MODULE-3

MERCHANT BANKER
As per SEBI, a merchant banker refers to, “any person who is engaged in
the business of issue management either by making arrangement
regarding buying, selling or subscribing to securities or acting as
manager, consultant or rendering corporate advisory services in relation
to such issue management”. In India, the functions of the merchant
bankers are governed by Securities and Exchange Board of India (SEBI)
Regulations, 1992.
The SEBI has classified ‘merchant bankers’ under four
categories for the purpose of registration:
1. Category I Merchant Bankers: These merchant bankers can act as
issue manager, advisor, consultant, underwriter and portfolio manager.
2. Category II Merchant Bankers: Such merchant bankers can act as
advisor, consultant, underwriter and portfolio manager. They cannot act
as issue manager of their own but can act co-manager.
3. Category III Merchant Bankers: They are allowed to act as
underwriter, advisor and consultant only. They can neither undertake
issue management of their own nor they act as co-manager. They cannot
undertake the activities of portfolio management also.
4. Category IV Merchant Bankers: A category IV merchant banker can
merely act as consultant or advisor to an issue of capital.

Activities carried out by merchant bankers:

 Private placement of securities.
 Managing public issue of securities
 Management of international offerings like Depository Receipts,
bonds, etc.
 Stock broking
 Marketing and underwriting of the new issue.
 Merger and acquisition related services.
 Advisory services, for raising funds.
 Project promotion and project finance.
 Investment banking
 Portfolio Services

MERCHANT BANKING
Merchant Banking is a combination of Banking and Consultancy Services.
Merchant banking can be defined as a skill-oriented professional service
and consultancy provided by merchant banks to their clients, concerning
their financial needs, for adequate consideration, in the form of fee.

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 Organisations providing merchant banking services in
our country are as follows:

1. Commercial banks and their subsidiaries.

2. Foreign banks including National Grind lays Bank, Citi Bank, Hongkong
Bank etc
3. All India Financial Institutions and Development Banks such as, ICICI, IFCI,
IDBI.
4. State Level Financial Institutions, such as, State Industrial Development
Corporations (SIDC’s) and State Financial Corporations (SFCs).
5. Private Financial Consultancy Firms and Brokers, such as J.M. Financial
and Investment Services Ltd.; DSP Financial Consultants, Kotak Mahindra
Bank, etc.
6. Professional Merchant Banking Houses, such as VMC Project Technologies.

The Need
 It helps a businessman to start a business.
 It helps to raise finance.
 It helps to expand and modernize the business.
 It helps in restructuring of a business.
 It helps to revive sick business units.
 It also helps companies to register, buy and sell shares at the stock
exchange.

Objectives of Merchant Banking

1. To assist capital formation in the economy.
2. To provide guidance to business community in the formation of new
enterprises.
3. To assist the corporate houses in rising of capital, underwriting,
investment, marketing, etc.
4. To promote venture capital technology fund and provide services to them.
5. To assist in project formulation and execution.
6. To help in modernisation and expansion.
7. To suggest innovative operation.
8. To provide skill-based service involving every financial need of clients.

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 9. To create secondary market for bills and act as an acceptance house.

Brokers Underwriters
A Broker is a person who buys and sells An underwriter is a person or company that
goods or assets for others. underwrites an insurance risk.
A broker is entitled to receive brokerage only While an underwriter receives underwriting
on those shares or debentures for which he commission on the entire issue which he
procures subscription. underwritten.
Broker’s percentage of brokerage is Underwriting commission should not
determined as per prevailing rate exceed 5% of the issue price of shares and
2.5 % of the issue price of debentures.
The brokers are entitled to brokerage even if In case of Underwriters, only if the Article of
the Article of Association of a company is an Association authorized underwriting
silent on this point. Commission, the underwriters are entitled
to get such Commission.
In case, of Broker, it is not required the name While in case of underwriters the name of
and address of each broker to be disclosed in location and address of each one is to be
the prospectus. shown in the prospectus.

1. To provide services to Housing Finance Schemes.

2. To Render Services like a For-Ex dealer.
ROLES and FUNCTIONS OF MERCHANT BANKING
1. Raising Finance for Clients: Merchant Banking helps its clients to
raise finance through issue of shares, debentures, bank loans, etc. It
helps its clients to raise finance from the domestic and international
market. This finance is used for starting a new business or project or
for modernization or expansion of the business.
2. Broker in Stock Exchange: Merchant bankers act as brokers in the
stock exchange. They buy and sell shares on behalf of their clients. They
conduct research on equity shares. They also advise their clients about
which shares to buy, when to buy, how much to buy and when to sell.
3. Project Management : Merchant bankers help their clients in the many
ways. For e.g., Advising about location of a project, preparing a project
report, conducting feasibility studies, making a plan for financing the
project, finding out sources of finance, advising about concessions and
incentives from the government.
4. Advice on Expansion and Modernization: Merchant bankers give
advice for expansion and modernization of the business units. They give
expert advice on mergers and amalgamations, acquisition and takeovers,
diversification of business, foreign collaborations and joint-ventures,
technology up-gradation, etc.
5. Managing Public Issue of Companies: Merchant bank advice and
manage the public issue of companies. They provide following services:
a) Advise on the timing of the public issue.
b) Advise on the size and price of the issue.
c) Acting as manager to the issue, and helping in accepting applications
and allotment of securities.

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 d) Help in appointing underwriters and brokers to the issue.
e) Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects: A
businessman has to get government permission for starting of the project.
Similarly, a company requires permission for expansion or modernization
activities. For this, many formalities have to be completed. Merchant
banks do all this work for their clients.
7. Special Assistance to Small Companies and Entrepreneurs:
Merchant banks advise small companies about business opportunities,
government policies, incentives and concessions available. It also helps
them to take advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units: Merchant banks offer many services to
public sector units and public utilities. They help in raising long-term
capital, marketing of securities, foreign collaborations and arranging long-
term finance from term lending institutions.
9. Revival of Sick Industrial Units: Merchant banks help to revive sick
industrial units. It negotiates with different agencies like banks, term
lending institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management : A merchant bank manages the portfolios
of its clients. This makes investments safe, liquid and profitable for the
client. It offers expert guidance to its clients for taking investment
decisions.
11. Corporate Restructuring: It includes mergers or acquisitions of
existing business units, sale of existing unit or disinvestment. This
requires proper negotiations, preparation of documents and completion of
legal formalities. Merchant bankers offer all these services to their clients.
12. Money Market Operation: Merchant bankers deal with and
underwrite short-term money market instruments, such as:
a) Government Bonds.
b) Certificate of deposit issued by banks and financial institutions.
c) Commercial paper issued by large corporate firms.
d) Treasury bills issued by the Government (Here in India by RBI).
13. Leasing Services: Merchant bankers also help in leasing services.
Lease is a contract between the lessor and lessee, whereby the lessor
allows the use of his specific asset such as equipment by the lessee for a
certain period. The lessor charges a fee called rentals.
14. Management of Interest and Dividend: Merchant bankers help
their clients in the management of interest on debentures / loans, and
dividend on shares. They also advise their client about the timing
(interim / yearly) and rate of dividend.

DIFFERENCE BETWEEN COMMERCIAL BANK AND

MERCHANT BANK

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 BASIS FOR
COMPARIS COMMERCIAL BANK MERCHANT BANK
ON

Meaning Commercial bank is a Merchant bank refers to

banking company established the financial institution,
by a number of people for that specializes in
providing the basic banking international trade and
functions i.e., accepting provide an array of
deposits and lending money services to its clients.
to general public.

Governing Regulated by Banking Rules and regulations

Act/body Regulation Act, 1949. designed by SEBI.

Engaged in General banking business Consultancy type business

Nature of Debt-related Equity-related

loan
extended

Exposure to Less Comparatively more

risk

Role Financier Financial Advisor

Caters Needs of general public. Needs of corporate firms.

CONSORTIUM FINANCE
Consortium financing occurs for transactions that might not take place
with a single lender. Several banks agree to jointly supervise a single
borrower with a common appraisal, documentation, and follow-up and
own equal shares in the transaction. Under consortium financing, the
banks formally join, by way of an agreement, to meet the credit needs of
the borrowers.
Features:
a) Compulsory consortium formation: Banks have to ensure that their
exposure does not exceed the prudent credit exposure ceiling (max 15 %
of their capital fund for individual borrowers and 40 % for group
borrowers).

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b) No. of banks and new banks: There is no ceiling on the no. of banks to
participate. Without the consent of the existing consortium members, no
bank can extend any credit facility.
c) Disposal of loan application: 60 days (45 for export) for fresh loans or
enhancements, 45 days (30) for renewal and 30 days (15) for ad hoc
facilities. Where the participating banks are unable to adhere to the time
frame, borrowers are free to bring in new banks.
d) Appraisal: The lead banks is responsible for preparation of appraisal
note, its circulation, arrangement for convening meeting etc. It receives
fee from the borrower for this.
e) Documentation: The documents are obtained under the Single Window
Scheme, i.e. for all banks, one set of documents is obtained.
f) Asset classification: Each bank is to classify the loan account, according
to conduct of accounts with the bank concerned, irrespective of the
classification with other banks.
g) Post sanction follow–up: Regular meeting of consortium members is a
normal requirement where the banks share information about conduct of
account & performance of the borrowing unit.
h) Interest Rate: Since Jan 1995, the banks can fix their own rates.
i) Charge on securities: The banks have pari–passu charge over the
securities which means they share the charge in the ratio of their
exposure approved by the consortium through a formal agreement.
ELECTRONIC BANKING (E-BANKING)
Electronic banking has many names like e banking, virtual banking or
online banking. It is simply the use of electronic and telecommunications
network for delivering various banking products and services. Through e-
banking, a customer can access his account and conduct many
transactions using his computer or mobile phone. E-banking is a safe, fast,
easy and efficient electronic service that enables you access to bank
account and to carry out online banking services, 24 hours a day, and 7
days a week. With this service you save your time by carrying out banking
transactions at any place and at any time, from your home or office, all
you need is internet access. E-banking enables the following:
 Accurate statement of all means available in your bank account
 Statement of current account, credits, overdrafts and your deposits
 Execution of national and international transfers in various
currencies
 Execution of all types of utility bill payments (electricity, water
supply, telephone bills, etc.)
 Carrying out customs payments
 Electronic confirmation for all transactions executed by E-banking
 Management of your credit cards

IMPORTANCE OF E-BANKING
For Banks

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1. Lesser transaction costs – Electronic transactions are the cheapest
modes of transaction
2. A reduced margin for human error – Since the information is relayed
electronically, there is no room for human error
3. Lesser paperwork – Digital records reduce paperwork and make the
process easier to handle. Also, it is environment-friendly.
4. Reduced fixed costs – A lesser need for branches which translates into a
lower fixed cost.
5. More loyal customers – Since e-banking services are customer-friendly,
banks experience higher loyalty from its customers.
For Customers
1. Convenience – a customer can access his account and transact from
anywhere 24x7x365.
2. Lower cost per transaction – since the customer does not have to visit
the branch for every transaction, it saves him both time and money.
3. No geographical barriers – In traditional banking systems, geographical
distances could hamper certain banking transactions. However, with e-
banking, geographical barriers are reduced.
For Businesses
1. Account reviews – Business owners and designated staff members can
access the accounts quickly using an online banking interface. This allows
them to review the account activity and also ensure the smooth
functioning of the account.
2. Better productivity – Electronic banking improves productivity. It allows
the automation of regular monthly payments and a host of other features
to enhance the productivity of the business.
3. Lower costs – Usually, costs in banking relationships are based on the
resources utilized. If a certain business requires more assistance with wire
transfers, deposits, etc., then the bank charges it higher fees. With online
banking, these expenses are minimized.
4. Lesser errors – Electronic banking helps reduce errors in regular banking
transactions. Bad handwriting, mistaken information, etc. can cause errors
which can prove costly. Also, easy review of the account activity enhances
the accuracy of financial transactions.
5. Reduced fraud – Electronic banking provides a digital footprint for all
employees who have the right to modify banking activities. Therefore, the
business has better visibility into its transactions making it difficult for any
fraudsters to play mischief.
FINANCIAL E-BANKING SERVICES
Let’s quickly look at the various financial transactions offered by banks
through e-banking:
1. Transfer money to the other private and national bank account holders in
just a few clicks

