Module 1

Banking: Role of banks in business-Structure of Commercial banking in India-Changing scenario in

commercial banking; Public Sector and Private sector banks-Scheduled Banks-Foreign Banks- New
Generation Banks- Functions of Commercial Banks

Role of Banks in Business

Commercial banks play a vital role in the development of country.

a. Necessity of Banks for trade and industry

The entire economic progress based on extensive trade could not be possible without adequate
money. It is the bank deposits on which cheques can be issued is the main source of money. In
large transactions, usually payments are not made in terms of money but in terms of cheques
and drafts. Between countries, trade is financed through bills which can be discounted by banks.
Without the use of bank cheque, bank draft and bill of exchange, internal trade and
international trade cannot be possible.

b. Helps in distribution of funds

Commercial banks encourage production and enhance national income by transfer of surplus
capital from regions where it is not required much to those regions where it can be more
usefully and effectively employed. This distribution of funds between the regions has the effect
of opening up backward region and paying the way for economic development

c. Banks create credit and it helps in diversifying business

Fluctuations in bank credit have an important impact on the level of economic activity.
Expansion of bank credit will provide more funds to entrepreneurs and it will lead to more
investment. On the other hand, decrease in bank credit will result in decrease in production,
employment, sales and prices.

d. Supervision of debt

Commercial banks buy debts of others. In return, they issue demand deposits.

e. Capital formation

Commercial banks create savings habit among the people. They mobilize idle and dormant
capital of the community and make it available for productive purposes. Economic development
depends upon channelization of economic resources from consumption to capital formation.
 f. Variations in Interest rate

Banks can influence the rate of interest in the money market through its supply of funds. By
offering more or less funds, it can exert a powerful influence on interest rate.

Changing Scenario in Commercial Banking

Public Sector Banks

These are banks owned and controlled by the government. Public sector banks include Regional
Rural Banks, SBI, Nationalised Banks.

Private Sector Banks

The banks which come under the control of private ownership and not owned by the
government or cooperative societies are called private banks. As per RBI regulation, the new
banks are required to be registered as public limited companies under Companies Act 1956,
with the initial paid up capital of 100 crore. They are governed by the regulation of RBI Act and
Banking Regulation Act of 1949.They should comply with RBI directions.

The private sector banks operating in the country prior to 31.03.1994 were categorized as old
private sector banks. At present we have …. Old private banks and …. New private banks.

The guidelines issued by RBI on 1st April 1994 for promoting a new bank under private sector
are as follows:

 The bank should have a minimum capital of Rs 300 crore

 The bank should follow capital adequacy norms since the inception, which is at present
12% of Risk Weighted Assets.
 The bank should follow prudential norms right from the beginning
 Banks should use latest updated IT tools to bring efficiency
 Banks have liberty to recruit and decide remuneration policies of their own
 Banks should follow statutory reserve requirement norms of RBI
 Foreign Direct Investment may go upto 74%
 Net Bank Credit Priority lending stipulation should be at 40%
 New banks will be required to open 25 new branches in rural areas.
  No subsidiary of mutual fund for at least 3 years from date of commencement of
business can be set up by bank
 Top rated NBFCs are permitted to convert themselves into banks provided they have a
minimum net worth of 200 crore

Scheduled Banks
As per section 2 e of RBI act, a scheduled bank means a bank whose name is included in the
second schedule of RBI Act 1934. Only that bank is included in the second schedule which
satisfies the conditions laid down in Section 42 (6).Conditions include:

Paid up Capital and reserve requirement of not less than 5 lakhs, satisfaction of RBI that the
affairs will not be conducted by the bank in a way to harm the interest of depositors, and it may
be a state cooperative bank, a company defined in Company’s Act 1956, an institution notified
by Central Government for the purpose and a corporation or a company incorporated by or
under any law. Depositors of these banks are covered under deposit insurance scheme upto Rs
1 lakh.

A scheduled bank is classified into three categories:

1. Public Sector Banks

Majority of share is held by the Government of India or RBI.
2. Private Sector Banks
Majority of the share is held by private individuals. These banks are registered as companies
with limited liabilities

3. Foreign Banks

Banks that have their parent office in a foreign country and are working in India

Foreign Banks
The banks that have their parent office in a foreign country and are working in India are Foreign
Banks. They have to follow RBI guidelines while operating in India. The policy of permitting
foreign banks is decided by RBI from time to time.

The following are the guidelines for opening a branch by Foreign Bank

 Foreign banks are required to bring an assigned capital of 25 million $ at the time of
opening the first branch in India
  333333333333333Existing foreign banks having only one branch in India would have to
comply with the above requirement before their request of opening of second branch
 Foreign banks will be required to submit their branch expansion plan on an annual basis
 In addition to the parameters laid down for Indian banks, following parameters would
also be considered.
o Foreign banks and its group track record of functioning in the global market will
be considered
o Treatment extended to Indian banks in the home country of applicant foreign
bank will be considered
o Due consideration will be given to bilateral relationship between India and
home country
o Branch expansion of foreign banks would be considered keeping in view India’s
commitment at WTO

New Generation Banks

FUNCTIONS OF COMMERCIAL BANKS

Commercial banks are banks which accept deposits from the customers and grant short term loans and
advances to the customers. They also give medium and long term loan to business enterprises.

Commercial Banks are of three types:

1. Public Sector Banks

Majority of share is held by the Government of India or RBI.

Examples: SBI, Corporation Bank, Bank of Baroda

2. Private Sector Banks

Majority of the share is held by private individuals. These banks are registered as companies with
limited liabilities

3. Foreign Banks
These are registered banks with their headquarters in a foreign country but operate their branches in
our country. Examples: HSBC, Citibank, American express

The commercial banking structure in India consists of Scheduled banks and Non scheduled banks.

1. Scheduled banks

Scheduled banks in India constitute those banks which have been included in the second schedule of
Reserve Bank of India Act 1934.

The following conditions should be fulfilled by a bank for inclusion in the second schedule:
 1. The bank concerned must be carrying on a business of banking in India
2. The bank must have paid-up capital and reserve of an aggregate value of not less than 5 lakhs
3. It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the
interest of the depositor
2. Non Scheduled banks

Non scheduled banks are not included in the second schedule of RBI act 1934.
Scheduled banks are classified into:
a. SBI
b. Other nationalized banks
c. Regional Rural banks
d. Co-operative bank
e. Private sector banks, which can be either domestic or foreign

The functions of commercial banks are classified into primary functions and secondary functions.

1. Primary functions:
The main function of a commercial bank is to accept deposits from the public. They deposit to earn
interest and to avoid theft. To attract people, banks offer different kinds of deposits.

a. Current deposits

They are also known as demand deposits. They can be withdrawn by the depositor at any time by
cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any
interest as the amount deposited in these accounts is repayable on demand. RBI prohibits payment of
interest on current accounts if the period is below 14 days. Banks usually charges a small amount known
as incidental charges on current accounts depending on the number of transactions.

b. Savings Deposits
Savings account is meant for individuals who wish to deposit small amounts out of their current
income. It helps to earn interest on savings. It can be opened with or without cheque book facility.
There are restrictions on withdrawal from this account. Savings account holders are also allowed to
deposit cheques, drafts, dividends drawn in their favour for collection by bank. To open a savings
account, it is necessary for the depositor to be introduced by a person having a current or savings
account with the same bank.

c. Fixed Deposits

Fixed deposits means deposit repayable only after the expiry of a specified period. The period is
determined at the time of opening the account. It is also known as time deposit. These types of
deposits are most useful for a commercial bank. Since they are repayable only after a period, the
bank can invest these funds more profitably by lending at higher rates of interest for relatively
 longer period. The rate of interest depends on duration of period. The longer the period, the higher
the interest rate.

d. Recurring Deposits

The depositor is required to deposit a fixed amount of money every month for a specific period of time.
Each installment may vary and the period of account may vary from 1 year to 10 years. After the
completion of the period, customer gets back his deposits along with accumulated interest

e. Miscellaneous Deposits

There are several deposits like Children gift plan, Old age Pension scheme etc.

2. Granting Loans and Advances

The second important function of a bank is to advance loans to the public. Banks lend money in the
following ways.

a. Overdraft

It is a temporary arrangement. A customer who has a current account with the bank is allowed
to withdraw more than the amount of credit balance in his account. OD with a specified limit is allowed
either on the security of assets or on personal security or both

b. Cash Credit

A cash credit is a financial arrangement under which a borrower is allowed an advance under a separate
account called cash credit account upto a specified limit called credit limit. Such loans are usually given
against the pledge of agricultural or industrial products. Depending upon the requirements of the
borrower he can withdraw money from the cash credit account from time to time. Interest will be
charged only on the amount actually withdrawn from the account.

c. Discounting of bills of exchange

It is an assurance given by a debtor to his creditor to pay the amount mentioned in the bill on the expiry
of a stated period. Discounting bill of exchange is a form of lending by a banker under which the banker
pays the amount of bill, after deducting a small amount as commission, to its holder before the due
date. When the bill of exchange matures, the bank gets its full amount from the person who accepted
the bill (debtor)

d. Money at call and at short notice

This is a type of loan given by one bank to another bank or a financial institution. Such loans are very
short period loans and can be called back by the bank at a very short notice of one day to 14 days.

e. Demand loan

Demand loan is repayable on demand. In other words, it is repayable at short notice. The entire amount
of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can
repay the loan either in lumpsum or as agreed with the bank. Loans are normally granted by the bank
against tangible securities including securities like NSC, LIC etc.

f. Term Loans

Medium and Long term loans are called term loans. Term loans are granted for more than one year and
repayment of such loans is spread over a longer period. The repayment is generally made in suitable
instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15
years. Term loan is required for the purpose of setting up of new business activity, renovation,
modernization etc. These loans are secured against mortgage of land, plant and machinery etc. The rate
of interest charged for such loans is high.

3. Promoting Cheques
Through a cheque, depositor directs the banker to make payment to the payee.

4. Credit creation

When a bank advances a loan to its customer, it does not lend cash but opens an account in the
borrower’s name and credits the amount of loan to this account. Thus, whenever a bank grants a loan, it
creates an equal amount of bank deposit. Creation of such deposits is called credit creation which
results in a net increase in the money stock of the economy.
 4. Agency Services
Commercial banks perform certain agency functions for and on behalf of their customers.
a. Remittance of funds
Banks help their customers in transferring funds from one place to another through cheques,
drafts etc
b. Collection of cheques, bills and promissory notes
On behalf of customers, banks accept cheques, bills and promissory notes for collection
c. Execution of standing orders
A standing order is an order given by customer in writing to his bank for making certain payments
on behalf of him. Thus banks pay subscriptions, rents, insurance premium etc. on behalf of their
customers.
d. Purchase and sale of security
Banks undertake purchase and sale of various securities like shares, stocks, bonds etc on behalf of
their customers
e. Collection of dividend on shares
Banks collect dividend on shares and interest on debuntures for their customers
f. Income Tax consultancy
Banks help their customers in preparing income tax return and give advice on various issues on tax
matters
g. Acting as a trustee and executor
Banks preserve the wills of their customers and execute them after their death.
h. Acting as authorized representative
Banks act as authorized representatives of their customers for getting passports, traveller’s
tickets, booking vehicles etc.

6. General Utility Services

a. Locker facility

The customers can keep their valuables and important documents in lockers for safe custody
b. Traveller’s cheque

Banks issue this to help their customers to travel without the fear of theft or loss of money.

c.Letter of credit
These are issued by the banks to their customers certifying their creditworthiness. They are useful in
foreign trade.
d. Collection of statistics
Banks collect statistics giving important information relating to industry, commerce and banking.
e. Publishing Journals

Banks publish journals and bulletins containing research articles on economic and financial matters.
f. Underwriting securities
Banks underwrite securities issued by the government, public and private bodies
g. Acting as referee

Banks may be referred for seeking information regarding the financial position, business reputation and
respectability of their customers.

h. Foreign Exchange

Banks also engage in the business of foreign currencies. They may finance foreign trade by discounting
foreign bills of excahange.
Module 2
Innovations in banking-Social banking- Lead Bank Scheme-Offshore Banking- Consortium Banking-
Negotiable Instruments- Cheque Truncation System- E-purse- Customer Services- Creation of Credit-
Retail Banking-Products and Services- NPA –its Management
Innovations in Banking
Social Banking
Social banking is banking which caters specially to the development needs of the poor.
Objectives of social banking
 To provide credit facilities to small farmers, small traders, cottage industries and self
employed persons
 To give priority to industries which produce essential goods
 To provide financial resources for welfare objectives
Major Social Bank Schemes
 Lead Bank Scheme
 Service Area Approach
 Village Adoption Scheme
 Differential Rate of Interest Scheme
 Priority Sector Lending
 Micro Finance Via SHG Bank Linkage Program
Lead Bank Scheme
It was introduced in 1969. A lead bank is a bank which coordinates banking institutions in a
district. It acts as a consortium lender.
Activities of lead bank are:
o To survey the credit needs of the district
o To formulate a credit action plan for the district
o To work with the government in development process
o To make sure that small borrowers are served effectively by the bank
o Assisting primary lending services
o Survey the resources and potential for banking development in the district
o Helps in marketing agricultural and industrial products
o Recruiting and training staff for offering advice to small borrowers and farmers
o Setting district consultative committee in consultation with other banks and
financial institutions in the district.
Service Area Approach
SAA was introduced in 1989 to bring about an orderly and planned approach for the
development of rural and semi urban areas of the country. Scheduled banks, semi urban banks
and rural banks were allocated specific villages.
Stages of SAA
1. Identification of service area for each bank
2. Survey for assessing the lending potential of villagers
3. Preparation of annual credit plan for each service area
4. Coordination of credit institutions and various agencies
5. Continuous monitoring

Advantages of SAA
 Improving economic status of people
 Helping banks by focus on small areas
 Making lending activity easy for supervision and control
 Development of each area through micro level planning
 Ensuring coordination among banks and other developmental agencies
 Encouraging people participation and involvement in credit planning and dispensation
Village Adoption Scheme
VAS is the development of selected villages in an integrated manner.
Main activities
 Meeting credit need of poor
 Development of livelihood based activities
 Assessment of credit needs and formulation of projects for rural development
 Creation of infrastructure in coordination with government
 Marketing related help to villagers
 Implementation of development programme as decided under government plan

Differential Rate of Interest Scheme

DRIS was introduced in 1972 to provide concessional rate of interest to low income group for
productive purposes.
Features of DRI Scheme
 Lending at lower rate
 Main objective is up liftmen of backward classes
 Banks monitor the utilization of loans
 Short term, Medium Term and long term loans are provided under this scheme
Priority Sector Lending
It was introduced in 1967-68 to provide adequate and reasonable financial assistance at
reasonable rate to priority sectors.
Priority sector includes agriculture, small scale industries, small road and water operators,….
Reserve Bank stipulates banks to provide credit under priority sector as follows;
Domestic Banks :- 40%; Foreign Banks:- 32%.
 Micro Finance Via SHG Bank Linkage Program
Micro finance is the provision of thrift, credit and other financial services and products of very
small amount to the poor. SHG is a registered or unregistered group of micro entrepreneurs
having similar economic and social back ground. They save money to contribute to a common
fund and to meet their emergency need on the basis of mutual help.
Functioning of SHG bank linkage program
 Banks interact with the poor especially women to form small homogeneous groups
 They are taught simple accounting methods to maintain their accounts
 They meet frequently and collect small amount of savings from their members
 This pooled saving enable them to open a formal bank account in the name of the group
 This is the first step in establishing link with formal banking system
 Out of the pooled savings they give small loans to members for meeting their
emergency needs
 Empowerment is achieved through group dynamics, decision making and fund
management
 When pooled savings grow, they can receive external funds in multiples of group savings
 Bank loans enable members to start income generating activities

