator.
b. above INR. 5,000/- and up to INR 50,000.00 will attract a flat charge of
INR. 75.00 for every remittance inclusive of service tax
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INDO-NEPAL REMITTANCE FACILITY SCHEME
The amount of remittance will flow back to the originating branch through
NEFT and the bank would communicate to the remitter about the return of
the remittance. He has to produce some evidence as a proof of remittance
like the counterfoil of the remittance application form and receive it, if it
was a cash remittance. If it had been remitted by debit to an account the
credit will flow to the concerned account.
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INDO-NEPAL REMITTANCE FACILITY SCHEME
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INDO-NEPAL REMITTANCE FACILITY SCHEME
REFERENCE MATERIAL
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443
CASH
Chapter 48
Cash
Objectives
Structure
48.1 Introduction
48.2 Coins
48.3 Notes
48.4 Sorting/Processing of Notes
48.5 Display of Notice Board
48.6 Facility for Exchange of Notes and Coins at Bank Branches
48.7 Remittance of Rs. 50,000 and above
48.8 Agreement Between RBI and Commercial Banks
48.9 Detection and Impounding of Counterfeit Notes
48.10 Dual Custody
48.11 General
48.12 Currency Chest
48.13 Small Coin Depot
48.14 Clean Note Policy
48.15 Acceptance of Cash over the Counter
48.16 Self Assessment Questions
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CASH
48.1 Introduction
• The intent is to keep as little cash as possible as cash does not earn any
interest while the bank has to pay interest to its depositors on amounts
they have deposited in the bank.
• Commercial Banks keep money with the Reserve Bank for two purposes:
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CASH
• Accounts are kept with other banks for commercial needs. Banks in India
often maintain accounts with banks in other countries for trade
transactions.
Cash in Hand
• The amount kept by a bank will vary from bank to bank and from branch
to branch as the demands of customers will vary.
• Banks will aim to keep the minimum they require to meet needs as cash
is unproductive and earns no interest.
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CASH
• The amount kept in the vault is the total the branch estimates is required
to meet its needs. It is usually for this amount or slightly more that the
bank will take insurance cover.
• This money is kept in a safe inside a strong room or a vault and is under
the custody of a cashier.
• Normally at the start of each day, the cashier hands over to tellers cash
for the day. The amount handed out to tellers will depend on the bank
and the usual volume of transactions the bank has.
• In addition each teller often has a certain amount in his box as bait
money. This consists of assorted notes. The numbers of these notes are
marked and the intent is to hand these over if a robbery takes place. The
fact that the numbers of these notes are recorded can help trace the
notes to those who robbed the bank.
❖ During the day if a teller needs more money he would either borrow
the amount he requires from another teller or from the cashier.
❖ At the end of the day the teller should account for the cash he has in
his box.
❖ It is not unusual, at the end of the day for a teller to have a difference.
A person may have been paid more or less money or the teller may
have received more or less money. This is known as “unders or overs”.
In some banks tellers are expected to make good any “unders”. In
others no action is taken apart from a record of unders and overs. At
the end of a month, the net amount is either added or deducted from
cash and taken to either income or expenses as appropriate.
❖ The practice of what should be done at the end of a day varies from
bank to bank. In some banks the money is returned to the cashier
whereas in others the box is not emptied every day but is replenished
after taking into account the net inflow/outflow.
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CASH
Excess Money
• If the branch has more money than it requires it would surrender the
extra money that it has either to the Reserve Bank or to another bank
with whom it has a relationship or to the bank’s currency chest branch.
• Large banks and those that have several branches in a city often have a
currency chest. This is technically money of the Reserve Bank that the
bank keeps on behalf of the Reserve Bank.
48.2 Coins
At present coins are in denominations of Rs. 10, Rs. 5, Rs. 2, Rs. 1 and 50
paise. Coins upto 50 paise are called small coins. Those above a rupee are
called rupee coins. There are also coins for Rs. 150, Rs. 500 and Rs.
1,000. These have been issued as commemorative coins and have no
commercial value.
• The RBI has issued instructions that banks must accept coins as it is
legal tender. This notice was issued as there were several banks that
refused to handle a large amount of coins deposited because of the time
it would take to count them.
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CASH
48.3 Notes
• Notes refers to currency notes issued by the Reserve Bank of India. This
is legal tender and are presently available in denominations of Rs. 1,000,
Rs. 500, Rs. 100, Rs. 50, Rs. 20 and Rs. 10. The printing of Rs. 5,
Rs. 2 and Rs. 1 notes have been discontinued. Those notes issued earlier
are still legal tender. Rs. 1 notes were discontinued but were again
printed after 2015. There is a move to print Rs. 1000 again.
• The RBI has issued instructions that notes must not be stapled. This was
because earlier banks had the habit of awkwardly stapling the notes and
binding bundles with multiple staples. The result was that it was very
difficult to separate the notes and the multiple stapling also resulted in
the notes tearing. Bundles should be secured by paper bands.
• The RBI has also issued instructions that notes should not be written on.
• Banks should sort out notes into re-issuable notes and non-issuable
notes. Only clean notes should be issued to the public.
• The RBI has appealed to the public not to use banknotes for making
garlands, decorating pandals and places of worship or for showering on
personalities in social events as such actions deface banknotes and
shorten their life.
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CASH
All branches of banks in all parts of the country should provide the
following customer services:
a. Meeting the demands for fresh/good quality notes and coins of all
denominations,
All the designated bank branches should provide facility for exchange of
damaged/ mutilated notes. The names and addresses of such bank
branches are available with RBI or the respective banks. Availability of such
facilities at the branches should be published for information of the public
at large.
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CASH
The agreement between the Reserve Bank of India and the commercial
banks for establishment of currency chests/and/or Small Coin Depots
provide that the bank branches would accept coins in exchange of notes.
The banks have been advised to instruct their branches that:
b. They should use counting machines or accept coins by weight for large
receipts, as hitherto.
c. Rupee coins accepted can be held as part of chest balance and small
coins as part of the Small Coin Depot balance.
The banks are required to direct all their branches to accept coins of all
denominations tendered at their counters either for exchange or for deposit
in accounts. Such coins, particularly lower denominations, may be
preferably accepted by weighment. However, as accepting coins packed in
polythene sachets of 100 each would be more convenient for the cashiers
as well as the customers, the banks may keep such sachets at the counters
and make them available to the customers. A notice to this effect should be
displayed suitably inside as also outside the branch premises for
information of the public. Considering that aluminium coins of 5 paise, 10
paise, 20 paise, aluminum-bronze coins of 10 paise, stainless steel coins of
10 paise, cupronickel coins of 25 paise, 50 paise and rupee one
denominations are being withdrawn and remitted to the mints, customers
may be requested, and not insisted, to pack each of these denominations
separately and also metal-wise with 100 coins in each sachet before they
are tendered at the counters. Similar arrangements may also be made for
acceptance of current coins of 25 paise, 50 paise and one rupee of
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CASH
stainless steel and two rupees and five rupees coins of cupronickel. In case
of large variations of weight, counting machines may be used.