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2. Purchase goods and services and use Business to Customer payment
modes like credit cards, debit cards, net banking, various payment
gateways, and wallets, etc. providing a range of payment options
3. Making business to business transactions using NEFT, RTGS, and IMPS
options, etc. depending on the size of the business transaction amount
4. Pay mobile bills, utility bills, make credit card payments and buy other
products/services,
One must know that since Information Technology itself is transforming
every day, newer technological solutions are making the banks to be on
their feet and adapt quickly to remain competitive in the market. In this
process, the opportunities to add more financial and non-financial
solutions to the electronic banking services offered by the banks are also
increasing.
NON-FINANCIAL E-BANKING SERVICES
Some of the e-banking services offered by various private and national
banks in India for non-financial transactions are:
1. View personal account balance for both savings and current accounts
2. View the history of transactions done by the customer with a huge
historical archive limit.
3. Submitting cheque book requests
4. Downloading Bank Statements, as and when required
5. View loan status or EMI Summary, if any
6. Mutual Funds, Demat accounts, and insurance policy details can also be
monitored online.
The backend decision-making of any bank like approvals, rejections,
etc. for various requests can also be queued in these banking processes
that are mapped virtually and help the account holders by skipping a
personal visit to the bank branch for such services. This is a win/win for
the customers and banks, as it saves time, efforts, energy, and other
resources for both parties.
Advantages of E-Banking:
1. The cost of operation per unit of services is lower for banks.
2. Offers convenience to customers since they are not required to go to the
bank’s facilities.
3. There is a very low incidence of errors.
4. The customer can obtain funds at any time from ATMs.
5. Credit cards and debit cards allow customers to get discounts at points of
sale.
6. The customer can easily transfer the funds from one place to another
place electronically.

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 Disadvantages of E-Banking:
1. Savings and credit cooperatives, and in particular small local
cooperatives, strive to match the level of convenience (ATMs and
branches) that many banks offer their customers, although many are part
of shared networks that increase channels available to its members
2. Some Credit Units are limited in their product offerings.
3. One must qualify for membership.
4. One must pay a membership fee to join.

E-BANKING PRODUCTS AND SERVICES

1. Automated Teller Machines (ATM)
2. Credit Cards
3. Debit Cards
4. Electronic Funds Transfer (EFT) System
5. Mobile Banking
6. Internet Banking
7. Tele-banking
8. SMS Banking
9. Home banking
10. Demat facility
11. Cheques Truncation Payment System (CTS 2010 Standard Cheque)

1. AUTOMATED TELLER MACHINE (ATM): It is a specialized

computer that makes it convenient to manage a bank account holder’s
funds. It allows a person to check account balances, withdraw or deposit
money, print a statement of account activities or transactions. There are
two types of automated teller machine (ATMs). The basic one allows the
customer to only draw cash and receive a report of the account balance.
Another one is a more complex machine (CDM) which accepts the deposit,
provides credit card payment facilities and reports account information.
Facilities:
In the automated teller machine facility following points to be considered:
a) ATM Machine: ATM is terminal of the bank's computer which can be
operated by the customer himself for withdrawal, deposits of cash,
balance enquiries, transfer of funds, statements of accounts round the
clock.
b) Video Screen: The terminal is coupled with a video screen. It has also a
cash dispenser which gives currency notes as per instruction of the
computer.
c) ATM Card: The customer is supplied with an ATM card. It has MICR
coding by which computer identifies the customer. Besides this, the
customer is given his secret personal identification number (PIN). He can
operate the computer by inserting the card in the slot of ATM window and
then giving his identification number.

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d) PIN: PIN is given by the customer while operating the account and even
Bank staff does not know this number.
e) Terms and Conditions about Withdrawal: The ATM card provides the
term and conditions of operation like maximum withdrawal per
transaction per day, the maximum balance to be maintained, etc.
compared with credit card, an ATM card is a debit card.
Advantages:
The advantages of ATM services are as follows:
a) 24 Hours Availability: Service is available 24 hours a day and seven
days a week.
b) Convenient Place: It can be placed in convenient off branch locations
like shops, factories, offices.
c) Privacy of Operation: It ensures privacy of operation through self-
service.
d) No Need of RBI's Permission: Banks need not obtain RBI's permission
for installing ATMs in their branches/ extension counters.
e) No Time Limit for Transaction: One can do the transaction while going
to office or while returning home or while going to shopping or on
holidays. The choice of time is unlimited.
f) Quick and Efficient Service: ATM offers quick and efficient service. It is
professional service. Since the machine is programmed and many driven
the customer knows how to operate the ATM in simple specified steps and
no time is wasted.
g) Fixed Response to Customer: Response of ATM to customer is fixed.
The ways the transactions are to be carried out in logical steps are
programmed. Further, the operation is to be carried out within specific
time limit. If the customer does not respond within that time, the
transaction is aborted. This time limit is pre-set by the bank.
Limitations:
a) Limitation on Withdrawals: Cash withdrawals for large amount are not
permitted. It is restricted by the amount fixed for the card.
b) Restriction on Cash Dispensations: Cash dispensations are generally
restricted to certain denominations of currency. As such, withdrawals are
to be made only in certain multiples.
c) Limited Functioning: The ATM performs only the limited functions. For
other banking activities like credit limits, locker facilities, etc. the
customer has to approach the bank in person or by other means.
Advantages:
a) Withdrawing money.
b) Checking how much money is remaining in the account.
c) Round the Clock Services: ATM provides banking services to its customers
round the clock, 24 hours a day, 7 days a week and 365 days a year.
d) Access to bank from any part of the world: Essential banking services like
deposits, withdrawals transfer of funds, etc can be accessed by customers
from any part of the world.

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e) Expansion of Services to any corner of the world: Of the Banks can expand
their services to any corner of the world by providing electronic access to
its customers.
f) For shopping Purpose: Now a day’s almost every shopping mall,
restaurant and other organizations are accepting debit or credit card
payments.
Disadvantages:
a) If problem with credit card you cannot withdraw your money.
b) If someone watches or hacks an ATM machine your details may be taken if
you forget your PIN number you cannot use the card.
c) Cannot be provided in rural areas: In a country like India, where banks are
having large number of rural and non-computerized branches, ATM
services cannot be provided.
d) Limitation of cash withdrawals: Again, there is a limitation of cash
withdrawals from ATM. For example, many banks do not permit
withdrawal of more than 25,000 at a time.
e) Cash deposit facility is not safe: Similarly, cash deposit facility is restricted
and not safe as dropping of envelope and ATM is not advisable.
f) Possibility of misusing ATM card: ATM card, if misplaced, lost or stolen,
may be misused. There are number of such reported incidences now a
day.
g) Loss of personal touch with the Banks: Last but not the least; customers
lose personal touch with their bankers.

2. Online Banking/Internet Banking

Online Banking, is the facility provided by banks and financial institutions
which allows customers to use banking services via internet. Different
services like online money transfer, account opening, bill payment,
tracking account activity, etc., which are made available to customers
with the help of online banking. Online banking also allows banks to
advertise their products and services in a manner that it reaches out
millions of customers. However, in order to use online banking, an
individual will require access to the internet, which is scarcely available in
rural areas. Internet banking can also be accessed via mobile phones
which have a data 3G/4G connection.

Advantages of Net Banking

a) Easy to Operate – Online banking is very simple and easy to understand,
maybe easier than conventional banking in many cases. Operation of an
online account is rather simple and easy to use.
b) Convenience of Making Payments – Internet banking makes it quite
convenient to carry out transactional activities like transfer of funds,
payment of bills, etc. this means, no longer having to wait in queues for
bill payments or having to safely keep receipts of bill payments, which are
also perishable. All record of payments and bills is stored online on your
account.

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c) Round the Clock Availability – Another indisputable advantage about
online banking is that it is available round the clock, throughout the year.
You don’t have to schedule a time when you can carry out banking
activities, regardless of it being a weekend, time of the day or even
holidays.
d) Time Saving and Efficient – E-banking is not only fast but also highly
efficient in letting you carry out transactions within a few minutes.
Transfer of funds, account opening, bill payments take not more than a
few minutes to process, which helps save a lot of time.
e) Account activity Tracking – Another very important benefit provided by
net banking is that it allows you to track your account activity at all times.
You can keep an eye on your account transactions and balance at all
times. Any unauthorized transaction or discrepancy can be immediately
tracked and reported to the bank immediately, allowing you to keep your
money safe at all times.
Disadvantages of Net Banking
a) May be complicated for beginners to understand – For those who
are new to the world of banking, online banking may pose as slight
challenge in terms of usage. While some banks do provide demos on their
websites regarding the use of online banking, there are many banks which
don’t do that. In the latter case, an inexperienced user may be left to fend
for him/herself.
b) No Online Banking without internet access – In order to use online
banking, one needs to have a stable internet connectivity or access.
Without internet, the facility of online banking is of no use. Also, if the
bank servers are down, you will be unable to access your account online
to carry out transactions.
c) Transaction Security – One of the main reasons which still keeps a lot of
customers from using internet banking is the safety of transactions. While
all major and recognized banks will have a powerful security encryption in
place for ensuring the safety of customer’s transactions, there have been
instances where transaction details have been compromised. Though it is
uncommon, but still can pose as a major threat.
d) Securing your Password – When it comes to internet banking, account
passwords are of crucial importance. For that reason, it is absolutely
necessary that a user must never reveal their account password to
anyone. The ideal thing to do would be to memorize the password and
also keep changing the same frequently, to eliminate any chance of
password theft.

3. E-WALLET
A mobile wallet or an e-wallet is virtual digital wallet where you can save
your funds to be used without the need for swiping any debit or credit
card. It is one of the fastest modes of transaction and does not require a
minimum deposit amount. E-wallets can be used to purchase anything
from groceries to flight tickets. E-wallets can be downloaded on your
smart phone through your app’s store.

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 E-wallets Vs Net banking
Although both are considered to be digital payment platforms, both differ
in some ways. The difference has been explained through the following
table:

E-wallets/Mobile Internet
Features
wallets banking

As much as
Rs.20,000 per month as
Transaction limit balance in
mandated by RBI
account

 No usage charges No usage charges

Annual/usage fees  Bank withdrawal except for specific
charges applicable fund transfers

Offers such as cashback

and discount periodically
Rewards or offers None
introduced by specific
partner merchants

Usability Offline (POS) and online Only online

Protection from
Low to medium Highly secure
fraud

4. ELECTRONIC CLEANING SERVICE

The Electronic Clearing Service (ECS) is an electronic mode of payment for

transactions that can be used for making bulk payments or receipts. This
facility is used by institutions for making bulk payment of amounts
towards distribution of dividend, interest, salary, pension, etc., or for bulk
collection of amounts towards telephone / electricity /water dues, cess /
tax collections, loan installment repayments, periodic investments in
mutual funds, insurance premium etc. Essentially, ECS facilitates bulk
transfer of monies from one bank account to many bank accounts or vice
versa.

Advantages-
a) Time savings. Money transfer between virtual accounts usually takes a
few minutes, while a wire transfer or a postal one may take several days.
Also, you will not waste your time waiting in lines at a bank or post office.