Lead Bank Scheme

 Study Group – Chairman – Dr. D.R.Gadgil appointed under the National Credit Council –
recommended ‘Area Approach’ for unbanked districts.
 Report submitted in October 1969
Conclusions:
 Nationalized banks provide 83% of total credit
 Banking facilities not available to 617 of 2700 towns
 5000 villages not covered by commercial banks

Prof. Gadgil recommended:

 Banks should provide integrated banking facilities in unbanked areas
 Adoption of ‘Area Approach’ –in unbanked areas- each bank should adopt an
area
 Help agriculture and SSI
 ‘District’ identified as the smallest geographical unit for the scheme
Narsimhan Committee appointed by RBI
 Same recommendations
 Nationalized banks should act as a ‘Lead Bank’
 Lead Bank should develop a district
  LEAD BANK SCHEME:
o 336 Districts to be distributed between nationalized banks ( 14 + SBI + 7 Sub. Of
SBI)
o Scheme applicable to all districts except the Metro. Cities of Mumbai Kolkata
Chennai and Un.Terr. Of Delhi, Pondicherry & Goa
Functions of lead bank
 Survey resources and development of banking in the area
 Survey the dependence on money lenders by industrial units, farms etc
 Survey the facilities for storing (fertilizers & agricultural inputs), marketing,
credit facilities for marketing
 Offer training to staff for advice to small borrowers & farmers in priority
sectors
 Assist other agencies and involve co-op banks, RRB’s, SFC’s, KVIB, NABARD

Banks were allotted Districts on the basis of :

1 .The capacity of the Bank – popularity of the bank in the area
2 .Geographical continuity of the Districts forming clusters
3. If possible each Bank to operate in more than 1 State
4. If possible to have more than 1 Bank in one State
Lead Banks were to first undertake an impression survey of whole District.
Then a detailed survey regarding saving potential, credit requirement, credit gap or
surplus

Advantages from the Scheme

 Spread the availability of banking facilities all over the country
 Inter link the Commercial and Co-operative banks
 More effective Branch Expansion
 Better relationship between Govt. and Banks
 Integration of credit activities of banks
 Bottlenecks in the development of a District can be located and removed
 Lead Bank Scheme would assist in implementation of the District Plan

District Credit Plans (DCP’s)

 First implemented in 1974
 DCP –consists of technically & economically viable schemes which can be taken up
for financing
 It is a plan of bankable schemes in agriculture, industry and services sectors of the
District
 The schemes can be taken up by different financial institutions in the district
  Implement the programme in collaboration with other institutions
 Monitor progress & evaluate progress in achieving targets
Progress of Lead Bank Scheme
By 1974 – 90% of geog areas in Assam, Bihar, W.Bengal, Orissa, M.P., U.P covered
2 Study Groups appoinetd by RBI in Gujurat & Maharashtra concluded:
A) Lead Banks were successful in identifying potential areas for new branches
B) Formulation & implementation of DCP’s was slow
They suggested preparation of Annual Action Plans followed by Annual Credit Plans (ACP’s). By
mid nineties the Lead Bank Scheme covered 493 Districts .
Problems – Lead Bank Scheme
 Confusion regarding the concept of ‘Lead Bank’ especially for opening branches-
ambiguous scope & objectives
 Co-ordination & Effective Functioning between banks & F.I’s – not just providing finance
 Problems in allotment of Districts
 Expertise- knowledge on the district, agriculture, projects etc
 Problems in preparation and uniformity of DCP’s
 Other Infrastructure
 Did not consider role of co-operatives – imp source of institutional finance
Offshore Banking
An offshore bank is a bank located outside the country of residence of its depositors with most
of its account holders being non residents of the jurisdiction. An account held in a foreign
country especially in a tax haven country is often described as offshore account.
Typically an individual or company will maintain an off shore account in a low tax jurisdiction
that provides financial and legal advantages such as
Greater Privacy
Easy access to deposits
Protection against local, political or financial instability
Offshore bank account has often been associated with underground economy and organized
crime, via tax evasion and money laundering, however legally offshore banking does not
prevent assets from being subject to personal income tax on interest. Except for certain people
who meet fairly complex requirements, the personal income tax of many countries makes no
distinction between interest earned in local banks and those earned abroad.

Banking Advantages
 Offshore banks can sometimes provides access to politically and economically stable
jurisdictions
 Some offshore banks may offer higher interest rate than the interest rate in home
country due to lower overheads and a lack of government intervention
  Interest is generally paid by offshore banks without tax being deducted. This is an
advantage to individuals who do not pay tax on worldwide income or who do not pay
tax until the tax return is agreed
 Offshore banking is often linked to other structures such as offshore companies, trusts
or foundations which may have specific tax advantages

Disadvantages
 Offshore bank accounts are less financially secure. In a banking crisis which swept the
world in 2008, some savers lost funds that were not insured by the country in which
they were deposited
 Offshore jurisdictions are often remote and therefore costly to visit. So physical access
and access to information is difficult.
 Offshore bank accounts are sometimes treated as the solution to every legal financial
and asset protection strategy.

Offshore banking Services

 Savings Account
 Corporate administration
 Credit
 Deposit taking
 Foreign exchange
 Fund Management

DEFINITION OF A NEGOTIABLE INSTRUMENT

Documents of a certain type which are used in commercial transactions and monetary dealings,
are known Negotiable instruments.

“Negotiable” means transferable by delivery and

“instrument” means a written document by which a right is created in favor of some person.
Thus, negotiable instrument means a document which is transferable by delivery.

According to Section 13(i) of negotiable instrument Act, 1881 a negotiable instrument includes
and means a promissory note, bill of exchange or cheque.

What is a 'Negotiable Instrument '?

A negotiable instrument is a document guaranteeing the payment of a specific amount of
money, either on demand, or at a set time, with the payer named on the document. More
specifically, it is a document contemplated by or consisting of a contract, which promises the
payment of money without condition, which may be paid either on demand or at a future date.

A negotiable instrument is a document that promises payment to a specified person or the

assignee. The payee, which is the person who receives the payment, must be named or otherwise
indicated on the instrument. A check is considered a negotiable instrument. This type of
instrument is a transferable, signed document that promises to pay the bearer a sum of money at
a future date or on demand.

Negotiable Instrument vs. Contract

While a negotiable instrument seems similar to a contract, it is different in that it simply conveys
the value part of the agreement. The contract itself is outlines the obligations of the parties, and
may give one party the right to hold the instrument. A negotiable instrument contains no promise
to perform any duties under a contract, and makes no consequence if the payer defaults, as would
a contract. A negotiable instrument merely gives the holder (1) the authority to demand payment,
and (2) the right to be paid.

While many instruments must contain an endorsement, usually in the form of a signature, by
both parties involved in the transaction, this is not a requirement for the document to be
considered a negotiable instrument. If such an instrument is lost or stolen, it may be deemed
void. The most commonly used types of negotiable instruments include promissory notes, and
bills of exchange.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

 Freely transferrable:The property in a negotiable instrument gets transferred by a

simple process of mere delivery if it is payable to bearer, endorsement and delivery or
payable to order.
 Recovery: One can sue upon the instrument in his own name.
 Presumption as to considerations: These instruments are presumed to have been
made,drawn,accepted,endorsed,negotiatedor transferred for consideration.
 Payable to order or bearer: It must be payable either to order or bearer.
 Holder’s title free from all defects: The holder (one who acquires the instrument in
good faith and for consideration) in due course gets title free from all defects.
 Presumption as to holder-:Every holder of negotiable instrument is presumed to be
holder in due course.
TYPES OF NEGOTIABLE INSTRUMENTS

There are two types of Negotiable Instruments:

Instruments Negotiable by Statute:

The Negotiable Instruments Act mentions orgy three kinds of negotiable instruments (Section
13). These are:

 Promissory Notes
 Bills of Exchange
 Cheques:

Instruments Negotiable by Custom or Usage:

There are certain other instruments which have occupied the character of negotiability as a result
of usage or custom of trade. For example:

 Exchequer bills.
 Bank notes,
 Share warrants,
 Circular notes,
 Bearer debentures,
 Dividend warrants,
 Share certificates with blank transfer deeds, etc.

SUB-TYPES OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTES:

Section 4 of the Act defines a promissory note as an instrument in writing.

It contains an unconditional undertaking which is signed by the maker to pay of certain sum of
money to, to the order of certain person, or to the bearer of the instruments. The person, who
makes the promissory note, promises to pay and is called the maker. The person to whom the
payment is to be mode is called the payee.

Essential features:

The following are the essential features of a Promissory note,:

1. The promise must be in writing.

2. The promise must be signed by the maker or payer.
3. The promise must be unconditional.
 4. The amount to be paid must be definite in terms of money.
5. It must be payable on demand or at a fixed or determinable future date.
6. It must be payable to a definite person. The Payee must be certain.
7. Promissory note must bear stamp at the rate prescribed by law of a country.
8. There are two parties a promissory note,

 Maker
 Payee

NOTE: An instrument containing a promise to pay a sum after educating necessary expenses or
imposing any other condition is not a promissory note.

BILL OF EXCHANGE:

It is an instrument in writing. Further, it contains an unconditional order signed by the maker,

directing a certain person to pay

 a certain sum of money only to, or

 to the order or
 certain person to the bearer of the instrument.

A bill of exchange is a financial document that states an individual or business will pay a certain
amount on a specific date. The date may range from the date it is signed, to within six months
into the future. A bill of exchange must contain the signature of the individual promising to pay
to be considered legally binding. Unlike a promissory note, a bill of exchange may be transferred
to a third party, binding the payer to pay the third party who was not involved in the first place.

Essentials:

 The amount payable must be certain.

 The payment must be made in money.
 The bill Payable may be either on demand or after a specified period.
 The bill may be payable either to the bearer or to the order or payee.

CHEQUE:
A cheque is a bill of exchange drawn on a specified banker. It is expressed to be payable
otherwise than on demand.

Essentials:

 In writing
 Express order to pay
 Definite and unconditional order
 Signed by drawer
  Order to pay certain amount
 Payable on demand

Parties:

Drawer: The maker of a bill of exchange.

Drawee: The person directed to pay the money by the drawer.

Payee: To whom or to whose order the money ore directed to be paid by the instruments. The
person named in the instrument only.

Types of Cheques:

Cheques are of different kinds-

1. 1.Open cheques: An open cheque is one which is payable in cash across the counter of
the bank
2. 2. Crossed cheques: A crossed cheque is one which has Iwo short parallel lines marked
across its face. It can be paid only to another banker. The advantage of crossing is that it
reduces the danger of unauthorized persons getting possession of a cheque and cashing it.
3. Bearer Cheque
4. Order Cheque
5. Marked Cheque
6. Not payable or bad cheque
7. Ante-dated Cheque
8. Post dated Cheque
9. Stale Cheque
10. Multilated Cheque
11. Digital Cheque- Cheques in Electronic form and Truncated Cheques.
12. Banker Cheque
13. Golden Cheque
14. Travellers Cheque

OTHER NEGOTIABLE INSTRUMENTS

Bill in sets:

Foreign bills are generally drawn in set of 3 each. To avoid miscarriage during transit, they are
drawn in different parts and each part is transmitted separately and all these parts, as a whole
constitute a complete bill.

Accommodation Bill:

They are drawn, accepted and subsequently discounted from a bank for accommodating a
friend.They are not real bills and hence, do not represent acknowledgement of an actual debt.

Example: A in order to financially help X, writes a bills on a mutual friend X who accepts the
bill, Y then gets the bill discounted from a bank. He pays the required amount on maturity to X
(acceptor) who in turn makes payment to the bank. Thus in an accommodation bill it is the payee
who is the principal debtor and the drawer and accept or act as a surety for him.

Ambiguous Instruments (Section 17)

An instrument, which in form is such that it may either be treated by the holder as a bill or as a
note, is an ambiguous instrument. Bill drawn to. to the order of the drawee, by an agent on his
principal, by one branch of a bank on another, by the direction of a company, their cashier are
also ambiguous instruments.

Example: where P draws a bill payable to P’s order, it is not an ambiguous instrument and cannot
be treated as a promissory note.

Inchoate Stamped Instrument (Sec 20):

When one person gives to another such a document, the other person is prima facie entitled to
complete the document and make it into a proper negotiable instrument up to the value
mentioned in the instrument, or up to the value covered by the stamp affixed on it.
The person signing the instrument is liable on it to any holder in due course.
Inland and foreign Bills:

A bill which is

 drawn or made in India and also made payable in India or

 drawn or made in India upon any person resident in India, although it may be made
payable in a foreign country, is deemed to be an inland bill.
Forged Instruments:

 In Forged instruments, there is a complete absence of title from the very beginning.
Forged instruments in the eyes of law have no existence whatsoever. A forged signature
is altogether inoperative.

Cheque Truncation System

The process of stopping the physical flow of the cheque issued by a drawer at some point with
the presenting bank enroute to drawee bank branch.In its place, an electronic image of the
cheque is transmitted to the drawee branch by the clearing house along with relevant
information like data on MICR band, date of presentation, presenting bank etc. This eliminates
cost of movement of physical cheques. This eliminates time required for collection also.

This speeds up the process of collection of cheques resulting in better service to customers,
reduces the scope of clearing related frauds, loss of instruments in transmit, lowers the cost of
collection of cheques and removes logistics related problem.

E-Purse

E-purse or electronic purse is an e-commerce payment method ie a method of payment used in

e-commerce, in which cash is stored electronically on a microchip. In order to avail e-purse
payment facility, the merchant must first have subscribed to a service provider ie with a
payment server. The payment server holds the security module specific to the merchant which
is known as Payment Security Access Module.

The smart card technology is widely used by bankers to market their products. Smart card,
which is a chip based card, is a kind of an e-purse. Embedded in the smart card is a microchip
which will store a monetary value. E-purse is more secure than ATM, debit and credit cards
because card related crimes and frauds cannot take place due to the employment of
cryptography.

Payment Procedure by e-purse

 1. Once a customer agrees to make an e-purse payment, he clicks on the screen to
indicate that he clicks on the screen to indicate that he chooses this means of
payment. The merchant web requires the customer to introduce his e-purse card
into his card reader.
2. The merchant sends the transaction details and details of the e-purse used,
which has received from the customer’s computer to the payment server.
3. The server analyses the data, authenticates the e-purse and calculates the data
necessary to debit the card.
4. The server sends these data to the card, the card reader requires the customer
to validate the payment by pressing the OK button of the card reader. Then the
e-purse is debited of the electronic money amount. An e-purse debit statement
and a certificate authenticating the debit are then forwarded ti merchant’s
PSAM.
5. On receipt of these data, merchant’s PSAM is credited with the electronic money
by the payment server. The transaction enabling the merchant’s account to be
credited can then be generated and collected by the bank.
The card is debited before the PSAM is credited. The card has authenticated the PSAM
and vice versa. This mutual authentication contributes to high level of security of the e-
purse.

Advantages of Payment with e-purse

1. Payment of small amounts
An e-purse allows to make payments of small amounts and micro payments over the
internet
2. Safety
Once e-purse has been debited and the merchant PSAM has been credited, the
transaction is settled between the issuer of electronic money and the merchant’s
bank.
3. Use is easy
To pay on the internet with an e-purse requires only to introduce the card into a
reader and to press the O.K button in order to validate the payment.

Retail Banking- Products and Services

Retail Banking:- Definition

Retail banking refers to the activities of banks that provide services to the public and to small
businesses rather than to large companies and organizations. Fixed, current, savings account on
the liabilities side and personal, housing, auto, credit cards … on the asset side are the clusters
of products and services banks offer through branches, internet and other channels.

Characteristics of retail banking

 There are multiple customer groups (Consumer, small business)
 Multiple products ( Deposits, loans, Payment cards, insurance, Investment, securities,
Depository Accounts, Educational loans, Personal loans)
 Multiple Channels of distribution ( Branch, internet, ATM, Mobile banking, credit cards)
 Well defined input, process and output

Objectives of retail banking

The main objective of retail banking is to provide low cost banking services across customers in
line with their changing needs, by offering standardized products, simplifying sales process
through provision of multiple delivery channels.