Mutilated/Soiled Notes
• Soiled notes are bank notes which have become dirty and limp due to
excessive use.
• Mutilated bank notes are those which are torn, disfigured, burnt, washed,
eaten by white ants, etc.
• A double numbered bank note cut into two pieces but on which both the
numbers are intact is treated as a soiled bank note.
• All bank branches must provide the facility of exchanging soiled notes.
• Banks must accept mutilated notes provided all the relevant details such
as numbers, etc., are on the note. It must be noted that a mutilated note
is a note of which a portion is missing or which is composed of pieces.
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CASH
denomination of Rs. 10 and above. With regard to Rs. 1, Rs. 2 and Rs. 5,
either full or no value is given depending on the condition of the note.
• If mutilated notes are presented banks should accept them if they are
not in more than two pieces and no essential feature of the note is
missing. Both the pieces should be of the same note and the complete
number of the note in an undivided area on each piece should be the
same. On these notes the officer in charge should stamp PAY/PAID/
REJECT. The PAY & REJECT stamp should bear the name of the bank and
branch concerned. These notes should be treated as soiled notes and
kept with soiled notes.
• Banks should ensure that all their designated branches undertake note
exchange business and all such designated branches are required to
display a board indicating the availability of note exchange facility with
the legend, “MUTILATED NOTES ARE ACCEPTED AND EXCHANGED HERE”.
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CASH
• Unfit notes should not be issued to the public. These should be deposited
in currency chests and periodically sent to the Reserve Bank.
• All the banks branches have instructions not to issue notes bearing PAY/
PAID stamps to the public even through oversight. Customers should be
cautious and should not accept such notes from any bank or anybody
else.
• In order to facilitate quicker exchange facilities, the soiled and cut note
should be freely exchanged by all bank branches. The single numbered
notes in the denomination of Rs. 1/-, Rs. 2/- and Rs. 5/- should not be
presented in more than two pieces, the essential feature of the such note
should not be missing and the complete number should be available in an
undivided area on one of the pieces. The doubled numbered notes in the
denomination of Rs. 10/-, Rs. 20/-, Rs. 50/-, Rs. 100/-, Rs. 500/- and
Rs. 2,000/- should not be presented in more than two pieces, the
essential feature of the such note should not be missing and both the
pieces should be of the same note
• Banks should not force customers to note their names on bank notes or
list note numbers on the bills submitted for payment or insist on an
undertaking when depositing higher denomination notes.
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CASH
• Defectively printed notes in any packet are replaced with a good note
bearing the same number as the one replaced.
• A ‘star series’ banknote will have an a star in the number panel between
the prefix and the number.
• The bands of the packets containing the ‘star series’ will clearly indicate
the presence of such banknotes in the packet.
• Star series banknotes are legal tender and may be freely accepted and
used.
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CASH
456
CASH
FIRs must be sent in all cases even if only one or two notes are detected
and the tenderer appears innocent. The notes must be impounded and sent
to the RBI.
457
CASH
458
CASH
Reserve Bank may consider the option of levying higher penal interest/
penalties for the amount of forged notes detected in the chest remittances
by RBI or during inspection.
Each bank should designate Nodal Bank Officer, district-wise and notify the
same to the concerned Regional Office of RBI and Police Authorities. All
cases of reporting of counterfeit note detection as indicated in Para 5
should be through the Nodal Bank Officer. The Nodal Bank Officer will also
serve as the contact point for all counterfeit note detection related
activities.
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CASH
Each bank shall establish at its Head Office, a Forged Note Vigilance Cell to
undertake the following functions:
b. Sharing of the information thus compiled with bank’s CVO and report to
him/her all cases of acceptance/issue of counterfeit notes over the
counters.
c. Conducting periodic surprise checks at currency chests where
shortages/defective/ counterfeit notes, etc., are detected.
Forged Note Vigilance Cell shall submit status report on a quarterly basis
covering the aforesaid aspects to the Chief General Manager, Department
of Currency Management, Reserve Bank of India, Central Office, Amar
Building, Fourth Floor, Sir P.M. Road, Fort, Mumbai-400 001, and to the
Issue office of the Regional office of Reserve Bank under whose jurisdiction
the FNV Cell is functioning, within a fortnight from the conclusion of the
quarter under report.
In order to update the record of the addresses of the Forged Note Vigilance
Cells, the bank shall furnish by e-mail, particulars to the Reserve Bank
every year, as on 1st July.
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CASH
The banks shall maintain a daily record of the notes processed through the
Note Sorting machines, including the number of counterfeits detected.
The banks should also consider providing at least one counting machine
(with dual display facility) for public use at the counter.
Compensation
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CASH
All Counterfeit Notes received back from the police authorities/courts may
be carefully preserved in the safe custody of the bank and a record thereof
be maintained by the branch concerned. Forged Note Vigilance Cell of the
bank shall also maintain a branch-wise consolidated record of such
Counterfeit Notes.
They may thereafter be sent to the concerned Issue Office of Reserve Bank
of India with full details.
Counterfeit notes, which are the subject matter of litigation in the court-of-
law should be preserved with the branch concerned for three years after
conclusion of the court case.
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CASH
• As a matter of control the vault must be under dual control. This means
that the second key and the combination should be with another person.
This ensures that if the vault is to be opened there has to be two persons
present and embezzlement will therefore not happen unless there is
collusion.
48.11 General
• Notes and coins are kept at bank branches to meet the needs of
customers. These are also accepted on behalf of customers who wish to
deposit monies in their accounts.
• The amount of cash and coins kept at banks are the minimum they need
to meet business requirements as these are idle assets. This is why
banks at times request customers to intimate them in advance if they
require to withdraw large amounts.
• Banks must not accept cash in excess of Rs. 50,000 for the issuance of
drafts/traveler’s cheques.
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CASH
• These are actually storehouses where banknotes and rupee coins are
stocked on behalf of the Reserve Bank.
• Some bank branches are also authorised to establish Small Coin Depots
to stock small coins.
• The Small Coin Depots also distribute small coins to Acceptance of cash
over the counter.