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b) Expenses control. Even if someone is eager to bring his disbursements
under control, it is necessary to be patient enough to write down all the
petty expenses, which often takes a large part of the total amount of
disbursements. The virtual account contains the history of all transactions
indicating the store and the amount you spent. And you can check it
anytime you want. This advantage of electronic payment system is pretty
important in this case.
c) Reduced risk of loss and theft. You cannot forget your virtual wallet
somewhere and it cannot be taken away by robbers.
d) Low commissions. If you pay for internet service provider or a mobile
account replenishment through the UPT (unattended payment terminal),
you will encounter high fees. As for the electronic payment system: a fee
of this kind of operations consists of 1% of the total amount, and this is a
considerable advantage.
e) User-friendly. Usually, every service is designed to reach the widest
possible audience, so it has the intuitively understandable user interface.
In addition, there is always the opportunity to submit a question to a
support team, which often works 24/7. Any way you can always get an
answer using the forums on the subject.
f) Convenience. All the transfers can be performed at anytime, anywhere.
It's enough to have an access to the Internet.

Disadvantages
a) Restrictions. Each payment system has its limits regarding the
maximum amount in the account, the number of transactions per day and
the amount of output.
b) The risk of being hacked. If you follow the security rules the threat is
minimal, it can be compared to the risk of something like a robbery. The
worse situation when the system of processing company has been broken,
because it leads to the leak of personal data on cards and its owners.
Even if the electronic payment system does not launch plastic cards, it
can be involved in scandals regarding the Identity theft.
c) The problem of transferring money between different payment
systems. Usually, the majority of electronic payment systems do not
cooperate with each other. In this case, you have to use the services of e-
currency exchange, and it can be time-consuming if you still do not have a
trusted service for this purpose.
d) The lack of anonymity. The information about all the transactions,
including the amount, time and recipient are stored in the database of the
payment system. And it means the intelligence agency has an access to
this information. You should decide whether it's bad or good.
e) The necessity of Internet access. If Internet connection fails, you
cannot get to your online account.

5. ELECTRONIC FUND TRANSFER

An electronic funds transfer, or EFT, refers to the act of transferring

money from one account to other electronically by using a computer or
mobile network. An Electronic funds transfer is faster than transacting via

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 a cheque. Various leading e-commerce sites such as Amazon, eBay,
Flipkart and others are a glowing testimony to the extensive use of
technologies such as Electronic Data Interchange (EDI) and Electronic
Funds Transfer (EFT). EFT covers some of the most widely accepted
payment systems, which includes, payment cards (credit & debit cards),
Online Banking, Mobile Banking, NEFT (National Electronic Funds
Transfer), and RTGS (Real Time Gross Settlement).

Advantages of NEFT:
a) Safe and Effective – For a seamless movement of funds on the Internet,
you could opt for NEFT as it helps you transfer any amount of money
quickly.
b) Low Processing Charges – Internet banking and NEFT are flexible
payment options which are very economical. For getting this facility, you
don’t have to reimburse a huge sum of money to your bank. The
processing charges are quite low and you can transfer any amount of
money without any difficulty.
c) Highly Dependable – NEFT, an integral aspect of Internet banking, is a
highly dependable method of making payments and receiving funds
online. Most of the banks in India are regulated under the norms set by
RBI and, hence, the Internet banking facility too is quite safe in nature.
d) Rapid Settlement – Unlike the regular banking methods of fund transfer,
NEFT transfer is really quick and you can enjoy rapid settlement of
accounts, thereby improving the overall functionality of your business.
Disadvantages of NEFT:
a) Highly Technical – One of the major drawbacks of Internet banking and
NEFT transfer in India is that this is a highly technical method of funds
transfer which is not easy to operate for everyone. An individual with little
knowledge of computer or the Internet might not be able to operate an
Internet banking account easily.
b) The Risk involved with Online Payments – Even though most of the
banks in India take proper steps to secure an NEFT transaction, it is quite
possible that your information might get passed on to a hacker if you’re
using an unsecured browser. This is one of the reasons why a lot of people
across the country don’t believe in this facility.

6. TELE BANKING
Telephone banking is a service provided by a bank or other financial
institution, that enables customers to perform financial transactions over
the telephone, without the need to visit a bank branch. Telephone banking
times can be longer than branch opening times, and some financial
institutions offer the service on a 24-hour basis. From the bank's point of
view, telephone banking reduces the cost of handling transactions by
reducing the need for customers to visit a bank branch for non-cash
withdrawal and deposit transactions.
Services covered under Tele-banking:

15
 The customers get the following services under tele-banking.
a) Online balance enquiry.
b) Request for service.
c) Last five transactions.
d) Transactions of a recent date.
e) Details of transactions.
f) Request for cheque book.
g) Request for a statement of account.
Thus, the customer can access information of his account and do some
transactions without visiting the bank even when he or she is out of
station. This service is available round the clock.

7. ELECTRONIC CHEQUE-

The only difference between normal paper cheques and electronic

cheques is that e-cheque is an online and virtual version. Conversion here
means transforming the paper cheque to an electronic one. The
information given by you in paper cheque is used for extracting bank
name, payer’s name, account number and other such information. Once
this is done, there is a single time electronic money transaction from your
account to beneficiary.

Advantages-

a) The conversion is absolutely electronic and hence, the process includes

electronic scanning to money transfer. So, there is very less amount of
human intervention in this process which results in reduced processing
fee. You end up saving about 60-70% of the fee that you may be paying
through paper cheques.

b) Conversion is very easy and all it requires is scanning of physical cheque

and all the details would be read.

c) The laws and regulations related to e-cheques are absolutely similar to

that of paper ones and those of electronic money transfers. This makes
this method a secured and safe one.

d) While the software employed for this system are highly advanced and
leading ones, it also results in lesser usage of physical resources that are
consumed for transfers of paper cheques to make funds transfers.

Disadvantages

a) E-cheques can be processed and accessed using specific equipments that

ask for investments from financial institutions who offer this system. The
investment would directly depend on the size of institution.

16
b) Unauthorized transactions can give you a great pain, in case of any
information breach. So, maintaining paper cheque records is even hectic,
but has to be done for surety.

c) Since the transactions are dependent on networking, any fault in it will

delay the transfer. This means that for successful transfer to take place,
the system has to be working all the time. But, is it really possible?

8. CREDIT CARD
A small plastic card issued by a bank allowing the holder to purchase
goods or services on credit. A credit card allows you to borrow money
from a bank to make purchases, whether the requirement of money is
small or large. As long as you pay back the money you borrow within the
grace period of 50 days, you don’t have to pay extra. Grace period are
interest free period. If you don’t pay it back in that time period, you’ll
have to pay an interest of 2.25% p.m. on the outstanding amount. A credit
limit is the maximum amount that a person may have on a credit card or
borrow from a financial institution. It is based on the salary and the
number of transactions. The limit may be increased if the person clears
his dues within the stipulated time. A person should satisfy the following
criteria to be able to avail the facility of credit card;
 Applicant should be at least 18 years old
 Applicant should be salaried or self-employed, with a regular source of
income to pay back the credit card bills
 He should have a savings account in his name
 He should not have a bad credit history

DIFFERENT TYPES OF CREDIT CARD

a) Business Credit Cards: Business Cards are designed for businessmen

and corporates. It is one of the fastest ways to get finance to run your
business. These types of card is also known as corporate credit cards.
Business credit card offers benefit such as expense monitoring and
control, insurance, business saving plans, lucrative travel and
accommodation deal, higher credit limit and advance facility.
b) Balance Transfer Credit Cards: Balance Transfer credit cards or facility
allows cardholder to transfer existing outstanding balance from one credit
card to other. So, if you are worrying about massive credit card dues you
can use these types of credit cards facility. Bank charges normal
processing fees for balance transfer. Most of the balance transfer card do
not charge interest rate for first three months.
c) Cashback Credit Cards: Everyone likes to earn more money if you are
one of them you should try Cashback Credit Card. Cashback Credit cards
allows you to earn money spending money. The cashback amount and
rewards depend on the issuer.

17
d) Co-branded Credit Cards: Co-branded credit cards are offered by bank
in association with a retail brand, online e-commerce website or travel
aggregator. This card is especially designed to offer privileges associated
with co-brand. If you are married to specific brand you can plan to opt for
this type of card.
e) Credit Cards for Women: Few Credit cards are exclusively designed for
the women. These credit card mainly focus on shopping rewards, cash
back as women are fond of doing extensive shopping. Apart from that,
this card also offers extra benefit such as shopping voucher, surcharge
waiver, insurance etc.
f) Credit Cards for Online Shopping: If you are fond of shopping, you can
surely go for such type of credit card for online shopping in India. This
type of credit card is designed for offering online shopping benefits. You
can avail discount, e-voucher and option of shopping on EMI via these
types of cards.
g) Classic Credit Cards: The main feature of Classic Credit Card is global
acceptance, cash advance, interest free credit period, supplementary card
benefit, card lost insurance and dedicated customer support.
h) Entertainment Credit Cards: If you are spending lot of money on
entertainment such as movie, drama, shows and events you can plan to
opt for entertainment card. This type of card is mainly designed to offer
amazing entrainment benefits. It also offers extra benefits such as reward
points and discount on dining.
i) Fuel Credit Cards: Fuel Credit Cards are specially designed to offer
benefits on fuel including discount, cashback, and surcharge waiver. You
can make use of fuel credit card and bring down the cost of fuel expense
from the household budget. If you spend heavily on petrol and diesel you
can use this card.
j) Life Style Credit Cards: Life Style Credit Card as name suggest it is a
credit card that offers benefits on changing lifestyle and income of
cardholder. These type of card offers shopping, dining, travel and other
exclusive benefits on lifestyle.
k) Prepaid Credit Card: Prepaid credit card as name indicates it is
preloaded credit card with specific amount. There are two types of credit
cards in prepaid category namely domestic currency and forex credit
card. Prepaid card is as good as debit card. You need not to worry about
clearing dues and interest rate as usage is allowed only based on money
deposited by you.
l) Premium Credit Cards: Premium credit card as name suggests, it is a
credit card for the premium customers. These types of cards are designed
to provide extraordinary premium services such as club membership,
concierge services, dining privileges etc. High income and high spending
are requirements of premium credit cards. If you have high-income level
and capacity to spend.
m) Students Credit Cards: A student credit cards are card that is
offered to student at college level. There are very few banks that offers
student credit cards in India. The main requirement of this credit card is
student should be above 18 years of age. This type of credit card is

18
 offered against employment document, Income tax return or income proof
of their parents.
n) Secured Credit Cards: A Secured Credit Card is card offered by bank
against fixed deposit. This deposit serves as credit limit for the
cardholder. If you don’t have good credit history and you are facing
problems of getting credit card you can use this option. In this card if
cardholder default on payments, bank can deduct the amount from the
deposit.
o) Travel Credit Cards: Travel Credit card is best suitable for the person
who is travelling frequently. Travel credit card offers multiple benefits like
air mile, free access to airport lounge, benefit on accommodation, travel
insurance benefit etc
p) Limited Purpose Credit Cards: There is limitation to its use and is to be
used only for particular applications. This is used for establishing small
credits such as gas credits and credit at departmental stores. Minimal
charges are levied.

Features of Credit Card:

a) Parties: The credit card system has three parties - the bank issuing the
credit card; the account holder using the card and the establishments
accepting the cards for payment of goods and services sold.
b) Specific Person: A customer with assured and substantial income and
who maintains good account is issued with a credit card.
c) Size of the Card: The cards are of standard size and thickness.
d) Details: The details such as name of the cardholder, account number,
validity date are embossed on the card so that they can be checked with
imprinter machine.
e) Specimen Signature: The card also bears specimen signature of the
card holder.