Retail Banking in India

The typical products offered in Indian retail banking segment are housing loans, consumption
loans for purchase of durables, auto loans, credit cards and educational loans.

Drivers of retail banking in India

 Economic prosperity and consequent increase in purchasing power

 Growth in consumption
 Technological advancements; Convenience banking in the form of debit cards, internet,
phone banking, anywhere any time banking attracted new customers
 Decline in interest rate resulted in growth of credit
Retail Banking Infrastructure
Appropriate banking infrastructure such as extensive branch network, IT and
communication network augmented by multiple distribution channels and trained
manpower is essential for retail banking.

In general, retail banks need to address the following types of applications:

a) Financial transaction processing system such as deposits, variable return rates,

compounding, payments, withdrawals, tax reporting.
 b) Customer relationship management system
c) Customer support system which provide customers resources for self help
d) Remote expert systems which provide multimedia support through voice, video
and chat between bank specialists and customers
e) Infrastructure system facilitates and automates business processes such as
printing, imaging, reporting…
Nature of retail banking products

 Products exist in a legal framework between bank and customer. For example, capacity
to enter into a legal valid contract
 Product benefits are defined in contractual documents; say deposit receipts or loan
documents
 Products are linked with Service quality
 Since products do not have any physical attributes, gaining trust of customers is
essential

Types of Retail Banking Products

The retail banking products and services are broadly grouped into 4 categories;

1. Retail Deposit Accounts

2. Retail Lending
3. Retail Payments
4. Third Party Products

I. Retail Deposit Accounts

Retail Deposit Accounts can be classified under

a. Transaction and Non Transaction deposit accounts

Transaction deposit is accounts primarily used for carrying out transactions
by individuals and businesses. These deposits normally do not earn any
interest. Customers can deposit or withdraw any amount of money any time.

Non Transaction Deposit Accounts

These accounts like savings deposits or term deposits are designed to help
customers in savings or investing. Funds in these accounts can be withdrawn
by customer only after giving notice. They pay interest.
b. Savings deposit, current deposit, term deposit and hybrid deposit accounts
Savings deposits are a source of low cost funds. They are meant to encourage
savings habit among the people and allow them to write cheque for carrying
out routine transactions.

Current Deposit Account:- The primary relationship with business customers

begins with current deposit account. It is a source of low cost fund for banks.

Time Deposits

It is a non transaction deposit held with bank for a predetermined fixed term.
It is also referred to as term deposits and fixed deposits. These deposits can
be issued by banks with maturities ranging from few days or months to a
number of years. From bank’s perspective, these are stable source of funds.

Hybrid Deposit Schemes

o Variable interest term deposits

 Interest rate is linked to inflation
o Term deposit with cheque writing facility
 Account holders can withdraw funds by writing a cheque
o Savings/ Current accounts linked to money market mutual funds
 Customers can transfer surplus funds from savings accounts to
money market mutual funds
o Unfixed time deposits
 Time deposit with inbuilt convenience of overdraft facility
o Annuity deposit scheme
 Banks accept a lump sum from depositor and pay back the
amount in EMI

 Resident and Non Resident deposit accounts

Banks operating from India can open following types of deposit accounts
 Non Resident Ordinary Rupee Account
 Non Resident External Rupee Account
 Foreign Currency Non Resident Account
 Rupee and Foreign Currency Deposit Accounts
There are 2 types of foreign currency accounts:
 1. Resident foreign currency account
2. Exchange earners foreign currency account
II.Retail Lending
The retail loans extended to individuals, salaried and self employed is classified as :
i. Secured Versus Unsecured retail loans
Secured loans:-Loans backed by tangible assets like houses in case of home loans
and car in case of auto loans. These loans are safe as banks can repossess and
dispose off the asset if the customer fails to repay

Unsecured loan: Loans are granted on the basis of credit rating of borrower and
his income and expense behavior. Personal loans, credit card facility, educational
loans etc fall under this category. These are more expensive, less flexible and of
short duration.
ii. Straight Versus Revolving Retail loans
Straight Loans:- They repay the same amount of principal and interest with each
repayment but reducing amount of interest each time. Housing loans, consumer
loans are straight loans.
Revolving loans:-This is an arrangement which allows for the loan amount to be
withdrawn, repaid and redrawn again up to a certain limit in any manner and any
number of times. Eg:- Credit Card loans

Retail loan Products

Home loan
Vehicle loan
Consumer loans
Education loans
Personal loans
Loan against shares

III. Retail Payments

Retail Payments are classified into

 Paper based Methods
Cheque, Bank Draft etc is paper based methods
 Plastic based Methods
Debit card, credit card, smart card..
  Electronic Methods
ECS, NEFT, RTGS etc are examples
c. Third Party Products
IV. Third Party Products

This refers to distribution of financial products and services designed by other financial
institutions by a bank to its retail customers. Banks in India tie up with insurance companies,
mutual funds etc to sell their products.

Risks in retail banking

 Lack of retail loan policy
 Multiple borrowing beyond means leading to default
 Wrong selection of borrower leading to NPA
 Interest rate risk due to interest fluctuation
CREDIT CREATION

The word credit is derived from the Latin word 'credo' which means 'I believe'. The creditor believes
that the debtor will return the loan and so decides to give the loan. Advancing credit essentially depends
upon the confidence, character, capacity, capital and collateral (i.e. 5C's) of the debtor. The whole
structure of banking is based on credit.

Bank credit means bank loans and advances. In the ordinary course of business, banks accept deposits
from the public and lend money to it's customers. A bank keeps a certain proportion of it's deposits as
minimum reserve for meeting the demand of the depositors and lends out the remaining portion of
deposits to earn income. When a bank advances a loan, it does not pay the amount in cash. But it opens
an account in the depositor's name and allows him to withdraw the required amount by cheque. Every bank
loan creates an equivalent deposit in the bank. Thus, credit creation means expansion of bank deposits. It
refers to the unique power of the banks to multiply loans and advances. In the words of Newlyn, "Credit
creation refers to the power of commercial banks to expand secondary deposits either through the process of
making loans or through investment in securities." It is because of this credit creation power, the
commercial banks have been called the ''factories of credit' or 'manufacturers of money'.

The banking system as a whole can expand its loans many times the reserves of deposits raised by it
and this process is known as 'multiple credit creation'. By experience banks know that all depositors do not
withdraw their money simultaneously. Some withdraw while some others deposit on the same day. So

by keeping a small cash reserve for day to day transactions the bank is able to grant loans on the basis of
excess reserves. The amount lent may come back again to the same bank or some other bank as deposit.
The bank whose deposits have been increased will again lend money. This process will continue till the total
deposits have increased by a number of times the original deposit of cash.

Through credit creation, the commercial banks add money to the total money supply in a country. In
other words 'loans make deposits'. Sayers has aptly said that "banks are not merely purveyors of
money but also, in an important sense, manufacturers of money". Primary deposits and Derivative
deposits

From the viewpoint of credit creation, it is said that the bank deposits arise in two ways i.e.
primary deposits and derivative deposits.

When a person deposits money with the bank, it is credited in his account. It is a debt of the bank and
the bank has an obligation to repay whenever demanded. This type of deposit is known as primary
deposit. The initiative for creating such deposit is taken by the public.

Using the primary deposits, the banks grant loans or buys assets such as bills, bonds etc from the
market. Whenever a bank grants a loan or buys an asset, it does not usually pay cash for it. Instead of paying
the cash, the banker actually places the amount of loan in the account of the borrower. Thus the
borrower acquires a claim against a bank just as he has deposited a sum of money. These deposits are derived
from the primary deposits and therefore they are known as derivative deposits. The initiative for creating
such deposit comes from the banking system.

Credit creation assuming that there is only a single Bank

Suppose a depositor deposited (i.e. primary deposit) Rs. 2 000 in Canara Bank whose cash reserve
ratio is 10%. Now Canara Bank after keeping Rs. 200 (10% of Rs. 2,000) as cash reserve, can grant credit of
Rs. 1,800 to a person by crediting the amount to his account. The bank can again grant a loan of Rs. 1620
(after keeping Rs. 180 i.e., 10% of Rs. 1800) to second person by crediting the amount to his account. The
bank can further grant another loan to a third person of Rs. 1458 after maintaining 10% reserve i.e., Rs.
162. This process can be continued until the primary deposit of Rs. 2,000 and the initial excess reserve of
Rs. 1800 (i.e. excess of 10% of Rs. 2,000) lead to derivative deposit of Rs. 1800 + 1620 + 1458 + ...........

= Rs. 18,000. Total primary and derivative deposits will be Rs. 18,000 + 2,000 = Rs. 20,000. Credit multiplier is
the reciprocal of cash reserve ratio i.e. 10 and the credit creation (i.e. total derivative deposits Rs. 18,000)
is ten times of the initial excess reserve. Thus, credit creating ability of the bank is the product of credit
multiplier and excess reserve of primary deposit (i.e., 10 xRs. 1,800 = Rs 18,000).

Process of multiple credit creation by the banking system

Normally there would be more than one bank and the borrower of a bank may withdraw the money and may
deposit -the amount in another bank which in turn can create credit. This •transfer of cash within the banking
system creates primary deposits and thereby provides the facility of creation of derivative deposits. This
proess of creation of credit through primary and derivative deposits is called multiple credit creation by
the banking system.

The process of multiple credit creation can be studied with an example. If a depositor deposits Rs. 2,000 in
Canara Bank and the cash reserve ratio is 10%, the bank can grant a loan of Rs. 1800 (Rs. 2,000 - Rs. 200) to a
person by crediting the amount to his account. If that person pays the amount of Rs. 1800 to the supplier of
material by a cheque and if the supplier of material deposits that cheque in the State Bank of India, the
deposit will be primary deposit to State Bank of India. Now State Bank of India can grant a loan of Rs. 1620
after maintaining 10% cash reserve (Rs.1800- 180) to another person. If this person pays this amount to his creditor
and if the creditor deposits the amount in Syndicate Bank, this amount of Rs. 1620 will be the primary deposit to
Syndicate Bank. Syndicate Ban in it's turn can grant a loan of Rs 1458 after maintaining 10% cash reserve (Rs
1620- 162) which in turn can be deposited in another bank. Thus the credit creation or the creation of
derivative deposits by the banking system will be Rs 1800 Rs. 1620+ Rs 1458 +..... = Rs. 18,000 i.e., 10 times
ofRs.1800.

Limitations of credit creation

1. Adequate cash reserve

The first factor that limits the capacity of the banks to expand credit is the necessity to keep
adequate cash reserves By creating deposits, banks create their own liability and are prepared to honour
customer's cheque up to an agreed sum. The success of the bank depends upon the ability to meet the
demand of it's depositors and failure to do so will result in l(j of confidence of the customers. If the banks
maintain more cash reserves, they could create less credit.

2. Quantity of money circulation

Another limiting factor is the total quantity of money circulation in the country. The Central Bank
of a country gas the monopoly power to issue currency notes. Lower money circulation reduces deposits
and thereby restricts the capacity of banks to expand credit.

3. Attitude of people

If the public decide to hold more cash due to uncertainty about economic conditions, they would
withdraw a large part of their deposits. As a result, banks are left with depleted cash reserve which restricts
the capacity to create credit.

4. Policy of the Central Bank

The policy of the Central Bank influences the capa6ity of the banks to multiply credit. Every
commercial bank is required to keep certain percentage of cash against it's deposit liabilities with the Central
Bank. Thus higher the percentage of cash reserve ratio, the smaller will be the volume of credit.

5. Nature of business conditions

During the period of recession, economic activities are at the lower end. Recession leads to more
cautious attitude by bankers, causing them to hold large reserve balances. The demand for loans will be
small and banks could create credit to a limited extent.

6. Behaviour of other banks

If some banks do not grant loans to the extent required of the banking system, the credit expansion
will be restricted.

7. Use of cheques
 When the use of cheque is scanty, people will withdraw cash for every transaction and banks ought to be
alert by keeping more cash and it restricts the power of credit creation.

NPA & ITS MANAGEMENT

Management of Non-Performing Assets

NPA’s are an inevitable burden on the banking industry. Banks need to monitor standard
assets to arrest any account becoming an NPA. Today the success of banks depend upon the
methods of managing NPA’s and keeping them within a tolerance level.

What is NPA?

A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest
payment remained overdue for a period of 90 days. Banks are required to further classify NPA’s
into Substandard, Doubtful and Loss assets:-

1. Substandard Assets: Assets which have remained NPA for a period less than or equal to12
months.
2. Doubtful Assets: An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months.
3. Loss Assets:As per RBI, "Loss asset is considered uncollectible and of such little value that
its continuance as a bankable asset is not warranted, although there may be some salvage or
recovery value."

Factors contributing to NPA’s

According to a recent study conducted by RBI, the underlying reasons for NPAs in India
can be classified into two heads:
i. Internal Factors
ii. External Factors
Internal Factors

The following factors contribute to NPA in the order of prominence:

a. Diversion of funds for expansion/diversification/modernization or for taking up new

projects.
b. Diversion of funds for assisting or promoting associate concerns.
c. Time or cost overrun during the project implementation stage.
d. Business failures due to product failure, failure in marketing, etc.
e. Inefficiency in management.
f. Slackness in credit management and monitoring.
g. Inappropriate technology or problems related to modern technology.

External Factors

The external factors that contribute to NPA’s are the following:

a. Recession in the company as a whole.

b. Input or power shortage.
c. Price escalation of inputs.
d. Exchange rate fluctuation.
e. Accident and natural calamities
f. Changes in government policies relating to excise and import duties, pollution control
orders, etc.
g. Government loan waiver scheme.

Impact of NPA’s

The problem of NPAs in the Indian banking system is one of the foremost and
the most formidable problems that had impact the entire banking system. Higher NPA ratio
trembles the confidence of investors, depositors, lenders, etc. It also causes poor recycling
of funds, which in turn will have serious effect on the deployment of credit. The non-
recovery of loans effects not only further availability of credit but also financial soundness of the
banks:-
Profitability: NPAs put detrimental impact on the profitability as banks stop to earn income on
one hand and attract higher provisioning compared to standard assets on the other hand. On an
average, banks are providing around 25% to 30% additional provision on incremental NPAs
which has direct bearing on the profitability of the banks.

Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds and reduces
the ability of banks for lending more andthus results in lesser interest income. It contracts the
money stock which may lead to economic slowdown.

Liability Management: In the light of high NPAs, Banks tend to lower the interest rates
on deposits on one hand and likely to levy higherinterest rates on advances to sustain
NIM. This may become hurdle in smooth financial intermediation process and hampers banks’
business as well as economic growth.

Capital Adequacy: As per Basel norms, banks are required to maintain adequate capital on risk-
weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets
which warrant the banks to shore up their capital base further. Capital has a price tag ranging
from 12% to 18% since it is a scarce resource.

Shareholders’ confidence: Normally, shareholders are interested to enhance value of their

investments through higher dividends andmarket capitalization which is possible only when
the bank posts significant profits through improved business. The increased NPA level islikely
to have adverse impact on the bank business as well as profitability thereby theshareholders do
not receive a market return on theircapital and sometimes it may erode their value of
investments. As per extant guidelines, banks whose Net NPA level is 5% & above arerequired to
take prior permission from RBI to declare dividend and also stipulate cap on dividend payout.