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CASH
• All branches of banks must accept cash over the counters from all their
customers who desire to deposit cash at the counter.
• Banks cannot incorporate clauses which restricts deposit of cash over the
counters.
465
CASH
466
CASH
1. Cash is _________.
(a) Notes
(b) Coins
(c) Notes and coins
(d) Notes, coins and money held with other banks
5. The currency notes are issued by the Reserve Bank of India under the
signature of _________.
(a) Executive Director (b) Dy. Governor
(c) Governor (d) Secretary
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CASH
REFERENCE MATERIAL
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468
ELECTRONIC BANKING
Chapter 49
Electronic Banking
Objectives
Structure
49.1 Introduction
469
ELECTRONIC BANKING
49.1 Introduction
• There are two types – interior and exterior. Interior are those in banking
premises whereas exterior are in malls/shopping centres and other
locations.
• ATM cards/debit cards/credit cards and other prepaid cards that permit
withdrawal can be used at ATMs.
• ATMs facilitate the withdrawal of money at times when banks are not
open (outside banking hours) and are primarily used for performing
some of the banking functions such as withdrawal of cash or deposit of
cash/cheque, etc. by using an ATM card.
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ELECTRONIC BANKING
• If the customer forgets his PIN or the card is sucked in by the ATM, the
customer should approach the card issuer.
• Most commercial banks have their own ATMs. In the case of smaller
banks they piggyback, at times, on the ATMs of larger banks to allow
their customers access to money outside banking hours.
• Some banks charge a fee if you use another bank ATM (to which they are
connected or have an arrangement with). With effect from October 15,
2009 a customer can take out a maximum of Rs. 10,000 per withdrawal
from ATMs not owned by the bank. This number of withdrawals is limited
to 5 per month. Additional withdrawals will be charged.
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ELECTRONIC BANKING
• The RBI also states that the claim should be credited to the customer’s
account automatically without any claim from the customer, on the same
day when the bank affords the credit for the failed ATM transaction.
Issuer banks can claim compensation paid to the customer from acquirer
bank/ATM operators if the fault is the latter’s.
• Rs. 100 and above notes may be issued through ATMs only after they are
checked for authenticity, genuineness and fitness by note sorting
machines.
• Banks are required to ensure that all ATMs are provided with ramps so
that wheel chair users/persons with disabilities/wheel chairs can access
them. Additionally height of the ATM should not create an impediment for
a wheel chair user.
• Banks should consider covering all ATM sites by CCTV so that identity of
person withdrawing cash can be established.
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ELECTRONIC BANKING
• Cash withdrawals are permitted at POS terminals for all debit cards
issued in India upto Rs. 1,000 per day.
• Customers can:
❖ Ascertain their account balance;
❖ Transfer amounts from one account to another;
❖ Arrange for the issuance of a cheque;
❖ Instruct payments to be made;
❖ Request for a cheque book;
❖ Request for a statement of their account;
❖ – Make a fixed deposit.
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ELECTRONIC BANKING
• Digital cash is designed to allow the consumer to pay cash rather than
use a credit card to purchase products on the internet.
• Another type of digital cash converts money into digital coins that can be
placed on the computer’s hard drive.
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ELECTRONIC BANKING
475
ELECTRONIC BANKING
476
ELECTRONIC BANKING
477
ELECTRONIC BANKING
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478
TELEPHONE BANKING
Chapter 50
Telephone Banking
Objectives
Structure
479
TELEPHONE BANKING
• Balance enquiry;
• Payment of a bill.
480
TELEPHONE BANKING
481
TELEPHONE BANKING
REFERENCE MATERIAL
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482
MOBILE BANKING
Chapter 51
Mobile Banking
Objectives
Structure
51.1 Introduction
51.2 Regulatory and Supervisory Issues
51.3 Registration of Customers for Mobile Service
51.4 Technology and Security Standards
51.5 Authentication
51.6 Interoperability
51.7 Clearing and Settlement for Inter-bank Funds Transfer Transactions
51.8 Customer Complaints and Grievance Redressal Mechanism
51.9 Transaction Limit
51.10 Remittance of Funds for Disbursement in Cash
51.11 Board Approval
51.12 Approval of Reserve Bank of India
51.13 Customer Protection Issues
51.14 Self Assessment Questions
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MOBILE BANKING
51.1 Introduction
• Only banks which are licensed and supervised (regulated) in India and
have a physical presence in India will be permitted to offer mobile
banking services. They should also have implemented core banking
solutions.
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MOBILE BANKING
485
MOBILE BANKING
• Technology used for mobile banking must be secure and should ensure
confidentiality, integrity, authenticity and non-repudiability.
51.5 Authentication
• Banks providing mobile banking services shall comply with the following
security principles and practices for the authentication of mobile banking
transactions:
• Where mPIN is used, end to end encryption of the mPIN is desirable, i.e.,
mPIN shall not be in clear text anywhere in the network.
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MOBILE BANKING
487
MOBILE BANKING
• For mobile banking facilities which do not contain the phone number as
identity, a separate login ID and password is desirable to ensure proper
authentication.
51.6 Interoperability
Banks offering mobile banking service must ensure that customers having
mobile phones of any network operator are in a position to avail the
service, i.e., should be network independent. Restriction, if any, for the
customers of particular mobile operator(s) are permissible only during the
initial stages of offering the service, up to a maximum period of six months
subject to review.
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MOBILE BANKING
However, banks may put in place per transaction limit depending on the
bank’s own risk perception, with the approval of its Board.
a. In case of cash out, the maximum value of such transfers shall be Rs.
10,000/- per transaction. Banks may place suitable cap on the
velocity of such transactions, subject to a maximum value of Rs.
25,000/- per month, per beneficiary.
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MOBILE BANKING
c. Banks may carry out proper due diligence of the persons before
appointing them as authorized agents for such services.
Banks wishing to provide mobile banking services shall seek prior one time
approval from Reserve Bank of India by furnishing full details of the
proposal.
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MOBILE BANKING
banks offering mobile banking should notify the customers the timeframe
and the circumstances in which any stop-payment instructions could be
accepted.
Bilateral contracts drawn up between the payee and payee’s bank, the
participating banks and service provider should clearly define the rights
and obligations of each party.
In cases where the customer files a complaint with the bank disputing a
transaction, it would be the responsibility of the service providing bank, to
expeditiously redress the complaint. Banks may put in place procedures for
addressing such customer grievances. The grievance handling procedure
including the compensation policy should be disclosed.