Advantages of using a credit card

a) Easy access to credit: The biggest advantage of a credit card is its easy
access to credit. Credit cards function on a deferred payment basis, which
means you get to use your card now and pay for your purchases later. The
money used does not go out of your account, thus not denting your bank
balance every time you swipe.
b) Building a line of credit: Credit cards offer you the chance to build up a
line of credit. This is very important as it allows banks to view an active
credit history, based on your card repayments and card usage. Banks and
financial institutions often look to credit card usage as a way to gauge a
potential loan applicant’s creditworthiness, making your credit card
important for future loan or rental applications.
c) EMI facility: If you plan on making a large purchase and don’t want to
sink your savings into it, you can choose to put it on your credit card as a
way to defer payment. In addition to this, you can also choose to pay off
your purchase in equated monthly instalments, ensuring you aren’t
paying a lump sum for it and denting your bank balance. Paying through

19
 EMI is cheaper than taking out a personal loan to pay for a purchase, such
as a television or an expensive refrigerator.
d) Incentives and offers: Most credit cards come with offers and incentives
to use your card. These range from cash back to rewards point
accumulation each time you swipe your card, which can later be
redeemed as air miles or used towards paying your outstanding card
dues. Lenders also offer discounts on purchases made through a credit
card, such as on flight tickets, holidays or large purchases, helping you
save.
e) Flexible credit: Credit cards come with an interest-free period, which is
a period of time during which your outstanding credit is not charged
interest. Ranging between 45-60 days, you can avail free, short-term
credit if you pay off the entire balance due by your credit card bill
payment date. Thus, you can benefit from a credit advance without
having to pay the charges associated with having an outstanding balance
on your credit card.
f) Record of expenses: A credit card records each purchase made through
the card, with a detailed list sent with your monthly credit card statement.
This can be used to determine and track your spending and purchases,
which could be useful when chalking out a budget or for tax purposes.
Lenders also provide instant alerts each time you swipe your card,
detailing the amount of credit still available as well as the current
outstanding on your card.
g) Purchase protection: Credit cards offer additional protection in the form
of insurance for card purchases that might be lost, damaged or stolen.
The credit card statement can be used to vouch for the veracity of a
claim, if you wish to file one.

Disadvantages of Credit Cards:

a) Minimum due trap: The biggest con of a credit card is the minimum due
amount that is displayed at the top of a bill statement. A number of credit
card holders are deceived into thinking the minimum amount is the total
due they are obliged to pay, when in fact it is the least amount that the
company expects you to pay to continue receiving credit facilities.

This results in customers assuming their bill is low and spending even
more, accruing interest on their outstanding, which could build up to a
large and unmanageable sum over time.

b) Hidden costs: Credit cards appear to be simple and straightforward at

the outset, but have a number of hidden charges that could rack up the
expenses overall. Credit cards have a number of taxes and fees, such as
late payment fees, joining fees, renewal fees and processing fees. Missing
a card payment could result in a penalty and repeated late payments
could even result in the reduction of your credit limit, which would have a
negative impact on your credit score and future credit prospects.
c) Ease of overuse: With revolving credit, since your bank balance stays
the same, it might be tempting to put all your purchases on your card,

20
 making you unaware of how much you owe. This could lead to you
overspending and owing more than you can pay back, beginning the cycle
of debt and high interest rates on your future payments.
d) High interest rate: If you do not clear your dues by your billing due
date, the amount is carried forward and interest is charged on it. This
interest is accrued over a period of time on purchases that are made after
the interest-free period. Credit card interest rates are quite high, with the
average rate being 3% per month, which would amount to 36% per
annum.
e) Credit card fraud: Though not very common, there are chances you
might be victim of credit card fraud. With advances in technology, it is
possible to clone a card and gain access to confidential information
through which another individual or entity can make purchases on your
card. Check your statements carefully for purchases that look suspicious
and inform the bank immediately if you suspect card fraud. Banks usually
waive off charges if the fraud is proven, so you will not have to pay for
purchases charged by the thief.

9. DEBIT CARDS
Debit cards are also known as bank card or cheque cards. It is a plastic
payment card that provides the cardholder electronic access to his or her
bank account. Debit cards are accepted at many locations including
grocery stores, retail stores, gasoline stations and restaurants. One can
use his/her card anywhere. It is an alternative to carry a cheque book or
cash. When one uses a debit card his/her money is quickly deducted from
his/ her savings account. Debit cards allow one to spend only what is in
her/his bank account. It is a quick transaction between the merchant and
one's personal bank account. Obtaining a debit card is often easier than
obtaining a credit card.
FEATURES OF DEBIT CARD

a) Debit Card offers the convenience of cashless transaction.

b) It can be used for cash withdrawals at ATM and shopping online or at POS.
c) It ensures instant payment as well as transfer of funds.
d) Unlike credit cards, which are a loan in disguise, debit card encourages
judicious spending.
e) It lets you redeem the reward points obtained from certain services like
insurance coverage, bonus points, cash back offers that are offered by banks.
f) Debit cards are safer than carrying cash.
g) You can pay EMIs on certain online purchases as well.
h) Keeping a track on the debit card transaction is easy. All you need to do is
update the passbook or be watchful of the SMS/email notifications.
i) Using the ATM, you transfer funds via debit card. Although the amount is
limited, it’s a great help especially on bank holidays.
j) You can pay utility bills, tax, recharge mobile phones and even use it at the
filling station.
k) The maintenance cost is comparatively less.

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 ADVANTAGES
a) Prepaid card: Debit card acts as a type of prepaid card. It is so, since it
already has a sufficient amount of cash balance in its holder’s bank
account. It permits to carry on the value of the transaction (i.e.,
purchases) to the extent of available balance in its holder’s bank account.
b) Nominal fee: Bank issuing a debit card charges an annual fee for the
issuance and maintenance of card. This fee charged is very nominal in
nature. Generally, bank charges the fee on a per annum or yearly basis.
Such a fee gets automatically debited (deducted) from the debit-
cardholder’s bank account.
c) Alternative to cash: Debit card acts as an alternative mode of payment
for executing various cash-related financial transactions. It can be used
for the purchases of goods and receipt of services. In its presence, there is
no need to carry a large amount of cash. Thus, it helps to avoid carrying
huge amount of cash while traveling and minimize risk of loss due to theft,
damage, etc.
d) Immediate transfer of funds: Debit card ensures immediate transfer of
funds in the merchant’s or dealer’s bank account. Such a transfer of funds
takes place almost instantly at the moment of purchases of goods and
receipts of services. With its use, there is no need to visit bank’s office
premise and do a manual transfer of cash in the merchant’s or dealer’s
bank account. Thus, it saves precious time and gives ease, safety, and
comfort to its holder in his or her finance-related activities.
e) Instant withdrawal of cash: The debit card facilitates instant
withdrawal of cash from any nearest ATM. This helps its holder to avoid a
personal visit to bank’s office premise and wait in a long time-consuming
queue. In short, it also acts as an ATM card to meet its holder’s cash-
related needs, anytime and anywhere.
f) Easy to manage: Debit card is very easy to carry, handle and manage
while traveling to outstations or overseas. Being small, thin, flat and
having a negligible weight it easily fits in any pocket. It can be handled
very freely even with just two fingers. Managing it is also not a big
problem.
g) Earns bonus points: Now-a-days, the competition among debit card
providers (banks) is challenging. Today, most banks offer bonus points to
encourage their cardholders (customers) to make purchases using their
debit cards. Banks are able to offer such points to their cardholders as it’s
merchants and not them who actually run the reward program. After
every successful sale, a merchant gives the bank a small cut-off or
percentage as a commission. This commission is further shared or divided
by the bank with its holder (as a reward) who did the original purchase.
Thus, in return, it finally also helps the cardholder earn bonus points on
selected financial transactions executed by him or her via a debit card. In
this cycle, all, viz., bank, merchant, and cardholder are directly benefited.
Bank offers an incentive like this to improve the sale of the products in the
ordinary course of business and contribute in the economic growth.
h) Gifts on redeeming points: As we have seen above, debit card helps to
accumulate bonus points through a reward program. These points can be
redeemed by the cardholder (within card’s expiration date) at any

22
 merchant website and/or outlet that bank has already authorised. While
redeeming accurred points, cardholder gets an idea of its worthiness in
terms of amount, and so he/she proceeds to claim gifts nearly equal to
that amount.
i) Cash back: In a cash back, cardholder gets a percentage of the total
amount spent on purchases made using his card. In other words, when a
holder uses his debit card to buy something then a percentage of
entire money, he spent usually in a month is credited-back to his account
once every following month. Consider for an example, a debit-cardholder
spends 100 dollars three times a month on shopping and the cash-back
offer on shopping is 10 percent. In such a case, cardholder will get back
$30, which is 10% of $300 ($100 × 3) returned to his account in the
coming month. However, to avail this offer some minimal amount must be
spent on some minimum number of transactions at least once a month in
a specific currency by eligible cardholders only.
j) Free insurance coverage: Debit-cardholders also gets free insurance
coverage. The bankers provide such insurance facilities to attract new
customers and to maintain their current customer strength. They provide
various types of insurances for free to their cardholders:
 Insurance on loss of debit card,
 Purchase insurance,
 Personal insurance,
 Accidental insurance,
 Travel insurance, and so on.
However, these types of insurances are given freely to cardholders
depending on which type of debit card they have possessed. The cost of
insurance premium is borne by the bankers who provide debit cards to
their customers.
k) Can be used by everyone: The only thing that you must have to have a
debit card is have a bank account. Anyone can open a bank account with
a small minimum deposit. This makes debit cards much different than
credit cards, because approval for a credit card largely depends on your
credit score and payment histories. None of these things are taken into
account when getting a debit card.
l) Strong Budgeting Tool: One of the best things about a debit card is that
you cannot spend more money than you have, which means you cannot
go into debt. This helps you to only spend the money that you have to
spend because you cannot accumulate new debt, like with credit cards.

DISADVANTAGES
a) Your Credit Score Isn’t Helped: A person’s credit score impacts them
for their entire life, whether it be negative or positive. With a debit card,
you do not impact your credit score at all, which means that you cannot
build it up. Having a higher credit score gives you lower interest rates and
increased lines of credit.
b) Fees Galore: When you have a debit card, fees are likely a part of your
life as well. Banks inflict a wide variety of different fees to debit card
holders, which can add up very fast. Some of these include monthly use
charges, major over usage fees, and transaction fees or limits.

23
c) Instant Money Means Instant Risk: If someone got a hold of your
debit card, they would be able to take money directly from your bank
account. With a credit card, the charges are much easier to dispute, and
they do not interfere with your direct lines of income the way that debit
cards do.
d) Protection against fraudulent use: Debit cards don't offer as much
protection against fraudulent use as credit cards do. While debit cards are
offering more protection than they did in the past, the exact protection
can vary from one card to another. This is especially true if a debit card
has been taken and is not been reported as stolen in a timely manner. It's
important to contact your bank to find out exactly what protection you
have and what you are liable for in the event of fraud occurring.
e) Merchant disputes: If there is a dispute regarding a purchase you make,
you are in a weaker position when you use a debit card vs. a credit card.
This is because the merchant already has your money when a debit card
is used; this is not the case with a credit card. That means that while the
dispute is taking place, your money will remain with the merchant and will
only be returned if the dispute is mutually settled in your favour at the
end.
f) Personal account: you are using money out of your personal account
when making a purchase with a debit card. While this in itself may not
appear to be a problem, it can have a huge effect when fraud or disputes
occur. While the fraud or dispute may eventually be ruled in your favour,
the time it takes to resolve the problem means you will not have that
money in your account. This can cause other transactions to default,
forcing you to pay substantial fees. If a default occurs, this can trigger
universal default from the credit rating services, and the problem can
continue to cascade from there. Again, these may all eventually be
resolved, but because it is your account, you will need to spend the time
fighting the issues all along the way to get them resolved.
g) Rewards: While some debit cards are beginning to offer rewards, they
are still far fewer and less valuable than those rewards that credit cards
offer.
h) Money taken instantly: When you use a debit card, the money is
immediately taken out of your bank account. With a credit card, there is a
float period between the time you make the purchase and the date the
credit card bill is due. This means that you earn a little bit of extra interest
on your money when you use a credit card vs. a debit card.
i) No added services: Credit cards often come with added benefits, such
as extended warranties on products purchased and insurance for rental
cars and airline travel. Debit cards do not offer these services, and that
means you will have to pay extra for them if you want them.
j) Tracking spending: When using a debit card, it can be difficult to keep
track of what you purchased if you aren't diligent in writing down
everything. Making a mistake on the balance can cause you to think you
have more in the account than you really do, and that can ultimately
result in accidental overdrafts.
k) Banks may trick you into fees: Unfortunately, banks aren't always
helpful when it comes to figuring out how much you have in your account.

