UNIT 1: INTRODUCTION TO BANKING

1. INTRODUCTION
A bank allows a person with excess money(saver) to deposit this money in the bank and earns
an interest and it lends loan to needy persons. Which licensed to receive deposits and offer loans.
Banks are the financial institutions that play a crucial role in the functioning of the Indian economy
and are licensed to receive cash deposits and provide loans. The word ‘Bank’ was developed
from the German word ‘Banck’ which means a joint stock firm.

2. DEFINITION OF BANK
According to the Indian Banking Regulation Act of 1949 defines Banking as “Accepting for the
purpose of lending or investment of deposits of money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft, order or otherwise”.
According to R.P. Kent, “Bank is an institution which collects idle money temporarily from the
public and lends to other people as per need.”
Banking Company: Section 5(c) of the Banking Regulation Act 1949 defines a “Banking Company”
as a company that transacts the business of banking in India. So, Sec(b) as a body corporate
says that banking company includes the following functions-
a. Accepting deposits from the public.
b. Allows withdrawals of deposits on-demand or by any other means.

3. NEED FOR BANKING

a) Financial Intermediation: Banks act as intermediaries between savers and borrowers. They
accept deposits from individuals and institutions and then lend them to businesses,
individuals, and governments.
b) Payments System: Banks provide a convenient and secure means for individuals and
businesses to make payments. This includes issuing checks, facilitating wire transfers,
providing debit and credit cards, and offering online banking platforms.
c) Credit Creation: Banks play a crucial role in creating credit. Through fractional reserve
banking, banks can lend out a portion of the deposits they receive, thus increasing the overall
money supply in the economy.
d) Facilitating Investments: Banks provide loans and other financial services to businesses,
allowing them to invest in equipment, infrastructure, and expansion. This helps stimulate
economic growth and create jobs.
e) Risk Management: Banks offer a range of financial products to help individuals and
businesses manage various types of risks, including credit risk, interest rate risk, and foreign
exchange risk. These products include insurance, derivatives, and hedging strategies.
f) Storage of Value: Banks provide a safe and secure place for individuals and businesses to
store their wealth through deposits. This helps protect against theft, loss, and inflation.
Overall, banking plays a crucial role in facilitating economic activity, promoting investment and
growth, and providing financial services essential for individuals and businesses to manage their
finances effectively.

4. IMPORTANCE OF BANKING
Banking is important for several reasons:
1) Financial Inclusion: Banking allows individuals and businesses to access financial services,
such as savings accounts, loans, and payment systems. This promotes financial inclusion by
providing opportunities for people to save money, borrow capital for investments or
emergencies, and participate in the formal economy.
2) Economic Growth: Banks play a critical role in allocating capital efficiently by channeling
savings into productive investments. This facilitates economic growth by funding businesses,
infrastructure projects, and innovation, creating jobs and increasing productivity.
3) Stability and Security: Banks provide a safe and secure environment for storing and
managing money. Deposit insurance schemes and regulatory oversight help protect
depositors' funds and maintain confidence in the financial system, contributing to overall
economic stability.
4) Payment Systems: Banking systems facilitate efficient funds transfer between individuals,
businesses, and governments. This includes services such as electronic transfers, checks,
credit and debit cards, and mobile payments, which are essential for conducting commerce
and managing financial transactions.
5) Credit Creation: Banks can create credit through fractional reserve banking. By accepting
deposits and making loans, banks expand the money supply, which fuels economic activity
and enables individuals and businesses to invest, consume, and grow.
6) Support for Government Policies: Banks play a role in implementing government monetary
and fiscal policies. Central banks use tools such as interest rate adjustments and reserve
requirements to influence economic activity, and commercial banks help transmit these policy
measures to the broader economy through their lending and deposit-taking activities.
Overall, banking is essential for promoting economic development, facilitating financial
transactions, managing risks, and supporting the functioning of modern economies.

5. HISTORY OF BANKING IN INDIA

Banking in India forms the base for the economic development of the country. Major changes in
the banking system and management have been seen over the years with the advancement in
technology, considering the needs of people. The banking sector development can be divided into
three phases.

5.1 The Early Phase from 1770 to 1969

The first bank of India was the “Bank of Hindustan” , established in 1770 and located in the then
Indian capital, Calcutta.
During the British rule in India, the East India Company had established three banks: Bank of
Bengal(1809), Bank of Bombay(1840) and Bank of Madras(1843) and called them the
Presidential Banks. These three banks were later merged into one single bank in 1920, which
was called the “Imperial Bank of India.” The Imperial Bank of India was later nationalised in 1955
and was named The State Bank of India, which is currently the largest Public sector Bank.
Later in 1865, Allahabad bank was established followed by Punjab National bank in 1894,
between 1906 to 1913 , Bank of india, central bank of india, Bank of Baroda, Canara bank, Indian
bank and bank of Mysore were set up. Reserve bank of India came into existence in 1935.

5.2 The Nationalization Phase from 1969 to 1991

In 1949, Banking regulation act enacted. After independence, the Imperial bank of india was
nationalised under the state bank of india act of 1955 and became known as state bank of india
of handling central and state government banking transactions
in 1969 14 major banks were nationalised . Regional Rural bank was introduced in 1975. In
1980, 6 banks with deposits over Rs. 200 crore were nationalised.

5.3 The Liberalization or the Banking Reforms Phase - 1991

onwards
Prior to 1991, all banks were state owned. In 1991 government opened the gate of liberalisation
of banking practices as per the report of a banking committee set-up under the chairmanship of
Mr. M Narasimham.
Later on , in the year 1993, the government merged New bank of India with Punjab National Bank.
It was the only merger between nationalised banks and resulted in the reduction of the number of
nationalised banks from 20 t0 19.
Till now, banking industry has changed tremendously with retail banking shifting to universal
banking, E-banking and has customer satisfaction as the highest priority.

6. FUNCTIONS OF BANKS
6.1 Primary Functions of Banks
The primary functions of a bank are also known as banking functions. They are the main functions
of a bank. These primary functions of banks are explained below.

1) Accepting deposits:
The bank collects deposits from the public. These deposits can be of different types, such as:
 Saving Deposits: This type of deposit encourages saving habits among the public. The rate
of interest is low. At present, it is about 4% p.a.
 Fixed Deposits: The lump sum amount is deposited once for a specific period. A higher rate
of interest is paid.
 Current Deposits: This type of account is operated by businessmen. Withdrawals are freely
allowed. No interest is paid.
 Recurring Deposits: This type of account is operated by salaried persons and petty traders.
Withdrawals are permitted only after the expiry of a certain period. A higher rate of interest is
paid.

2) Granting of Loans and Advances:

The bank advances loans to the business community and other members of the public. The
rate charged is higher than what it pays on deposits. The types of bank loans and advances
are:

 Overdraft: This type of advance is given to current account holders. It is sanctioned to

business people and firms. An overdraft facility is granted against collateral security.
 Cash Credits: The client is allowed cash credit up to a specific limit fixed in advance. The
cash credit is given against the security of tangible assets and or guarantees. The advance is
given for a longer period, and a larger loan amount is sanctioned than that of an overdraft.
 Loans: It is normal for the short term, say one year, or medium-term, say five years.
Nowadays, banks do lend money for the long term. Loans are normally secured against the
tangible assets of the company.
 Discounting of the bill of exchange: The bank can advance money by discounting or by
purchasing bills of exchange, both domestic and foreign bills. The bill is presented to the
drawee or acceptor of the bill on maturity, and the amount is collected.

6.2 Secondary Functions of Banks

The bank performs some secondary functions, also called non-banking functions. These
important secondary’ functions of banks are explained below.

(1) Agency Functions :

The bank acts as an agent of its customers. The bank performs several agency functions,
which include:
 Transfer of Funds: The bank transfers funds from one branch to another or from one place
to another.
 Collection of checks: The bank collects the money of the checks through the clearing section
of its customers. The bank also collects money from the bills of exchange.
 Periodic Payments: On standing instructions of the client, the bank makes periodic payments
regarding electricity bills, rent, etc.
 Portfolio Management: The banks also undertake to purchase and sell the shares and
debentures on behalf of the clients and accordingly debit or credit the account. This facility is
called portfolio management.
 Periodic Collections: The bank collects salary, pension, dividend, and other periodic
collections on behalf of the client.
 Other Agency Functions: They act as trustees, executors, advisers, and administrators on
behalf of their clients. They act as representatives of clients to deal with other banks and
institutions.

(2) General Utility Functions:

The bank also performs general utility functions, such as:
 Issue of Drafts and Letter of Credits: Banks issue drafts for transferring money from one
place to another. It also issues letters of credit, especially in the case of import trade. It also
issues traveler’s checks.
 Locker Facility: The bank provides a locker facility for the safe custody of valuable
documents, gold ornaments, and other valuables.
 Underwriting of Shares: The bank underwrites shares and debentures through its merchant
banking division.
 Dealing in Foreign Exchange: Commercial banks are allowed by. RBI to deal in foreign
exchange.
 Project Reports: The bank may also undertake to prepare project reports on behalf of its
clients.
 Social Welfare Programs: It undertakes social welfare programs, such as adult literacy
programs, public welfare campaigns, etc.
 Other Utility Functions: It acts as a referee to the financial standing of customers. It collects
creditworthiness information about clients of its customers. It provides market information to
its customers, etc. It provides travelers’ check facilities.

7. TYPES OF BANKS
The various types of banks in India help in economic growth and development, maintain financial
stability, and support existing and new businesses.
Banks in India can be broadly classified into commercial banks, cooperative banks, and regional
rural banks. Commercial banks include public sector banks, private sector banks, and foreign
banks. Cooperative banks are further categorized into urban cooperative banks and rural
cooperative banks. Regional rural banks are specialized banks established to cater to the banking
needs of rural areas.

1) Central Bank/Banker’s Bank

The central bank of India is the Reserve Bank of India (RBI). The RBI is responsible for
regulating and supervising the Indian banking system. It also manages the country's monetary
policy and foreign exchange reserves.
2) Commercial Banks
Commercial banks are the most common type of bank in India. They provide a wide range of
financial services to individuals and businesses, including savings accounts, loans, and
investment products.
(a) Public Sector Banks
Public sector banks are owned and operated by the government of India. They account
for a significant share of the Indian banking system. Some of the major Public Sector
Banks include SBI, PNB, Bank of Baroda, Canara Bank etc.
(b) Private Sector Banks
Private sector banks are owned and operated by private individuals or companies. They
have played an increasingly important role in the Indian banking system in recent years.
Some of the major Private Sector Banks include Axis Bank, HDFC Bank, ICICI Bank etc.
(c) Foreign Banks
Foreign banks are branches of foreign banks that operate in India. They offer a range of
financial services, including corporate banking, investment banking, and retail banking.
 Some of the major Foreign Banks include HSBC (Hongkong and Shanghai Banking
Corporation), CITI Bank etc.
3) Regional Rural Banks
Regional rural banks (RRBs) were established in 1975 to provide banking services to rural
areas. They are sponsored by commercial banks and the government of India. RRBs play an
important role in promoting financial inclusion and rural development. Some of the major
Regional Rural Banks include Assam Gramin Vikash Bank, Karnataka Gramin Bank etc.
4) Cooperative Banks
Cooperative banks are owned and operated by their members. They provide a range of
financial services, including savings accounts, loans, and agricultural credit. Cooperative
banks play an important role in the rural economy.
5) Scheduled Banks
Scheduled banks are commercial banks that are regulated by the RBI. They are included in
the Second Schedule of the Reserve Bank of India Act, 1934. Scheduled banks can be
classified into three categories: public sector banks, private sector banks, and foreign banks.
6) Non-Scheduled Banks
The banks, which are not covered by the second schedule of RBI,
7) Local Area Banks
Local area banks (LABs) were established in 2013 to provide banking services to underserved
areas. They are sponsored by commercial banks and the government of India. LABs play an
important role in promoting financial inclusion.
8) Payment Banks
Payment banks were set up in 2015 to offer basic banking services such as savings accounts,
money transfers, and bill payments. They cannot offer loans or credit cards. Payment banks
are designed to promote financial inclusion and cashless transactions. Some of the major
Payments Banks include Airtel Payments Bank Ltd, India Post Payments Bank Ltd etc.
9) specialized Banks
Specialized banks are banks that focus on a specific sector of the economy, such as
agriculture, industry, or trade. Some examples of specialized banks in India include:
 National Bank for Agriculture and Rural Development (NABARD) and
 Industrial Development Bank of India (IDBI).