Public confidence: Credibility of banking system is also affected greatly due to higher level
NPAs because it shakes the confidence ofgeneral public in the soundness of the banking system.
The increased NPAs may pose liquidity issues which is likely to lead run on bank bydepositors.
Thus, the increased incidence of NPAs not only affects the performance of the banks but also
affect the economy as a whole.
 In a nutshell, the high incidence of NPA has cascading impact on all important
financial ratios of the banks viz., Net Interest Margin, Return on Assets, Profitability,
Dividend Payout, Provision coverage ratio, Credit contraction etc., which may likely to
erode the value of all stakeholders including Shareholders, Depositors, Borrowers, Employees
and public at large.

Management of NPAs

The size of NPA portfolio in the Indian Banking Industry was Rs.64,786 crore in 2004.
However due to the active steps taken by the regulatory authorities and banks, gross NPA levels
has reduced from 13.2% from gross advances in 2000-01 to 7.2% in 2004. To ensure long term
profitability, banks have to manage NPAs by adopting the following techniques:-

a) LokAdalats (People’s Court)

b) Debt Recovery Tribunals

c) SARFAESI Act, 2012

d) Agents appointed for recovery

Lok Adalats (People’s Court)

• To settle disputes involving account in “doubtful” and “loss” category.

• Outstanding balance of Rs. 5 lacs for compromise settlement.

• Proved to be quite effective for speedy justice and recovery of small loans.

Debt Recovery Tribunals (DRT)

• To recover bad debt quickly and efficiently.

• DRT has powers to grant injunctions against the disposal, transfer or creation of third
party interest by debtors in the properties charged to creditor and to pass attachment
orders in respect of charged properties

• In case of non-realization of the decreed amount by way of sale of the charged properties,
the personal properties if the guarantors can also be attached and sold.
 • It is the special court established by Central Government for the purpose of bank or any
financial institutions recovery.

• The judges appointed to this court are the retired judges of high court.

SARFAESI Act, 2002

• The Act provides three alternative methods for recovery of non-performing assets,
namely:

 Securitization
 Asset reconstruction
 Enforcement of security without the intervention of the court.

• The provisions of this Act are applicable to NPA loans with outstanding above Rs. 1.
Lac.

• However, NPA loan accounts where the amount is less than 20% of the principal and the
interest are not eligible to be dealt with this act.

This act empowers the bank:

• To issue demand notice to the defaulting borrower and guarantor, calling upon them to
discharge their dues in full within 60 days from the day of the notice.

• To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the bank.

• To ask the debtor of the borrower to pay any sum due or becoming due the borrower.

• Any security interest created over agricultural land cannot be proceeded with.

Agents appointed for recovery

 Recovery Agents: They are agents hired by the banks for the recovery of the non-
performing assets at 10% commission.
 Enforcement Agent: They are the agents hired by the bank after filing the case in court.
Module 3

E-banking: Centralized Online Real Time Electronic Banking (CORE), Electronic Clearing
Service (ECS), Electronic Fund Transfer (EFT), Real Time Gross Settlement (RTGS), National
Electronic Fund Transfer (NEFT), Society for Worldwide Interbank Financial
Telecommunications (SWIFT), E-Cheque, Ant Time Money, ATMs, Credit Cards, Debit Cards,
Smart Cards, Internet banking, Phone banking, Mobile banking

Centralized Online Real Time Electronic Banking (CORE)

Electronic Banking

• Electronic Banking is a major innovation in the field of banking

• Information revolution led to the evolution of internet and E-banking
History of E- banking

• Dates back to 1980

• The term “online” became popular in late 80s and it referred to the use of terminal, key board and
monitor to access the banking system using a phone line.
• Standford Federal Credit Union was the first to offer online internet banking services to all of its
members in 1994
E-banking in India

1991: Indian economy opened up..Entry of Foreign Banks with new technology

Banking products became competitive .Need for differentiation was felt

1996 ICICI bank started online banking

• Electronic Banking is the automated delivery of new and traditional banking products and services
directly to customers through electronic communication channels
• Bank use e-channels
• Internet
• WAP based mobile network
• Automated telephone
• ATM
 • SMS
• E channels enable financial transactions from anywhere and allow non stop working time
Modern E banking: Virtual banking

• Virtual Banking:- Customer cannot see the bank but can conduct banking activities from anywhere in
the world
• Major type of virtual banking services include:
• ATM
• SMART card
• Phone banking
• Home banking
• Internet banking

Electronic delivery Channels

1 .Automated Teller machines

• Widely used electronic channel

• Computer controlled device at which customers can withdraw, check balance etc.
• Customers are given a plastic card containing name
• Customers are also given PIN number
• It offers a host of banking services like
– Deposits
– Withdrawals
– Requisitions
– Instructions
– Transfers
2.Smart Cards

• a smart card is a plastic card with an embedded microchip that can be loaded with data, used for
telephone calling, electronic cash payments, and other applications, and then periodically "recharged"
for additional use.
• smart card contains more information than a magnetic stripe card and it can be programmed for
different applications.
• Some cards can contain programming and data to support multiple applications and some can be
updated to add new applications after they are issued
• Benefit of smart cards:
 – enhanced security
– off line transaction
– programmable card
1. Telephone Banking
• Transactions over phone
• Automated phone answering system (IVR) with keypad response
• Voice Recognition Capability
• VRU- Voice Response Unit:- Programmed Computer Responds to caller
• IVR-Interactive Voice Response- Computer phone application which accepts key pad selection
• CTI- Computer Telephone integration
2. SMS Banking
• Basic banking inquiry transactions(balance inquiry, funds, exchange rate inquiry…) are
performed by the cooperation of bank and the GSM operator
• Security is the main problem
3. WAP Banking
• Wireless application protocol (WAP) is an application environment and set of communication
protocols for wireless devices designed to enable manufacturer-, vendor-, and technology-
independent access to the Internet and advanced telephony services.
• WAP is a global standard and is not controlled by any single company
• Various banking transactions offered in WAP environment by banks.
• Similar architecture with SMS banking
4. Home banking
Using machines for a wide range of banking services
• Includes corporate banking and personal banking
• Personal banking-doing transactions with the help of online banking
• Corporate banking-corporate customers will be able to get the following services
i. Get the statement of accounts
ii. Ordering cheque books
iii. Ordering intra-bank and inter-bank fund transfers
iv. Instructing stop payments of cheques
v. International remittances
vi. Opening letter of credits

5. Internet banking
• This is a web based service that enables a banks authorised customers to execute bank related
transactions through internet.
• Service provided are
o Account details
o Fund transfer
o Request services- cheque book, stop payment of cheques, make loan requests etc
o Investment services – create FD, recurring deposit
o Value added services – pay utility bills, recharge mobile,
 • Three levels of banking services are offered through internet
1. The basic level service
• Provide information on different products and services
• Receive and reply to customers queries through e-mail
2. Simple transactional websites
• It allows customers to submit their instructions, applications for different services,
queries on account balances etc
3. Fully transactional websites
• Allows the customers transfer of funds, payment of utility bills, subsribing to other
products of bank and to transact purchase and sale of securities
Services Offered

• Answering routine queries

• Bill Payment service
• Electronic Fund Transfer
• Credit Card
• Railway pass
• Investing through internet banking
• Recharging Phone
• Shopping……

Core Banking (Centralized Online Real Time Bnaking)

• It is doing all banking operations of Branches and Head Office by connecting to a Central Computer
kept at DATA CENTRE
Working in TBA mode

• Each branch has its own computer and branch functions are automated on that computer. This is
called “Total Branch Automation”
• Consolidation from different branches is done at Head Office
Core Banking:- Basic Concept

• “Telecommunication” and “Wireless communication” made data transfer easier from one computer to
another.
 • Branch Computers are connected to a single computer at the data centre and have all branch
transactions recorded live at one place. This concept is “CORE BANKING

Core Banking:- Business Change

• As the single computer at data centre get live data from branches, position of the bank as a whole is
available at one place at each moment
• This system brought total change in traditional banking operations. Many repetitive functions at
branches were taken at central place.
Advantages of Core Banking

1. Centralized Accounting

• All the transactions of the bank directly impact the General ledger and Profit and Loss Account. This
provides real time total picture of the financial position of the Bank
• Helps in timely effective decision making for financial management
2.Centralized Product Control and Monitoring

• Centralization helps in better product analysis, monitoring and control

• Aspects like interest rate modification, product modification etc can be done centrally
• Bank can quickly respond to customer needs and market scenario. This gives competitive edge
6. Introduction of Technology based Services

 Service Channels like ATM either onsite or off site can be started
 Cheque Deposit Machines can be installed. Such machine in WAN connectivity can allow any
customer to deposit the cheque for collection at any branch
 Cheque book printing machine can be installed . Such machine in WAN connectivity can receive
command from any branch
7. Centralized Customer Account Management
 Customer becomes customer of a bank rather than of a branch
 With unique account number accounts of customers can be viewed centrally by the bank. Customer
profile, details of products and services availed by him and behaviour of customer etc can be well
understood.
 Such customer view gives the bank opportunity to develop business and marketing startegies
8. Centralized Reporting
o Centralized data is updated at real time. This makes possible comprehensive report generation
o Helps in decision making as well as submission to various authorities
o Operational efficiency gets improved because of quick report generation for bank as a whole.
 9. Centralized system Administration

• Enhances security and user management

• In TBA mode, man power for IT administration is required at each branch. In core banking, it is
required only at one place.
Advantages of Core Banking:-Advantages to Head Office

• Consolidation of MIS/ statements/ reporting at one place reduces duplication of tasks at branches
• Supervision of branches on risk perception possible
• Frequent audits and timely control measures
• Faster and real time reconciliation of accounts
• Centralized marking and monitoring of NPA accounts
• Follow up and coordination of overdue and NPA account
• Better ALM
• Product wise and customer wise analysis and decision making possible
• Clearing function is centralized; so reduced man power.
• Audit can be done at a single location
• Printing of several matters such as follow up notices, statement of accounts can be done centrally
• Account opening and scanning of signatures can be done at central location
• By installing mailing solution, written communication in the form of letters between H.O and branches
can be eliminated
Advantages of Core Banking:-Advantages to Credit Department

• Reduced credit processing time for existing loan accounts as the Credit Department gets information
handy
• For processing of new loan accounts the information on product is that facilitates proper decision
Advantages of Core Banking-Advantages to Customers

• Customers can operate his account from any branch of the bank
• More service channels can be made available to the customer
• Even extension counters can provide all services to customer
• Customer gets full attention and service satisfaction at branches as branches are free from all clearing
and accounting functions
• Customer gets SMS alert and email alert through net for transactions taking place in his account
 Electronic Fund Transfer (EFT)

With the advent of internet, all banks in different countries are inter-linked with each
other. This facilitates easy remittance of money not only inside the country but also to any part of
the world through the press of a button. Now the banks all over the world are inter-linked with a
satellite maintained by SWIFT (Society for World Wide Inter-bank Financial Telecommunications) in
Europe. In India, Gate Way, Bombay maintained by the Computer Maintenance Corporation of
I nd ia is its agent. Those banks which want to use the satellite facility in India can open SWIFT
centres with Gateway to avail inter-linking facility with banks all over the world. Any information
for remittance of money can be passed on to the banks concerned with in a moment's time
through this satellite arrangement. This system of electronic Fund transfer is known as
"Paperless banking'. Electronic Fund Transfer ( FFT) is defined as "any transfer of funds initiated
through an electronic terminal, telephone instrument, or computer or magnetic tape so as to
order, instruct, or authorize a financial institution to debit or credit an account". In short, EFT is
a system of transferring money from one bank account directly to another w i t ho u t physical
exchange of paper money. The term EFT includes the following;

(a) Cardholder-initiated transactions, where a cardholder makes use of a debit card or

credit card. This takes place at an ATM or Point of Sale (POS).
(b) electronic payments by businesses, including salary pay-ments.

(c) electronic cheque clearing.

Foreign Inward Remittance Payment Scheme (FIRPS) is a scheme of remittance of funds envisaged
by the Foreign Exchange Dealer's Association of India (FEDAI) for facilitating easy
remittance of money from foreign countries. It is meant pur e l y for foreign inward
remittance. Under this scheme, any NRI or foreign citizen can remit money in foreign currencies to
any person in India through his bank abroad. It is done by the foreign bank by way of an order to
its branch or correspondent in India to pay a fixed sum to the person named in the document.
The branch or correspondent bank in India will convert the foreign currency into Indian rupees
at the prevailing market rates and issue a document called FIRP instrument in favour of the payee.
FIRP instrument is treated as a negotiable instrument and hence it can be endorsed in settlement
of claims. It can also be encahsable at any branch of any commercial bank which is a member of
FEDAI.

SWIFT ( Society for Worldwide Inter bank Financial Telecommunications)

It was founded in 1973 by 239 banks spread over 15 countries. It is fully owned by its member banks. It
is a non profit making organisation with its headquarters at Brussels. In India, all nationalised banks are
members of SWIFT. Banks are connected to the SWIFT regional processor at Mumbai.

It is basically a message transmission system. Majority of international inter bank messages use SWIFT
network. As of November 2008, SWIFT connected 8740 financial institutions in 290 countries. SWIFT
transports messages in a highly secure way, but does not hold account for its members or does not
perform any clearing or settlement. It does not facilitate fund transfer. All the transactions are
processed without the exchange of paper, cheque, draft etc. It is a true model of paperless banking.

SWIFT operates two data centres one in US and one in Netherlends. These centres share information in
real time. In case of a failure of one data centre, other centre is able to handle the full network.
Software called SWIFT net link is installed on the SWIFT customer’s site and opens a connection to the
SWIFT net. For a bank A to send a message to bank B, it formats the message according to the standard,
and sends it to SWIFT. SWIFT guarantees its secure and reliable delivery to B. SWIFT protects the
network against unauthorised access , errors in transmission, loss of privacy, fraudulent changes etc.

The main features of SWIFT are:

1. It is operational through out the year 24 hours a day

2. Transmission of the messages to any part of the world is almost immediate
3. All the message formats for inter-bank transactions are standardised
4. All messages are acknowledged ( either accepted or rejected)
5. Information is protected and is confidential
6. Method of transmission is cost effective
7. SWIFT assumes responsibility for the accuracy and timely delivery of all messages from
the time they enter the network to the point they leave the network

Real Time Gross Settlement (RTGS)

RTGS is the fastest possible money transfer system through the banking channel. Real Time
Gross settlement system is a mechanism of transferring funds from one bank to another (Inter bank
funds transfer) on a 'real time’ and on 'gross' basis. A real time settlement system can make
settlement on a continuous basis during the processing day. It means that payment transactions
are settled as soon as they are processed. Gross settlement means that the settlement of funds
occurs on a transaction by transaction basis without bunching with any other transaction,
i.e., without adjusting debits against credits.

Type of inter bank funds transfer

On the basis of the time of settlement, inter bank funds transfer systems can be either
designated time settlement system or real time settlement systems. Designated time
settlement system settle transactions at prescribed points in time. For example settlement takes
place 3 times a day at 9.30 am, 10.30 am and 12.00 noon. In the case of designated time settlement
any transactions intiated after a designated settlement time would have to wait till the next
designated settlement time. But in real time settlement system transactions are processed
continuously through the RTGS business hours.
 Inter bank fund transfer systems can also be classified as net settlement system and gross
settlement system. In the case of net settlement system, the settlement of fund transfers takes
place on a net basis. It means that the sum of the value of all transfers a participating bank has
sent (debit) is deducted from the sum of the value of all transfers the bank has received (credit)
upto a particular point in time. The net position can be either a net credit or net debit. In the
case of gross settlement system debits are not adjusted against credits but the settlement takes
place on a transaction by transaction basis.

Features of RTGS system

The following are the features of RTGS system.

1) Under RTGS, inter bank funds transfer takes place on a real time and on gross basis.

2) RTGS system is meant for large value transactions. The minimum amout to be remitted
through RTGS is rupees one lakh.

3) There is no restriction with regard to the maximum amount to be remitted through RTGS.

4) RTGS does not require core banking facility among the participating banks.

5) The remitting bank receives a message from the RBI that money remitted has been credited to
the account of the receiving bank.