24
 Some banks report your balance from the ATM when you use your debit
card as what you have in the bank, plus courtesy overdraft, leading you to
believe you have more in your account than you really do. This can cause
you to spend more than is in the account and rack up overdraft fees.
l) Not always accepted: Using a debit card as a deposit on a rental car or
for a hotel room is not always possible. In the cases where it is possible,
many times the vendor will freeze a portion of the money in the account,
and this can cause problems for other payments. Even when this money is
returned, it can take up to a week to make it back into your account. This
mean that even when you believe you have money, it may not be
available for use, and this can cause you to accidentally go over your limit
and incur fees.

DIFFERENCE BETWEEN CREDIT CARD AND DEBIT CARD

BASIS CREDIT CARD DEBIT CARD

Meaning Credit card is issued by a Debit card is issued by a bank to

bank or any financial allow its customers to purchase
institution to allow the goods and services, whose payment
holder of the card to is made directly through the
purchase goods and customer's account linked to the
services on credit. The card.
payment is made by the
bank on the customer's
behalf.

Implies Pay later Pay now

Bank The bank account is not The bank account is a must for
Account prerequisite for issuing a issuing a debit card.
credit card.

Limit The maximum limit of The maximum limit of withdrawing

withdrawing money is money will be less than the money
determined according to lying in the saving bank account.
the credit rating of the
holder.

Bill The holder of the card has There is no such bill; the amount is
to pay the credit card bill directly deducted from the
within 50 days of every customer's account.
month.

Interest Interest is charged when No interest is charged.

payment is not made to
the bank within a specified 25
time period.
 10. SMART CARD
A smart card is a device with the dimensions of a credit card that uses a
small microchip to store and process data. In many cases, smart cards
have replaced old magnetic cards because they can handle more
information and provide more functionality. Smart cards are now in use in
many industries, including retail, transit systems and security services.
A smart card is basically a plastic card with a chip. The chip contains
information. In terms of banking, it contains information like your account
details. So, to be precise all our debit cards as well as credit cards are
smart cards. Gift cards are also available with banks these days. Gift cards
are mostly like our ATM cards of an appropriate value of money. These are
smart cards as well.

ADVANTAGES OF SMART CARD: -

a) More secure: Smart cards offer more security and confidentiality than
any other financial or transaction card on the market. They use encryption
and authentication technology which is more secure than previous
methods associated with payment cards.
b) Safe to transport: Another advantage of having a smart card is their use
the banking industry. These cards give the holder the freedom to carry
large sums of money stolen. They are also safe because the cards can be
easily replaced, and the person would have to know the pin number to
access its store value.
c) Offer a variety of benefits: Smart cards Offer a variety of benefits to
merchants, financial institutions, and other card issuers such as faster
transaction, increased sales, reduced costs, easier book-keeping, and
fewer losses.
d) Time-saving: Making a payment with a smart card saves a lot of time
because its chip contains details about the owner in a non-encrypted form
and the user doesn’t have to explicitly provide details for verification.
e) Double as an ID card: They can provide complete identification in
certain industries. There are numerous benefits of using smart cards for
identification.
For example, a driver’s license that has been created using smart card
technology can give the police the ability to quickly identify someone
who’s been stopped for speeding or reckless driving.
f) The safe place to store sensitive information: Smart cards are a safe
place to store sensitive information such as keys, passwords or personal
information.
g) Less expensive: As compared to debit and credit cards, smart cards are
less expensive and provide faster transaction processing.
h) Prevents fraud: Other benefits of using smart cards for identification can
be used by governments to prevent benefits and social welfare fraud to
ensure the right person is receiving the welfare benefit.
DISADVANTAGES OD SMART CARD: -
a) Easily Lost: Smart cards are small, lightweight and can be easily lost if
the person is irresponsible. Since smart cards have multiple uses, the loss

26
 may be much more inconvenient. If you lose a card that doubles as a
debit card, bus pass and key to the office, you would be severely
inconvenienced for a number of days.
b) Security: Another drawback of using smart cards is their level of security.
They are more secure than swipe cards. However, they are not as secure
as some in the general public would believe. This creates a false sense of
security and someone might not be as diligent as protecting their card
and the details it holds.
c) Slow Adoption: If used as a payment card, not every store or restaurant
will have the hardware necessary to use these cards. One of the reasons
for this is since technology is more secure, it is also more expensive to
produce and use. Therefore, some stores may charge a basic minimum
fee for using smart cards for payment, rather than cash.
d) Possible Risk of Identify Theft: Smart cards are vulnerable to
hardware hacking, which means that data stored in the card can be
altered or corrupted. For criminals seeking a new identity, they are like
gold, based on the amount of information it can contain on an individual.

11. MOBILE BANKING

Mobile banking refers to the use of a smart phone or other cellular device
to perform online banking tasks while away from your home computer,
such as monitoring account balances, transferring funds between
accounts, bill payment and locating an ATM.

ADVANTAGES OF MOBILE BANKING:

a) Always on 24 x 7 Accesses: Banks are able to provide services to the
customers for 24 hours per day and 7 days per week. It enables the
consumers to be transaction-ready much as cable access has facilitated
online PC access and reduced consumer dialup delays.
b) Advanced Penetration of Mobile Networks: The 2G networks already
cover more than 90% of the population in the western world and this
number is growing steadily.
c) Personalisation: Through Subscriber Identify Module (SIM) cards, mobile
customers have a specific profile that enables customised functionality to
directly reflect the way they want to transact business over mobile
devices. Through the convenient addition of a multi-application,
relationship card, mobile customers will also have a built-in platform for a
host of other application services, including security keys, virtual credit
cards and other customised payment instruments.
d) WAP: Rapid evolution of global protocols such as Wireless Application
Protocol (WAP) enables the communication channel between computers
and mobile devices. The WAP component essentially provides the facility
of reforming data for display in wireless handsets.
e) Faster Data Processing Speed: Increase in bandwidth and data
transmission speeds makes mobile data services efficient and cost-
effective in a real time environment.
f) Security: In addition to the above-mentioned smart card, a private key
stored on the SIM card can protect e-banking transactions. Effectively, the

27
 mobile phone can become a wireless wallet to protect proprietary
purchase and financial information.
g) Mobile Payment: Mobile payment means executing a payment
transaction using a wireless device such as mobile phone or personal
digital assistant. The mobile device becomes the electronic payments
device. Its mobility is its big advantage. It enables payments to be
transacted regardless of place and time. Telephone and internet banking
afford customers bill payment and purchasing conveniences at any time.
DISADVANTAGE OF MOBILE BANKING:
a) Restricted Plans: Though there were many plans to enhance mobile
banking offerings and services, in reality the initiatives were very
restricted. Most applications are informative such as bank balances or
credit card or bank amounts rather than interactive services like buying or
trading.
b) Technical Problems: There are problems of technical issues, security
concerns and cost constraints. WAP proved to be too slow and
cumbersome to satisfy the customer. People think about security. But
their concerns are not adequately fulfilled by purveyors of m-banking.
c) High Charges: The most significant problem of m-banking is that costs
exceed perceived benefits. The charges for data transmitted are still too
high to develop mobile banking in several countries.
d) Negative Experience in European Countries: Experience about m-
banking in European countries has not been positive. e.g., the British
leader in on-line banking decided to abort its mobile offering. It saw little
enthusiasm for mobile banking among its customers.
RISKS OF E-BANKING
a) Strategic risk: This can arise because of faulty business decisions and
improper implementation. It can be current or prospective. If the senior
management takes decisions tomeet competitive pressure without cross
checking the cost benefit analysis.
b) Transaction Risk: This can arise because of fraud, negligence, error, etc
if adequate services levels are not maintained.
c) Compliance Risk: If the bank doesn't comply with legal provisions and
ethical standards, it can result in monetary loss as well as reduced
business.
d) Reputation Risk: The reputation of the bank can be tarnished because
of inferior service.
e) Credit Risk: Risks due to uncertainty in a counterparty's ability to meet
its obligations in accordance with agreed upon terms.
f) Operational Risk: The risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events

CENTRALISED ONLINE REAL TIME EXCHANGE (CORE)

BANKING SOLUTION
It is networking of bank branches, which allows customers to manage
their accounts, and use various banking facilities from any part of the

28
 world. In simple term, there is no need to visit your own branch to do
banking transactions. You can do it from any location, any time. You can
enjoy banking services from any branch of the bank which is on CBS
network regardless of branch you have opened your account. In Core
banking, the all-branches access banking applications from centralized
server which is hosted in secured data centre. Banking
software/application performs basic operations like maintaining
transactions, balance of withdrawal & payment, interest calculations on
deposits & loans etc. This banking applications are deployed on
centralized server & can be accessed using internet from any location.

OBJECTIVES:
a) To meet the dynamically changing market & customer needs.
b) To improve & simplify banking processes so that bank staff can focus on
sales & marketing stuff.
c) Convenience to customer as well as bank.
d) To Speed up the banking transactions.
e) To expand presence in rural & remote areas.

BENEFITS OF CORE BANKING

A. BENEFITS For CUSTOMERS:

a) Quicker services at the bank counters for routine transactions like cash
deposits, withdrawal, passbooks, statement of accounts, demand drafts
etc.
b) Anywhere banking by eliminating branch banking.
c) Provision of banking services 24 X 7.
d) Fast payment processing through Internet banking, mobile banking.
e) Anytime anywhere banking through ATMs.
f) All branches access applications from central servers/datacentre, so
deposits made in any branch reflects immediately and customer can
withdraw money from any other branch throughout the world.
g) CBS is very helpful to people living in rural areas. The farmers can receive
e-payments towards subsidy etc. in his account directly. Transfer of funds
from the cities to the villages and vice versa will be done easily.

B. BENEFITS For BANKS:

a) Process standardization within bank & branches.
b) Retention of customers through better customer service.
c) Accuracy in transactions & minimization of errors.
d) Improved management of documentation & records – having centralized
databases results in quick gathering of data & MIS reports.
e) Ease in submission of various reports to the Government & Regulatory
boards like RBI.
f) Convenience in opening accounts, processing cash, servicing loans,
calculating interest, implementing change in policies like changing
interest rates etc.

29
 DISADVANTAGES OF CORE BANKING
a) Excessive reliance on technology
b) Any failure in computer systems can cause entire network to go down.
c) If Data is not protected properly and if proper care is not taken, hackers
can gain access to the sensitive data.