8. BANKS LENDING:
It is a Fundamental precept of banking everywhere that advances are made to customers in
reliance on his promise to repay, rather that the security held by the banker. Although al lending
involves some degree of risks, it is necessary for any bank to develop sound and safe lending
policies and new lending techniques in order to keep the risk to a minimum.

9.1 PRINCIPLES OF SOUND LENDING:

Unless ensuring the safety and security for funds, any banks cannot lens the hard earned money
of their customers, deposit in the banks. As Such, the banks are required to follow certain
principles of sound lending which are explained as below:
(i) Safety: Advances should be expected to come back in the normal course. The repayment
of the depends upon the borrower’s capacity to pay and willingness to pay. The capacity
 depends upon the tangible assets of the borrower. The willingness to pay depends upon
the honesty and character of the borrower.
(ii) Liquidity: Liquidity is the availability of bank funds on short notice. The borrower must be
in a position to repay within a reasonable time. Liquidity also signifies that the assets
should be saleable without any loss.
(iii) Profitability: A banker has to see that major portion of the assets owned by it are not only
liquid but also aim at earning a good profit. The difference between the interest received
on advances and the interest paid on deposits constitutes a major portion of bank’s income
Besides, Foreign exchange business is also highly remunerative.
(iv) Purpose: A banker would not lend money for any purpose for which the borrower wants.
The purpose should be productive so that the money not only remains safe but also
provides a definite source repayment.
(v) Security: Security serves as a safety valve for an unexpected emergency. The security
offered for an advance is a cushion to fall back upon in case of need. An element of risk
is always present in every advance however secured it might appear to be.
(vi) Spread/Diversity: the advances should be as much broad-based as possible and must
be in keeping with the deposit structure. The advances must not be in one particular
direction or to one particular industry. Again, Advances must not be granted in one area
alone.
(vii) National Interest: Bank has significant role to play in the economic development of a
country. The banker would lend if the purpose of the advance is for overall national
development.

9.2 TYPES OF LENDING

Advances by commercial banks are made in different forms, such as demand loan, term loan,
cash credit, overdraft etc.. These forms of advances are explained below:
1) Demand Loan: In a demand loan account, the entire amount is paid to the debtor at one time,
either in cash or by transfer to his savings bank or current account. No subsequent debit is
normally allowed except by way of interest, incidental charges, insurance premiums,
expenses incurred for the protection of the security etc.
2) Term Loan: When a loan is granted for a fixed period exceeding three years and is repayable
according to the schedule of repayment, it is known as a term loan. The period of term loan
may extend up to 20 years. a term loan is generally granted for fixed capital requirements,
e.g. investment in plant and equipment, land and building etc.
3) Overdraft: An overdraft is a fluctuating account where in the balance sometimes may be in
credit and at times in debit. Overdraft facilities are allowed in current accounts only.
4) Cash credit: A cash credit is essentially a drawing account against credit granted by the bank
and is operated, in the same way as current account in which an overdraft limit has been
sanctioned the principal advantages of a cash credit account to a borrower are that, unlike the
party borrowing on a fixed loan basis, he may operate the account within the stipulated limit
as and when required and can save interest by reducing the debit balance whenever is in a
position to do so.
5) Bills Purchased: Bills, clean or documentary are sometimes purchased from approved
customers in whose favour regular limits are sanctioned. In the case of documentary bills, the
drafts are accompanied by documents of title to goods such as railway receipts or bills of
lading (BOL).
6) Bills Discounted: Usance bills, maturing within 90days or so after date or sight, are
discounted by banks for approved parties. In case a bill say for Rs. 10,000/-due 90 day hence,
is discounted today at 205 per annum, the borrower is paid Rs. 9,500/-, its present worth
However, the full amount is collected from the drawee on maturity.

9. CHANGING ROLE OF BANKS IN INDIA

The role of banks in India has changed a lot since economic reforms of 1991. These changes
came due to LPG, i.e. liberalization, privatization and globalization policy being followed by GOI.
Since then most traditional and out-dated concepts, practices, procedures and methods of
banking have changed significantly. Today, banks in India have become more customer-focused
and service-oriented than they were before 1991. They now also give a lot of importance to their
rural customers. The changing role of banks in India can be glanced in points depicted below.
A) Better Customer Service: Before 1991, the overall service of banks in India was very poor.
There were very long queues (lines) to receive payment for cheques and to deposit money.
In those days, some bank staffs were very rude to their customers. However, all this changed
remarkably after Indian economic reforms of 1991. Banks in India have now become very
customer and service focus.
B) Mobile Banking: Under mobile banking service, customers can easily carry out major banking
transactions by simply using their cell phones or mobiles. customer can now comfortably and
securely, find his bank balance, transfer money from his account to another, ask for a cheque
book, stop payment of a cheque, etc. Today, almost all banks in India provide a mobile-banking
service.
C) Bank on Wheels: The 'Bank on Wheels' scheme was introduced in the North-East Region of
India. Under this scheme, banking services are made accessible to people staying in the far-
flung (remote) areas of India. This scheme is a generous attempt to serve banking needs of
rural India.
D) Portfolio Management: In portfolio management, banks do all the investments work of their
clients. Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first
enter a contract with their clients and charge them a fee for this service.
E) Issue of Electro-Magnetic Cards: Banks in India have already started issuing Electro-
Magnetic Cards to their customers. These cards help to carry out cash-less transactions,
make an online purchase, avail ATM facility, book a railway ticket, etc.
Banks issue many types of electro-magnetic cards, which are as follows:
 Credit cards help customers to spend money (loaned up to a certain limit as previously
settled by the bank) which they don't have in hand.
 Debit cards help customers to spend that money which they have saved (credited) in their
individual bank accounts.
F) Universal Banking: In India, the concept of universal banking has gained recognition after
year 2000. The customers can get all banking and non-banking services under one roof.
Universal bank is like a super store. It offers a wide range of services, including banking and
other financial services like insurance, merchant banking, etc.
G) Automated Teller Machine (ATM): There are many advantages of ATM. As a result, many
banks have opened up ATM centres to offer convenience to their customers. Now banks are
 operating ATM centres not only in their branches but also at public places like airports, railway
stations, hotels, etc. Some banks have joined together and agreed upon to set up common
ATM centres all over India.
H) Internet Banking: Internet banking is also called as an E-banking or net banking. Here, the
customer can do banking transactions through the medium of the internet or world wide web
(WWW). The customer need not visit the bank's branch. Through this facility, the customer
can easily inquiry about bank balance, transfer funds, request for a cheque book, etc. Most
large banks offer this service to their tech-savvy customers.
I) Encouragement to Bank Amalgamation: Failure of banks is well-protected with the facility
of amalgamation. So depositors need not worry about their deposits. When weaker banks are
absorbed by stronger banks, it is called amalgamation of banks.

10. RESERVE BANK OF INDIA (RBI)

11.1 BRIEF HISTORY OF RBI:
The Reserve Bank, as the central bank of the country, started its operations as a private
shareholder’s bank. RBI replaced the Imperial Bank of India and started issuing the currency
notes and acting as the banker to the government. Imperial Bank of India was allowed to act as
the agent of the RBI. RBI covered all over undivided India. To have close integration between
policies of the Reserve Bank and those of the Government, it was decided to nationalize the
Reserve Bank immediately after the independence of the country.
From 1st January 1949, the Reserve Bank began functioning as a State-owned and State-
controlled Central Bank. To streamline the functioning of commercial banks, the Government of
India enacted the Banking Companies Act, 1949 which was later changed as the Banking
Regulation Act 1949. RBI acts as a regulator of banks, banker to the Government, and banker’s
banks. It controls the financial system in the country through various measures.

11.2 ROLE OF RESERVE BANK OF INDIA:

1) MONETARY POLICY: Monitory policy refers to the use of instruments under the control of the
Central Bank to regulate the availability, cost, and use of money to maintain price stability,
inflation, and credit.
2) ISSUER OF CURRENCY: RBI shall have the sole right to issue banknotes in India. Banknotes
shall be of the denominational values of 2, 5, 10, 20, 50, 100, 500, 1000, 5000, and 10000
rupees or such other denominational values, not exceeding ten thousand rupees, as the
Central Government may, on the recommendation of the Central Board, specify in this behalf.
3) TRANSACT GOVERNMENT BUSINESS: The Reserve Bank shall undertake to accept
monies for the account of the Central Government and to make payments up to the amount
standing to the credit of its account, and to carry out its exchange, remittance, and other
banking operations, including the management of the public debt of the Union.
4) BANKER TO BANKS: An important role and function of RBI are to maintain the banking
accounts of all scheduled banks and act as the banker of last resort. RBI works as a central
bank where commercial banks are account holders. The RBI must control the credit through
the CRR, bank rate, and open market operations.
5) REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM: RBI prescribes broad
parameters of banking operations within which the country’s banking and financial system
functions. Their main objective is to maintain public confidence in the system, protect
depositors’ interests and provide cost-effective banking services to the public.
6) MANAGER OF FOREIGN EXCHANGE: The manager of the exchange control department
manages the foreign exchange, according to the foreign exchange management act, 1999.
The manager’s main objective is to facilitate external trade and payment and promote orderly
development and maintenance of the foreign exchange market in India.

11.3 FUNCTIONS OF RBI

FUNCTIONS OF RBI CAN BE CLASSIFIED INTO Traditional functions, Development functions
and Supervisory functions. Which are explained as under.