6. The RTGS service window for customer transactions is available from 9.00 hrs to 16.00 hrs on
week days and from 9.00 hrs to 12.00 noon on Saturdays. For inter ba nk transactions the
service w i n d o w is available from 9.00 hrs to 17.30 hrs on week days and from 9.00 hrs to
14.00 hrs on Saturdays.

7) RBI has w a i ve d its processing charges f o r all electronic payment products till 31st March
2009. However, the respective banks are given discretio11 to levy service charges.

RTGS Process

• Each bank will have a single gateway interface called Participant Interface
• It uses P.I to send payment request to IFTP
• Communication between P.I and RTGS is through IFTP
• IFTP removes all information that is not needed by RTGS and send message to RTGS
• On receipt of the message, RBI checks whether sending bank has sufficient funds in its account
• Settlement message is sent back to IFTP
• Based on response, IFTP sends message to sending & receiving bank
 Difference between NEFT and RTGS

• NEFT:- Deferred Net Settlement (DNS) settles transactions in batches

• RTGS transactions are processed continuously

NEFT (National Electronic Fund Transfer)

• Nationwide system that facilitates individuals, corporate and firms to electronically transfer
funds from any bank branch to any other bank branch

Objective of NEFT

• to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer
and clearing in the banking sector throughout India
• to relieve the stress on the existing paper based funds transfer and clearing system.
Terminologies in NEFT

Beneficiary“:-

Recipient of money

"Beneficiary / Destination Bank / Branch" :-

the branch of the bank / branch identified in a payment instruction which is maintaining the
account of the beneficiary.

"Nodal Department“

Department of Payment and Settlement Systems of Reserve Bank of India

"NEFT SFMS message“

Structured Financial Messaging Solution (SFMS) message containing a batch of NEFT payment
instructions for funds transfer
"NEFT Service Centre"

branch of a bank in a centre designated by that bank to be responsible for processing, sending or
receiving NEFT SFMS message on behalf of that bank

"NEFT Clearing Centre“

Office designated by the Nodal Department for receiving, processing and sending the NEFT SFMS
message and the debiting and crediting of accounts of the participating banks and institutions for
settlement of payment obligations

National Clearing Cell, Reserve Bank of India, Nariman Point, Mumbai has been designated as the
NEFT Clearing Centre (NCC) for purposes of the NEFT System.

Eligibility for Participation

• shall be a bank
• Regional Rural Banks (RRBs) allowed to participate through sponsor banks
• member of the Real Time Gross Settlement (RTGS)System.
• installed SFMS.
• shall meet the other prescribed eligibility criteria / conditions which are notified by RBI from
time to time

Parties involved in NEFT

o the sending bank

o the sending Service Centre
o the NEFT Clearing Centre
o the receiving Service Centre
o the beneficiary branch
Process

1. Request for NEFT by a Bank Customer / Any Person

2. Data Entry at the Sending Bank Branch
3. Processing / Data Upload at Sending NEFT Service Centre
4. Transmission / Submission of NEFT Message to the NEFT Clearing Centre
5. Processing and Transmission of NEFT Message to the Beneficiary Banks
 6. Data Validation at the Receiving NEFT Service Centre
7. Payment to Beneficiary
8. Revocation of Payment Instruction
9. Acknowledgement / Positive Confirmation by the Beneficiary Bank and Return in Case of Non-
Credit
10. Sender to be Advised in Case of Returns
11. Beneficiary to be Advised of the Receipt of Funds

1.Request for NEFT by a Bank Customer / Any Person

• submit an "NEFT Application Form“

• authorize the sending bank to debit the sender's account and transfer funds to the beneficiary
• submitted either in physical form or electronically
• NEFT system will be said to have been initiated when the sending bank accepts a payment
instruction issued by the sender.

• In single payment instruction, the sender directs payments to several beneficiaries, each
payment direction shall be treated as a separate payment instruction

• A bank branch may reject a customer's request for funds transfer when:
• the customer has not placed funds at the disposal of the sending bank
• funds placed is not adequate
• The essential elements of beneficiary's identification are:
• Beneficiary's Name
Beneficiary's Branch Name
Beneficiary's Bank Name
Beneficiary's Account Type
Beneficiary's Account No.
Beneficiary's Branch IFSC

• In order to facilitate workers' remittances from India to Nepal for bank customers and persons
not having bank accounts in India, Indo Nepal Remittance Facility Scheme has been introduced
• At Nepal end, the remittances would be distributed through the branches of Nepal SBI Bank
Ltd. (NSBL)
2.Data Entry at the Sending Bank Branch

• sending bank branch shall prepare the SFMS message and send the message to NEFT Service
Centre
1. Processing / Data Upload at Sending NEFT Service Centre
NEFT Service Centre shall accept the messages received from branches through net banking
platform if these messages are complete

4. Transmission / Submission of NEFT Message to the NEFT Clearing Centre

• Sending Service Centre shall transmit the NEFT SFMS message to the NEFT Clearing Centre by
using the communication network designated by Reserve Bank of India.

1. Processing and Transmission of NEFT Message to the Beneficiary Banks

• Consolidating all NEFT messages received from originating banks, the NEFT Clearing Centre
shall process the data, arrive at fund settlement
• After settlement is over, send beneficiaries' details / data to each beneficiary bank for
affording credit to the beneficiaries' accounts.
• Banks which have no transactions will get a batch wise 'nil' transactions report
• and a summary report at the end of the day indicating all inward transactions received by
them during the day.
• NEFT messages generated for destination banks will be transmitted to the NEFT Service Centre
of each beneficiary bank using SFMS.

2. Data Validation at the Receiving NEFT Service Centre

• Receiving NEFT Service Centre forward them to the beneficiary branches using SFMS
3. Payment to Beneficiary
beneficiary branches would make payment to the beneficiaries within two hours of batch
settlement time by crediting the specified account of the beneficiary

4. Revocation of Payment Instruction

• A payment instruction issued for execution shall become irrevocable when it is executed by the
sending bank

5. Acknowledgement / Positive Confirmation by the Beneficiary Bank and Return in Case of

Non-Credit
 NEFT presently functions with a Batch+2 (B+2) return cycle
 Require banks to afford credit to the beneficiaries' account immediately upon
completion of a batch else return the transactions within two hours of completion of
the batch settlement
 After successfully crediting the Beneficiary's account, the beneficiary bank will send a
Credit Acknowledgement message indicating “credited to customers' account” to the
originating bank through NEFT Service Centre
6. Sender to be Advised in Case of Returns
 • If the beneficiary specified in the sender's payment instruction fails to get payment through
the NEFT system for some valid reasons, the sender shall be informed immediately after the
sending bank gets the returned NEFT
7. Beneficiary to be Advised of the Receipt of Funds
After crediting the account of the beneficiary, the beneficiary bank shall advise the beneficiary
of the funds received

Inter-Bank Settlement

• Every participating bank and admitted institution shall open and maintain in the NEFT Clearing
Centre, Mumbai, a settlement account for settlement of payment obligations

NEFT Settlement Timings

• Operates in hourly batches

• Week Days:- 12 settlements from 8:00 am -7:00 pm
• Saturdays:- 6 settlements from 8:00 am – 1:00pm
• No settlements on weekly holidays & public holidays
• Any transaction initiated after a designated settlement time has to wait till the next settlement

Automated teller machine

An automated teller machine (ATM) is a computerized telecommunications device that provides the
customers of a financial institution with access to financial transactions in a public space without the
need for a human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a
plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card
number and some security information, such as an expiration date or CVVC (CVV). Security is provided
by the customer entering a personal identification number (PIN).

Credit card

The introduction of Credit Cards is one of the recent innovations in the field of banking. In
order to remove the burden of carrying huge amount of cash, cheque system was introduced in
the banks. With the development of information technology banks have moved one step
forward by introducing Credit Cards to their customers. Credit Cards enable card holders to avail
credit facilities for a specified period of time without giving any security to the issuing bank. The
cardholders can settle their hotel bills, railway and airway ticket payments, hospital bills etc. by
using credit cards. The credit card issuing banks tie up with a number of establishments like
hotels, airway companies, hospitals, shops, petrol pumps and department stores, which honour
the credit cards. Credit cards are also called 'plastic money'.

A credit card is any card, plate or device that may be used from time to time and over and over
again to borrow money or buy goods and services on credit. Thus a credit card is a mechanism by
which the card holder can make purchases without immediate cash payment. In other words
credit card enables the card holder to obtain goods and services from various shops and
establishments, who have arrangements with the credit card issuing bank.

Banks issue Credit Cards to selected customers depending on their monthly income, credit
worthiness, Putation etc. The applicants of credit cards have to furnish the details of their
assets, personal particulars and financial status to the bank at the time of applying the same.
After a thorough scrutiny of the details the bank grants Credit Cards subject to certain rules
a n d regulations.

Features

1. The speciality of credit card is that even without having any balance in the current or
saving account of the card holder, he / she can make payments. Thus credit cards are a type
of customer loan. Some of the world wide accepted credit cards are American express,
Diners club, Euro card / Master card and Visa cards.

2. The payments through the credit card is limited to the credit limit determined by the issuing
bank based on the financial history of the card holder.

3. A credit card can also be used even to draw cash from ATMs within the cash limit
approved to the card holder.

4. The credit availed by the card holder has to be paid to the bank within a period and the
credit limit gets automatically renewed with the repayment.

Classification of credit cards

Credit cards can be classified as general purpose credit cards and proprietary cards. General
purpose cards are those which are accepted by merchants accepting MasterCard and Visa
Cards. On the other hand, limited purpose or proprietary cards are those which are tied to the
retailer issuing the cards and can be used only in the retailer’s store. In India most of the banks
have either tied up with Master Card International or Visa international.

Privileges of credit card holder

A credit card holder enjoys the following privilages or facilities.

1. Cash withdrawal through ATMs

 Most of the banks provide the card holder the facility of cash withdrawal through ATMs
subject to service charges. However, cash withdrawal through ATMs is restricted to a certain
amount of withdrawal limit, say, Rs.20,000 per month.

2. Special discounts

A credit card holder enjoys the benefit of special discounts from hotels, airlines and business
establishments with whom the credit card issuing bank have made arrangements.

3. Use by a person other than the card holder

The card holder can nominate a person for using the credit card in his absence. Such
nomination facility ne'ps the family member / spouse of the card holder to make payments on his
behalf.

4. Issue of drafts and pay order

A credit card holder can get a draft or pay order going to the bank. Once the card holder
informs the details of draft or pay order with the credit card number, the bank will send the draft to
the customer for a nominal charge.

5. Insurance coverage

Banks provide insurance coverage to the card holder ranging from 2 lakhs to 8 lakhs. The
amount of coverage depends up on the types of card. Some banks extend the insurance coverage
to spouse of the card holder also.

6. Flexible repayment options

It is not necessary to reimburse the bank the entire amount due on the billing statement.
After making payment of the minimum amount, the balance amount can be rolled over to next
billing cycle. Interest at a certain rate will be charged on the outstanding amount.

7. Other privilages

Other privilages include free supply of magazines, payments at petrol bunks and holiday
packages etc..

Operation of credit cards

Credit cards operate in the following manner.

1. After making purchases the card holder gives his card to the merchant who swipes it on a
credit card payment terminal or a point of sale system. In the case of some credit cards, the
card holder has to type his Personal Identification Number (PIN) after the card is swiped.
2. The system communicates with the system of Credit Card issuing bank inorder to ensure that the
amout1 being swiped is within the credit limit of the card-

3. If the amount is wi thi n the credit limit the transaction is authorised by the credit card
issuing bank.

4. The card holder then put his signature on a receipt hich is his consent to the transaction and
that he will pay the amount of the transaction to the card issuing bank.

Every month the card issuing bank will send a statement of transactions to the card
5.
holder which indicates the total amount due, the amount of interest being charged etc..

Procedure of obtaining a credit card

33333333333333333333The fo l l o w i n g are the procedures involved in obtaining a credit

card from a bank. 1. Submission of application form

A person intending to obtain a credit card should submit an application in the prescribed form.
The applicant has to furnish his/her personal and professional details, financial soundness and to
sign an undertaking to abide by the terms and conditions of the issue of credit card. Supporting
documents like proof of income, copy of bank statements for the last six months should also be
submitted the bank for assessing the credit worthiness of the applicant. A photograph of the
applicant should also be 8'ven along with the application form.
*

2. Assessment of credit wothiness of the applicant

The bank will go through the application form to assess the credit worthiness of the
a ppl ica nt . The assessment is based on the fi nanc ia l soundness a nd f i na nc i a l history of the
applicant. The bank also ask for references to check the antecedents of the applicant.

The credit card application can be rejected by a bank if ;

a) The applicant has made any default in payment of any loans or payments to credit card
companies in the past.

b) The applicant has not fulfilled the income criteria specified by the card issuing bank.

c) The applicant has not made himself available to the credit investigating agency which
represents the card issuing bank.

3. Issue of credit card

If the c ar d issuing b a n k is s a t i s f i e d w i t h the documents submited and about the credit

worthiness of the applicant, it will take necessary steps to issue a credit card after assigning the
credit limit. Normally it takes] to 4 weeks to send the credit card to the applicant. The bank will
always send the credit card through registered post or reliable courier to ensure that the card is
delivered only to the applicant.

Advantages of Credit cards

Bank credit cards provide the following benefits to the cardholders.

1) The burden of carrying huge amount of cash, while going for shopping or any other business or
personal purposes, is removed.

2) Credit Card provides convenience and security to the card holder.

3) The card holder is relieved from the danger of pick pocketing a lot of cash.

4) The cardholder need not approach the bank every now and then to sanction credit
facility. He can continue to a v a i l t he c r e d i t f a c i l i t y up to the sanctioned limit for the
agreed period.

5) Credit card is very useful to the holder d u r i n g business trips and holiday travels to any
foreign countries. Credit cards issued by leading banks are acceptable all over the world.

6) Credit card enhances the purchasing power of the cardholder.

7) The cardholder is not required to pay any interest on the credit sanctioned provided he pays
the sum within a specified time.

8) The cardholder is required to settle his account with the bank only once in a month. It helps
him to avoid the burden of going to the bank every time when he requires money.

9) It helps the cardholder to travel in any part of the world without carrying foreign currencies.

10) Credit card holders are offered fabulous discounts on the purchases made using credit
cards by international brands like Nike, Levis etc.

Disadvantages of credit cards

Despite the popularity of credit cards, there are certain disadvantages of using credit cards.
They are;

a) Risk of overspending

Credit card is an encouragement to those people who like to purchase things, but may not have the
cash amount available with them at the time of purchase. As the amount

Of purchase is paid later, there is a tendency among credit

card holders to buy goods that are less urgent and >. tendency may lead to spending money
disproportion to their income.
b) Financial indiscipline

The use of credit cards pave the way for financial indiscipline by the users. It has become
quite common to come across individuals who have had several credit cards with high credit
limits and ultimately fallen in debt trap.

c) High interest rate

Banks charge high interest rate for providing the service of credit cards particularly to those
card holders who do not make the payment within the stipulated timt period. This high rate of
interest, quite often, turns out to be fuel to the fire which ultimately increases the liability of the card
holder.

d) Risk of fraud

Now a days credit card frauds are on the rise. There are several unscrupulous people who
collect credit card numbers whether by copying the details during an actual transaction or by
stealing them from the internet website database. These people then make purchases by using
these details and the car d holder gets a statement of transactions which he is unware of.

Debit Cards

A Debit Card is a plastic card which provides an alternative payment method to cash while
making purchases. A debit card is basically a better way of carrying cash or cheque book. A debit card
can be used to withdraw cash from a bank like an ATM card and it can also be used at stores to pay
for goods and services in place of a cheque. Debit and allows the holder to spend only what is in his
account. Debit cards are more readily accepted by merchant establishments since they get instant
payments.