ORGANIZATION OF BANK LENDING

Principles of sound lending:
1. Liquidity: Liquidity is an important principle of bank lending. Bank lend
for short periods only because they lend public money which can be
withdrawn at any time by depositors. They, therefore, advance loans on
the security of such assets which are easily marketable and convertible
into cash at a short notice.
2. Safety: The safety of funds lent is another principle of lending. Safety
means that the borrower should be able to repay the loan and interest in
time at regular intervals without default. The repayment of the loan
depends upon the nature of security, the character and capacity of the
customer.
3. Diversity: In choosing its investment portfolio, a commercial bank should
follow the principle of diversity. It should not invest its surplus funds in a
particular type of security but in different types of securities. It should
choose the shares and debentures of different types of industries situated
in different regions of the country. The same principle should be followed
in the case of state governments and local bodies.
4. Stability: Another important principle of a bank’s investment policy
should be to invest in those stocks and securities which possess a high
degree of stability in their prices. The bank cannot afford any loss on the
value of its securities. It should, therefore, invest it funds in the shares of
reputed companies where the possibility of decline in their prices is
remote.
5. Profitability: This is the cardinal principle for making investment by a
bank. It must earn sufficient profits. It should, therefore, invest in such
securities which was sure a fair and stable return on the funds invested.
The earning capacity of securities and shares depends upon the interest
rate and the dividend rate and the tax benefits they carry.
LOANS AND ADVANACES
Loans: The amount lent by the lender to the borrower for a specific
purpose like the construction of the building, capital requirements,
purchase of machinery and so on, for a particular period of time is known
as Loan. In general, loans are granted by the banks and financial
institutions. It is an obligation which needs to be repaid back after the
expiry of the stipulated period. The loan carries an interest rate on the
debt advanced. Before advancing loans, the lending institution checks the
credit report of the customer, to know about his credibility, financial
position and capacity to pay. Loan is classified in the following categories:

30
ON THE BASIS OF SECURITY
 Secured Loan: The loan which is backed by securities is Secured
Loan.
 Unsecured Loan: The loan on which no asset is pledged as security
is Unsecured Loan.

ON THE BASIS OF REPAYMENT:

 Demand Loan: The loan which is repaid on demand of the lender is
Demand Loan.
 Time Loan: Loan, which is repaid in full at a future specified date is
Time Loan.
 Instalment Loan: Loans which are to be repaid in evenly distributed
monthly instalments is Instalment Loan.

ON THE BASIS OF PURPOSE:

 Home Loan
 Car Loan
 Education Loan
 Commercial Loan
 Industrial Loan

Advances: Advances are the source of finance, which is provided by the

banks to the companies to meet the short-term financial requirement. It is
a credit facility which should be repaid within one year as per the terms,
conditions and norms issued by Reserve Bank of India for lending and also
by the schemes of the concerned bank. They are granted against
securities which are as under:
 Primary Security: Hypothecation of Debtors, Stock, Pro-notes, etc.
 Collateral Security: Mortgage of land and buildings, machinery, etc.
 Guarantees: Guarantees given by partners, directors or promoters,
etc.

DIFFERENCES BETWEEN LOANS AND ADVANCES

Basis Loan Advances

When a fund is borrowed by When a fund is provided by
an entity or business the bank to a business
corporation or an individual corporation or an entity for a
Meaning from another entity, specific purpose to be
repayable after a specific repayable after a short
period carrying interest rate duration is known as
is known as loans. advances.
Advances are by nature a
Nature A loan by nature is a debt.
credit facility.
Time Loans are generally for a long Advances are for short term,
duration term. maximum for one year only.

31
 A loan may be secured Advances are facilitated only
Collateral
against collateral security or against primary security or
security
not. any type of guarantee.
There are high legal There are low legal
Legal
formalities while granting a formalities as compared to
formalities
loan. the loan.
Auto loan, Personal loan, Short term loan, Overdraft
Example Education loan, home loan facility, Cash credit, Bill
etc. purchased etc.

METHODS OF GRANTING ADVANCES

CASH CREDIT
Cash Credit is an arrangement by which the borrower is allowed to borrow
money up to a certain limit known as the ‘cash credit limit’. Usually, the
borrower is required to provide security in the form of pledge or
hypothecation of tangible securities. Sometimes, this facility is also
provided against personal security. This is a permanent arrangement and
the customer need not draw the sanctioned amount at once but draw the
amount as and when required. He can put back any surplus amount which
he may find with him. Thus, cash credit is an active and running account
to which deposits and withdrawals may be affected frequently. Interest is
charged only for the amount withdrawn and not for the whole amount
approved. If the customer does not use the cash limit to the full extent, a
commitment charge is made by the bank. This charge is imposed on the
un-utilized portion of cash credit only.

Features of Cash Credit

1. Borrowing limit: A cash credit comes with a borrowing limit determined

by the credit worthiness of the borrower. A company can withdraw funds
up to its established borrowing limit.
2. Interest on running balance: In contrast with other traditional debt
financing methods such as loans, the interest charged is only on the
running balance of the cash credit account and not on the total borrowing
limit.
3. Minimum commitment charge: The short-term loan comes with a
minimum charge for establishing the loan account regardless of whether
the borrower utilizes the available credit. For example, banks typically
include a clause that requires the borrower to pay a minimum amount of
interest on a predetermined amount or the amount withdrawn, whichever
is higher.
4. Collateral security: Cash credit is often secured using stocks, fixed
assets, or property as collateral.
5. Credit period: Cash credit is typically given for a maximum period of 12
months, after which the drawing power is re-evaluated.

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 ADVANTAGES OF CASH CREDIT

1. Source of working capital financing: A cash credit is an important

source of working capital financing as the company need not worry about
liquidity issues.
2. Easy arrangement: It can be easily arranged by a bank, provided that
collateral security is available to be pledged and the realizable value of
such is easily determined.
3. Flexibility: Withdrawals on a cash credit account can be made many
times, up to the borrowing limit, and deposits of excess cash into the
account lowers the burden of interest that a company faces.
4. Tax-deductible: Interest payments made are tax-deductible and, thus,
reduce the overall tax burden on the company.
5. Interest charged: A cash credit reduces the financing cost of the
borrower as the interest charged is only on the utilized amount or
minimum commitment charge.

DISADVANTAGES OF CASH CREDIT

1. High rate of interest: The interest rate charged by a bank on cash

credit is very high as compared to traditional loans.
2. Minimum commitment charges: A minimum commitment charge is
imposed on the borrower regardless of whether the company utilizes its
cash credit or not.
3. Difficulty in securing: The short-term loan is extended to the borrower
depending on the borrower’s turnover, accounts receivable balance,
expected performance, and collateral security offered. Therefore, it can be
difficult for new companies to obtain.
4. Temporary source of finance: The loan is a short-term source of
financing. A company cannot rely on it for an extended period of time.
After the expiration of a cash credit loan, it must be renewed under new
terms and conditions.

OVERDRAFT

Overdraft is a financial instrument in which the money can still be

withdrawn from the current or savings account, even if the account
balance goes below zero. It is a type of extension of monetary limit
offered by banks and that money is said to be ‘overdrawn’. An authorized
overdraft limit is assigned for each customer depending on their
relationship with the bank. The customer can withdraw money up till the
assigned limit. Banks do charge interest rate on the money withdrawn in
form of overdraft.

FEATURES

1. Overdraft account is a facility that can be availed by maintaining any bank

account

33
2. Several private sector banks are now offering this facility for both salary
and savings account holders
3. The money extension is granted on the basis of customer’s account value,
repayment history or credit score
4. It is short-term credit provided by the bank that needs to be paid within
the stipulated time limit
5. Credit amount or overdraft attracts interest for the time of use which can
be from a couple of days to a few weeks
6. Repayment tenure is decided by the bank and it has full authority over the
account and its use
7. As per the RBI regulations, current accounts and cash credit accounts are
eligible for a maximum of Rs. 50,000 per week

TERM LOANS
Term loan is a medium-term source financed primarily by banks and
financial institutions. Such type of loan is generally used for financing of
expansion, diversification and modernization of projects, so this type of
financing is also known as project financing. Term loans are repayable in
periodic installments.
FEATURES OF TERM LOANS
1. Security: Term loans are secured loans. Assets which are financed
through term loans serve as primary security and the other assets of the
company serve as collateral security.
2. Obligation: Interest payment and repayment of principal on term loans is
obligatory on the part of the borrower. Whether the firm is earning a profit
or not, term loans are generally repayable over a period of 5 to 10 years
in installments.
3. Interest: Term loans carry a fixed rate of interest but this rate is
negotiated between the borrowers and lenders at the time of dispersing of
loan.
4. Maturity: As it is a source of medium-term financing, its maturity period
lies between 5 to 10 years and repayment is made in installments.
5. Convertibility: Term loans may be converted into equity at the option
and according to the terms and conditions laid down by the financial
institutions.
ADVANTAGES OF TERM LOANS
1. From Point of View of the Borrower:
Cheap: It is a cheaper source of medium-term financing.
Tax Benefit: Interest payable on term loan is a tax-deductible
expenditure and thus taxation benefit is available on interest.
Flexible: Term loans are negotiable loans between the borrowers and
lenders. So, terms and conditions of such type of loans are not rigid and
this provides some sort of flexibility.

34
 Control: Since term loans represent debt financing, the interest of the
equity shareholders are not diluted.
2. From Point of View of the Lender:
Secured: Term loans are provided by banks and other financial
institutions against security, so term loans are secured.
Regular Income: It is obligatory on the part of the borrower to pay the
interest and repayment of principal irrespective of its financial position;
hence the lender has a regular and steady income.
Conversion: Financial institutions may insist the borrower to convert the
term loans into equity. Therefore, they can get the right to control the
affairs of the company.
DISADVANTAGES OF TERM LOANS
1. From Point of View of the Borrower:
Obligation: Yearly interest payment and repayment of principal is
obligatory on the part of borrower. Failure to meet these payments raises
a question on the liquidity position of the borrower and its existence will
be at stake.
Risk: Like any other form of debt financing term loans also increases the
financial risk of the company. Debt financing is beneficial only if the
internal rate of return of the concern is greater than its cost of capital;
otherwise, it adversely affects the benefit of shareholders.
Interference: In addition to collateral security, restrictive covenants are
also imposed by the lenders which lead to unnecessary interference in the
functioning of the concern.
2. From Point of View of the Lender:
Negotiability: Terms and conditions of term loans are negotiable
between borrower and lenders and thus it sometimes can affect the
interest of lenders.
Control: Like other sources of debt financing, the lenders of term loans
do not have any right to control the affairs of the company.
PURCHASING AND DISCOUNTING BILLS
Bills of exchange, as defined in The Negotiable Instruments Act, 1881, is
“an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay (on demand or at a fixed or
determinable future time) a certain sum of money only to, or to the order
of, a certain person or to the bearer of the instrument”.
Banks grant advances to their customers by discounting bills of exchange.
The net amount, after deducting the amount of interest/discount from the
amount of the installment, is credited in the account of the customer. In
this form of lending, the interest is received by the banker in advance.
Banks sometimes purchase the bills instead of discounting them. Bills
which are accompanied by documents or title to goods such as bills of

35
 lading or railway receipt are purchased by the bankers. In such cases, the
banker grants a loan in the form of overdraft or cash credit against the
security of the bills. The term ‘bill purchased’ seems to imply that the
bank becomes the purchaser or owner of such bills. But in almost all cases
the bank holds the bill only as a security for the advance.