(1) TRADITIONAL FUNCTIONS OF RBI

(a) Issue of Currency Notes:
As per the provisions of the Section 22 of the Reserve Bank of India Act 1934 the RBI has
sole right or authority to issue currency notes except one rupee note and coins of smaller
denomination. RBI can exchange these currency notes for other denominations. RBI
issues these currency notes ( 2, 5, 10, 20, 50, 100, 500, 1000) against the security of gold
bullion, foreign securities, rupee coins, exchange bills, promissory notes and government
of India bonds etc.
(b) Banker to other Banks:
RBI also guide, help and direct other commercial banks in the [Link] can control the
volume of bank reserves. Every commercial bank has to maintain a part of their reserves
with Its parent (RBI). If bank need fund they approach to RBI for fund, that is called Lender
of the Last Resort.
(c) Banker to The Government:
RBI works as an agent of the central and state governments. On the behalf of government
it makes payments, taxes and deposits etc. It also represent the government at
international level also. It maintains government accounts and provide financial advice to
the government. It also manages government public debts and maintains foreign
exchange reserves on behalf of the government. RBI also provides overdraft facility to the
government in case of financial shortage
(2) DEVELOPMENTAL FUNCTIONS OF RBI
(a) Development of the Financial System:
The financial systems includes -financial institutions, financial markets and financial
instruments. The sound and efficient financial system is necessary for rapid economic
development of the [Link] encourages the banking and non -banking institution for
maintenance of sound and healthy financial system.
(b) Development of Agriculture:
As we know, India is an agrarian economy so RBI always give attention to agriculture
sector by assessing credit needs of this sector. Regional Rural Banks (RRB), National
Bank for Agriculture and Rural Development (NABARD) which are only for agriculture
finance comes under the control of the RBI.
(c) Industrial Finance:
 For economic development of country, Industrial development is necessary. As we know
industries includes small industries, middle industries, large scale industries etc all these
industries development is necessary for overall economic development of country. For this
purpose RBI supports the industrial sector also. RBI had played the vital role for setting
up of such industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.
(3) SUPERVISORY FUNCTIONS
(a) Granting Licence to Banks:
RBI grants licence to banks for carrying its business. RBI also provide licence for opening
extension counters, new branches even to close down existing branches.
(b) Bank Inspection:
RBI has power to ask for periodical information from banks on various components of
assets and liabilities.
(c) Control Over NBFIs :
The non -bank financial institutions are not influenced by the working of a monitory policy.
RBI has a right to issue directives to the NBFIs from time to time regarding their
functioning. Through periodic inspection, it can control the NBFIs.

Finally, finance is the life blood of trade, commerce and industry. Now a days, banking sector act
as the backbone of modern business. Development of country mainly depends upon the banking
system. There are different types of banks working for accomplishing financial and non-financial
needs of people of the country.
 UNIT 2: PAYING AND COLLECTING
BANKER
1. INTRODUCTION
Cheque is an instrument used by customers of bank to withdraw their deposits from bank and
also is a bill of exchange in which one party orders the bank to transfer the money to the bank
account of another party. It is a negotiable instrument that is covered under the negotiable
instrument act, 1881. a cheque can be issued against a savings account or a current account.
Parties to a Cheque -Drawer, Drawee, Payee.
In cheque transaction there are two bankers involved Paying Banker and Collecting Banker.

2. PAYING BANKER
A paying banker may be defined as ‘Paying banker is a banker, who actually pays a cheque to
his customer or to the order of his customer”.
In other words, it may be defined as ‘Paying banker is the banker who holds the account of the
drawer of the cheque and is obligated to make payment, if the funds of the customer are sufficient
to cover the amount of his cheque drawn.’

2.1 ROLE OF PAYING BANKER

The role of a paying banker refers to the responsibilities and obligations of a bank when it comes
to honoring payment instructions from its customers. Here are some key aspects of the role:
1) Payment of Cheques: A paying banker is responsible for honoring checks drawn on accounts
held by its customers. When a check is presented for payment, the bank verifies the signature,
checks the available funds, and if everything is in order, it pays the specified amount to the
payee.
2) Protecting Customer Funds: The paying banker must ensure that the payment is made
accurately and securely to protect the funds of its customer. This involves verifying the
authenticity of the check and ensuring that there are sufficient funds in the account to cover
the payment.
3) Legal Obligations: Banks are legally obligated to honor valid payment instructions from their
customers. However, they also have the responsibility to detect and prevent fraudulent
transactions, such as forged signatures or altered checks.
4) Duty of Care: Paying bankers owe a duty of care to their customers. This includes taking
reasonable steps to verify the authenticity of payment instructions and to protect customer
funds from unauthorized transactions.
5) Settlement: After honoring a payment instruction, the paying banker settles the transaction
by debiting the customer's account for the amount paid. This ensures that the customer's
account balance is updated accurately.
Overall, the role of a paying banker is crucial in facilitating transactions and maintaining trust in
the banking system. By fulfilling their obligations diligently, paying bankers contribute to the
smooth functioning of financial transactions and help safeguard the interests of their customers.

2.2 FUNCTIONS OF PAYING BANKER

1) Payment of Customer's Cheques: One of the primary functions of a paying banker is to
honor the cheques issued by the bank's customers when presented for payment, provided the
account has sufficient funds and the cheque is valid.
2) Verification of Signatures and Account/Cheque Details: The paying banker verifies the
signature of the account holder on the cheque to prevent fraud. They also ensure that the
details mentioned on the cheque, such as the amount, date, and payee, are accurate.
3) Maintaining Account Balances: The paying banker maintains records of the account
balances of its customers and ensures that there are sufficient funds available to honor the
cheques presented for payment.
4) Facilitating Electronic Payments: With the advancement of technology, paying bankers also
facilitate electronic payments, including online transfers, direct deposits, and electronic fund
transfers (EFTs), among others.
5) Customer Service: Paying bankers provide customer service to account holders, addressing
their queries, resolving issues, and offering guidance on banking products and services.
6) Issuance of Bank Drafts and Money Orders: Paying bankers issue bank drafts and money
orders, which are secure forms of payment used for transactions such as purchasing goods
or making payments when the recipient requires assurance of funds.
7) Currency Exchange: In some cases, paying bankers offer currency exchange services,
allowing customers to exchange one currency for another, either for travel purposes or
international transactions.
8) Safekeeping of Valuables: Some paying bankers offer safe deposit boxes or vaults for
customers to securely store valuables such as important documents, jewelry, or other items.
9) Compliance and Regulation: Paying bankers adhere to regulatory requirements and
compliance standards set by regulatory authorities to ensure the safety and security of
banking operations and customer funds.
10) Fraud Prevention and Risk Management: Paying bankers implement measures to prevent
fraud and mitigate risks associated with banking operations, including monitoring transactions
for suspicious activities and implementing security protocols.

2.3 DUTIES OF PAYING BANKER

There are certain precautions to be taken by the paying banker. He should see,
1) Cheque should be in Proper Form: The cheque must be in printed from supplied by the
banker.
2) Physical Conditions of the Cheque: The cheque should be in good physical condition. The
instrument should not be torn or cancelled.
3) Verify whether it is open or Crossed Cheque: If the cheque is a crossed one, the payment
cannot be made across the counter. It has to pass through the account holder account.
4) Office of Drawing: The cheque should be presented for payment in the same bank where he
has account.
5) Date of the cheque: The cheque should possess a valid date for payment during should be
made.
6) Time of Presentation: The cheque should be honoured for payment during the banking hours
only.
7) Amount: The amount of the cheque has to be recorded in both words and figures and they
should tally with each other.
8) Material Alteration: If material alteration is apparent, the banker should get confirmation from
the drawer by obtaining full signature at the place of material alteration.
9) Signature of the Drawer: The banker has to examine the signature of the drawer on the
cheque before he makes payment with the specimen he has.
10) Legal Restrictions: In case of death, insolvency or lunacy, banker should confirm before
making the payment.

2.4 STATUTORY PROTECTION FOR PAYING BANKER

The payment must be made to the right person and the banker must get order from his customer
to debit his account. The banker might not be able to make detailed enquiries before making the
payment. Thus, the act provides him some legal protection, if the banker fulfills the obligations
laid down by the Act.
(1) Protection in Case of Bearer Cheque: Section 85(2) of the Negotiable Instruments Act, 1881
states, “whereas a cheque is originally expressed to be payable to bearer, the drawee is
discharged by payment to the bearer. Drawee will get protection.
(2) Protection in Case of Order Cheque: If the payment is made to a person other than the
payee, the paying banker does not get any protection under the Negotiable Instruments Act.
If the endorsement is regular and payment is made in due course, the paying banker gets
protection under section 85(1) of the Negotiable Instruments Act, 1881.
(3) Protection in Case of Crossed Cheque: Regarding payment of crossed cheque, the paying
banker gets the protection under section 128 of the Negotiable Instruments Act, 1881:
“Whereas the banker on whom crossed cheque is drawn has paid the same in due course.
(4) Protection in Case of Drafts: In case of demand drafts drawn by one branch of a bank upon
another branch of the same bank, the banker gets protection under section 85A of the
Negotiable Instruments Act. The Section states: “Whereas any draft, that is an order to pay
money drawn by one office of a bank upon another office of the same bank for a sum of money
payable to order on demand.
(5) Protection in respect of Materially altered cheque: Section 89 grants protection to the
paying banker when the banker pays a materially altered cheque provided conditions are
satisfied: if the Banker has made payment in good faith and without negligence.

3. DISHONOR OF CHEQUES
A cheque is said to be honored ‘if the banks give the amount to the payee.’ while, ‘if the bank
refuses to pay the amount to the payee, the cheque is said to be dishonored.
The wrongful dishonor of a cheque occurs when a bank refuses to honor a cheque without a valid
reason, despite there being sufficient funds in the account. This can have several legal, financial,
and reputational consequences for both the account holder and the bank.
Whenever the cheque is dishonored, the drawee bank instantly attaches a ‘Cheque Return Memo’
to the payee banker specifying the reasons for dishonour. The payee banker provides the memo
and the dishonoured cheque to the payee.
The payee has an option to resubmit the cheque within three months of the date specified on the
cheque after fulfilling the reason for the dishonour of the cheque. Moreover, the payee has to give
notice to the drawer within 30 days from the date of receiving the “Cheque Return memo” from
the bank. The notice should state that the cheque amount will be paid to the payee within 15 days
from the date of receipt of the notice by the drawer.
However, if the drawer fails to make a fresh payment within 30 days of receiving the notice, the
payee has the right to conduct a legal proceeding against the defaulter as per section 138 of the
Negotiable Instruments Act.

3.1 GROUNDS FOR DISHONOR OF CHEQUE

 When the cheque is a conditional one by drawer.
 When the customer stops the payments of any cheque.
 When a bank receives a notice from holder about loss of cheque.
 When a bank receives a notice of drawers death, insolvency, insanity, garnishee order
issued by court, any prohibitive order from any govt. authority.
 Presented cheque after customer Account closed.
 Forged signature of drawer.
 When crossed cheque presented at counter for payment.
 Cheque crossed by more than one bank.
 Date and Time of presentation.
 If the amount is not properly written in words or figures or they have been written incorrectly
or if the amount written in words and figures do not match one another.
 If the cheque is overwritten.
 If the bank balance remains less on account of not collecting the cheque deposited.
 If the drawer has closed the respective bank account before presenting the cheque.