A debit card is different from credit card on the following points.

a) When credit card is used the card holder is borrowing funds from the bank. On the other
hand, when debit card is used the card holder is drawing funds from his deposit accounts.
In other words a debit card uses the money the card holder have and a credit card uses
the money the card holder does not have.

b) If credit card means "pay later" debit card means "pay now".

c) In the case of credit card, the card holder makes the cash payment not at the time of purchase
of goods and services but at the end of the month. On the other hand, in case of debit card
the card holder makes the payment from his own deposit account at the time of making the
purchase.

Types of debit cards

 There are two types of debit card. They are direct debit card and deferred debit card. This
classification is based on the way in which debit card transactions are processed.

a) Direct debit card

Direct debit cards require electronic authorization of every transaction and the debits are
reflected in the card holder’s account immediately. Direct debit card allows only 'on-line'
transactions and there is an immediate electronic transfer of money from card holder's bank
account to the. merchant's account. In the case of direct debit cards the system immediately
checks whether the card holder has necessary funds in his account for the purchase.

b) Deferred debit card

A deferred debit card allows 'off-line' transactions. The merchant's terminal reads the card and
creates debit against the card holder's account. However, transactions conducted with deferred debit
cards require two to three days to be reflected on the card holder's account balances, Deferred debit
cards have the logos of major credit cards (Visa or MasterCard) or major debit cards (Maestro) and
are used at the Point of Sale (POS) like a credit card.

Advantages of debit cards

The following are some of the advantages of debit cards.

a) A customer who is not as credit worthy to get a credit card can obtain a debit card without much
difficulty and make plastic transactions.

b) Since the use of debit cards is limited to the existing funds in the account, there is no problem of
financial indiscipline and overspending by the card holders

c) Debit cards are accepted by merchants wit h less identification and scrutiny.

d) Debit card relieves the cardholder from the durden of carrying cheque book or cash.

e) Debit card is of much use to international travellers because they need not carry travellers
cheques or cash during their journeys.

f) As the debit card holder is drawing his own funds from his deposit account, there is no
question of 'charging interest, late fees etc. by the banks.

g) A debit card may be used to obtain cash from an ATM

Internet banking
Internet banking is a method by which the customer is allowed to perform banking transactions through
bank’s website hosted in the internet. This is also called virtual banking, online banking or anywhere
banking. Internet banking helps the customer to bring the bank to his computer at the place and time of
his choice. Through online banking a customer can perform all routine transactions like money transfer,
balance enquiry, bill payments etc. Broadly the level of banking offered through internet can be
classified into two levels:

a. Transactional
b. Non Transactional

Transactional

At this level, customer is allowed to operate their accounts for transfer of funds, payment of insurance
premium, booking and cancellation of train and air tickets, purchase and sale of securities, applying for
loans and repayment of loans etc.

Non Transactional

At this level, customer is not permitted to do any fund based transactions on their accounts. But a
customer can make balance enquiries, get on line statements etc.

Internet banking - Features

1. It involves the use of internet for delivery of banking products and services
2. It helps the customer to manage their account quickly and efficiently by replacing the
time consuming paper based aspects of traditional banking
3. It helps customers to carry out their banking tasks during the day or night, from home or
office. It promotes any time-any where banking.
4. It helps the expansion of customer base through increased geographical reach, serving
millions of customers at the same time.
5. It has built in security features such as encryption, prescription of maximum monetary
limits and authorisations
6. It provides quick and speedy information on various banking products and services
7. It eliminates costly paper processing
8. It helps customers to obtain banking services as per their conveniences
9. It has the ability to generate income, attract customers, enhance image, reduce
customer attrition rate and combat competition

Factors responsible for growth of internet banking

 There are a large number of factors which are responsible for the growth of internet
banking services. Some of them are as follows.

1. Competition

Now a days competition among the banks are on the rise. This competitive pressure is the
chief driving force behind the increasing use of internet banking technology Banks use internet
banking as a tool for keeping existing customers and attract new customers.

2. Cost efficiency

One of the factors that contribute to the growth of internet banking services is cost Banks
can provide banking services on the internet at transaction costs far lower than traditional brick
and mortar banks.

3. Wider reach

Internet banking services can be availed by custom from any part of the world. Banks can
increase their customer base through wide geographical reach of internet banking sevices.

4. Relationship marketing

Building relationship with customers is an important pre-requisite for winning customer

confidence. Internet banking technology and products can act as a means for bank to develop
and maintain an ongoing relationship with their customers by offering easy access to a wide
range of products and services, e

5. Round the clock access

Internet banking services are provided to customers on 24 x 7 basis without charging any
extra cost from them. Moreover customers can access the bank from any where, any time at
one's own convenience.

Advantages

The advantages of internet banking can be classified under two heads as (a) advantages to
customers and (b) advantages to banks.

Advantages to customers

Customers derive the following benefits from internet banking services.

a) Low transaction costs

b) Customers can carry out a number of transactions sitting on one's seat with just a few
clicks on the computer system.

c) Customers get upto date information. The accounts of customers are updated as soon as a
transaction takes place.

d) The speed of transactions is faster than traditional banking channel.

e) It is easy for the customers to navigate the bank site due to comprehensive help menus
and simple software requirements.

f) Customers are relieved from the botheration of traveling to and from a bank branch.

g) Customers get round the clock accessability to banking services.

h) It ensures privacy of banking transactions.

i) Customers can make online bill payment for shopping, travel and donation transactions.

Advantages to banks

Banks enjoy the following benefits by providing internet banking services.

a) Internet banking has resulted in lesser pressure on employees in terms of entertaining

customers. This reduces the administration cost.

b) Banks can easily make publicity about their new banking products and services without
any wastage of time and resources.

c) It provides banks an opportunity to have access to a large market.

d) It reduces errors, time consumed and overhead costs.

e) It improves competitive position of banks.

f) It eliminates costly paper processing.

g) Banks acheive economies of scale since they are able to provide more services at lower costs.

h) It is a powerful tool for improving customer satisfaction as well as increasing cross -

selling opportunities.

f) It provides an o ppo rtuni t y for banks to tailor products and services as per customer's
requirements.
Disadvantages

Despite the above mentioned advantages, internet banking suffers from the following
disadvanatages.

a) Accessability to internet by customers is poor particularly in countries like India where

penetration of PCs and other devices for access to internet is minimal.

b) The entire system of online banking goes waste when customers are not technically literate.

c) Internet banking creates a fear in the minds of customers regarding the security of
transactions. Customers fear that their accounts could be viewed and manipulated by
others.

d) Many customers hesitate to deal with an internet bank as they are not sure of the quality
of products and services they will receive.

e) There are various banking products like loans and mortgages, withdrawal of cash etc. that
require to be delivered in the physical form. These products and services cannot be
offered through internet banking.

f) There is lack of human interface in internet banking

ELECTRONIC CHEQUE

“ A cheque in the electronic form means a cheque which contains the exact mirror image of a
paper cheque, and is generated, written and signed in a signature and a symmetric crypto
system.”

Essential Features of E-cheque

 It is the exact mirror image of a paper cheque. In other words, it is the electronic image
of a paper cheque.
 It is generated, written and signed in a secured manner using digital signature which has
been legally recognized.
 It may or may not have bio-mertic signature
 Digital signature of the drawer is compulsory
 There should be minimum safety standards like asymmetric crypto system.
PROCESS OF PREPARING E-CHEQUE

Step 1: prepare a physical paper cheque as usual with all details like date, name of the payee, a
mount, signature etc.

Step 2: scan the paper cheque so pepared and create an electronic image of the cheque.

Step 3: add digital signature to the e-cheque.

Step 4: make it secure under the asymmetric crypto system by using the private key of the
drawer.

Step 5: add biometric signature to the e-cheque if desired

Step 6: forward the e-cheque to the payee through e-mail or internet.

Step 7: the drawee bank is bound to honour it after verifying the digital signature.

MECHANISM OF E-CHEQUE

 The drawer prepares the e-cheque in his computer with the help of a specialized
software
 He enters all the particulars like name of the drawee bank, date, payee, amount,
signature etc. and fills them up.
 He signs the same with his digital signature.
 It is then forwarded to the payee through e-mail or internet
 The payee, upon receiving the e-mail, opens the e-cheque with a specialized software.
 After verifying the authenticity of the drawer’s signature, he endorses it as usual for
getting payment. He also writes out a deposit slip and signs the same with his digital
signature.
 Then, the payee forwards the e-cheque along with the deposit slip to his bank through
e-mail.
 The payee’s bank verifies the signature of the drawer and honours it by debiting the
account of the drawer and effecting payment to the payee’s bank by crediting its
account

Advantages of E-cheque
1. Offers more convenience: One need not carry physical cheque book with with himself
always for transacting banking business. A specimen chequecan be prepared on an
electronic mode and stored in the computer itself. Whenever, a cheque has to be
drawn, the drawer has to simply fill up the particulars and send it immediately through
e-mail. He can sit leisurely and prepare it in his house.

2. Anytime cheque: E-cheque can be drawn and banking business can be transacted at
any time during the day. But, physical cheque has to be transacted only during the
banking hours.

3. Less expensive: In these days, the cost of producing, issuing and maintaining paper
cheques is going up like anything. The cost of producing an e-cheque is practically nil.
The handling cost is considered also low.

4. Avoids loss in transit, bad delivery, etc: There is very possibility of the physical cheque
being loss in transit. The question of loss in transit, bad delivery,etc does not arise in the
case of an e-cheque.
5. More protection: Alterations unauthorised by the drawer can take place easily on a
paper cheque. The signature can be forged skilfully and payment can be obtained by
unscrupulous persons. They cannot take place on an e-ssscheque. More authenticity
and security have been provided to e-cheque by means of digital signatures.
6. Avoids delay in payments: A paper cheque sent for collection requires a long period for
its realization. But, a physical cheque can be converted into a truncated cheque and it
can be credited to the payee’s banker’s account instantly and there is no delay in
encashing that e-cheque.
7. Facilitates e-banking: E-cheque is a boon to e-cheque. E-cheque facilitates the
performing of banking transactions around the clock. There are no restricted office
hours either for e-cheque or for e-banking.
Module 4
Reserve Bank of India and its functions, Banking Sector Reforms, Basel Norms, Capital
Adequacy Norms, Global Challenges in Banking Services, Business strategies of banks,
Instruments of credit control

Functions of RBI

RBI

Traditional Developmental
Functions Functions

Central Banking General Banking Prohibitory

Functions Functions Functions

The main function of RBI is to regulate the monetary system of the country in such a way that
the balance of economic growth of the country is achieved along with economic stability.
According to Preamble of RBI Act 1934, “ The main function of RBI are to regulate the issue of
bank notes and keeping of reserve with view to securing monetary stability in India and
generally to operate the currency and credit system of the country to its advantage.

Functions of RBI may be broadly classified into two categories:

1. Traditional function
2. Development Function

1. Traditional Functions
 The traditional functions of RBI are further divided into three types:
A. Central Banking Function
B. General Banking Functions
C. Prohibitory Functions
A. Central Banking Functions
1. Issue of Paper Currency
2. Regulation of Credit
3. Banker’s Bank
4. Banker of the Government
5. Regulation of foreign exchange
6. Other functions
B. General Banking Functions
a. Accepting Deposits
b. Bills Discounting
c. Advancing Loans
d. Deal in foreign securities
e. Deal in costly metals
f. Deal with other countries’ bank
C. Prohibitory Functions
1. The bank cannot participate in trade, commerce, or industrial activities of the
country
2. RBI cannot purchase its own shares or shares of any other bank or a company. It

Functions of RBI

1. Issuing currency notes

The bank has the sole right to issue notes of all denominations, except one rupee note and coins which
are issued by the ministry of finance. RBI issues and distributes currencies through its two major
departments:

2. issue department
The main function is to issue and distribute paper currency. The issue department maintains
currency chests with the branches of SBI group, government treasuries and public sector banks.
Currency chests are boxes where stocks of notes and coins are kept.

3. banking department
The main functions are
 1. deals with government transactions
2. maintains cash reserves of scheduled banks.

Whenever currency circulation declines, banking department transfers eligible securities to the issue
department, on the basis of which issue department issues more currency notes.

RBI follows minimum reserve system of note issue:

According to this system, RBI has to maintain a minimum reserve of Rs 200 crores, out of which Rs
115 crores are to be kept in the form of gold reserves and Rs 85 crores in the form of foreign
exchange reserves.

2. Banker to the Government

It acts as an agent and adviser to the Government of India.

1. It maintains and operates government deposits

2. It collects and makes payment on behalf of Government
3. It sells for the Central government treasury bills of 91 days duration
4. It undertakes foreign exchange transactions on behalf of government
5. It acts as an agent of Government in dealing with world bank
6. It advises Government on all financial matters such as formulation of five year plans, economic
development, banking, agricultural and industrial finance etc.
7. It advances money to the Central Government in times of emergency. Loans and Advances given
by RBI to central government for a short period is called Ways and Means Advances
3. Banker’s Bank
Being the apex financial institution in the country, RBI controls and regulates the activities of all
scheduled commercial banks

1. It keeps reserves of commercial banks.

2. It serves as lender of last resort by meeting the immediate cash requirements of commercial
banks in India
3. It provides clearance and remittance facility to commercial banks
4. It rediscounts the eligible bills of commercial banks during the period of their financial
emergency.
4.Control and Management of Foreign Exchange Reserves
 RBI is the custodian of India’s foreign exchange reserves. All Indian remittances to foreign
countries and foreign remittances to India are made through RBI. Foreign currencies received by
persons in India are to be exchanged for Indian currencies either to RBI or through its approved
commercial banks. Exchange rate stability is maintained by RBI.

5. Credit Control

RBI controls the availability of credit in the Indian economy. It is the commercial banks that
make the credit available in the economy. Since the commercial banks are controlled by RBI, the
availability of credit in the economy is controlled by controlling the activities of commercial
banks. RBI exercises control through quantitative and qualitative measures.

6. Collection of Data and their Publications

RBI collects statistical data and economic information through its department of economic
analysis and policy. It conducts research on financial and banking conditions of the country. It
collects data on money, finance, credit, industrial production etc. RBI bulletin, Report on trend
and progress of banking in India are some of the publications of RBI

7. Other Developmental and Promotional Functions

1. Provides training facilities to banking personnel at different levels through various training
institutes set up by RBI
2. RBI channelises credit to priority sectors like agriculture, small scale industries etc.
3. It sets up various institutions for rural and industrial finance
4. It assists government in economic planning
5. It appoints committees, from time to time to enquire into the problems of money and banking
and to suggest measures to resolve them.
Banking Sector Reforms

The first phase of banking sector reform began in 1992 was focused on transparent accounting norms,
cleansing the balance sheet, reduction in statutory pre emption of resources of banks and deregulation
of interest rate. The following were the area identified for bringing improvements;

 Liberalization of interest rate on deposits and loans and advances

 Phased reduction in statutory pre-emption
 Encouraging private sector to banking operations for bringing more efficiency in services and
also the spirit of competitiveness
 Bringing transparency in financial reporting
 Fixing capital standards as per Basel accord Capital Standards
 Fixing prudential norms for asset classification, income recognition and provisions for bad
debts
 Added focus on reduction of NPAs
 Bringing operational autonomy
 Diversification of banking operations
 Improved profitability and efficiency
 Better supervisory arrangements for banks by RBI
 Added focus on IT related services
 Disinvestment of public ownership
After the implementation of reform process in the first phase based on Narasimham Committee
recommendations, the committee submitted second report for implementation which is known as
second generation reforms. In the second phase, emphasis was on:

 Reduction of government stakes in banks to 33%

 Stricter prudential norms
 Greater emphasis on asset liability management
 Introduction of narrow banking concept to rehabilitate weak banks
 Setting up of asset reconstruction fund
 Integration of NBFC with financial system
 Consolidation of banking industry by merging strong banks
 Focus on rationalization of staff strength and branches
BASEL Norms

 The central bank governors of the G10 countries established a Committee on Banking
Regulations and Supervisory Practices.
 The group of ten countries consist of Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, the United Kingdom and the United States, Switzerland was also included
as part of the group.
 Later renamed as the Basel Committee on Banking Supervision(BCBS)
 The Basel Committee on Banking Supervision provides a forum for regular cooperation on
banking supervisory matters
 Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with
the purpose of enhancing financial stability.

