PRINCIPLES OF

BANKING AND
INSURANCE
MODULE 2:
BANKING REGULATORY NORMS: Know Your Customer(KYC), Anti
Money Laundering(AML) Guidelines and Precautions to be taken by a
Banker while opening A New Account.
PRACTICAL BANKING: Opening and Operations of different Types of
Accounts- Individual and Joint Accounts, Proprietorship, Partnership,
Company, Club, Association, Societies, Trusts and Foundations.
BANKING SERVICES: Deposit and Credit Services, Payment and
Remittance Services, Collection services and the Different Products
there under, Portfolio Management, Credit Creation, Banking
Ombudsman 2006, Social Responsibility of Banks.

KNOW YOUR CUSTOMER(KYC)

 The Know Your Client or Know Your Customer is a standard in the
investment industry that ensures investment advisors know detailed
information about their clients' risk tolerance, investment knowledge,
and financial position.
 KYC protects both clients and investment advisors. Clients are protected
by having their investment advisor know what investments best suit
their personal situations.
 Investment advisors are protected by knowing what they can and cannot
include in their client's portfolio.
 KYC compliance typically involves requirements and policies such as risk
management, customer acceptance policies, and transaction
monitoring.
REQUIREMENT OF KYC
KYC documents along with the customer’s photograph have been made
mandatory only in the recent past where fraudulent transactions, fraud
accounts and money laundering had become prevalent. Thus, only to reduce as
much fraud as possible and as an anti money laundering measure, these
documents have been made mandatory.
List of documents commonly accepted as Standard Identity Proof:
 Passport
 PAN Card
 Voter’s Identity Card
 Driving License
 Photo identity proof of Central or State government
 Ration card with photograph
 Letter from a recognized public authority or public servant
 Bank Pass Book bearing photograph
 Employee identity card of a listed company or public sector company
 Identity card of University or board of education like ISC, CBSE, etc.
List of common identity documents which are accepted as Standard Address
Proof:
 Passport
 Voter’s Identity Card
 Driving License
 Electricity Bill, Telephone bill including mobile, landline, wireless, etc
type of connections, not more than 6 months old
 Bank Account Statement
 Consumer Gas connection card or Gas Bill
 Letter from any recognized public authority or public servant
 Credit Card Statement
 House Purchase deed
 Lease agreement along with last 3 months rent receipt
 Employer’s certificate for residence proof.

PURPOSE OF KYC:
The KYC guidelines have been put in place by the Reserve Bank of India in the
context of the
recommendations made by the Financial Action Task Force (FATF) on Anti
Money Laundering (AML) standards and on Combating Financing of Terrorism
(CFT). The Prevention of Money Laundering Act requires banks, financial
institutions and intermediaries to ensure that they follow certain minimum
standard of KYC and AML.

TYPES OF KYC:
[Link] BASED KYC:
 Aadhaar based e-KYC (electronic-Know Your Customer) offered by the
Unique Identification Authority of India can be used voluntarily by
Aadhaar card holders as a means to authenticate and establish their
identity, if they so desire/consent.
 The Electronic Know your customer or e KYC is the way of resident
authentication which allows the residents to submit it as an address
proof electronically to banking companies.
 Aadhaar based e-KYC provides this information electronically, negating
the need for physical document submission.
[Link] PERSON VERIFICATION KYC:
 In Person Verification or IPV is a process where a participant in personal
verifies documents and other details as per the law by the Securities and
Exchange Board of India (SEBI).
 The intermediary is responsible for collecting and maintaining records of
all necessary & important customer details on the KYC Form, including
company, designation and signature.