3.2 LIABILITY OF BANKER IN WRONGFUL DISHONOR OF

CHEQUE
In normal circumstances, if a cheque is dishonored, the defaulter may be punished with
imprisonment up-to two years or with a monetary penalty or with both as it is a criminal offence,
this is in accordance with section 138 of the Negotiable Instrument Act, 1881.
WRONGFUL DISHONOUR
When the banker dishonour the cheque without proper reasons, banker becomes liable to
compensate the customer for any loss or damage caused to the customer.
The term 'wrongful dishonor' refers to 'a bank's failure to hone a valid negotiable instrument such
as a check or draft that has been presented to it for payment. If the instrument is valid and there
are enough funds to cover it, a bank's failure to honor the instrument within the time period
stipulated by the Uniform Commercial Code UCC) would constitute wrongful dishonor.
However, in case the cheque is dishonored wrongfully, the banker must bear some penalty
according to section 31 of the Act. When a customer has a sufficient balance in his account, the
banker is bound to honor such a cheque. If he fails to do so, he shall compensate the drawer for
any loss or damage caused by such default. Chapter XVII of the Act, consisting of sections 138142
deals with the dishonor of cheque. It may be rightful or wrongful dishonor of cheque.

Consequences for the Account Holder

 Reputational Damage
 Financial Losses
 Contractual Breaches

Consequences for the Bank

a) Legal Liability
b) Compensation for Damages
c) Regulatory Penalties: Banks are subject to regulations and oversight by financial authorities.
Wrongful dishonour of cheques can attract scrutiny and penalties from regulatory bodies. This
can also lead to increased oversight and more stringent regulatory requirements.
d) Loss of Customer Trust: Customers rely on banks to handle their financial transactions
accurately and reliably. Incidents of wrongful dishonour can erode customer trust and lead to
a loss of business. Customers may choose to move their accounts to other banks, resulting
in a loss of revenue.
e) Operational Reviews: Banks may need to conduct internal reviews and audits to identify and
rectify the issues that led to the wrongful dishonour. This can involve significant time and
resources, and may also lead to changes in procedures and policies to prevent future
occurrences.

4. COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of cheque, bill, oder, traveller
cheque, letter of credit, dividend, debenture interest on behalf of customer/ for his customer from
the paying banker.

 For undertaking this collection, the collecting banker will be charging commission.
 Collection of cheque is not statutory obligation to the banker but now it become important
function of modern banker because of the use of more crossed cheque.
 A Collecting Banker undertakes ‘to collect cheques, drafts, bills, pay orders, traveler’s
cheque, Letter of credit, dividend warrants, debenture interest etc, on behalf of the
customer”.
4.1 HOLDER FOR VALUE
When a collecting banker, advances some amount to his customer, before realizing his cheque,
the banker becomes owner of the cheque now and he is termed as “ Holder for value”.
That is the person holding the cheque, for the value paid to the or true owner of the cheque,
before the realization of the instrument.
As holder for value, the collecting banker is said to acting as holder for value:

 When the collecting advances money to the customer before the realization of the cheques
given for collection.
 When the collecting banker settles the loan amount due from the customer with the cheque
amount given for collection, even before its realization.
 When a collecting banker reduces an overdraft with the amount for collection before its
realizartion . 4. Where a part of the cheque amount is given by the collecting banker to the
customer even before the realization of the cheque.
 By allowing the customer to draw the full amount of the cheque before its realization.

4.2 HOLDER IN DUE COURSE

Holder in Due Course (HDC) is defined as a ‘a holder who acquires the negotiable instrument in
good faith for consideration before it becomes due for payment and without any idea of a defective
title of the party who transfers the instrument to him, therefore, it’s said to be a holder in due
course.
Holder in Due course implies a person who obtains the instrument bonafide for consideration
before maturity, without any knowledge of defect in the title of the person transferring the
instrument. A holder in due course is a person who acquires the negotiable instrument bonafide
for some consideration for some consideration, whose payment is still due.

4.3 DIFFERENCES BETWEEN HOLDER AND HOLDER IN DUE

COURSE
1) Possession: A holder may or may not be in possession of the instrument but, the holder in due
course is always in possession of the instrument. This is the primary difference between these
two.
2) Entitlement: The holder is entitled to the possession of the instrument in his own name. Holder
in due course has obtained it in good faith for some consideration.
3) Consideration: Consideration is not necessary in case of a holder but, in case of a holder in
due course consideration is vital.
4) Title: If the prior parties are fraudulent and don’t have a legal title to deliver or endorse the
instrument to the holder, the holder also has no right to the same. However, a holder in due
course is free from the fraudulent prior parties and has a better title than the transfer.
5) Right to sue: A holder does not have a right to sue all the prior parties related to the transaction.
However, the holder in due course has a complete right to sue all the prior parties.
6) Good Faith: The holder may or may not obtain the instrument in good faith but, the holder in
due course always obtains the instrument in good faith.
7) Privileges: Privileges of a holder are very minimal whereas privileges given to the holder in
the course are much more.
8) Maturity of the instrument: Maturity of the instrument can also be used to differentiate between
holder and holder in due course. A person can be a holder before or after the maturity of the
instrument; however, a holder in due course is valid only until the maturity of the instrument.

GOOD LUCK – THANK YOU

 UNIT 3

CUSTOMER AND ACCOUNT HOLDER

1. INTRODUCTION
Banks come into contact with a variety of customers while opening and operating bank
accounts. When customer opens an account, a contractual relationship, also known as ‘Banker
Customer Relationship’ is formed, founded on free will and agreement. Because each account’s
constitution is unique, the requirements vary as well.
While opening the account, the banker carefully enquires about the responsibility, respectability,
reliability of the particular customer because when the account is opened, it is a contract
between the banker and the customer.
Who is Customer?
Customer of a bank is a person who is maintain an account in his/her own name or in whose
name the deposits are maintained.
Two types of customer –
1. Individual Account Holder (minor, Lunatics, Illiterate, Married women)
2. Institutional Account Holder (Joint stock co., Partnership firm, trustees, co-operative
societies)
2. INDIVIDUAL CUSTOMER ACCOUNT
This is purely personal account in the name of an individual and its normally operated upon by
the account holder himself.
The Account holder may authorize another person to operate on his account. For this purpose,
he gives a mandate or executes a Power of Attorney in favour of such a person.
Different types of individual Customers are explained in the following parts.

2.1 MINOR’S
A Minor is a person who has not completed the age of 18 years.
Where the legal guardian is appointed by a court of law the person attain majority on completion
of 21 years and not before. (section 3 of Indian Majority Act, 1875). There are 2 types of minor’s
A/c
 Minor’s Individual Account
 Minor’s Joint Account

(A) Minor’s Individual Account

Risks to be faced by Minor’s Creditors:
1) Contract with the minor is void.
2) According to the section-68 of the Indian contract Act of 1882, Creditor cannot force a minor
for repayment of loans.
3) A bill or promissory note or cheque given by a minor to repay the money actually borrowed
by him during his minority is considered as entirely void.
4) If any property is given as security or mortgage for loan, creditor has no right on such
properties.
5) The property of the minor is liable for the necessary supplied to him here minor is not
personally liable but only his property is liable.

Precautions to be taken by the banker while operating a minor’s account:

1) Open the savings Bank Account: The banker can open the savings Bank account but not
current account in the name of minor in any of the following ways:

 In the name of minor

 In the Joint names of minor and his guardian
 In the name of the guardian
2) Recording the date of birth of minor: While opening an account in the name of a minor,
banker must record the date of birth of minor. The date of birth certificate must be produced
by the guardian or minor. This certificate must be issued by the registrar of death and birth.
3) Death of the minor or guardian: If the minor dies before obtain the majority, The Majority,
the money available in the min’s account will be payable to his guardian. On the contrary, if
the guardian dies before the minor attains the majority; the amount available in the minor’s
account will be paid to him, when he attains the majority or some person who is appointed
by the court as his Guardian.
4) Minor as a partner: Minor can be admitted as a partner of the firm, if all the other partners
agree. But such minor person can share the firm’s profits but minor is not liable for any loss
of the firm.
5) Minor as an agent: A Minor can be appointed as an agent, and when the minor is appointed
as an agent, he can deal on behalf of the principal. In such cases, principal will be liable to
banker.
Generally, banker will have to take the following four steps.
a) A written mandate from customer (principal)
b) Powers given to minor
c) Name of minor
d) Specimen signatures
Guardian:
As per section 4 of ‘The Guardian And wards Act, 1890’ ‘Guardian’ means a person who having
the care of the person of a minor or of his property or of both his person and property.
Guardians are three types:
a) Natural Guardian: In case of a minor boy or an unmarried girl, his/her father is a natural
guardian. If father dies mother becomes natural guardian. In Case of married girl, husband
becomes natural guardian. When the father is alive, mother cannot become natural
guardian. But if entitled to be a natural guardian:
b) Testamentary Guardian: appointed by the will of the minor’s father. Hindu father is a natural
guardian of minor children, or he may appoint, by will, a guardian for his minor persons.
Such person will become guardian after the death of the father or the mother. The person
who becomes a guardian through will is known as Testamentary Guardian.
c) Guardian appointed by a court: When father or husband is not alive or father or husband is
unfit to be a guardian of the minor, in such case, the court can appoint a guardian to protect
the interests of the minor.

(B) Minor Joint account

A minor joint account is a type of bank account jointly by a minor and typically a parent or
guardian. This account allows the adult to manage the account on behalf of the minor until the
minor reaches the age of majority.
Accounting opening procedure for minor’s:
 Step 1: Determine the type of account that minor should open: Bank can open fixed,
recurring deposit and savings bank accounts in the name of minor with guardian.
 Step 2: Choose the bank and fill out account application form accurately: By name, address,
date of birth and signature of minor and guardian etc
 Step 3 : Submit the document: Name proof, address proof, etc banks are required to take
adequate safeguards in allowing operations in the account.
 Step 4: Initial Deposit: By depositing some money the bank allows the individual as account
holder.
 Step 5: Receive account details and other facilities to the account holder: Account no.,
passbook, debit card, online access, if any.
 Step 6: Regular monitor and maintenance: Monitor the account regularly to ensure there are
no unauthorized transactions.

2.2 LUNATICS:
A lunatic is a person of unsound mind. They cannot understand the happening around them and
do not have rational thinking. They cannot make judgements.
Thus, law protects them from others who may like to take advantage of their ill health of mind
and absence of rational thinking.
Indian contract act 1872 provides that a person of unsound mind is disqualified from contracting.
Banker responsibility:
 A contract with person of unsound mind is void.
 If the account holder becomes insane as soon as it comes to his notice of the banker should
stop all types of operation of the account and also such dealings.
 Before discontinuing the operations of his account, banker should obtain definite proof about
the lunacy.
 Banker can make his further dealings with the person appointed by the court.
 If a lunatic become normal, banker can continue his account.

2.3 DRUNKARDS (INTOXICATED PERSONS)

A drunkard is a person who is so intoxicated as to be incapable of understanding the nature and
the effect of a contract in his interest.
According to section 12 of the Indian contract act, a drunkard is a man of unsound mind and if
he makes a contract, while he is drunk, it become void.
If a customer presents a cheque when drunk and intoxicated, and demands payment, the bank
will have to get his signature and payment witnessed by a responsible person who is not an
employee of the bank.

Precautions to be taken by the banker:

1) Banker should not open the account in the name of a person when he is fully drunk.
2) If the account is already opened, great care should be taken.
3) when the drunker customer presents a cheque himself for endorsement, the banker, in
such cases, should get it signed by a witness who is known to the banker. The witness
should not be an employee of the bank.
4) Banker should not to execute any document by a customer when he is drunk.