ADVANTAGES OF BILL/INVOICE DISCOUNTING

1. No Need to Incur Debt: As noted earlier, bill or invoice discounting
enables business owners to fund working capital needs without increasing
liabilities. The business owner can opt for this option to avail cash quickly
by releasing the funds locked in unpaid invoices or bills. He can even
meet working capital needs simply by converting current assets into liquid
assets.
2. Improve Cash Flow Position: Often small businesses have to sell goods
in credit to expand customer base. When they sell goods on credit, it
becomes difficult for entrepreneurs to maintain positive cash flow. The
invoice discounting services provided by lending institutions help
entrepreneurs to improve cash flow quickly. They can even shorten the
working capital cycles by converting unpaid invoices into cash.
3. Help Businesses to Sell Goods on Credit: Many enterprises explore
ways to credit sales to maintain a positive cash flow position. But small
businesses cannot acquire new customers and retain existing customers
in the long run without combining cash and credit sales. The bill
discounting services make it easier for enterprises to sell goods in credit
by liquidating current assets and boosting cash flow.
4. Access Funds Quickly: No entrepreneur can avail conventional working
capital loans without meeting the eligibility criteria set by the lending
institutions. Many lending institutions even require additional time to
process and disburse small business loans. Hence, many business owners
opt for bill discounting to avail funds without lengthy approval process.

DISADVANTAGES OF BILL/INVOICE DISCOUNTING

1. Reduces Profit Margin: The lending institutions discount bills or
invoices by charging a fee. The fee normally includes interest charges,
administrative expenses and maintenance expenses. The percentage of
fee or discount also differs from one lender to another. Hence, the
business owners have to sacrifice a percentage of the bill value. The fees
charged by the lender will even impact the business’s profitability.

36
2. All Bills Cannot Be Discounted: An entrepreneur cannot avail funds by
discounting all his unpaid bills or invoices. Many lending institutions
discount only commercial bill. Also, they evaluate the bills or invoices
based on a number of parameters before providing funds. Hence,
entrepreneur cannot rely on bill discounting as a consistent or long-term
working capital funding solution.
3. Not Available to New Businesses: Both banks and NBFCs provide bill
discounting services only to existing customers or established enterprises.
Some lending institutions even provide discount bills only if the business
is generating profit. Hence, new business owners may not fund working
capital needs through bill discounting service. Also, the fees charged by
the lending institutions will impact their profitability in the short run.
4. Reduce Available Collateral: Most banks do not provide collateral free
business loans to small business owners. They require the borrowers to
use their personal and business assets as collateral to avail credit. Each
time a business owner discounts an invoice or bill, his working capital
declines accordingly. Hence, the business owner may find it challenging to
avail other working capital loans.

PRIORITY SECTOR LENDING

Lending by a commercial bank for certain sectors which are identified as
“priority sector” by the central bank (Reserve Bank of India) is called as
priority sector lending. Following important points cover the core meaning
of priority sector lending:
1. Priority sector lending scheme is a policy of providing a specified portion
of bank lending to the important sectors of the economy.
2. It includes agriculture, small-scale industries, cottage sector, tiny sector,
export sector, and other small business (service) firms.
3. The Reserve Bank of India was first to initiate priority sector lending
scheme in India.
4. The main purpose of this scheme was to see that timely and sufficient
credits (loans) are given (provided) to the priority sector.
5. Previously, only public sector banks were asked to give loans to this
sector. However, now even private and foreign banks have to give loans
to this sector.

AREAS UNDER PRIORITY SECTOR

37
1. Agricultural Sector: In India, nearly one-third of its national income
come from the agriculture sector. Its economic and social development
directly depends on the expansion of the agriculture sector. Therefore, it
is treated as primary priority sector lending in India. Agricultural loans are
given to the farmers on their need-based credit. These loans are classified
into following two categories:
A. Direct Agricultural Loans: Under this category, loans are directly
given to the farmers in form of tractor loan, dairy loan, crop loan, etc.
These loans are given either for a short-term period (which is not more
than 12 months) or for a medium and long-term period (which is not
more than 36 months).
 Short-term loans are given to meet agricultural expenses and
maintenance of assets such as a tractor, pumping machine, bore
well, etc.
 Medium and long-term loans are given for agricultural activities like
land reclamation, farm building, farm mechanization, and so on.
B. Indirect Agricultural Loans: Here, farmers are provided loans at
concessional rates of interest. Indirect agricultural loans benefit the
farmers in the long run. These loans are given for cattle feed,
warehouse, seeds, pesticides, rural electrification, subscription of
bonds issued by NABARD, boring equipments, etc

38
2. Small Scale Industries: Loans given to small-scale and
ancillary industries are treated as priority sector lending. These industrial
units are those who do manufacturing, processing, and preservation of
goods. In case of these industries, investment made in fixed assets must
not exceed the maximum limit notified by the Government of India. Such
small-scale and ancillary industries create newer job opportunities in
the market. Small-scale and ancillary industries include tailoring,
Xeroxing, typing centres, etc.
3. Small Roads and Water Transport Operators: This category of
borrowers includes owners of taxis, trucks, buses, auto-rickshaws, cars,
bullock-carts, camel, etc. Under priority sector lending, small road and
transport operators get loans based on the conditions mentioned in the
notification issued by the Government of India. The repayment period of
loan is communicated to the borrower at the time of disbursement of
loan. Borrowing is done for the purchase of vehicles and their parts. Bank
mainly provides loans for the following purposes:
 Purchase of vehicles.
 Purchase of spare parts.
 Carrying out major repairs.
 Working capital requirements.
4. Professional and self-employed: Under this category, bank provides
loans to professionals like: Doctors, Chartered accountants, Architects,
Engineers, Lawyers, etc. Bank also provided loans to self-employed
persons like: Freelance journalists, Owners of health care centres, Beauty
parlours, Photographers, Fashion designers, and so on. The borrowing
limit will be an aggregate of fixed capital and working capital
requirements of a professional and self-employed person. Doctors and
other self-employed professionals who start practicing in rural or semi-
urban areas are also eligible to borrow loans.
5. Retail Trader Loan: Under priority sector lending, retail trader trading in
fertilizers, mineral oil, fair price shops and consumers' co-operative stores
get bank loans. The loaned amount can be used to purchase fixed assets,
tools and other equipments needed to carry on trading and its allied
activities.
6. Educational Loan: Education loan is given to those students who want to
pursue higher education in India or abroad. Generally, bank provides loans
to students on the following conditions:
 The Government of India set limits on the amount of educational
loan taken by students for pursuing studies in Indian and/or abroad.
 Students may undergo graduation, post-graduation (masters)
programs, professional programs and other job-oriented diplomas.
 Rate of interest on educational loan varies in accordance with the
latest ‘Finance Bill’ issued by the Government of India.
7. Housing Loan: Under housing loan facilities, following types of loans are
available for:
 Construction of a house.
 Repair (maintenance) and/or renewal of a house.
 Clearance of slums and rehabilitation of disaster-stricken masses to
temporary refuge shelters.

39
8. Consumption Loan: Banks provide the consumption loan to weaker
sections of society that include small farmers, landless agricultural
workers, rural artisans, barbers, washer men, carpenters, and so on who
have no savings in their hands. People of weaker sections need to
borrow money for their immediate requirements like marriage, festivals,
illnesses, etc. Consumption loan is given for such non-productive
purposes. Here, loan limit is prescribed on each family.
9. State Sponsored Corporation for SC/ST: Priority sector lending
includes loans given to state-sponsored corporations for the promotion of
scheduled castes (SC) and scheduled tribes (ST). Banks are given freedom
to decide the amount and also the terms and conditions for these loans.
10. Other Recommended Priority Sectors
a. Software Industry: Here, loans are given to a software industry up to a
limit as per the notification issued by the government of India.
Software professionals are given loans under the category of “Loans to
professionals and self-employed”.
b. Venture Capital: If the venture capital project is registered with ‘SEBI’
(Securities and Exchange Board of India) then it will be included in the
priority sector lending. It will get a loan under priority sector lending
scheme.

RBI issued specific directions to the banks regarding

priority sector lending like: -
a)Priority sector lending should constitute 40% of aggregate bank
credit.
b)Out of priority sector advances, at least 40% should be provided to
agriculture.
c) Direct advances to the weaker sections in agriculture and allied
activities in rural areas.
d)Bank credit to rural artesian, village craftsman and cottage
industries should at least be 12.5% of the total advances to small
scale industries.
e)About 12% of bank credit should go to exporters.

Problems of Priority Sector Lending

The initial enthusiasm in favour of priority sector lending slowly but
surely faded and their overall profitability also declined because of
certain concrete problems faced by till banking sector:
1. High Targets: In their anxiety to reach the target of 40 per cent, the
banks went in to haphazard and indiscriminate lending.
2. Poor Administration: As priority sector loans were small amounts, the
public sector, banks were not able to properly monitor the distribution,
follow-up and recovery of tiny loans.
3. Huge Costs: Collection costs increased and adversely affected their
profitability.
4. High Reserve Requirements: The commercial banks were squeezed in
both ways. On the one hand, they were forced to keep a high

40
 proportion of their deposits i.e. under. CRR and SLR provisions and on
other hand out of the balance deposit resources banks were to give
40 per cent of their available resources, as loan to the priority sector.
5. Low Interest Rates: The worse thing was that the priority sector
lending had to be done at a low concessional rate of interest.
6. Other Sectors Ignored: Resultantly, the banking sector was unable to
satisfy the credit requirements of the other sectors.
7. Low Profitability: Banks' profitability was badly affected and most of the
banks suffered huge losses.
8. Uneven Disbursement of loans: The bank lending to priority sector was
not uniform in all states. In order to attain 40 per cent of the target for
the country as a whole, till banks increased their loans to the priority
sector in the more advanced states. Backward states like U.P., Bihar, and
Rajasthan, etc. got quite low assistance. This worsened the regional
imbalance in the country.

EXPORT CREDIT
Broadly defined, an export credit is an insurance, guarantee or financing
arrangement which enables a foreign buyer of exported good and/or
services to defer payment over a period of time. Export credits are
generally divided into short-term, medium-term (usually two to five years
repayment) and long-term (usually over five years).
 Short term export credits are provided on cash or near cash terms
through open account or letter of credit facilities.
 Medium-and long-term export credits may take the form of either
“supplier credits” (extended by the exporter to the overseas buyer) or
“buyer credits” (the exporter’s bank or other financial institution lends
to the buyer or the buyer’s bank).
 Long term export credit

Export Credit in India:

In India, export credit is available both in Indian rupees and foreign
currency as discussed here.
Export credit in Indian rupees:
The Reserve Bank of India (RBI) prescribes a ceiling rate for the rupee
export credit linked to Benchmark Prime Lending Rates (BPLRs) of
individual banks available to their domestic borrowers. However, the
banks have the freedom to decide the actual rates to be charged with
specified ceilings.
Export credit in foreign currency:
In order to make credit available to the exporters at internationally
competitive rates, banks (authorized dealers) also extend credit in foreign
currency’ at LIBOR (London Interbank Offered Rates), EURO LIBOR
(London Interbank Offered Rates dominated in Euro), or EURIBOR (Euro
Interbank Offered Rates).