KYC POLICIES:
 CUSTOMER ACCEPTANCE POLICY (CAP)
Accept only those clients whose identity is established by conducting due
diligence appropriate to the risk profile of the client.
Where the investor is a new investor, account must be opened only after
ensuring that pre account opening KYC documentation and procedures are
conducted.
(a) Documents as per standard norms to be collected.
(b) identity verification of the client to be made through support desk.
(c) PBSPL will follow the industry standard in implementing the procedure for
KYC.
 CUSTOMER IDENIFICATION PROCEDURE
 Banks are required to clearly spell out the Customer Identification
Procedure to be carried out at different stages i.e. while
establishing a banking relationship; carrying out a financial
transaction or when the bank has a doubt about the
authenticity/veracity of the adequacy of the previously obtained
customer identification data.
 Financial institutions need to conduct a risk assessment of their
customer base and product offerings, and in determining the risks,
consider:
The types of accounts offered
The methods of opening accounts.
The types of identifying information available
The institution’s size, location, and customer base.
 MONITORING OF TRANSACTIONS:
 Ongoing monitoring is an essential element of effective KYC
procedures.
 Banks can effectively control and reduce their risk only if they
have an understanding of the normal and reasonable activity of
the customer so that they have the means of identifying
transactions that fall outside the regular pattern of activity.
 However, the extent of monitoring will depend on the risk
sensitivity of the account.
 RISK MANAGEMENT:
 KYC Risk Management means an established centralised process
for coordinating and promulgating policies and procedures on a
groupwide basis, as well as robust arrangements for the sharing of
information within the group.
 Policies and procedures should be designed not merely to comply
strictly with all relevant laws and regulations, but more broadly to
identify, monitor and mitigate reputational, operational, legal and
concentration risks.
 Similar to the approach to consolidated credit, market and
operational risk, effective control of consolidated KYC risk requires
banks to coordinate their risk management activities on a
 groupwide basis across the head office and all branches and
subsidiaries.

MONEY LAUNDERING
 Money laundering is the illegal process of making large amounts of
money generated by a criminal activity, such as drug trafficking or
terrorist funding, appear to have come from a legitimate source.
 The money from the criminal activity is considered dirty, and the process
"launders" it to make it look clean.
 Money laundering is a serious financial crime that is employed by white
collar and street-level criminals alike.
 MONEY LAUNDERING IS A 3 STAGED PROCESS:

[Link]
The process of placing, through deposits or other means, unlawful cash
proceeds into traditional financial institutions. At this stage cash derived
from criminal activity is infused into the financial system. The placement
makes the funds more liquid since by depositing cash into a bank
account can be transfer and manipulated easier. When criminals are in
physical possession of cash that can directly link them to predicate
criminal conduct, they are at their most vulnerable. Such criminals need
to place the cash into the financial system, usually through the use of
bank accounts, in order to commence the laundering process.
 [Link]
Layering is the process of separating the proceeds of criminal activity
from their origin through the use of many different techniques to layer
the funds. These include using multiple banks and accounts, having
professionals act as intermediaries and transacting through corporations
and trusts, layers of complex financial transactions, such as converting
cash into traveller’s checks, money orders, wire transfers, letters of
credit, stocks, bonds, or purchasing valuable assets, such as art or
jewellery. All these transactions are designed to disguise the audit trail
and provide anonymity.
[Link]
It is the stage at which laundered funds are reintroduced into the
legitimate economy, appearing to have originated from a legitimate
source. Integration is the final stage of the process, whereby criminally
derived property that has been placed and layered is returned
(integrated) to the legitimate economic and financial system and is
assimilated with all other assets in the system. Integration of the
“cleaned” money into the economy is accomplished by the launderer
making it appear to have been legally earned. By this stage, it is
exceedingly difficult to distinguish legal and illegal wealth.

ANTI MONEY LAUNDERING:

 Anti-money laundering (AML) refers to the laws, regulations and
procedures intended to prevent criminals from disguising illegally
obtained funds as legitimate income.
 Though anti-money laundering laws cover a limited range of transactions
and criminal behaviour, their implications are far-reaching.
 For example, AML regulations require banks and other financial
institutions that issue credit or accept customer deposits to follow rules
that ensure they are not aiding money-laundering.
BASIC PRECAUTIONS TO BE TAKEN TO PREVENT
MONEY LAUNDERING:
Devise a clear anti-money laundering policy and appoint an anti-money
laundering officer who is aware of the company’s legal obligations to
report anything suspicious to the authorities.
 Make thorough checks on the identity of a client, trading partner or
anyone else involved in moving money into, out of or around your
company.
Take the time to identify the real beneficiaries of a deal or the exact
nature of a business relationship between two parties.
Introduce accounting and cash handling procedures into the workplace
that make it as hard as possible for money laundering to happen within
your company.
Enforce a no-cash policy on transactions of a certain size.
Appoint senior staff to scrutinise the source of funding for deals or
investment – or devise a procedure for third parties to disclose their
funding sources.
GUIDELINES WHILE OPENING A BANK ACCOUNT:
 Due Diligence Process: Under “Know Your Customer” (KYC), a bank has
to carry out due diligence before opening any deposit account. The ‘due
diligence’ process involves the bank having adequate knowledge of the
person’s identity, occupation, sources of income, and location.
 Minimum Balance: For products like a savings bank account or a current
account, banks normally stipulate certain minimum balances to be
maintained. For people below the poverty line, banks encourage the
opening of ‘No-frills Accounts’, typically a special savings bank account
where no minimum balance requirement is required.
 Transparency: All such details regarding terms and conditions for
operation of the accounts and schedule of charges for various services
provided should be communicated to the prospective depositor while
opening the account. The transparency of charges levied include the
charges attached to issue of cheques books, additional statement of
accounts, duplicate passbook, folio charges and charges upon failure to
maintain minimum balance in the accounts.
 Eligibility: The criteria for a savings account and a current account are
similar, but while both the accounts can be opened by individuals, the
savings account cannot be opened by a firm. Term Deposit Accounts can
be opened by all categories of account holders.
 Permanent Account Number: Banks are required to obtain a Permanent
Account Number (PAN) from the prospective account holder or alternate
declarations as specified under the Income Tax Act.
  Operation of Joint Account: A joint account can be operated by a single
individual or by more than one individual jointly. The mandate for who
can operate the account can be modified with the consent of all account
holders.
 Power of Attorney: At the request of the depositor, the bank can
register mandate/power of attorney given by him authorizing another
person to operate the account on his/her behalf.
 Closure/renewal of deposits: In the absence of a mandate with regard
to closure of deposit account or renewal of deposit for further period on
the date of maturity, the bank will be at liberty to roll over the deposit
on due date.
 Nomination: A depositor authorizes someone who would receive the
money of his/her account when the depositor passes away. This is called
the nomination process.
PRECAUTIONS TO BE TAKEN BY A BANKER WHILE
OPENING A BANK ACCOUNT
1. Introduction: Before opening an account the banker should obtain
satisfactory introduction from the applicant. If a new account is opened
without introduction it may create problems for the bankers.
2. Signature Of The Customer: A banker must obtain specimen signatures on
account opening form and also on the card.
3. Importance Of Form: The account opening form is an important document it
must be filled neatly and correctly.
4. Personal Information About The Customers: All the time of opening an
account the banker should get the information about the character and capital
of the customers tactfully.
5. Opening With Cash: New account should be opened only with cash. In case
of cheque it may create any problem for the banker.
6. The Issuance Of A Cheque Book: Cheque book should not be issued to the
new customer unless there is a reasonable balance in the account.
Legal Aspects of Opening & Operation
of different types of A/C
A bank opens accounts for various types of customers. While opening the
accounts, the banker has to keep in mind the various legal aspects involved in
opening and operation of these accounts, as also the practices followed in
conducting these accounts. Normally the banks have to deal with the following
types of deposit customers:
Individuals
Proprietorship Firms
Partnership Firms
Companies
Trust
Executors & Administrators
Clubs and Associations
Cooperative Societies.
Opening of Accounts:
As the banker-customer relationship is a contractual relationship, all the
essential features of a valid contract must be present when a banker
opens an account. The actual formalities will differ depending on the
type of the customer. Certain formalities are common to all. These are:
The banker must ensure that the customer is competent to
contract.
The banker should obtain an account opening form, which should
be filled in all respects by the account holder.
The banker should also obtain his specimen signature for
verification in future of his signature in cheques, etc., signed by
him.
After the formalities are over, the banker should issue a cheque
book to the customer, indicating his account number. Customers
can be supplied with Pay-in Slip books for making deposits
Recent KYC guidelines require the banker to obtain the
photographs of the depositors/account holders, proof of identity
like copy of passport / driving license / voter’s ID card /
employment ID card / ward commissioner’s certificate / U.P
chairman’s certificate and proof of residence like electricity /
 Telephone / Municipal bills etc., and also transaction profile of
the account holder.