2.4 ILLITERATE PERSON

 Illiterate person is the one who cannot read and write.
 Illiterate person is the one who cannot put his signature.
 For identification Banker should obtain the thumb impression of the depositor on the account
opening form and on the specimen signature card.
 A current Account should not be opened in the name of an illiterate person.
 Cheque book should not be issued under any circumstances even in case of joint accounts.
 Passport size photographs of the customer have to be obtained one to be attached to
account opening form and another to the passbook.
 Every withdrawal should be orally confirmed by the account holder to the authorized official.
In case of illiterate persons, for withdrawals he/she personally comes to bank and produces
his or her passbook. On the production of pass book, the banker will issue the withdrawal
slip and write the amount and obtain the thumb impression which is witnessed by some
person know to the bank.
 Identification mark: Brief details of one or two identification marks of the depositor should be
noted on the account opening form and specimen signature card, under the authentication
of an authorized official.

2.5 MARRIED WOMEN

 Married women can open an account with the banker in their name operate the accounts.
 A married woman is competent to enter into contract.
 She is competent to sell the property belonging to her.
 Married woman has power to draw, hold and endorse cheques, bills etc.

Precautions to be taken by the banker:

a) Detail enquiries about her husband’s name and other things are to be made.
b) The bank can open any type of account including current account in the name of married
woman. But in France, married women are not accepted as customers by French Banks
without written permission of their husbands.
c) The banker may allow overdraft to married women provided there is some property in
the name of married women. It helps the banker to get the repayment.
d) Loan Agreement: Whether loans required for personal necessities or for necessaries of
family, banker should obtain loan agreement signed by both i.e., Husband and wife.

Married woman as Joint Account Holder:

 A married woman can open a joint account with her husband. In such cases the banker
should observe certain precautions.
 Banker should get clear instructions as to who is authorised to operate the account.
 In the event of death, the credit balance is to be paid to any one or both.
 A letter of consent from the joint account holders in case of overdraft. Whether both are
liable or individually, are to be obtained from the banker.

2.6 PARDANASHIN WOMEN:

 A Pardanashin Woman wears veil and she observes a complete seclusion(parda) in
accordance with the custom of her community.
 The pardanashin woman poses a problem of fair and correct recognition.
 While dealing with such customer bank have to check that there should not be any undue
influence(any pressure from others).
 Savings bank/term deposit a/c may be opened after being properly identified /introduced.
Precautions to be taken by the banker:
a) The banker is always in doubt about the identity of a pardanashin woman.
b) Any contract entered with pardanashin woman is subject to undue Influence.
 c) A cheque may be drawn, endorsed or a bill may be accepted even Under durers, undue
influence might have been exercised. These factors may be examined and analysed
before the payment is made.

2.7 JOINT ACCOUNT

A joint account is an account opened in the name of two or more persons, who are not partners,
trustees, executors, administrators. These persons may be husband & wife, father & son,
friends.

Procedure & Precautions to be taken by the banker:

1) Application in prescribed form: Bank should receive application for opening and operating
a joint account signed by all those who have expressed their willingness to have joint
account.
2) The Mandate must clearly mention name of the person authorised to operate the joint
account - in writing, signed by all the joint account holders.
3) Banker should obtain in writing by a borrowing powers given to authorised ll the joint
account holders regarding persons.
4) He should ascertain the style or title under which the account is to be opened.
5) The banker should also get clear instruction in writing as to how the credit balance in the
joint account is to be disposed off in the event of death of any of joint holder.
6) On the revocation of authority given to operate the account( can be cancelled by any of the
joint account holder).

3. JOINT STOCK COMPANY

A joint stock company is a voluntary association formed for the purpose of carrying on some
business. Legally, it is an artificial person and having a distinctive name and a common seal.
Even a company having a separate entity, can also enter into contract. It can own property in its
own name, carry on lawful business and incur the abilities in its own name. So, the banker can
open an account in the name of the company.

Procedure & Precautions to be taken by banker:

 Application in a prescribed form:Account must be in the name of company. The
application must contain, 1. Names and Addresses of all the directors 2. Full and clear
signature of all the directors.
 Certificate of incorporation: It is a legal evidence or proof for the existence of company.
Banker has to verify the incorporation certificate issued by the registrar of Joint Stock
Company.
 Commencement of business certificate in case of public ltd company.
 Should get a certified copy of memorandum of association, Articles of association and list of
current directors.
 Banker should obtain a certified copy of resolution passed.
 Signature of the persons who are authorized to operate the account of the co.
 Ensure funds do not go to personal accounts on the receipt of liquidation notice.

4. PARTNERSHIP FIRM
Partnership is the relation between persons who have agreed to share profits of business
carried on by all or any one of them acting for all (Indian Partnership Act 1932).
A partnership business is collectively called a firm. Partnership persons individually are called
partners. A banker can open an account in the name of a partnership firm after obtaining an
application in writing from all the partners to open an account.

Procedure & Precaution to be taken by the banker:

1) Letter for opening an account: Barker has to receive a requesting letter from the firm for
opening an account, stating the name of the firm, names of the partners, the place of
business, nature of business, names of partners those who will operate the
account(mandatory).
2) Partnership Deed: Banker demands the partnership firm to produce the partnership deed
and he verifies the details contained in the deed, relating to rights & duties
3) Title of the firm's account: Banker can open the account in the name of a firm.
4) Revocation of Authority to operate the account: The authority given to operate the
account of the firm may be withdraws by any one of them, by giving a notice to the banker.
So the banker should stop the payment when he receives a notice from one of the partner's
to stop the payment of the cheque drawn on the partnership account by another.
5) Delegation of Authority: cannot delegate his authority to another person without the
consent in writing of all other partners.
6) Borrowing Powers: Banker should verify the borrowing powers of authorised persons.
7) Dissolution of the firm: In case of death, retirement, insolvency of a partner, Banker
immediately closes the firm's account and advises to open a new account in the name of the
remaining partners.

5. HINDU UNDIVIDED FAMILY(HUF):

Hindu Joint Family is a family which consists of more than one male member, possesses
ancestral property and carries on family business. It arises by law and not by an agreement
The affairs of the family are managed by the male elder person (i.e. the senior most male
member) called the “karta”. The other coparceners do not take part in the management of the
joint family.

Procedure & precautions to be taken by banker:

1) Before opening an account banker should obtain name and signature of all coparceners.
2) The banker should know the style or the title under which the account is to be
opened.(Either karta or family name)
3) Authorized to operate: In the absence of specific instructions, only karta should be allowed
to operate (mandate sign by major coparceners).
4) Banker should see that borrowings are for family purposes but not for individual purpose of
karta.
5) Karta’s liability is unlimited.
6) The banker should get all clarifications regarding family business, etc A Joint Hindu Family
business may be either (1) hereditary (2) New business or (3) in partnership with outsiders.
7) Joint Hindu Family business does not end on account of death of one of the co- parceners.

6. CLUBS, SOCIETIES AND ASSOCIATIONS:

Group of people who come together to performing/achieving a particular objective/task.
Sometimes, non-trading or non-profit organisations such as societies, clubs, Charitable &
religious institutions, schools etc. are registered under the societies Registration Act of 1860, or
under co-operative society act. These association get a legal entity separate that of its members
and the banker can allow these institutions to open the account in the name of clubs, schools
etc.
Procedure & precautions to be taken by banker:
a) The Society must be registered: Before opening an account, the banker must see that
whether they are properly registered. If they are registered, contracts entered become valid.
b) Rules and by-laws of society(Obtain copy): : Banker should examine the by-laws & rules of
the society. It helps the banker to ascertain the power and functions of persons managing its
affairs. For this purpose banker should obtain a certified copy of such rules and by laws.
c) Resolution of the Managing Committee: Banker should obtain the copy of Resolution of the
managing committee for opening an account. Managing Committee should pass a resolution
for opening the account.
d) Resolution contains: Appointing the bank concerned as a banker of the society.
e) Name and Sign of the persons are to be taken by banker to operate the a/c.
f) Borrowing power of the society: Banker has to verify the borrowing powers of the society
g) Death or resignation: If operating person dies or resign, in such cases banker should stop
operating until society nominate another person to operate it’s a/c.
h) Personal account: Banker should see that the funds of society are not credited to personal
a/c.

6. EXECUTORS AND ADMINISTRATORS

Executor is a person appointed by the customer(Maker of will Or Testator) for the purpose of
executing his will after his death. On the death of testator, the executor named in the will, is
granted by court an official probate.
Executors are those persons who are appointed to conduct the affairs of the person after his
death. In otherwords, an executor is a person to whom the execution of the will is entrusted by
the testator( the person appointing an executor in his will).
An administrator is a person appointed by a competent court to administer the estate of a
deceased. Administrator is appointed when there is no executor is named in the will of
deceased testator. Or
The person/persons who have been appointed by the court are called Administrators. Executors
or administrators are allowed to open the account with the banker.

Procedure & Precautions to be taken by Banker:

 On the receipt of the notice of death of testator, the banker should stop the operations on
the account of the testator.
 Letter of Administration: Before allowing the executor/administrator To operate the account
of deceased testator, the banker should ask to produce the official probate or the letter of
administration granted by the court.
 In case of more than one executor: Banker should take mandate sign by all the executors or
administrators.
 Close the account of deceased testator: Open a/c under the heading of “Executors to the
estate of deceased. Or administrators to the estate of deceased.
 Banker should honour only those cheques which are signed by authorised
executors/administrator.
 He should ensure that the money belonging to the estate of deceased is not
misappropriated by the executor/ administration.
 On the death or resignation of any one of the executors/administration the banker need not
stop the operations on the account. He can allow the remaining executors or administrators
to operate the account.

7. TRUSTEES
A trustee is a person to whom the management of property is entrusted by one in trust for the
benefit of another. (section 3 of Indian Trust Act,1882)
The person who forms or creates the trust and entrusts the management of property to the trust
is called settlor or author of trust.
The person for whom benefit the trust is formed is called Beneficiary.
A trust is formed by means of a document called the Trust deed.
A trust account can be opened in the name of the trustee personally. Types of Trust a/c:
a) Private trust: Benefit of specific individuals like wife, children etc.
b) Public trust: General public charitable trusts.

Procedure & Precautions to be taken by banker:

 The banker should thoroughly examine the trust deed appointing the applicants (persons) as
trustees. So it helps the banker to ascertain their (Trustees) power and functions.
 In case of two or more trustees, Banker should obtain clear instructions as to the
person/persons operating the account. In the absence of such instruction, all the trustees
should sign the cheques.
 While granting loans to trustees, the banker should see the borrowing powers as per the
trust deed. Because, if the provision is contained in respect of mortgage or pledge,
otherwise, trustees are not allowed to pledge or mortgage the trust properties.
 Banker should verify the Trust Deed. In case of death or retirement of one or more trustees,
i.e. whether the surviving trustees could act without the appointment of a new trustee in
place of the deceased is to be examined by the banker. Where all the trustees die, the court
would naturally appoint a new trustee.
 Where the trustee becomes insolvent, the trust property of trustee is affected by such
insolvency; the creditors of the trustee cannot recover their claim from such trust property.
 Where the trustee becomes lunatic, the banker should not allow operations of the account
by such trustee (person).
 Banker should not allow t0 transfer the trust money to the personal account of trustee.