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 PROJECT
A project in business is a temporary endeavour undertaken to create a
unique product, or service. The aim of a project is to attain its objective
and then terminate. Some of the reasons to start a project can be:
1. A customer request or market demand
2. An organizational need
3. A customer requests
4. A technological advance
5. A legal requirement

PROJECT FINANCE
Project finance is the financing of long-term infrastructure,
industrial projects, and public services, based on a non-recourse or limited
recourse financial structure, in which debt and equity are used
to finance the project, are paid back from the cash flow generated by
the project.
Project financing is a loan structure that relies primarily on the project's
cash flow for repayment, with the project's assets, rights, and interests
held as secondary collateral. Project finance is especially attractive to the
private sector because companies can fund major projects off-balance
sheet.
Not all infrastructure investments are funded with project finance. Many
companies issue traditional debt or equity in order to undertake such
projects.
PARTIES INVOLVED AND TRANSACTION FLOW IN
PROJECT FINANCE

1. SPONSORS: Sponsors are usually the equity share capital holders of the
parent company who wish to seek project finance.
2. BANKS/FINANCIAL INSTITUTIONS: It may be a single lender or a
consortium of financial institutions. They are the providers of senior debt
and hold precedence over debt extended (if any) by the sponsors.
3. SPECIAL PURPOSE VEHICLE (SPV): It is a separate legal entity floated
by the sponsors of the project. The project finance obtained is directed
exclusively only towards this SPV. The SPV acts as a corporate veil

42
 between the lenders and the parent company preventing seepage of
credit and attachment of property between the two parties.
4. HOST GOVERNMENT: Refers to the government of the home country
where the SPV is located. The SPV must be incorporated in accordance
with the government’s rules and regulations. It also often acts as a
guardian angel in providing various tax concessions, subsidies, and
rebates.
5. OFF TAKERS: Off-takers are bound via an off-take agreement to
mandatorily purchase a certain minimum quantity of produce from the
selling party. An off-take agreement ensures the seller of the existence of
a market upon completion.
6. SUPPLIERS & CONTRACTORS: As in any construction job, suppliers and
contractors are necessary for the execution of a contract. They are the
key suppliers of raw material. They also perform crucial functions such as
design and build (D&B), operations and maintenance (O&M), etc.
WORKING CAPITAL
Every business need funds for two purposes for its establishment and to
carry out its day-to-day operations. Long-term funds are required to
create production facilities through purchase of fixed assets such as plant
and machinery, land, Building etc. Investments in these assets represent
that part of firm’s capital which is blocked on permanent basis and is
called fixed capital. Funds are also needed for short-term purposes for
purchase of raw materials, payment of wages and other day-to-day
expenses etc. These funds are known as working capital which is also
known as Revolving or circulating capital or short-term capital. According
to Shubin, “Working capital is amount of funds necessary to cover the cost
of operating the enterprise”.
DIFFERENT TYPES OF WORKING CAPITAL FINANCING
1. CASH CREDIT/BANK OVERDRAFT: These are the most usable forms
of working capital financing that are mainly used by both small and large
businesses. These cash facilities are provided by the commercial banks by
which the borrower is approved a specific amount of cash that he can use
for making business payments. Additionally in this setting, the borrower
has to make certain that he does not cross the approved limit. The good
thing is that the rate of interest is charged to the level the cash is used
and not at the approved amount which encourages him to keep depositing
the amount, when possible, to save on interest rate. Truly, this is valuable
working capital financing.
2. TRADE CREDIT: This is a type of working capital financing that is
extended by the present or potential supplier of a business. Trade credit is
offered to businesses based on their creditworthiness, which is revealed
by its profit records, liquidity situation and payment records. As other
funding programs, trade credit also comes with some specific
requirements and costs. The supplier will also thoroughly evaluate your
business credit history before offering you money.

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3. PURCHASE/DISCOUNT OF BILLS: For a small business, it is another
good type of working capital financing provided by the commercial banks.
Every business generates bills in their normal routine while selling
products or services to debtors. In the end, that bill works as a document
to get payment from the debtor. And if the seller needs cash, he will go
directly to the bank with that bill and the bank will apply discount on the
whole amount of the bill primarily based on the existing interest and pay
the outstanding amount to the seller. The bank will collect the money on
the maturity date of that bill.
4. WORKING CAPITAL LOANS: Working capital loans are used by small
businesses to finance their day-by-day operations or raise their cash flow.
Working capital loans are as good as term loans for a short duration.
During financial difficulties, a small business can get help from this loan to
pay for salaries, mortgages, rent and other expenses. You can also get
this loan for financing your business permanent working capital
requirements.
5. BANK GUARENTEE: This is a non-fund based working capital financing.
Bank guarantee is acquired by the client or seller to decrease the risk of
loss to the other party due to non- performance of agreed undertaking
which may be paying back the money or offering some services and so on.
A bank guarantee is repealed by the holder only in case of non-
performance by other party. Bank will charge some commission and may
also ask for some security.
6. INVOICE FACTORING: Invoice factoring is an arrangement in which a
business sells all or some of the account’s payables to a third party at a
value lower than the original value of those accounts. The third party in
this setting is called the factor that offers factoring services to business.
The factor provides financing by purchasing the bills and additionally
collects the amount from the debtors.
7. LETTER OF CREDIT: This form is also known as non-fund based working
capital financing. There is a little difference between letter of credit and
bank guarantee. So, a buyer would purchase a letter of credit and send it
to the seller. As soon as the seller sends the products according to the
agreement, the bank would pay the amount to the seller and collects that
cash from the buyer.

ANNUAL REPORT OF A BANK

An Annual Report is a reflection of the company’s philosophy, policies,
achievements and shortcomings. The annual report gives general
information regarding the names of the Chairman/MD, Chief Executive
Officer and all the directors, the bankers and the auditors of the company,
registered office, date, time and venue of the annual general meetings. It
also gives a summary of the financial operations as well as its assets and
liabilities. An annual report comprises of two parts.
Part 1 -
1. Notice for the meeting of the shareholders.

44
2. Directors’ Report. The chairman of the company presents the directors’
report which highlights the company’s achievements, new
initiatives/products/technology etc.
3. The company’s philosophy that describes how the company does
business.
4. Social responsibility report. It has initiatives for environment conservation
and corporate social responsibility.
5. Corporate Governance report. Corporate governance deals with
conducting the affairs of the organisation with integrity, transparency and
commitment to principles of good governance.
6. Declaration of dividend (if any) is provided.
7. Retirement, reappointment of existing directors or appointment of new
directors.
8. For the sake of uniformity and transparency in reporting.

Part 2-
1. The second part deals with performance highlights of the organisation.
2. It includes a balance sheet, a profit and loss account, cash flow statement
and other statements and explanatory material that are an integral part of
the financial statements.
3. An auditor’s report certifies the financial statements together present a
true and fair view of the company’s affairs.

OBJECTIVES OF ANNUAL REPORT:

1. Taking prospective economic decisions.

2. Providing information about the financial position, performance and
changes in financial position of the bank.
3. Presenting and disclosing information about the bank.
4. To lure new investors and make adequate disclosures to the existing ones.

PURPOSE OF ANNUAL REPORT:

1. PROVIDE FINANCIAL INFORMATION: An annual report provides

information on the company’s fiscal year. The financial information
provided in the annual reports helps determine the current status of
business, how the company is funding operations and growth, and how
good the company is placed at making money for its investors.
2. ACCOUNTABILITY: Annual report is considered as the main
accountability mechanism. Accountability is a pre-requisite, as it gives an
idea of how far the company has met its responsibilities towards its
owners, and fulfilled the role defined, which through the financial reports
should reflect the extent of performance that are related to the entity.
3. DECISION MAKING: The objective of reporting the financial statements’
is to inform about the performance of the company that could be helpful
to a wide range of potential users for evaluating and making economic
decisions.

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BALANCE SHEET OF BANK
A Balance sheet is a statement of assets and liabilities of a business firm
at a particular point of time. It throws light on the financial health of the
enterprise. Assets are economic resources of a firm, such as land,
buildings, machinery, equipment, accounts receivable, etc. Liabilities are
economic obligations of a definite or reasonably certain amount to be paid
in the future. These include amounts payable to creditors amount to be
paid in the future. These include amounts payable to creditors, loans,
wages, taxes, salaries, etc.
The financial statements of banks and other manufacturing and trading
companies show many differences – for a bank the equity base is very low
and financial leverage is very high. The proportion of fixed assets is very
low and operating leverage is very low. The sources of funds are primarily
short term in nature, payable on demand or with short term maturity.
FORMAT OF THE BALANCE SHEET OF A BANK
The balance sheet of a commercial bank like any other balance sheet
comprises two sides; conventionally the left side shows liabilities and
capital, while the right side shows assets.

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LIABILITIES AND ASSETS OF A BANK
LIABILITIES OF A BANK

47
 A liability is an obligation as a result of a pass event. Its settlement results
in outflow of resources. Liabilities of a commercial bank are claims on the
bank. They represent the amounts which are due from the bank to its
shareholders, depositors, etc. The major components of the liabilities of a
bank are as follows: -
1. CAPITAL – Capital and reserves what the customer regard as an asset,
the same bank deposit is a liability for the bank as the customer gains
claim over them. The paid-up share capital implies the liability of the bank
to its shareholders. It is the amount received by the bank to its
shareholders.
2. RESERVE FUND – Reserves are created out of the undistributed profits
which are retained over a period of years by the bank. At least 20% of
profits before declaration of dividend has to transferred to the reserve
fund. Creation of reserve fund is a statutory requirement in most of the
countries of the world. Banks build up reserves to strengthen their
financial position and also to meet unforeseen liabilities or unexpected
losses.
3. DEPOSITS – Deposits constitute the major sources of funds for banks. A
bank raises deposits from households, corporates and the government.
What the customer regards as an asset, the same bank deposits are a
liability for the bank as the customer gains claim over them. Banks get
funds from investment and these are indirectly the source of its income
4. BORROWING FROM OTHER SOURCES – In case of need, banks can
borrow from the Reserve Bank of India, other commercial banks,
development banks, non-bank financial intermediaries like LIC, etc.
Secured loans are obtained on the basis of some recognized securities
whereas unsecured loans are out of its reserve funds lying with the
central bank.
5. OTHER LIABILITIES - Other liabilities include bills payable, bills sent for
collection, acceptance, endorsement, etc. The amounts of all such bills are
shown on the liability side of the balance sheet.
6. CONTINGENT LIABILITIES – Contingent liabilities are those liabilities
which may arise in future but cannot be determined accurately, e.g.,
guarantee given on behalf of others, outstanding forward exchange
contracts, etc. A contingent liability is an off-balance sheet item
7. PROFIT OR LOSS – Profit is unallocated surplus or retained earnings of
the year after playing tax and dividends to shareholders, as shareholders
have claim over the bank’s profit, it is shown as liability. In case of loss,
the figure will be shown on the assets side.
8. OTHERS – Provisions made for income tax, bad debts, depreciation, etc.
come under this head.

ASSETS OF A BANK
Commercial banks use their funds primarily to purchase income earning
assets, mainly loans and investments. These assets are shown in the
balance sheet of the bank in decreasing order of the liquidity. The major
assets of the bank include:

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1. CASH- Cash in hand and cash balances with the Reserve Bank of India are
the most liquid assets of a bank. Cash assets provide bank funds to meet
reserve requirements and the liquidity to meet the withdrawals of
deposits and to accommodate new loan demand.
2. MONEY AT CALL AND SHORT NOTICE – This is the money lent by the
banks to other banks, bill brokers, discount houses and other financial
institutions for a very short period of time varying from 1 to 14 days.
When these funds are repayable on demand without prior notice, it is
called money at call. On the other hand, if some prior notice is required, it
is known as money at short notice. In the balance sheet, both are shown
as a single item on the asset side. Bank charge very low rate of interest
on these.
3. LOANS AND ADVANCES – Loans and advances are the bank’s earning
assets. The interests earned from these assets generate the bulk of
commercial bank revenues. Loans may be demand loans or term loans
which may be repayable in single or in many instalments. Advances are
usually made in the form of cash credit and overdraft.
4. INVESTMENTS/SECURITIES – Commercial banks use funds for
investment in various types of securities like the gilt-edged securities of
the central and state government as well as shares and debentures of
corporate undertakings. The securities issued by government are safe
from the risk of default though they are subject to risk from change in rate
of interest.
5. BILLS RECEIVABLE – Bills receivable and other credit instruments
accepted by the commercial banks on behalf of their customers are shown
on the asset side of the balance sheet. The reason is that the bank has a
claim on the payee, on whose behalf it has accepted the bills, Thus the
same amount appears on assets as well as liabilities sides of the balance
sheet of the bank.
6. OTHER ASSETS – These include the physical assets of a bank like the
bank premises, furniture, computers, machines equipment, etc. These
also include the collaterals which the bank has repossessed from the
borrowers in default.

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