Accounts in the Name ofl Individuals:

The banker should ensure that the account is opened with cash and not with a
cheque, draft payable by some other bank or branch. This is to ensure against
the possibility of the very first cheque deposited being a stolen or forged
cheque. If the bank collects such cheque or draft, it will not have the
protection of Sec. 131 if the first deposit was not by way of cash, because the
banker-customer relationship was not established.
Mandates:
A bank account holder has a primary right to operate upon his account
maintained with the particular bank. No person other than the account holder
can order the bank to debit his account (except a competent court).
A mandate is an authority given by the account holder in favor of a third
person to do certain acts on his behalf. This is issued by an account holder with
a direction to his banker authorizing the person to operate the account on his
behalf.
 In case a customer wants his account to be operated by another person,
a mandate in writing to that effect together with the specimen signature
of the agent who is to operate the account should be obtained by the
banker.
 Power to draw and endorse cheques does not include the power to
overdraw the account. So, if a customer wishes to allow his agent to
overdraw the account , the mandate should clearly state this.
 It is unstamped letter signed by the account holder addressed /
submitted to the bank.
 The signature of the person so authorized should be appended in the
letter of mandate and the same should be verified by the
customer/account holder.
 A letter of mandate is generally issued for a short and temporary period.
 In case of joint account holders all the parties concerned must sign the
letter of mandate irrespective of operational instructions.
 A mandate comes to an end, on death, insanity, insolvency and
bankruptcy of the account holder.
 A mandate can be withdrawn at any time by the account holder.
  The instructions should be carefully noted in the ledger account of the
account holder and also in the specimen signature card/sheet.
 The mandate letter should be properly filed and securely kept. There
should be an updated index.
Those who can open an Account:
 Every person who is competent to contract
 Who is of sound mind
 Who is not disqualified from contracting by any law.
 Capable of understanding the contract and of forming a rational
judgment as to its effects upon his interest.
 Provided the bank is satisfied regarding the genuineness and is willing to
establish banking relations.

Operation:
 A special feature of banking business is that each and every transaction
of money with the customer is supported by a separate slip or
document.
 A customer is, therefore, required to make use of
a) Pay-in-slip for depositing money, and
b) cheques for withdrawing money from the bank.
 The Second obligation of the banker is to maintain the secrecy of his
customers accounts. This obligation is also not absolute. The banks are
permitted to disclose the status of the account of the customers in
certain circumstances.
 In those circumstances, where banks are required to disclose the
financial status, banks should take utmost care while submitting such
reports. Undue or irrelevant information should not be given. The
opinion should be brief and factual and should indicate that the
information is given in confidence and should be kept so by the
recipient.