GOOD LUCK - THANK YOU

 UNIT 04: NEGOTIABLE INSTRUMENTS

1. INTRODUCTION
In the world of business and finance, negotiable instruments play a very important role.
They provide the parties with an ease of doing business and they can also be a source of finance
when in need of funds. Negotiable instruments are freely used in commercial transactions and
monetary dealings. They are useful for making payments and discharging the business
obligations.
The law relating to Negotiable Instruments is contained in the Negotiable Instruments Act
1881, which came into force on 1st March 1882. The Act extends to the whole of India. The Act
operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act 1934.
The Negotiable Act deals with Promissory Notes, Bills of Exchange and Cheques.

2. Meaning
 Negotiable: The word 'Negotiable' means transferable from one person to another in return
for consideration.
 Instrument: The word 'Instrument' means a written document by which a right is created in
favor of some person.
Thus, a negotiable instrument is a signed document that promises a sum of payment to a specified
person or the assignee. Or
A Negotiable Instrument is a document which entitles a person to a sum of money, and which is
transferable from one person to another by mere delivery.
In short, a Negotiable Instrument is a method of transferring a debt from one person to another.
Examples of Negotiable Instruments: (1) Promissory Notes (2) Bills of Exchange (3) Treasury
Bills (4) Dividend Warrants (5) Share Warrants (6) Railway Receipts (7) Hundis

3. Definitions
Section 13 (a) of the Indian Negotiable Instruments Act 1881 defines, "a Negotiable Instrument
means a promissory note, bill of exchange or cheque payable either to order or to the bearer."
Justice K.C. Willis defines a Negotiable Instrument as, "one the property which is acquired by
anyone who takes it Bonafede and for value not withstanding any defect of title in the person from
whom he takes it."
Thus, a negotiable instrument is an instrument which entitles a person holding it to a sum of
money and which is transferable from one person to another person by mere delivery like cash.
4. FEATURES/ESSENTIAL ELEMENTS OF
NEGOTIABLE INSTRUMENTS
Some of the main characteristic features of 'Negotiable Instruments' are discussed as below:
1) Easily Transferable: A negotiable instrument is easily and freely transferable. There are no
formalities, or much paperwork involved in such a transfer. The ownership of an instrument
can transfer simply by delivery or by a valid endorsement.
2) Must be in Writing: All negotiable instruments must be in writing. This includes handwritten
notes, printed, engraved, typed, etc.
3) Time of Payment must be Certain: If the order is to pay when convenient then such an order
is not a negotiable instrument. Here the time period has to be certain even if it is not a specific
date for example, it is acceptable if the time of payment is linked with the death of a specific
individual. As death is a certain event.
4) Payee also must be certain: The person to whom the payment is to be made must be a
specific person or persons. Also, there can be more than one payee for a negotiable
instrument. And "person" includes artificial persons as well, like body corporate, trade unions,
chairman, secretary etc.
5) Substitute of money: It works just like money and can be transferred from one person or the
other.
6) Signature: Must bear the signature of its maker
7) Delivery: Delivery of the instrument is essential.
8) Stamping: Stamping of bill of exchange and promissory note is mandatory.

5. TYPES OF NEGOTIABLE INSTRUMENT

The different types of Negotiable Instruments are discussed in brief as under:
1) Promissory Note: “An instrument in writing containing an unconditional undertaking signed
by the maker to pay certain sum of money only to or to the order of certain person or to the
bearer of the instrument.”
2) Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs
the drawee (debtor) to pay the payee a certain amount of money. The bill will be made by the
drawer (creditor).
3) Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such
a cheque is only payable on demand. It is basically the depositor instructing the bank to pay
a certain amount of money to the payee or the bearer of the cheque.
4) Commercial Bill: This deals in commercial markets. They are drawn either by the seller or
the drawer and it is drawn by the drawer of the goods of the buyer in place of the value for the
goods delivered. They are also called trade bills. When these bills are accepted by the
commercial banks, they are called commercial bills.
5) Commercial Paper: Commercial paper is also issued in the form of promissory note. It can
be sold directly by the issuer to the investors. It can also be transferred to the borrowers
through agents. These instruments can only be issued in multiples of 5 lakhs and thereafter.
The maturity period varies from one week until one year.
6) Treasury Bills: Treasury bills are also known as T-bills. It is a short-term instrument for
borrowing for the government. For these bills, the tender is issued in the money market and
various government departments. Thus, for this, tenders are invited weekly from brokers and
bankers. It provides the government a very cheap way to borrow the money in the times of
fluctuating cash and further it also provides the security for the transaction. Furthermore, the
RBI which is the banker for government provides these bills at a discount rate.
7) Bank Draft: These are also the bills of exchange. So, in this, the bank's orders one its branch
to repay the money to a person or to his order. For this, the banks charge a nominal fee.
8) Other Negotiable Instruments: There are other instruments such as government promissory
notes, railway receipts, delivery orders, etc. These can be negotiable instruments by custom
or practice of the trade.

4.6 PROMISSORY NOTES

Section 4 of the Negotiable Instrument Act 1881 defines, "A Promissory Note is an instrument in
writing (not being a bank note or a currency note) containing an unconditional undertaking signed
by the maker to pay or to order a certain sum of money only to a certain person or to the bearer
of the instrument."

In this case, the debtor is the one who makes the instrument. And he promises unconditionally to
the creditor (or the bearer of the document) a certain sum of money on a specific date.

6.1 PARTIES TO A PROMISSORY NOTE

1) Maker (or promisor): The person who makes the Promissory Note and promises to pay
is called the maker in the above example Ganesh is the maker.
 2) Payee or promisee: The person to whom the payment is to be made is called the payee.
In the above example Raju Patil is the payee.
3) Endorser: The person who endorses the Promissory Note in favor of another person is
called endorser
4) Endorsee: The person to whom the Promissory Note has been endorsed is called the
endorsee.
5) Holder: The person who holds the Promissory Note as per law is called Holder. He
(holder) may be the payee or an endorsee or the bearer of the Promissory Note

6.2 FEATURES/ESSENTIAL ELEMENTS OF PROMISSORY

NOTE
a) Printed (or Written) Agreement: A promissory should be in writing, and an oral promise
to pay money is not accepted
b) Pay Defined Amount: It is a promise to pay the money on a particular time or when
demanded. The mentioned amount can neither be added nor subtracted.
c) Signed Documents: The document is duly signed and drawn by the drawer and stamped.
d) Unconditional Promise: The promise to pay a certain amount of money must be absolute
in all cases. In such notes, a conditional guarantee is not accepted.
e) It should bear the required stamping: The promissory note should, necessarily, bear
sufficient stamp as required by the Indian Stamp Act, 1889.
f) Promise to pay: The instrument must contain promise to pay.
g) The payee may be certain: The name of the person to whom the payment is to be made
must be mentioned in the promissory note.
h) Time of payment: It may be payable on demand or after a definite period of time.

6.3 TYPES OF PROMISSORY NOTES

I. Secured Note: In case of a secured note, the borrower will be required to provide a
collateral such as property, goods, services etc., in the event that they fail to repay the
borrowed amount. The value of the collateral being provided must be more or equal the
amount that is being borrowed.
II. Unsecured Note: In case of an unsecured Promissory Note, no collateral needs to be
provided.

7. BILLS OF EXCHANGE
Section 5 of the Indian Negotiable Instruments Act of 1881 defines a Bill of Exchange as, "an
instrument in writing, containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of a certain person or to the bearer
of the instrument.

This is an order from the creditor to the debtor. This instrument instructs the drawee(debtor) to
pay the payee a certain amount of money.

7.1 PARTIES INVOLVED IN BILL OF EXCHANGE:

1) Drawer: The person who draws or makes or writes the Bill of Exchange on his debtor is called
drawer. In the above examples Shivakumar is called the drawer.
2) Drawee: The person on whom the Bill of Exchange is drawn is called Drawee In other words,
the drawee is a person on whom the Bill of Exchange is drawn by his Creditor. So, the drawee
is a person who has to pay the amount of the bill. In the above example Rupa is the Drawee.
3) Payee: The Payee is a person to whom the amount of bill is payable. in the above specimen
Ramu is the payee
The payee may be drawer himself or some other person.
4) Holder: When the payee is in Bill's custody, he is referred to as the holder. The holder must
provide the Bill to the drawee for the latter's acceptance.
5) Acceptor: When the drawee signs the Bills of Exchange as a mark of his acceptance, then
he becomes the acceptor of the Bill.
6) Endorser: If the bill holder endorses it to another person, then he will be called an endorser.
7) Endorsee: This is the person to whom the Bills of Exchange has been endorsed.
7.2 Features / ESSENTIALS OF A BILL OF EXCHANGE
a) It must be written: The bills of exchange should be in writing format. No verbal note would be
considered as valid.
b) Stamped by Drawer: It holds a legal stamp to ensure its validity.
c) Duly Signed by Drawee: A bill of exchange is duly accepted and signed by the drawee who
owes the sum to the payee.
d) Unconditional Order: it must contain definite and an unconditional order to pay. A conditional
instrument is invalid.
e) It must contain an order to pay: the bill of exchange must contain an order by the drawer to
the drawee to pay under any circumstances.
f) Payable to a certain person: bill may be made payable to two or more payees jointly or in the
alternatives.
g) The bill must contain an order to pay money only.
h) Date of Payment: Fixed date for the amount to be paid.
i) The bill of exchange amount should be definite.

7.3 Classification of Bill of Exchange:

a) Inland Bills: A bill of exchange drawn within the geographical boundaries of a country,
when the drawer, drawee and payee resides in that particular country, is known as an
inland bill.
b) Foreign Bills: When a drawer makes a bill in one country to be accepted and payable by
the drawee in some other country, this bill of exchange is called a foreign bill.
c) Demand Bills: These bills of exchange do not have a specific date or period of repayment;
instead, these are payable on demand of the payee or holder.
d) Term Bills: The bills of exchange payable on a specific date or after a definite period are
called term bills.
e) Trade Bills: Trade bills are those who are drawn by the seller or creditor at the time of
selling goods on credit to the drawee.
f) Accommodation Bills: The bill which is drawn by a lender to provide financial support or
aid to the drawee, or the borrower is known as an accommodation bill.
g) Fictitious bill: it is a type of bill in which the name drawn is fictitious (imaginary) that is
either or drawer or drawee.
h) Forged bill: Forged bill are those in which name of the drawer or the payee has been
forged. Such a bill cannot be enforced by law and does not hold good even in the hands
of holder in due course.

8 CHEQUE
A cheque is a bill of exchange in which one party orders the bank to transfer the money to the
bank account of another party. It is a negotiable instrument that is covered under the Negotiable
Instruments Act, 1881. A cheque can be issued against a savings account or a current account.
8.1 Meaning and Definitions of a Cheque
“A cheque is a document that orders a bank to pay a specific amount of money from a person's
account to the person in whose name the cheque has been issued.”