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MOBILE BANKING
1. What are the RBI regulations that govern the use of Mobile Banking?
2. What are the security procedures that must be enforced by banks that
offer Mobile Banking?
4. Technology used for mobile banking must be secure and should ensure
_________.
(a) Confidentiality and integrity (b) autHenticity
(c) Non-repudiability (d) All of the above
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MOBILE BANKING
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493
CARDS
Chapter 52
Cards
Objectives
Structure
52.1 Introduction
494
CARDS
52.1 Introduction
• American Express and Diners Cards are the major charge cards in
circulation. These are also called T & E cards.
• Credit cards are similar to charge cards. At the end of a month details of
all amounts purchased are sent to the card holder who is required to pay
a minimum amount (if he does not wish to pay the entire amount). He is
then given credit for the balance not paid and charged interest on the
balance (varies between 2-3% per month).
• The major credit card issuers are Mastercard and Visa and most banks
offer either Mastercard or Visa linked cards. This is for acceptability at
vendor establishments.
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CARDS
Credit cards allow cardholders to pay for purchases made over a period of
time, and to carry a balance from one billing cycle to the next. Credit card
purchases normally become payable after a free credit period, during which
no interest or finance charge is imposed. Interest is charged on the unpaid
balance after the payment is due. Cardholders may pay the entire amount
due and save on the interest that would otherwise be charged.
Alternatively, they have the option of paying any amount, as long as it is
higher than the minimum amount due, and carrying forward the balance.
• Cardholders: persons who are authorized to use credit cards for the
payment of goods and services;
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CARDS
General purpose cards and private label cards: The former are issued
under the trademark of credit card associations (VISA and Mastercard) and
accepted by many merchants while the latter are only accepted by specific
retailers, (e.g., a departmental store).
Prior approval of the Reserve Bank is not necessary for banks desirous of
undertaking credit card business either independently or in tie-up
arrangement with other card issuing banks. Banks can do so with the
approval of their Boards. However, only banks with net-worth of Rs. 100
crore and above should undertake credit card business. Banks desirous of
setting up separate subsidiaries for undertaking credit card business would,
however, require prior approval of the Reserve Bank. Banks should adopt
adequate safeguards to ensure that their credit card operations are run in
a sound, prudent and customer friendly manner.
Most of the cards issuing banks in India offer general purpose credit cards.
These cards are normally categorised by banks as platinum, gold or classic
to differentiate the services offered on each card and the income eligibility
criteria. Banks may, at the request of a cardholder, issue a supplementary
card (also referred to as ‘add-on cards’) to another individual who is
usually an immediate family member of the cardholder.
Banks may also issue corporate credit cards to the employees of their
corporate customers.
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CARDS
The types of credit cards mentioned above are illustrative and not
exhaustive. Banks may, from time to time, introduce new credit card
products to satisfy customer needs and cater to the changes in market
conditions.
The Reserve Bank requires each bank must have a well documented policy
and a Fair Practices Code for credit card operations.
Issue of Cards
Banks should ensure prudence while issuing credit cards and independently
assess the credit risk while issuing cards to persons, especially to students
and others with no independent financial means. Add-on cards i.e. those
that are subsidiary to the principal card, may be issued with the clear
understanding that the liability will be that of the principal cardholder.
The Reserve Bank has advised banks that in case of all categories of loans
irrespective of any threshold limits, including credit card applications,
banks should convey in writing the main reason/reasons which in the
opinion of the bank have led to the rejection of the loan applications. It is
reiterated that banks should convey in writing the main reason/reasons
which have led to the rejection of the credit card applications.
As holding several credit cards enhances the total credit available to any
consumer, banks should assess the credit limit for a credit card customer
having regard to the limits enjoyed by the cardholder from other banks on
the basis of self-declaration/credit information.
The card issuing banks would be solely responsible for fulfillment of all KYC
requirements, even where DSAs/DMAs or other agents solicit business on
their behalf.
While issuing cards, the terms and conditions for issue and usage of a
credit card should be mentioned in clear and simple language (preferably in
English, Hindi and the local language) comprehensible to a card user. The
Most Important Terms and Conditions (MITCs) termed as standard set of
conditions should be highlighted and advertised/sent separately to the
prospective customer/customers at all the stages, i.e., during marketing, at
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CARDS
Credit card dues are in the nature of non-priority sector personal loans and
as such, upto June 30, 2010, banks were free to determine the rate of
interest on credit card dues without reference to their BPLR and regardless
of the size in terms of the Directives on Interest rates on advances.
However, with the introduction of Base Rate system with effect from July 1,
2010, all categories of loans, except certain specified exemptions, should
be priced only with reference to the Base Rate.
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CARDS
a. Card issuers should ensure that there is no delay in dispatching bills and
the customer has sufficient number of days (at least one fortnight) for
making payment before the interest starts getting charged. In order to
obviate frequent complaints of delayed billing, the credit card issuing
bank may consider providing bills and statements of accounts online,
with suitable security measures. Banks could also consider putting in
place a mechanism to ensure that the customer’s acknowledgement is
obtained for receipt of the monthly statement.
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CARDS
d. Banks should not levy any charge that was not explicitly indicated to the
credit card holder at the time of issue of the card and without getting
his/her consent. However, this would not be applicable to charges like
service taxes, etc., which may subsequently be levied by the
Government or any other statutory authority.
e. The terms and conditions for payment of credit card dues, including the
minimum payment due, should be stipulated so as to ensure that there
is no negative amortization.
Wrongful Billing
The card issuing bank/NBFC should ensure that wrong bills are not raised
and issued to customers. In case, a customer protests any bill, the bank/
NBFC should provide explanation and, if necessary, documentary evidence
may also be provided to the customer within a maximum period of sixty
days with a spirit to amicably redress the grievances.
When banks/NBFCs outsource the various credit card operations, they have
to be extremely careful that the appointment of such service providers
does not compromise with the quality of the customer service and the
banks’ ability to manage credit, liquidity and operational risks. In the
choice of the service provider, the banks have to be guided by the need to
ensure confidentiality of the customer’s records, respect customer privacy,
and adhere to fair practices in debt collection.
501
CARDS
Banks should ensure that the DSAs engaged by them for marketing their
credit card products scrupulously adhere to the Code of Conduct for Credit
Card operations of the banks which should be displayed on the website of
individual bank and be available easily to any credit card holder.
The bank should have a system of random checks and mystery shopping to
ensure that their agents have been properly briefed and trained in order to
handle with care and caution their responsibilities, particularly in the
aspects included in these guidelines like soliciting customers, hours for
calling, privacy of customer information, conveying the correct terms and
conditions of the product on offer, etc.