• Basel Committee on Banking Supervision (BCBS) came into being under the patronage of Bank
for International Settlements (BIS), Basel, Switzerland.

• The Committee formulates guidelines and provides recommendations on banking regulation

based on capital risk, market risk and operational risk

• Currently there are 27 member nations in the committee

• Basel guidelines refer to broad supervisory standards formulated by this group of central banks-
called the Basel Committee on Banking Supervision (BCBS)

• The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial
system are called Basel accord

• The purpose of the accord is to ensure that financial institutions have enough capital on
account to meet obligations and absorb unexpected losses. India has accepted Basel accords for
the banking system

• Credit Risk - Credit risk is most simply defined as the potential that a bank’s borrower or
counterparty may fail to meet its obligations in accordance with agreed terms
• Market Risk - Market risk refers to the risk to a bank resulting from movements in market prices
in particular changes in interest rates, foreign exchange rates and equity and commodity prices.

BASEL I

Risk management (Focused on Credit Risk, No recognition of operational risk)

•Capital adequacy, sound supervision and regulation

•Transparency of operations – Unquestionably accepted by developed and developing countries –

Capital requirement 8% of assets (banks were advised to maintain capital equal to a minimum 8% of
a basket of assets measured based on the basis of their risk)

• Tier 1 capital at 4% • Tier 2 capital at 4%

Capital Adequacy Framework

A bank should have sufficient capital to provide a stable resource to absorb any losses arising from
the risks in its business.

• Capital is divided into tiers according to the characteristics/qualities of each qualifying instrument.

• For supervisory purposes capital is split into two categories: Tier I and Tier II.

Tier I capital -Share capital and disclosed reserves and it is a bank’s highest quality capital
because it is fully available to cover losses.
 Tier II capital on the other hand consists of certain reserves and certain types of subordinated
debt.

• The loss absorption capacity of Tier II capital is lower than that of Tier I capital.

• The twin objectives of Basel I were:

– (a) to ensure an adequate level of capital in the international banking system &
– (b) to create a more level playing field in the competitive environment.

BASEL II – The New Capital Farmework

• In June 1999, the Committee issued a proposal for a new capital adequacy framework to replace
the 1988 Accord
• This led to the release of the Revised Capital Framework in June 2004. Generally known as
‟Basel II”,
• The New Basel Capital Accord focused on, three pillars viz. – Pillar I - Minimum capital
requirement – Pillar II - Supervisory review – Pillar III - Market discipline

Pillar I - Minimum Capital Requirement

The Committee on Banking Supervision recommended the target standard ratio of capital to Risk
Weighted Assets should be at least 8% (of which the core capital element would be at least 4%).

The minimum capital adequacy ratio of 8% was prescribed taking into account the credit risk.
However, in India the Reserve Bank of India has prescribed the minimum capital adequacy ratio of
9% of Risk Weighted Assets.

Pillar II - Supervisory Review

The Supervisory review should be carried out in the following manner.

 • Banks should have a process for assessing their overall capital adequacy
• Supervisors should review banks’ assessments – Banks are expected to operate above minimum
• Supervisor’s intervention if capital is not sufficient

Pillar III: Market Discipline

Role of the market in evaluating the adequacy of bank capital

• Streamlined catalogue of disclosure requirements

• Close coordination with International Accounting Standards Board

• In principle, disclosure of data on semiannual basis

Global challenges in Banking Services

 Liberalisation and functional autonomy have made the banking market extremely competitive
with operational flexibility and decontrolled interest rate and liberalized norms for foreign
exchange businesses.
 The deregulation of industry coupled with decontrol in interest rate has led to a number of
players in the banking industry. The credit take off from banks particularly for the corporate
sector has declined because of economic slowdown on one side and availability of new cheaper
instruments on other side.
 Banks are transforming into universal banking; adding new channels with attractive pricing and
adopting cross selling practices. The challenge is to serve customers by adopting sophisticated
IT Techniques.
 Proper development of infrastructure is needed to satisfy increased demand of customers in
terms of efficiency and speedy services. The concept of operating banking from home is gaining
more importance. This will increase in future.
 Because of increased competition, the interest margin of banks are getting lower as there are
many banks operate at lower operational cost due to advanced technology. This poses a serious
challenge to public sector banks where operational cost is higher
 Retention of customers is another challenge as customers becomes demanding and the loyalties
are diffused. There are multiple choices for a customer. Switching to another bank is possible at
low cost.
 Another major challenge for the banks is the growth of money market and capital market which
helps the corporate customers to satisfy their financial requirements at a lower cost through
innovative and low cost instrument. This will reduce the dependency of corporate customers on
banks.
 The Indian banks are striving to cope up with the compliances of Basel II norms which stress
more on risk assessment and control. The Basel III norms which are more strict may throw
another challenge to banks
 The inclusive banking as a strategy for inclusive growth process offers wide opportunities for
expansion of banking services and branches in unbanked rural areas. In this scenario, availability
of resources with bank has to be thought of.
 The macroeconomic policies of the government which cause inflation in the economy, has direct
impact on interest rate and cost of funds to the banks.
 Another challenge is mainly for public sector banks as the role of private sector bank has been
increasing continuously.
 The true professional approach as a banker will be the greatest challenge for a successful banker
in the days to come.
 New Trends in banking services:- Business Strategies of banks

The individual banks have developed their own innovative strategies and initiatives to strengthen the
customer relationship. For example, SBI took the following initiatives;

Segregating and targeting existing high value customers

Cross sales of other products
Setting up call centers and outbound sales force to secure new customers
Plans were also made to utilize database marketing to pursue large and medium sized
corporate, government and trade finance customers.
Aggressive marketing through print and television media

Marketing Mix in banking Services

Price

The method used by banks for pricing include “cost plus”, “transaction volume base” and
“challenging leader”

Distribution

The features of banking make personal interaction between customer and bank necessary.
Therefore direct distribution is the best strategy. This is also done through e-banking.

Promotion

Personal selling
Bank employees, branch head, take active part in selling
Advertising
Public Realtions
Give information about activities of bank

Innovative banking Services and Products

Relationship marketing
Marketing banking services have shifted from transactions to relationship. Relationship
marketing is the activity done by banks to attract, interact and retain more profitable
customers.
Relationship banking
 Focuses on customer relation
 Orientation on product benefits than product features
  Higher emphasis on customer service
 Higher customer commitment
 High customer contact
 Quality in the concern of all
Cross selling
Cross selling is selling an additional product to an existing customer. If the bank is able
to sell an asset, product (housing/car/education loan), mutual fund, Insurance, credit
card to a savings account holder, it is cross selling.

Corporate Banking
It means comprehensive and exclusive provision of customized banking services to
corporate clients.
Universal Banking
It is a combination of commercial banking, insurance services and investment banking.
Under this system, bank has a role of financial supermarket as a range of financial
services are provided under one roof to customers.
Private banking
Private banking is the provision of banking, investment and other financial services by
banks for rich customers. It is also referred to as wealth management services.
Personal Banking
Banks identify a few selected branches to provide personalized banking services. The
motto is individual customer focus.
Correspondent banking
It is the banking services offered by one financial institution to another financial
institution.
Mobile banking
This is conducting banking transactions by logging on to a bank’s website using mobile
phones.
Online Banking
This is transacting banking business via electronic networks.
Islamic banking
This is banking carried out in accordance with Islamic law. Collection of interest is
prohibited.
Offshore banking
Provision of banking services to non residents.

Green banking: A new Strategy

This is a new concept which promotes environment and social commitment. Following are the green
banking initiatives taken by banks in india:
 IndisInd Bank:- Solar Powered ATMs

This bank implemented first solar powered ATM as part of Green Office Project. It also unveiled
Green Office Practices

 SBI Green Banking Policy

SBI set up wind mills to generate 15 MW of power in TamilNadu, Maharashtra and Gujarat for
its own consumption. SBI also introduced Green Home Loan scheme which will support
environmental friendly residential projects .and will offer various concessions- reduced margins,
low interest rate and zero processing fee.

 IDBI Bank
IDBI is a member of National Action Plan for climate change
 Yes Bank
Through it’s retail branches, Yes bank is incorporating community development initiatives such
as clean and green drives, energy efficiency practices, work place health etc…
Instruments of CREDIT CONTROL

Credit control is a mechanism through which the central bank exercises control over the total money
circulation in the country. Depending on the situation prevailing in the economy, central bank is able to
increase or decrease the total money circulation in the economy. Credit control is done by the central
bank through the commercial banks by giving instructions and guidelines on their working from time to
time and checking their activities. In simple terms, control of credit means the regulation and control of
bank advances.

Objectives of Credit Control

8. Price Stability
One of the main objectives of credit control is to maintain price stability in the country by
controlling the volume of credit. Inflation occurs when there is excess credit, and deflation occurs
when there is shortage of credit.

9. Stabilty of foreign exchanges

10. Elimination of business cycle
The ups and downs in the economic activities due to fluctuation in the price level is known as
business cycle.

11. Economic Growth

This is achieved by promoting savings, mobilization of resources, encouraging the requirements of
different sectors etc.

The methods of Credit control are divided into two:

10. Quantitative or General credit control

11. Qualitative or Selective Credit control

A. Quantitative or General credit control

Quantitative credit control aims at regulating the volume of bank advances ie to make the banks lend
more or less.

(a) Bank Rate Policy

 Bank rate is the rate of interest on loans and advances given to commercial banks by RBI. It is
different from market interest rate in the sense that former is the rate of interest charged by the
Central bank, while latter is the rate of interest charged by the financial institutions in the market.
By making variations in the bank rate, Central bank can influence the volume of bank credit available
in the country.

When the bank rate changes, market interest rate also changes, making credit costlier or cheaper
and affecting its demand and supply. When RBI feels that there is excess credit in the country, it
raises the bank rate so that cost of borrowing of the commercial bank increases. This causes a rise in
the market rate, which will discourage business activity, and the demand for credit falls. This will
result in the reduction of credit available in the country. When the RBI feels that there is lower
volume of credit in the country, it cuts the bank rate so that business activity in the country
flourishes which causes an increase in the volume of credit.

(b) Open Market Operations

Open Market Operations means purchase and sale of any kind of securities by the Central bank.
These securities can be bills and bonds of Government, or any other public securities. OMO is a
deliberate attempt by the Central Bank to influence the volume of credit available in the country.

Sale of securities by the central bank leads to contraction of credit while purchase leads to credit
expansion. When the RBI sells securities in the open market, the customer’s deposits with the
commercial bank decreases because these customers purchase the securities sold by the Central bank.
When the deposits of the commercial banks decrease, the credit creation capacity of commercial banks
also come down. The ultimate result is the contraction of bank credit available in the country. When the
central bank purchases securities, reverse happens.

(c)Variable Reserve Ratio

Every commercial bank is required by law to keep a certain percentage of its deposits as reserves with
the central bank. This is known as cash reserve. Cash Reserve Ratio is the ratio of reserves kept with the
central bank in proportion to the total deposits of the commercial bank. The RBI has the authority to
increase or decrease the CRR depending on the credit needs of the country. When the central bank feels
that there is excess credit in the country, it will increase the CRR. When CRR is increased, all commercial
banks in the country have to keep more cash with the central bank. This reduces the lending capacity of
all the commercial banks, which will ultimately lead to contraction of credit in the country. When the
central bank decreases the CRR, reverse happens.

(d) Variations in SLR

SLR means Statutory Liquidity Ratio. Every bank is required to maintain a certain percentage of their
demand and time liabilities as SLR. SLR refers to cash in hand, gold, central and state government
securities, balances in the current account with RBI as certain percentage of demand and time liabilities.
RBI is empowered to fix the SLR. When the central bank feels that there is excess credit in the country, it
will increase the SLR. When SLR is increased, lending capacity of commercial banks come down.

B.Qualitative credit control

(a)Fixation of margin requirements

Margin is the difference between the market value of a security and the amount of loan granted by
commercial bank against a security. In other words, margin is that percentage of the value of a security
that cannot be borrowed by a customer. For example, if the market value of a security is Rs 10,000 and
the margin is 25%, a commercial bank can lend only Rs 7,500. The central bank has the power to fix the
margin to be kept by the commercial banks on their loans. If the central bank wants to reduce credit, it
raises the margin and vice versa.

(b)Regulation of consumer credit

This is done by regulating the demand for consumer durable goods. Under this method, credit is
controlled by laying down rules regarding minimum down payment and duration of loans. If the cost of
consumer durable good is Rs 10,000, and the bank fixes 50% minimum down payment and period of
loan as 10 months. Then the borrower has to pay Rs 5000 immediately and the remaining amount in 10
equal installments of Rs 500 each. If the RBI finds depression in a particular economy, it reduces the
down payment and extends the maturity period of loans. If it finds boom, it hikes the down payment
and lowers the maturity period.
(c) Moral suasion

The central bank persuades the entire commercial banks to co-operate with the general monetary
policy. It may take many forms. It may request the commercial bank not to approach the former for any
financial assistance or not to finance any unproductive activities.

(e) Direct Action

Direct action is done by the central bank when the commercial banks do not follow its instructions.
Under direct action, central bank refuses to rediscount the bill of erring commercial banks. It may charge
higher rate than bank rate as penal interest.
Module 5
Merchant Banking- Historical Perspective- Nature of services provided by
merchant bankers- structure of merchant banking firm- setting up and managing
a merchant bank- SEBI regulations on merchant banks

Merchant Banking:- Historical Perspective

Introduction

The origin of merchant banking can be traced back to the period when people used to deposit
their money and other valuables with grain merchants in their locality for safe custody before
going to a trip. On returning from their journey, they collected their belongings from the
merchants. There were no charges for safe keeping. Later merchants realized that the money
deposited with them can be used for lending. Merchants started lending to the needy in that
area and charged interest for the amount. Some merchants shared their interest income with
the depositors. As time passed, people who were not going for journey also started depositing
their excess money with merchants for interest. Merchants used that money for lending and
started making profit. Kings used to borrow funds from merchant bankers to fight wars. Thus
merchants who were involved in the business of banking came to be known as merchant
bankers.

The business of merchant banking got acceleration with industrial revolution. As industrial
activities expanded, business of merchant banking grew at a faster pace. Some of the
prominent merchant bankers were Baring Brothers, Rothschild, Warburg, Schroder etc.

As the years passed by, the original merchant bankers diverted from their traditional trading
activities and concentrated more on providing financial services. Further, the business of
merchant banking became more attractive and many players entered the field. So the merchant
banking business became more competitive. In order to survive, merchant bankers diversified
into new lines of business, which included discounting of bills, managing issue of securities,
arrange finance for projects located abroad etc.

After the Second World War, industrial activity picked up and development activities
accelerated in many countries. This provided many opportunities for merchant bankers. They
started specializing in activities such as issue management, bill acceptance, corporate
restructuring, mergers and takeovers etc. Thus the role of merchant banks evolved.
Merchant Banking in India

Merchant banking in India started in the 19th century with the establishment of agency houses
of London based merchant banks. The agency houses were primarily engaged in overseas trade
and commerce. They also provided financial services like bill discounting. East India house was a
popular agency house at that time.

After the Second World War, industrial activity picked up in India. Companies floated different
kinds of securities in the market to raise capital. Merchant banks were engaged in stock broking
and underwriting of securities.