8.2 ESSENTIALS OF A CHEQUE:

1) Written instrument: A cheque must be in writing. By pen or printed form.
2) Unconditional order: A cheque must contain an unconditional order. It is not necessary to
write the word "order”, or its equivalent must not be used in the cheque. Generally, the order
to a bank is expressed by the word "pay".
3) Payee to be certain: The person to whom cheques are issued, his name must be clearly
mentioned on the face of the cheque.
4) Payable on Demand: A cheque is payable on demand and not otherwise. If the cheque is
payable on demand, it is the valid instrument. It is not necessary to use the exact words, "on
demand" or their "equivalent". When the drawer asks the banker to pay, without specifying the
time or period of payment, it means that payment is to be made on demand.
5) Amount of the cheque: The amount of the cheque must be clearly written. It means the
amount payable to a particular person is to be mentioned on the cheque. The amount should
be clearly written both in words and figures on the face of the cheque.
6) Dating of cheque: A cheque should be dated. The date may be put either by the drawer or
holder.
7) Delivery of the cheque: For completing cheque, delivery is essential. It means the cheque
must be delivered to the person who receives it le. payee.
8) On a specified banker only.
9) Payable in money only.
10) Signed by the maker.

8.3 TYPES OF CHEQUES

There are two types of cheques, viz.,
 i. Open cheques: Open cheques are those that are paid across the counter. Great risk is
involved in case of the open cheques, because the open cheques may be stolen or lost,
and the finder can get encased it. In order to minimize such risk, a new method has been
developed and it is known as crossing of cheque.
ii. Crossed cheques: Crossed cheques are those that are not paid across the counter but
paid through the banker.

9. CROSSING OF CHEQUE
Drawing two parallel transverse lines across the face of the cheque with or without the words and
company" or any abbreviation thereof. Crossing may be hand-written or stamped. Crossing is a
direction from the drawer to the paying banker to pay the amount of the cheque through a bank
only and not directly to the person presenting the cheque at the counter. The purpose of crossing
is to minimize the risk of loss if the cheque is lost or stolen. So wrong person cannot get the
payment of a crossed cheque. The object of crossing cheque is that the amount of the cheque is
paid to the customer through the customer's bank account. This helps in tracing the person to
whom the money is paid.

9.1 METHODS OF CROSSING

There are two types of crossing, which may be used on cheques, they are:

 general crossing
 special crossing
(A) General Crossing-
Drawing two parallel transverse lines on the face of cheques with or without mentioning some
words, is known as general crossing.
Section 123 of the Negotiable instruments Act of 1881, defines, "where a cheque bears crossing
across its face, in addition to the words, "and company" or any abbreviation thereof between two
parallel transverse lines simply, either with or without words "not negotiable", that addition shall
be deemed a crossing, and the cheque shall be deemed to be crossed generally.
"Thus, cheque should contain two parallel transverse lines on its face with or without the words
"not negotiable" or "and company", or "account payee".
The main objective of General crossing is that the amount of cheque should be paid to a banker,
and it may be any banker. The lines may be drawn on the face of the cheque at any place, usually
at the left-hand top corner.
Among the above given specimen No. 1, 2, and 3, there is no difference. The meaning of above
specimen. No. 1, 2, and 3 is that banker can pay the amount to the customer, and it may be any
banker. In the above cases the customer need not be an account holder. So, if the cheque bears
the above specimen, it can be presented to banker through account holder. It means, cheques
first of all credited to account holder. Afterwards, account holder withdraws the amount and pay
to the concerned customer.
Specimen No 4 and 5 indicate that the cheque should not be further transferred. The person who
takes such cheque, does not acquire and cannot give a better title than that of the person from
whom he took it.
Specimen 6 i.e. account payee means that payment should be made through account only. That
is, account holder. Suppose the customer does not have any account, first of all, he should open
the account, and the cheque should be credited to the account. Afterwards the customer can
withdraw the money.

(B) SPECIAL CROSSING

Special crossing means mentioning the name of the banker on the face of the cheque. The main
objective of special crossing is that the cheque should be paid to a particular banker only. But if
the particular bank has no branch at the place of collection, it means to cross to another agent for
collection. (Drawing two parallel lines is not necessary in case of special crossing. Even then
drawing two transverse lines on the face of the cheque is in practice. Generally, name of the bank
is mentioned in between two transverse parallel lines) Section 124 of the Negotiable Instruments
Act, 1881, defines, "where a cheque bears crossing across its face, in addition to the name of a
bank, either with or without the words' not negotiable' that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed specially and to be crossed to that banker."
10. ENDORSEMENTS
An endorsement is an act of authorizing another person to receive payment of a negotiable
instrument.
Signing on the back of the instrument is known as endorsement. An endorsement is the mode of
negotiating, a negotiable instrument. Instruments payable to the order can be negotiated by
endorsement and delivery Negotiation of an instrument is the process by which the ownership is
transferred from one person to another.
The term endorsement is derived from the Latin word 'indorsum' meaning "on the back." Thus,
making it clear that the endorsement must be made on the back of the instrument with an intention
to transfer it to another person.

10.1 Definition of endorsement:

Section 15 of the Negotiable instrument Act, 1881, defines endorsement as ‘when the maker or
holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose
of negotiation, on the back or face thereof or on a slip of paper annexed thereto or so signs for
the same purpose a stamped paper intended to be completed as a negotiable instrument, he is
said to endorse the same, and is called the "endorsement".
 Endorser: The person who signs the instrument with an intention of transferring its ownership
to another is called 'endorser'.
 Endorsee: The person in whose favor the instrument is transferred is called the 'endorsee.'
10.2 TYPES OF ENDORSEMENT:
1) Blank or General endorsement: When the endorse just put his signature without mentioning
his/her name. for example, cheque payable to Mr. X, it is endorsed like pay……. order.
2) Full or special endorsement: When the endorser signs his name, mentioning the name of
the endorsee. For example, Cheque is endorsed by Mr. X to Mr. Y, it is endorsed: Pay Mr. Y
order ……………. sd/-Mr. X.
3) Conditional or qualified endorsement: the transfer of instrument is made to depend on the
fulfilment of a specified conditions. For ex: Pay Mr. Shiva on his marrying Priya. Sd/-Krishna.
4) Restrictive endorsement: when the endorser restricts the further negotiation of instrument.
For ex: Pay Deepa only. Sd/-Prema.
5) Partial endorsement: where only part of the instrument is transferred. For ex: the holder of a
promissory note for Rs. 8000, writes on it to pay Mr. X Rs. 2000 and endorses the note.
6) Facultative endorsement: When endorser waives some of his rights, for ex: Pay to shiva,
notice of dishonor waived. .sd/-Krishna
In such cases, endorses need not give him notice of dishonor.
7) Sans ‘Resourse’ endorsement: which means without resourse to me. The endorser removes
himself from his liability to the endorse.
8) Sans frais endorsement: When the endorse does not want any expenses to be incurred on
his account on the bill. Ex: Pay to shiva or order sans frais

10.3 RULES OF ENDORSEMENT:

a) The endorsement must be written on the instrument and itself or on a slip of paper
annexed thereto.
b) It must be made by the holder of the instrument and not by a stranger.
c) It must be signed by the endorser. The endorser must sign his name in the same spellings
as mentioned on the face of the cheque.
d) An endorsement written on a slip of paper attached to the end of a document is deemed
to be written on the instrument itself.
e) The endorser should endorse the instrument in full and not in part.
f) If an instrument is payable to the order or two or more payees or endorsees who are not
partners, all must endorse unless the one endorsing has authority to endorse for all others.
g) Endorsement is complete only when the instrument is delivered. The delivery must be
made by the endorser himself. If the delivery is conditional, endorsement is not complete
until the condition is fulfilled.

GOOD LUCK – THANK YOU

 UNIT 5: RECENT DEVELOPMENTS IN
BANKING
1. INTRODUCTION
The Indian banking sector has witnessed wide ranging changes under the influence of the
financial sector reforms initiated during the early 1990s. the Reserve Bank of India has been
consistently working towards the establishment of an enabling regulatory framework with prompt
and effective supervision as well as development of technological and institutional infrastructure.

New technology in banking:

The future of banking technology is driven by consumers, especially Gen Zers, who see
technology as something that enhances their lives. A common trend in banking technology is
using an application programming interface(API) to make proprietary data available to anyone
who has the consumer’s permission to access it.
 Open banking : A financial service model-allows third party developer(Online payment) to
access financial data through APIs. Banks embed their financial solutions into third-party
software and create a single interface for customers to access the services of their bank by
partnering with fintech,
 Blockchain: A shared data base or ledger. Bits of data are stored in files known as blocks. .
It helps in improving efficiency, enhancing security, and making quicker transactions with
decreased costs.
 Biometrics: The use of unique physical or behavioural characteristics of individuals for
authentication & security purposes in digital banking. Biometric payments are shaping the way
consumers make payments through their mobile devices Payments are made within seconds
of scanning their finger or facial recognition technology.
 Cloud computing: Enables institutions to reduce their data storage costs. Direct bank to
operate by using online banking.
 Artificial intelligence & machine learning: To offer real time, personalised services to their
customer. Automate banking services.
 Chatbots: AI-powered digital assistants designed to engage with customers through
websites, mobile apps, messaging platform.
 Zero trust security model: No one is trusted by default from inside or outside the network. It
is a security framework that secures the enterprise by removing implicit trust and enforcing
stricte user and device authentication throughout the network
 Wearables: Smartwatches & other wearables offer a quicker & easier way to check A/C
balance, pay bills, perform other basic banking tasks.

2. E-SERVICES IN BANKING
The concept of E-service represents prominent application of utilizing the use of information and
communication technologies, such e-service includes the service element of e-tailing, customer
support, and service delivery. Three main components of E-services are service provider, service
receiver and the channels of service delivery.
In the digitalized world almost, all of the banks are providing services electronically Banking or
virtual banking is an electronic payment system that enables customers of a bank or other
financial institution to conduct a range of financial transactions through the financial institution's
website.
1) Online Banking: Access to account information, transaction history, and transfer of
money between accounts, pay bills and send money to other banks, apply for loan,
manage investment-buy/sell stocks will be easily done through online banking.
2) Mobile Banking: Use of smartphone applications to conduct banking transactions, SMS
banking, pay for goods and services using mobile wallets and payment apps.
3) ATM (Automated Teller Machines): Cash withdrawal, Deposits, A/c information can be
easily accessable by using debit and credit cards.
4) EFT (Electronic Fund Transfer):when money transferred electronically from one bank to
another, called EFT. It covers NEFT, RTGS, IMPS etc
5) Online Customer Support: use AI-powered chatbots for instant customer support.
Communicate with bank representatives via live chat on websites or apps.
6) E-Statements and Notifications: Receive bank statements electronically and get real
time alerts for account activities via emails and apps.
7) Telephone Banking: Use voice commands to access banking services and speak with
customer service representatives for assistance.
Advantages
 Easy to operate • 24/7 available
 Lower transaction cost
 Convenient
 Time Saving
 Account activity tracking

Disadvantages:
 Challenging to new operator or uneducated
 Internet connectivity must required
 Password is crucial and memorise password may difficult

3. DEBIT CARD
A debit card is usually a rectangular piece of plastic, resembling any charge card. It is linked to
the user's checking account at a bank or credit union. The amount of money that can be spent
with it, is tied to the account size (the amount of funds in the account). In a sense, debit
Debit cards can help you reduce the need to carry cash, although using these cards can
sometimes entail fees. A 'debit card' is also called as 'check cards' or bank cards, which refers 'a
payment card that deducts money directly from a consumer's checking account when it is used.’