Right to Privacy
b. In addition, the person in whose name the card is issued can also
approach the Banking Ombudsman who would determine the amount of
compensation payable by the bank to the recipient of the unsolicited
card as per the provisions of the Banking Ombudsman Scheme 2006,
i.e., for loss of complainant’s time, expenses incurred, harassment and
mental anguish suffered by him.
c. There have been instances where unsolicited cards issued have been
misused before reaching the person in whose name these have been
issued. It is clarified that any loss arising out of misuse of such
unsolicited cards will be the responsibility of the card issuing bank only
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and the person in whose name the card has been issued cannot be held
responsible for the same.
d. The consent for the cards issued or the other products offered along
with the card has to be explicit and should not be implied. In other
words, the written consent of the applicant would be required before
issuing a credit card.
f. The card issuing bank should not unilaterally upgrade credit cards and
enhance credit limits. Prior consent of the borrower should invariably be
taken whenever there are any change/s in terms and conditions.
g. Banks may ensure that they engage telemarketers who comply with
directions/ regulations on the subject issued by the Telecom Regulatory
Authority of India (TRAI) from time to time.
Customer Confidentiality
a. The card issuing bank should not reveal any information relating to
customers obtained at the time of opening the account or issuing the
credit card to any other person or organization without obtaining their
specific consent, as regards the purpose/s for which the information will
be used and the organizations with whom the information will be
shared. Instances have come to light where banks, as part of the MITCs,
obtain the consent of the customer for sharing the information furnished
by him while applying for the credit card, with other agencies. Banks
should give the customer the option to decide as to whether he is
agreeable for the bank sharing with other agencies the information
furnished by him at the time of applying for credit card. The application
form for credit card may be suitably modified to explicitly provide for
the same. Further, in case where the customers gives his consent for
the bank sharing the information with other agencies, banks should
explicitly state and explain clearly to the customer the full meaning/
implications of the disclosure clause. Banks should satisfy themselves,
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based on specific legal advice, that the information being sought from
them is not of such nature as will violate the provisions of the laws
relating to secrecy in the transactions. Banks would be solely
responsible for the correctness or otherwise of the data provided for the
purpose.
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d. The banks should also ensure to comply with the guidelines in respect of
engagement of recovery agents issued by RBI. These guidelines inter-
alia cover aspects relating to: (i) engagement of Recovery Agents
including verification of antecedents of their employees by agents, (ii)
incentives to recovery agents – banks to ensure that contracts with the
recovery agents do not induce adoption of uncivilized, unlawful and
questionable behaviour or recovery process, (iii) methods followed by
recovery agents, (iv) training to recovery agents, (v) taking possession
of property mortgaged/hypothecated to banks, (vi) use of forum of Lok
Adalats, (vii) complaints against the bank/recovery agents, and (viii)
periodical review of the recovery agents’ mechanism.
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In cases where the banks are offering any insurance cover to their credit
card holders, in tie-up with insurance companies, the banks may consider
obtaining in writing from the credit card holders the details of nominee/s
for the insurance cover in respect of accidental death and disablement
benefits. Banks may ensure that the relevant nomination details are
recorded by the Insurance Company. Banks may also consider issuing a
letter to the credit card holder indicating the details regarding the name,
address and telephone number of the Insurance Company which will
handle the claims relating to the insurance cover.
Redressal of Grievances
Generally, a time limit of 60 (sixty) days may be given to the customers for
preferring their complaints/grievances.
Banks should ensure that their call centre staff is trained adequately to
competently handle all customer complaints.
The grievance redressal procedure of the bank and the time frame fixed for
responding to the complaints should be placed on the bank’s website. The
name, designation, address and contact number of important executives as
well as the Grievance Redressal Officer of the bank may be displayed on
the website. There should be a system of acknowledging customers’
complaints for follow up, such as complaint number/docket number, even if
the complaints are received on phone.
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If a complainant does not get satisfactory response from the bank which is
a subsidiary of a bank within a maximum period of thirty (30) days from
the date of his lodging the complaint, he will have the option to approach
the Office of the concerned Banking Ombudsman for redressal of his
grievance/s. The bank, which is a subsidiary of a bank shall be liable to
compensate the complainant for the loss of his time, expenses, financial
loss as well as for the harassment and mental anguish suffered by him for
the fault of the bank and where the grievance has not been redressed in
time.
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CARDS
Fraud Control
Banks should set up internal control systems to combat frauds and actively
participate in fraud prevention committees/task forces which formulate
laws to prevent frauds and take proactive fraud control and enforcement
measures.
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• Virtual cards are not physical cards. They are generated for internet
transactions and are allotted for short term and even for one time
transactions.
• The credit limit is decided by the customer subject to actual credit limit.
• It is used for online shopping and its intent is to prevent fraud while
purchasing items online.
• The customer when he approaches his bank for a virtual card would
stipulate the amount he requires the card for.
• The bank would require the individual to fill in personal details on the
bank’s home page.
• The Bank generates a virtual card that has a 16 digit card number, expiry
date and CVV number just like plastic credit cards or they generate a
masked equivalent of the customer’s real plastic card.
• On purchasing the item, the card number and the CVV number would be
keyed in and the purchase made.
• The great benefits are that it restricts the amount spent (to the amount
indicated when the card was applied for) and once the card is used it can
never be used again.
• In the case of a temporary virtual card, customers can top up their cards
with as much money as they require and the requisite amount will be
credited by the bank from the anchored account. This is like crediting a
prepaid card out of a credit or debit card and the purpose is to make
online transactions safe.
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• A smart card is like any other credit card. It however has an Integrated
Circuit (IC) chip installed in it. The chip contains memory, may contain a
processor and communicates through contacts on the surface of the
card.
• As these are difficult to copy there is a move to make credit cards and
other cards smart cards.
• The computer chip within the card will contain both financial and personal
information. Privacy and security issues could be a problem. Banks can
introduce smart/on-line debit cards with the approval of their Boards.
• The banks can issue smart on-line debit cards to select customers with
good financial standing even if they have maintained the accounts with
the banks for less than six months subject to their ensuring the
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• The banks can, however, issue on-line debit cards against personal loan
accounts, where operations through cheques are permitted.
• In case of smart cards having stored value (as in case of the off-line
mode of operation of the smart card), no interest may be paid on the
balances transferred to the smart cards. In case of debit cards or on line
smart cards, the payment of interest should be in accordance with the
interest rate directives issued to banks from time to time under Sections
21 and 35A of the Banking Regulation Act, 1949.