In the post independence era, Government of India established financial institutions such as
Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI) to
provide development finance to the industry. The establishment of LIC and UTI gave further
boost to capital market activity. They also took up merchant banking activities like underwriting
of public issue.

Merchant Banking as a specialized business started in India with the establishment of merchant
banking division of National & Grindlays Bank in 1969. The first National City bank also opened
a management consultant division in 1969 to take up merchant banking activities. When these
two foreign banks started merchant banking activities in India, nationalized commercial banks
started exploring the possibility of merchant banking activities.

As per the recommendation of Banking Commission (1972), SBI opened its merchant banking
division in 1972-73. Term lending institutions like ICICI, IFCI, IDBI also entered into merchant
banking business. During 1971-73, only 60 companies had gone public. In 1985-86, 760
companies went public. Along with increasing number of companies going public, many
merchant banking firms mushroomed. Private firms including DSP Financial consultants,
Twentieth Century Finance Corporation and Credit Capital Finance Corporation entered the
merchant banking business. Some of the commercial banks set up subsidiaries like SBI Capital
Markets.

To meet the increasing demand of the industry, merchant bankers designed and developed a
variety of financial services.

Concept of Merchant Banking

According to SEBI, “ a merchant banker is a corporate body which is engaged in the business of
issue management either by making arrangements regarding selling, buying or subscribing to
securities or acting as a manager, consultant, advisor, or rendering corporate advisory services
in relation to issue management.”

Merchant Banking Services

1. Project Counselling Services
2. Corporate Counselling Services
3. Capital restructuring services
4. Issue management services
5. Portfolio Management
6. Venture Capital Financing
7. Public Deposits
8. Loan/ Credit Syndication
9. Arranging Working Capital Finance
10. Bill Discounting
11. Lease Finance
12. Specialised services

1. Project Counseling Services

Project counseling covers the study of the project, offering advisory assistance on the
viability and procedural steps for its implementation.

Following are the activities forming part of Project Counselling:

1. Undertaking general review of project idea

2. Providing advice on procedural aspects of project implementation
3. Conducting review of technical feasibility of the project on the basis of report
prepared by own experts
4. Assisting in the selection of Technical Consultancy organization for preparing project
reports and market survey
5. Assisting in the preparation of project report from a financial angle and advising and
acting on various procedural steps including obtaining government consent for
implementation of project
6. Assisting in obtaining approval from government agencies
 7. Providing guidance to Indian entrepreneurs for making investment in Indian projects
in India and in Indian joint venture overseas
8. Identification of potential investment avenues
9. Carrying out precise capital structuring and shaping the pattern of financing
10. Arranging and negotiating foreign collaborations, amalgamations, mergers and
takeovers
11. Advising and assisting clients in the preparation of financial assistance to various
financial institutions

2. Corporate Advisory Services

A merchant banker guides the client on aspects of organizational goals, locational
factors, organization size, operational scale, choice of product, sales forecasting, cost
reduction and cost analysis, allocation of resources, pricing methods, marketing strategy
etc.

Following activities form part of corporate counseling

1. Providing guidance in areas of diversification based on Government’s economic and

licensing policies
2. Undertaking appraisal of product lines, by analyzing their growth and profitability
and forecasting future needs
3. Rejuvenating sick units by appraising their technology and process, assessing their
requirements and restructuring their capital
4. Commissioning of diagnostic studies
5. Planning for rehabilitation of sick units through modernization and revamping their
organizational structure
6. Arranging for approval of banks for schemes for rehabilitation involving financial
relief
7. Assist in getting soft loans from financial institutions
8. Monitoring of rehabilitation schemes

3. Capital Restructuring Services

Merchant bankers undertake the responsibility of designing the capital structure of the
client. They analyze various factors that govern the capital structure. The factors include
profitability, liquidity, control, nature of industry, timing, taxes etc.
 Following are the services covered:

1. Examining the capital structure of the client company and determine the extent of
capitalization required
2. Preparing a memorandum for SEBI and securing consent where capitalization takes
place through issue of shares
3. Suggesting extent of capitalization through fresh issue of securities, preference
shares etc.
4. Examine the tax implication of the issue of shares
5. Suggesting ideal capital structure for sick units
6. Capital restructuring also cover mergers and amalgamations

4. Issue Management Services

Issue management and underwriting services connects activities that are concerned
with the management of public issue of corporate securities like equity shares,
preference shares, debentures, bonds etc.

Following are the activities;

1. Preparation of an action plan

2. Preparation of budget for total expense of the issue
3. Drafting of prospectus
4. Selection of brokers and underwriters
5. Selection of Issue Houses and advertising agencies for undertaking pre-issue and
post issue publicity
6. Obtaining the approval of institutional underwriters and stock exchanges for
publication of prospectus
7. Making arrangements for designing and printing of prospectus and application forms
as well as their dispatch
8. Providing assistance in launching the issue in the form of advertisement campaign
by holding press, brokers and investors’ conference etc.
9. Coordination with the underwriters, brokers and bankers to the issue and stock
exchanges
10. Providing advice on design of sound capital structure, acceptable to financial
institutions
11. Determine the quantum, terms and timing of public issue
12. Arranging for stock exchange clearance and listing of securities
5. Portfolio Management Services
Making decisions relating to the investment of the cash resources of a company in
marketable securities by deciding the amount, timing and type of security to be bought
is known as Portfolio Management.

The services covered are;

1. Undertaking investment in securities

2. Undertaking investment for NRIs
3. Undertaking review of Provident Fund Investment, Trust Investment etc
4. Safe custody of securities
5. Investment advisory service to investors
6. Carrying out critical evaluation of investment portfolio
7. Securing approval from RBI for purchase or sale of securities (for NRIs)
8. Marinating investment records
9. Collecting interest and dividend on investment
10. Providing tax counseling and filing tax return

6. Venture Financing services

This is a form of equity financing for funding high risk and high reward projects. Many
merchant bankers provide venture capital funds to assist the entrepreneurs who lack
capital to be risked. Capital funds are provided for unproven ideas, products technology-
oriented or start up funds.
7. Public Deposits
Merchant bankers help companies in raising finance by way of public deposits.

8. Loan/ Credit Syndication

Merchant bankers provide specialized services in preparation of loan applications for
raising long term as well as short term credit from various banks and financial
institutions for financing the project.

Credit syndication involves the following services:

• Estimate total cost of the project

• Prepare financial plan to meet total cost
 • Assist client in preparing loan application to various Financial Institutions and
monitoring their progress
• Selecting Financial Institutions for financing
• Follow-up of loan application
• Speeding up legal documentation formalities listed by financial institutions
Arranging bridge finance

9. Arranging Working Capital Finance

o Assessing the working capital requirements

o Assist in preparing application for credit facilities for submission to bankers
o Assistance in negotiations for sanction of appropriate credit limits
o Speeding up documentation and other legal formalities
o Advice client for issue of debentures to meet long term working capital needs

10.Bill Discounting

In foreign countries, bill discounting is recognized as a merchant banking activity. In

India, this facility is not provided to corporate units by merchant bankers. The need for
such services in India was recommended by Banking Commission.

Proposed functions of merchant banker include:

– Finding reputation and financial standing of acceptor

– Collect information on borrowers
11.Lease Finance

• Lease is a contract between owner of the asset and user of the asset whereby owner
gives the right to use the asset to lessee over an agreed period of time for a
consideration called lease rental
• Following services are provided by MB:
o Advice on viability of leasing
o Fixing lease rentals
o Assist in documentation
12.Other Specialized Services

I. Foreign Currency Financing Services

 II. Fixed Deposit Brokering Services
III. Project Appraisal Services

I. Foreign Currency Financing Services

The finance provided to fund foreign trade transactions is called Foreign Currency Finance.
The main activities covered are:

 Providing assistance for carrying out the study of construction projects

 Providing assistance in making applications to RBI, ECGC
 Arranging for various types of guarantees, letter of credit, pre-shipment credit,
bridge loans..
 Providing assistance in opening and operating bank accounts abroad
 Arranging foreign currency loans under buyer’s credit scheme for importing goods
 Providing assistance in obtaining export credit facility from EXIM bank
 Providing guidance on covering exchange risk

II. Fixed Deposit Brokering Services

o Compute the amount that could be raised by a company in the form of deposits
o Advising the company on terms and conditions of fixed deposits
o Drafting advertisement for inviting deposits
o Filing a copy of advertisement with Registrar of companies
o Making arrangement for collection of deposit at bank’s branches

III. Project Appraisal Services

The various steps in project appraisal are:

a. Financial Appraisal
Financial appraisal involves assessing the feasibility of a new proposal for
setting up a new project or the expansion of existing production facilities.
Financial appraisal is done in order to gauge the viability of a project, rank
the project on the basis of viability.
b. Technical Appraisal
It is concerned with project concept in terms of technology, design, scope,
infrastructure facilities, etc.
c. Economic Appraisal
 Economic appraisal of a project deals with impact of project on
macroeconomic factors.

Structure of Merchant Banking Firm

CATEGORY I Preparation of prospectus, determining financial structure, tie –up of financiers, final
allotment and refund of subscription, act as adviser, consultant, manager, underwriter,
portfolio manager

CATEGORY II Adviser, consultant, co-manager, underwriter, portfolio manager

CATEGORY III Underwriter, adviser, consultant

CATEGORY IV Only adviser or consultant

Granting License Considerations for Merchant Banking

• Applicant shall be a body corporate other than NBFC

• Primary Dealer not accepting Public Deposit
• Should have necessary infrastructure
• Employ minimum of two persons having merchant banking expertise
• Fulfill Capital Adequacy Requirement
• Applicant, Partner or Principal Officer has not been convicted for any offense
• Has Professional qualification
Capital Adequacy Requirement

Minimum Networth

CATEGORY I Rs 5,00,00,000

CATEGORY II Rs 50,00,000

CATEGORY III Rs 20,00,000

CATEGORY IV Nil
Procedure for Registration

• Eligibility certificate is issued in Form B

• Applicant is liable to pay fees

Fees

CATEGORY I Rs 2.5 lakhs to paid annually for first 2 yrs and

third year a sum of Rs 1 lakh

CATEGORY II Rs 1.5 lakhs to paid annually for first 2 yrs and

third year a sum of Rs 50,000

CATEGORY III Rs 1 lakh to paid annually for first 2 yrs and third
year a sum of Rs 25,000

CATEGORY IV Rs 5000 to paid annually for first 2 yrs and third

year a sum of Rs 1000

General Obligations and Responsibilities

1. Maintenance of book of accounts, records

– Copy of balance sheet
– Copy of P& L account
– Copy of auditors report
– Statement of financial position
2. Submission of half yearly result
– Submit half yearly unaudited financial result when required by the board

3. Maintenance of book of accounts, records and other documents

– For a minimum period of 5 yrs

4. Report on steps taken on auditor’s report

– Steps to rectify deficiencies within 2 months of audit
5. Appointment of Lead Merchant Bankers
 – All public issue should be managed by at least one merchant banker acting as
lead manager

6. Restrictions on appointment of lead managers

Size of issue No of lead managers

< 50 crore 2

50 crore -100 crore 3

100 crore- 200 crore 4

200 crore-400 crore 5

Above 400 crore More than 5

7. Submission of due diligence certificate

Two weeks prior to issue

8. Documents to be furnished to the Board

a. Particulars of issue
b. Draft prospectus
c. Any other documents circulated to investors
9. Information to the board
– Complete particulars of any transaction for acquisition of securities of any body
corporate whose issue is managed by MB within 15 days
10.. Disclosures to Board
– His responsibility with regard to management of issue
– Any change in the information previously furnished
– Name of the company whose issue he has managed
– Particulars relating to breach of capital adequacy
11. Appointment of compliance officer
– For redressal of investor grievances
12. Board’s right to inspect
– To ensure that books of accounts are maintained in proper manner
 – Rules and regulations are complied with

CODE OF CONDUCT (Under Regulation 13)

A Merchant Banker shall maintain high standards of integrity, dignity and fairness intconduct
of its business.

A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner.

A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise:
independent professional judgment.

A Merchant Banker shall endeavor to ensure that enquiries from investors are adequatel
dealt with; grievances of investors are redressed in a timely and appropriate manner;

A Merchant Banker shall ensure that adequate disclosures are made to the investors in timely
manner in accordance with the applicable regulations and guidelines so as to enabl them to
make a balanced and informed decision.

A Merchant Banker shall endeavor to ensure that the investors are provided with true
adequate information without making any misleading or exaggerated claims or any
misrepreentation and are made aware of the attendant risks before taking any investment
decision.

A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document
letter of offer or any other related literature is made available to the investors at the time o
issue of the offer.

A Merchant Banker shall not discriminate amongst its clients, save and except on ethica and
commercial considerations.

A Merchant Banker shall not make any statement, either oral or written, which would
misrepresent the services that the Merchant Banker is capable of performing

A Merchant Banker shall avoid conflict of interest.

A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situation
that may arise in the conduct of its business

A Merchant Banker shall make appropriate disclosure to the client

A Merchant Banker shall always endeavor to render the best possible advice to the clients
having regard to their needs.

A Merchant Banker shall not divulge to anybody either orally or in writing, directly u
indirectly, any confidential information about its clients

A Merchant Banker shall haveinternal control procedures and financial and operational
capabilities which can be reasonably expected to protect its operations, its clients, investors
and other registered entities from financial loss arising from theft, fraud, and other dishonest
acts, professional misconduct or omissions.

A Merchant Banker shall not make untrue statement or suppress any material fact in any
documents, reports or information furnished to the Board.

A Merchant Banker shall maintain an appropriate level of knowledge and competence

A Merchant Banker shall ensure that the Board is promptly informed about any action, legal
proceedings etc., initiated against it in respect of material breach or non-compliance by it, of
any law, rules, regulations, directions of the Board or of any other regulatory body.

A Merchant Banker or any of its employees shall not render, directly or indirectly, any
investment advice about any security in any publicly accessible media.

A Merchant Banker shall demarcate the responsibilities of the various intermediaries ap-
pointed by it clearly so as to avoid any conflict or confusion in their job description .

A Merchant Banker shall provide adequate freedom and powers to its compliance officer for
the effective discharge of the compliance officer's duties.

SEBI Operational Guidelines

1. Submission of offer documents

The offer documents of issue size upto Rs 20 crore should be filed by lead merchant
bankers with the regional office of Board. The merchant banker shall make available
10 copies of the draft offer document to the board and 25 copies to stock exchanges

2. Advance dispatch of offer documents

Whenever there is reservation for NRIs, 10 copies of prospectus together with 1000
application forms are dispatched in advance of issue opening date to Indian
Investment Centre New Delhi
3. Acceptable exposure of underwriting
 While selecting underwriters and finalizing underwriting agreements, lead merchant
bankers should ensure that underwriters are not overexposed so that it is difficult to
fulfil underwriting commitments.
4. Compliance Obligations
o Involving public for finalization of allotment
In the case of over subscription in public issue, Board nominated public representative
shall be associated in the process of finalization of basis of allotment. Honorarium at a
minimum of Rs 500 plus conveyance charges should be paid.
o High Priority for redressal of investor grievances
The merchant banker should take all preventive steps to minimize number of
complaints. The merchant banker should set up investor grievances and redressal
system.
o Submission of post issue monitoring reports
The concerned merchant banker shall submit Post issue monitoring reports within 3
days from due dates
o Submission of application form for NOC
In accordance with the listing agreement of stock exchanges, issuer companies shall
deposit 1% of amount of securities offered with stock exchanges
o Renewal of registration of merchant bankers
Application for renewal shall be made according to the regulation of SEBI. Any
changes in the information previously submitted to SEBI must be highlighted.
o Reporting Requirements
According to regulation 28, merchant bankers shall send a half yearly report in the
format specified by SEBI .
o Imposition of penalty for Violation
Penalty may be imposed on the merchant banker for violation of any provision of
operational guidelines