Components of a Debit Card:

1) The card number: this is a 16-digit number. The card number is unique and is not the same
as the bank account number
2) The Issue and Expiration Date: The issue date is also printed in the MM/YY format. The
expiry date is also printed in the same MM/YY format
3) The Logo: The card has the logo of the bank that has issued it. It also has the logo which
determines the type of debit card it is Visa, Mastercard or RuPay logo.
4) Customer Service Number: The toll-free number is printed on the back of the card. You can
call this number in case of any questions or to report the loss or theft of your card.
5) The Signature Bar: A signature bar is provided on the back of the card. It is important that
you sign the bar as soon as you receive the card. This can help you to prevent fraudulent
transactions Some merchant retail outlets do not swipe the card unless the signature is
verified.
6) CVV Number: Also known as the card verification value number, the CCV number is unique
to every debit. This number needs to be provided at the time of making online payments. It
provides an additional layer of security to the card.

4. CREDIT CARD
A credit card is basically a financial tool that allows you to borrow money from your bank, in order
to meet your necessary expenses, whilst giving you the luxury of repaying the amount later. A
credit card offers you a line of credit that can be used to make necessary payments. However,
this amount must be paid back to the bank on the due date as mutually agreed upon by the bank
and the card holder.

5. INTERNET BANKING
5.1 DEFINITION OF INTERNET BANKING
"Internet banking refers to banking services where depositors can manage more aspects of their
accounts over the Internet, rather than personally visiting a branch."

5.2 FEATURES OF INTERNET BANKING

a) The use of Internet is involved to deliver the banking services.
b) It assists the client to manage their banking transactions fastly and efficiently.
c) Internet banking promotes anytime-anywhere banking.
d) It helps to expand the customer base.
e) Quick and fast information can be provided about different banking products and services.
f) Internet banking promotes digital banking which eliminates costly paper processing.
g) It offers banking services as per customers conveniences.

6. ADVANTAGES OF E-BANKING TO BANKS

1) It reduces cost. The cost of banking transactions is considerably reduced. It thus increases
the profitability of banks.
2) Global coverage. It provides global network coverage of bank services.
3) Central data base. The data base of each branch is centralised. Now a customer is not a
customer of branch but is the customer of a bank. He can deposit, withdraw or remit money
from any branch of his bank.
4) Increase in customer base. Large number of customers is satisfied. It leads to higher customer
satisfaction rates. There is possibility attracting new customers.
5) Improvement in quality of service. There is greater scope for improvement of quality of service.
6) Opportunities to cross-sell. Opportunities arise to cross-sell bank products.
7) Sharing of Cost. By developing sharing network number banks can save costs. The operating
costs also become lower.
8) Opportunities for Making Profits. Profits can be increased by enlarging business segments
like loan, remittances, low cost deposits etc.

7. MAGNETIC INK CHARACTER RECOGNITION (MICR)

The MICR code is a pattern recognition system used mostly by the bank industry to identify the
document’s originality and to enable the processing and approval of cheques and other papers.

Characteristics of MICR code

A MICR code is a nine-digit code that recognizes the bank and branch involved in an ECS
(Electronic Clearing System) uniquely. The MICR code is written next to the cheque number at
the base of a cheque leaf. It can also be found printed on the very first page of a bank savings
account
MICR code composed of three parts
 City code – The very first three digits represent the city. They are matched with the PIN code
which we use in India for postal addresses.
 Bank code – The next three digits reflect a bank.
 Branch code – The last three figures indicate the branch.

Features of MICR code

 Even if there is any stamp or sign over it, it is easily recognisable. So it’s beneficial. It
generates a very secure network as it is hard to track the same ink, which makes forging the
document very complicated.
 In this case, the error rate is low.
 MICR fonts that do not meet such criteria are either rejected or not approved.

Difference between the IFSC code and MICR code.

The main difference between the two is the IFSC Code is used to remit money via NEFT and
RTGS. MICR code, on the other hand, is used only on cheque leaves.
8. CRYPTO CURRENCY
A crypto currency is an encrypted data string that denotes a unit of currency. It is monitored and
organized by a peer-to-peer network called a block chain, which also serves as a secure ledger
of transactions, e.g. buying, selling, and transferring.
A crypto-currency or crypto is a digital currency designed to work as a medium of exchange
through a computer network that is not reliant on any central authority, such as a government or
bank, to uphold or maintain it. Hence, it is a great long term investment.
Types of crypto currency
Bitcoin(founded in 2009 developed by Satoshi Nakamoto) is considered the first crypto currency
created, and other individual crypto currencies are known as "altcoins" (a combo word derived
from "alternative coin"). It's difficult to say which cryptos are the best ones, Bitcoin and some of
the largest altcoins out there are top tier options because of their scalability, privacy, and the scope
of functionality they support.

Advantages of Cryptocurrency
 Funds transfer between two parties will be easy without the need of third party like credit/debit
card or banks.
 It is a cheaper alternative compared to other online transactions.
 Payments are safe and secured and offer an unprecedented level of
 Anonymity.
 Modern cryptocurrency systems come with a user "wallet" or account address which is
accessible only by a public key and private key. The private key is only know to the owner of
the wallet
 Funds transfer are completed with minimal processing fees.
Disadvantages of Cryptocurrency
 The almost hidden nature of cryptocurrency transactions makes them easy to be the focus of
illegal activities such as money laundering, tax-evasion and possibly even terror-financing.
 Payments are not irreversible.
 Cryptocurrencies are not accepted everywhere and have limited value elsewhere.
 There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods.

9. What is KYC?
KYC means "Know Your Customer". It is a process by which banks obtain information about the
identity and address of the customers. This process helps to ensure that banks' services are not
misused. The KYC procedure is to be completed by the banks while opening accounts and also
periodically update the same. To open a KYC account, one needs to submit Aadhaar and PAN as
'proof of identity and proof of address' together with a recent photograph. If the bank does not get
required document from customers then the bank may not be able to open a bank account.
KYC is required to be done once in every two years for high risk customers, once in every eight
years for medium risk customers and once in every ten years for low risk customers. This exercise
would involve all formalities normally taken at the time of opening the account.

Definition of KYC
Know Your Customer is the process of verifying the identity of customer. The objective of KYC
guidelines is to prevent banks from being used, by criminal elements for money laundering
activities. It is a mandatory procedure in India that helps banks, insurance companies and other
financial institutions verify prospective customers' addresses and identities before conducting
transactions. It includes verifying the customer's identity, address, occupation, residential status,
financial status and other personal details.

10. BASEL NORMS

Banks play the role of a heart in the economy. Banks serve the essential function of channelizing
the funds from the surplus economic units to the deficit economic units. Although it looks like a
very simple activity, this activity causes a variety of risks.
One of the major risks is the liquidity risk along with default risk, credit risk. Examples of failure of
big banks due to their inability to sustain the risk exposure are already available in the market. In
order to save the banking industry from this failure, strong supervision is always needed.
What are Basel Norms?
Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS),
which fosters co-operation among central banks with a common goal of financial stability and
common standards of banking regulations.
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.

11. E-PURSE (DIGITAL WALLET)

E-purse (also known as an e-wallet or digital wallet) refers to an electronic device that allows
users to make electronic commerce transactions quickly and securely using a financial instrument
(such as a credit card, debit card or digital cash), It is an online-prepaid account used to store
money and transact online and offline through a computer or a smartphone whenever required.
It holds owner information, owner contact information, credit card and e-cash. The consumer
provides all that information at an e-commerce site's check counter.

FEATURES OF E-PURSE
1) Wallet in Smart Phone: It is just like a wallet in pocket of customer but the difference is
that it is stored in his smart phone or tablet as an app. It allow user to purchase items
using smart-phone or online with a computer.
2) Online Prepaid Account: It is an online-prepaid account, linked with your bank account,
debit card, or credit card of customer. It carries a preloaded monetary value and can be
used as a means of payment for multiple small-value purchases.
 3) Storage of Money: Customer can store money in e-wallet that he may use for cashless
payment against any products or services without swiping your debit/credit cards. An E-
wallet is protected with a password.
4) Less Risk: Unlike credit or debit cards, where holders have to be extra careful as they can
have big balances or a huge credit limit, wallets can be loaded with small, or even exact
amounts.
5) Less Required Information: Instead of entering information at every site with which the
consumer want to do business, e-purse gives consumers the benefit of entering their
information at once.

12. MOBILE BANKING (M-BANKING, SMS BANKING):

Mobile banking is a service provided by banks or other financial institutions that allows their
customers to conduct financial transactions remotely using a mobile device such as smartphone
or tablet. It uses a software, usually called provided by bank for the purpose. Mobile banking also
known as M-Banking.
It is term used for performing balance checks, account transactions, payments, credit applications
and other banking transactions through a mobile device such as a mobile phone. The earliest
mobile banking services were offered through SMS a service which is
ADVANTAGES OF MOBILE BANKING
1) M-Payment: M-payment is also referred as mobile money, mobile money transfer or mobile
wallet. It refers to payment services operated under financial regulation and performed from
a mobile phone.
2) Fund Transfer Service: Mobile banking helps to transfer fund electronically through mobiles
and mostly channelized through NEFT mechanism. When the request to transfer fund is made
through mobile phone, the beneficiary account is credited immediately.
3) Balance Enquiry: The account holder can get the clear balances on account in mobiles its
through mobile banking.
4) Mini Statement: The mini statement i.e. last 5 transactions on the account can be obtained
by the customer on mobile phone.
5) Loan Enquiry: The customer can get instant information about different types of loans
available with bank.
6) Opening Digital Account: A customer can open a digital account with the assistant of mobile.
The digital process includes KYC documents and signature through a video call with bank.
There is no need of physical interaction or biometric verification to open the digital account.

13. E-MONEY
Meaning
Electronic money is referred to as the form of currency that is electronically stored in devices,
such as the banking computer systems. Unlike the decentralized cryptocurrency, electronic
money is backed by a fiat currency: meaning they are regulated by a central authority.
In simple sense, Electronic money or e-money is the electronic alternative to cash. It is monetary
value that is stored electronically on receipt of funds, and which is used for making payment
transactions. E-Money can be held on cards, devices, or on a server.
Electronic money refers to 'money that exists in banking computer systems that may be used to
facilitate electronic transactions’.

Definitions on e-money
According to Reserve Bank of India, e-money may be broadly defined as "an electronic store of
monetary value on a technical device used for making payments to undertakings other than the
issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid
bearer instrument."

Features of Electronic Money

Just like physical paper currency, electronic money also includes the following four features:
a) Store of Value: Just like physical currency, electronic money is also a store of value, the only
difference being, that with electronic money, the value is stored electronically unless and until
withdrawn physically.
b) Medium of Exchange: Electronic money is a medium of exchange, i.e., it is used to pay for
the purchase of a good or when acquiring a service.
c) Unit of Account: Just like paper currency, electronic money provides a common measure of
the value of the goods and/or services being transacted.
d) Standard of Deferred Payment: Electronic money is used as a means of deferred payment,
i.e., used for the tools of providing credit for repayment at a future date.

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