• The bank shall ensure full security of the smart card. The security of the
smart card shall be the responsibility of the bank and the losses incurred
by any party on account of breach of security, failure of the security
mechanism shall be borne by the bank.
• Banks shall keep for a sufficient period of time, internal records to enable
operations to be traced and errors to be rectified (taking into account the
law of limitation for the time barred cases).
• The cardholder shall bear the loss sustained up to the time of notification
to the bank of any loss, theft or copying of the card but only up to a
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• As there has been increasing cases of fraud, the RBI has stipulated that
from August 1, 2009 banks must:
❖ A system of ‘on line alerts’ to the cardholder for all ‘card not present’
transactions of the value of Rs. 5,000 and above.
• The purse holder can use funds either to transfer funds to another
account anywhere (through RTGS/DD) or make online purchases.
• The RBI views this as the acceptance of deposits which can be with
drawn on demand.
512
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• Debit cards are dissimilar to charge and credit cards as the holder
receives no credit. As soon as a transaction is undertaken, the
customer’s account is debited with the amount of the purchase. If the
customer does not have sufficient balance the transaction is rejected.
• These are issued by banks and are linked to the account of the holder.
The great benefit is that individuals cannot buy more than they have
funds for.
• Debit cards are similar to ATM cards and have a unique number.
• Bank customers may use this to withdraw money from ATMs by punching
in their personal identification number or they may pay for goods and
services.
• When paying for goods/services the vendor swipes the card through a
point of sale terminal. The customer’s account is checked and if there is
adequate balance, the account is debited and the vendor’s account is
credited.
• The great benefit is that the customer will not, by using these, create
huge outstandings.
• The flaw is that customers cannot avail of credit (as they can with a
credit card).
Banks may issue debit cards, including co-branded debit cards, without
seeking prior approval of the Reserve Bank.
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Banks may issue only online debit cards including co-branded debit cards
where there is an immediate debit to the customers’ account, and where
straight through processing is involved.
Banks are not permitted to issue offline-debit cards. Banks which have
been issuing offline debit cards were advised to conduct a review of their
offline debit card operations and discontinue operations of such cards
within a period of six months from December 12, 2012. Banks may,
however, ensure that customers are duly informed regarding switching
over to online debit cards. However, till such time as offline cards are
phased out, the outstanding balances/unspent balances stored on the
cards shall be subject to computation of reserve requirements.
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ii. The relationship between the bank and the card holder shall be
contractual.
iii. Each bank shall make available to the cardholders in writing, a set of
contractual terms and conditions governing the issue and use of such a
card. These terms shall maintain a fair balance between the interests of
the parties concerned.
v. The terms shall specify the basis of any charges, but not necessarily the
amount of charges at any point of time.
vi. The terms shall specify the period within which the cardholder’s account
would normally be debited.
vii.The terms may be altered by the bank, but sufficient notice of the
change shall be given to the cardholder to enable him to withdraw if he
so chooses. A period shall be specified after which time the cardholder
would be deemed to have accepted the terms if he had not withdrawn
during the specified period.
viii.(a) The terms shall put the cardholder under an obligation to take all
appropriate steps to keep safe the card and the means (such as PIN or
code) which enable it to be used.
(b) The terms shall put the cardholder under an obligation not to
record the PIN or code, in any form that would be intelligible or
otherwise accessible to any third party if access is gained to such a
record, either honestly or dishonestly.
(c) The terms shall put the cardholder under an obligation to notify the
bank immediately after becoming aware:
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(d) The terms shall specify a contact point to which such notification
can be made. Such notification can be made at any time of the day or
night.
ix. The terms shall specify that the bank shall exercise care when issuing
PINs or codes and shall be under an obligation not to disclose the
cardholder’s PIN or code, except to the cardholders.
x. The terms shall specify that the bank shall be responsible for direct
losses incurred by a cardholder due to a system malfunction directly
within the bank’s control. However, the bank shall not be held liable for
any loss caused by a technical breakdown of the payment system if the
breakdown of the system was recognizable for the cardholder by a
message on the display of the device or otherwise known. The
responsibility of the bank for the non-execution or defective execution of
the transaction is limited to the principal sum and the loss of interest
subject to the provisions of the law governing the terms.
Cash Withdrawals
No cash transactions through the debit cards should be offered at the Point
of Sale under any facility without prior authorization of Reserve Bank of
India under Section 23 of the Banking Regulation Act, 1949.
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a. The bank shall ensure full security of the debit card. The security of the
debit card shall be the responsibility of the bank and the losses incurred
by any party on account of breach of security or failure of the security
mechanism shall be borne by the bank.
e. Each bank shall provide means whereby his customers may at any time
of the day or night notify the loss, theft or copying of their payment
devices.
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CARDS
Review of Operations
Redressal of Grievances
518
CARDS
Co-branding Arrangement
• Due diligence: Banks should carry out due diligence in respect of the
non-banking entity with which they intend to enter into tie-up for issue of
such cards to protect themselves against the reputation risk they are
exposed to in such an arrangement. Banks may ensure that in cases
where the proposed co-branding partner is a financial entity, it has
obtained necessary approvals from its regulator for entering into the co-
branding agreement.
• Outsourcing of activities: The card issuing bank would be liable for all
acts of the co-branding partner.
• Role of non-bank entity: The role of the non-bank entity under the tie-
up arrangement should be limited to marketing/distribution of the cards
or providing access to the cardholder for the goods/services that are
offered.
Banks, which were granted specific approvals for issue of co-branded debit
cards in the past, were advised to ensure that the co-branding
arrangement is in conformity with the instructions mentioned above. In
case, the co-branding arrangement is between two banks, the card issuing
bank may ensure compliance with the above conditions.
519
CARDS
Banks may ensure that they engage telemarketers who comply with
directions/ regulations issued by the Telecom Regulatory Authority of India
(TRAI) from time to time.
Due Diligence
Banks should carry out due diligence in respect of the non-banking entity
with which they intend to enter into tie-up for issue of such cards to
protect themselves against the reputation risk they are exposed to in such
an arrangement. In case of proposed tie up with a financial entity, they
may ensure that that entity has the approval of its regulator for entering
into such arrangement.
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Outsourcing of Activities
The card issuing bank would be liable for all acts of the co-branding
partner.
The role of the non-bank entity under the tie-up arrangement should be
limited to marketing/distribution of the cards or providing access to the
cardholder for the goods/services that are offered.
The card issuing bank should not reveal any information relating to
customers obtained at the time of opening the account or issuing the card
and the co-branding non-banking entity should not be permitted to access
any details of customer’s accounts that may violate bank’s secrecy
obligations.
Payment of Interest
521
CARDS
Banks should ensure that they engage telemarketers who comply with
directions/ regulations issued by the Telecom Regulatory Authority of India
(TRAI) from time to time.
522
CARDS
2. Credit card scheme typically involves the following parties. This includes
_________.
(a) Card holders
(b) Card issuers
(c) Merchant acquirers
(d) Merchants who agree to accept credit cards for payments of
goods and services
(e) Credit card associations
(f) All of the above
(g) (a), (b), and (e)
3. Banks with net worth of Rs. _________ and above should undertake
credit card business.
(a) 50 crore (b) 75 crore
(c) 200 crore (d) 100 crore
4. They are generated for internet transactions and are allotted for short-
term _________.
(a) Debit cards (b) Credit cards
(c) Electronic purse (d) Virtual cards
(e) Smart cards
523
CARDS
REFERENCE MATERIAL
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chapter
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524
TELEMARKETING
Chapter 53
Telemarketing
Objectives
Structure
53.1 Telemarketing
525
TELEMARKETING
53.1 Telemarketing
526
TELEMARKETING
• Telemarketer must not misuse telecom resources for any other activity
and shall be responsible for the same.
527
TELEMARKETING
• The telemarketer shall not, without the prior written consent of DoT,
either directly or indirectly, assign or transfer the registration in any
manner whatsoever to a third party or enter into any agreement for sub-
Leasing and/or partnership relating to any subject matter of the
registration to any third party either in whole or in part/and third party
interest shall be created.
• The telemarketer would be required to provide the call data records of all
the specified calls handled by the system at specified periodicity, as and
when required by the security agencies.
528
TELEMARKETING
• The telemarketer must not engage in the provision of any service other
than telemarketing and/or requiring separate licence/permission.
529
TELEMARKETING
• The Regulation envisages that all the telecom service providers would set
up a mechanism to receive requests from subscribers who do not want to
receive UCC and for this purpose they will maintain and operate a Private
Do Not Call List. The Private Do Not Call List will include telephone
numbers and other details of all such subscribers. The telephone
numbers and area code from this Private Do Not Call List will be updated
online by the operators to a National Do Not Call Registry (NDNC) which
will be maintained by National Informatics Centre (NIC) and thus the
NDNC will have the telephone numbers of all the subscribers all over
India who have opted not to receive any UCC. Telemarketers will have to
register in the NDNC Registry. The telemarketers would submit online the
calling list to the NDNC Registry where the list will be modified/scrubbed
by excluding the numbers listed in the registry and the modified/
scrubbed list will be online transferred back to the telemarketers for
making calls.
530
TELEMARKETING
531
TELEMARKETING
532
TELEMARKETING
REFERENCE MATERIAL
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533
DOORSTEP BANKING
Chapter 54
Doorstep Banking
Objectives
This chapter will explain Doorstep Banking – a service bankers give their
customers.
Structure
54.5 Transparency
54.6 Others
534
DOORSTEP BANKING
535
DOORSTEP BANKING
• Agreement entered into with customer should not entail any legal or
financial liability on the bank for failure to offer doorstep banking.
54.5 Transparency
• Charges should form part of the agreement entered into by the customer.
54.6 Others
• This service is only for those who have complied with all Know Your
Customer procedures.
536
DOORSTEP BANKING
3. Doorstep banking services is only for those who have complied with all
Know Your Customer procedures.
(a) True (b) False
5. Agreement entered into with customer should not entail any legal or
financial liability on the bank for failure to offer doorstep banking.
(a) True (b) False
537
DOORSTEP BANKING
REFERENCE MATERIAL
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538
SAFE DEPOSIT LOCKERS
Chapter 55
Safe Deposit Lockers
Objectives
This chapter will tell you about the facility of Safe Deposit Lockers offered
by banks to their clients.
Structure
55.2 Allotment
55.4 Eligibility
55.6 Security
55.7 Operation
55.8 Key
55.9 Nomination
55.11 No Nomination
55.12 Liability
539
SAFE DEPOSIT LOCKERS
55.2 Allotment
• Branches must have a waitlist for the purpose of allotment of lockers and
ensure transparency in allotment of lockers.
• Linking the lockers facility with placement of fixed or any other deposit
beyond what is specifically permitted is a restrictive practice and is
prohibited.
• The relationship in this instance between the banker and the customer is
that of a lessor and a lessee.
• The lease rent charged would vary from bank to bank and is dependant
on the size of the locker leased.
540
SAFE DEPOSIT LOCKERS
55.4 Eligibility
• Some banks insist that the hirer either open a savings/current account or
place an amount with the bank in a fixed deposit. The RBI has stated
that this is a restrictive practice and banks should refrain from asking for
a deposit. However, if the locker hirer has a fixed deposit with the bank it
can be earmarked for an amount so that the interest covers the locker
rental as an alternative to collecting the annual rental in advance.
• Banks should maintain a waitlist for allotment of lockers and must ensure
transparency in allotment of lockers.
55.6 Security
• Banks should carry out due diligence for both new and existing
customers at least at the levels prescribed for customers classified as
medium risk. If the customer is classified in a higher risk category due
diligence as per KYC norms applicable to that category should be carried
out.
• Where lockers have remained unopened for more than three years for
medium risk category or one year for a higher risk category, banks
should immediately contact the locker hirer and advise him either to
operate the locker or surrender it. This must be done even if the hirer is
paying rent regularly. Banks should also ask the hirer in writing why the
locker is not being operated
• If the locker hirer does not respond nor operate the locker banks should
consider opening the locker after giving notice.
541
SAFE DEPOSIT LOCKERS
• Banks must have a clear policy drawn in consultation with legal advisers
on breaking open lockers and taking inventory.
55.7 Operation
• When a holder seeks to open the locker, the banker has the person sign a
register in his/her presence. After checking the signature the banker
accompanies the holder to the locker.
• Lockers usually open with two keys – one being with the banker and the
other with the holder. These two keys are inserted at the same time to
open the locker.
• After the locker is opened, the banker usually leaves, leaving the holder
to either place more articles in the locker or remove articles from the
locker.
• Banks must exercise due care and necessary precautions for the
protection of the lockers provided to the customer.
542
SAFE DEPOSIT LOCKERS
• Banks should review the systems in force for operation of safe deposit
vault/locker on an ongoing basis and take corrective action where
appropriate. The security procedures should be well documented and the
concerned staff should be properly trained.
55.8 Key
55.9 Nomination
• The Banking Regulation Act does not preclude a minor being a nominee
for obtaining delivery of a locker. Banks must ensure that in this case
that at the time of handing over the contents that the articles are handed
over on behalf of the minor to someone competent.
• Regarding lockers hired jointly, on the death of one of the hirers, the
contents are only to be removed jointly by the nominees and the survivor
after a full inventory has been done. If the locker was to be operated
jointly, on the death of any of the hirers, bank should give access and
liberty to remove contents jointly with the survivor and the nominee. If
the locker was hired jointly with survivorship clause (either or survivor,
543
SAFE DEPOSIT LOCKERS
• If the sole hirer nominates a person banks should give the nominee
access to the locker and liberty to remove the contents.
• If the sole locker hirer nominates a person banks must give the nominee
access to the locker and liberty to remove contents from the locker in the
event of death of the hirer.
• If locker hired jointly and one person dies, the nominee of the person
who died would get access jointly with the other hirer. If however there
was a “either or survivor” or “anyone or survivor” or “former or survivor”
clause in the operation, banks should follow the mandate given in the
event of death. However, care should be taken to establish identity of
nominee, fact of death, etc.
• Banks should also check if there is a restraint from a competent court not
allowing access to the locker of a deceased hirer.
• Bank should make diligent effort to find out if there is any restraining
order from a competent court.
544
SAFE DEPOSIT LOCKERS
55.11 No Nomination
• Banks are not required to open sealed closed packets left with them
while releasing to nominee.
55.12 Liability
• Bankers are not liable for items lost from the locker or for individual
items claimed to be missing as the banker does not know the contents of
the locker.
• The exception is when due to gross negligence the locker is opened and
items are stolen. Even then it is difficult to quantify the loss as the
contents are only known to the holder. In these situations courts usually
determine whether banks are liable to pay damages and the amount.
• In the case of Union Bank of India vs. Smt. Kanak Choudhary (July
2007), the National Consumer Redressal Commission awarded
compensation for the loss suffered by the customer on account of
termites destroying currency notes and valuable papers kept in the
locker. The Commission said, “The bank was bound to ensure that the
respondent’s locker remained safe at all times.”
• In Punjab National Bank vs. K.V. Shetty, the apex Consumer court stated
the consumer must be compensated for damages of around Rs. 1.26
lakhs along with interest at 18% to compensate for the loss of jewellery
kept in the locker of the bank.
545
SAFE DEPOSIT LOCKERS
1. What is the relationship of the customer with the bank regarding the
hiring of a locker and what kind of agreement is signed?
546
SAFE DEPOSIT LOCKERS
3. The lease rent charged for lockers vary from bank to bank and is
dependent on _________.
(a) City location of the locker allotted
(b) The purpose it is allotted for
(c) Size of the locker leased
(d) Price of valuables it safeguards
4. A minor _________.
(a) May be allotted a locker provided he is of 12 years of age
(b) May be allotted a locker provided he is of 16 years of age
(c) May be allotted a locker only jointly with his natural/legal
guardian
(d) Cannot be allotted a locker as he is incompetent to contract
547
SAFE DEPOSIT LOCKERS
REFERENCE MATERIAL
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548
SAFE CUSTODY
Chapter 56
Safe Custody
Objectives
This chapter will explain how bankers keep goods on valuables in Safe
Custody for their customers.
Structure
56.1 Introduction
56.2 Details
549
SAFE CUSTODY
56.1 Introduction
56.2 Details
• As these are given to the banker to keep safe, the banker cannot
exercise his general lien on them.
• When items are given for safe custody they may be open or sealed.
When open, the banker must make a detailed note of the items and then
have that list signed by the customer preferably in front of a witness.
This will stop him from later claiming that certain items handed over
have been lost or stolen. When a sealed packet or envelope is given, the
banker should clearly state that he has received a sealed envelope and
that he does not know the contents. He must have this signed by the
customer also.
• When items are received for safe custody, they should be entered in a
register or some other record.
• Bank must make clear that items are returned to them as trustees of
legal heirs/and that access does not give them any claims. If access is
given it will constitute a full discharge of the bank’s liability.
• When the item kept in safe custody is taken back by the client, the
receipt earlier issued at the time of deposit should be discharged and be
held in the bank’s possession as proof that the deposited item has been
returned.
• Even though the banker may not be aware of the contents (as in the
case of a sealed box), the banker must take reasonable care of the
articles placed in his possession.
550
SAFE CUSTODY
❖ He hands the items kept for safe custody to some other person
(conversion).
❖ One of the bank’s employees steals the items kept under safe custody.
1. Does the bank have a lien on items given to them for Safe Custody?
2. Can customers jointly put an item with the bank being put for Safe
Custody?
3. Under what circumstance is a banker held liable for the item left for
Safe Custody?
551
SAFE CUSTODY
2. Nomination facility for articles given for safe custody is available only in
case of _________.
(a) Minor depositors
(b) Individual depositors
(c) Persons depositing jointly
3. When the item kept in safe custody is taken back by the client,
_________.
(a) The receipt issued at the time of the deposit should be
discharged and held in the bank’s possession
(b) The receipt issued at the time of the deposit should be taken
back from the customer and held in bank’s possession
(c) The receipt issued at the time of the deposit should not be taken
back from the customer
4. A banker will be held liable for the items left for safe custody if
_________.
(a) He keeps the items in an open place or at a place that is easily
accessible to others and it is stolen
(b) The safe deposit vaults are not strong
(c) He hands the items kept for safe custody to some other person
(d) One of the bank’s employees steals the items under safe custody
(e) All of the above
5. Banks can exercise the right of general lien on items given for safe
custody.
(a) Yes (b) No
552
SAFE CUSTODY
REFERENCE MATERIAL
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553
CONCLUSION
Chapter 57
Conclusion
Retail Banking is the Future
It is dynamic. The changes that have taken place in the last few years have
been stunning. It is clear that the manner banking will evolve in the next
few years will be very different. Electronic banking will undoubtedly be the
way banking will evolve. Paper instruments including cheques will become
obsolete. At this time it might sound inconceivable. But then so were
computers, the internet and mobile phones several years ago. No one ever
thought of or believed virtual cards could exist.
After the demonetization of the Indian rupee, there was a shortage of cash.
The Government used this shortage to push for digital banking. In addition,
when the BJP Government came to power in 2014, there was a huge thrust
for financial inclusion which included lower income persons’ opening
accounts in order to get the benefit of concessions and subsidies.
In this book I have incorporated all the new innovations and happenings
that have taken place. It was an extremely interesting exercise as it forces
you to wonder – what next?
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CONCLUSION
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
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