Disclosures permitted by Law and practice

[Link] Law: A banker is justified to disclose any information about the
customer’s account when he is statutorily required to do so under
Income Tax Act
 Companies Act.
Banker’s books of evidence Act.
Foreign Exchange Regulations Act.
Money Laundering Prevention Act.
Bangladesh Bank Act
2. Under express or implied consent of the customer: When an account is
opened with the bank, there is an implied contract between the customer and
the bank that the later will not disclose information relating to his account
without his consent. If however, a customer permits, this information can be
disclosed.
3. Disclosure in the Bank’s interest: A banker can disclose information when it
is essential to protect his own interest, legally. For instance, if there is any
dispute between the customer and a banker, regarding balance standing in the
account of the customer or if there is a loan default, then the bank will be
justified in revealing the information to the guarantor or to a solicitor for
initiating legal proceedings in the court of law.
4. Disclosure in Public/National interest: A banker is justified in disclosing the
state of his customer’s account in the interest of the public. The following
grounds generally fall under this category:
a. Disclosure of the account where money is kept for extreme political
purposes.
b. Disclosure of the account of an unlawful association.
c. Disclosure of the account of a revolutionary body to avert danger to the
state.
d. Disclosure of the account of an enemy in times of war.
5. Common courtesy among bankers: Under the practices/usages in the
banking system (business) it is customary among the bankers, that whenever a
bank makes inquiries with another bank, such as, about proposed sureties or
acceptors, such information is shared. An implied consent of the customer is
presumed to exist therefore. However, such information is kept confidential at
both the ends and adequate precautions should be taken while furnishing such
information.
Opening & Operation of a Minor’s Account:
The banker can open a savings account. It will not be advisable to open a
current account of a minor since in case of an overdraft the minor does not
have any liability. The savings account may be opened in any of the following
ways:
a. In the name of minor himself, if he has attained at the age of 10 years and
can sign uniformly.
b. In the joint names of minor & his/her guardian.
c. In the name of guardian like as ‘X natural guardian of Y’.
Precautions to be taken:
 The banker should record the date of birth of the minor properly.
 The guardian should not be allowed to operate the account after
attaining a majority or after the minor’s death.
 In case the guardian dies before the minor attains having a joint account
or to be operated by the guardian only, the money should be paid by the
bank to the minor on attaining majority or to some person appointed by
the court as his guardian.
 If the minor dies, the amount of his/her credit balance is to be paid to
his/her next kin on the production of a succession letter or a letter of
administration.
 In case a banker is compelled to grant a loan to a minor he must see
that:
a) it is granted either for the necessaries for his/her life against sufficient
securities, or
b) against a joint promissory note in which one of the parties is an adult or
c) against an indemnity bond given by the adult.
Some privileges of a Minor guaranteed by Law:
 A contract entered into by a minor is void and that is not enforceable.
 Even if he borrows money by falsely representing himself as an adult, he
cannot be compelled to repay the loan since the contract is a void one.
 An adult, who gives a bill of exchange for the debt contracted during the
period of his infancy, can not be sued.
  A minor has the right to get back the securities pledged for the purpose
of securing a loan even without repaying the loan.
 A minor can never be appointed as a trustee.
 A minor can enjoy the benefits of a partnership firm, but he is not liable
for the debts of the partnership firm.
 A minor can act as an agent of an adult who has given the necessary
authority to him.
 Section 26 of the Negotiable Instrument Act.1881 permits a minor to
draw and endorse any Cheque, bill or promissory note. It will be valid
against all parties excepting a minor.
 A minor can be appointed as an executor, but he can commence his
work only after his coming of age.
 A guarantee given by a minor is not valid.
 A minor cannot be adjudged as an insolvent either on his own petition or
of others.
Law protects the minor because he is not matured enough to form a rational
judgment to things and some unscrupulous persons may take advantage of
his immaturity.
Lunatic Person:
 As per Section-12 of the Contract Act 1872, persons of unsound mind
are disqualified from entering into a valid contract. Although he can
enter into valid contracts during lucid intervals.
 However, no banker knowingly opens an account in a lunatic’s name.
But if an existing customer becomes insane, banker must immediately
stop the operation of the account till it receives a proof of his/her sanity
or gets an order of the court to the effect.
 However, the banker will not be responsible if it honours a cheque or bill
duly drawn, accepted or endorsed by the lunatic unless it is proved that
the bank knew his/her lunacy at the time of honouring or discounting.
Usually the court appoints a receiver when a customer becomes insane
and the banker can safely deal with that receiver.
Illiterate Person:
An illiterate person can open an account with the bank subject to following
conditions:
  Thumb impression should be obtained on the AOF & SS card in presence
of an authorized official.
 Two attested copies of recent photographs should be obtained &
attached with AOF & SS card.
 One or two identification marks should be noted on the AOF & SS card
with the proper authentication, and
 Finally a letter of undertaking shall be obtained from him to the effect
that he will not operate on the account unless he personally comes to
the bank & put his thumb impression on the cheque in presence of the
bank manager/ officer in charge.
Married Women:
There is no bar and a banker may open even a current account in the
name of a married woman.
But in case of allowing any overdraft in such account, banker must
ensure whether she has any separate estate or property in her own
name.
Woman’s husband cannot he made liable for any debt incurred by her
unless:
 She acts as agent of her husband.
 Personal guarantee is given by her husband.
 The debt has been incurred for purchasing some articles of her
necessities which the husband has not provided to her.
Pardansheen Women:
Since the identity of a pardansheen lady is not possible, bank may open such
account after being sure about her identity and observing certain formalities.
But it is always advisable not to entertain such request to open a/c in the name
of a pardansheen lady. A contract with pardanasheen lady is presumed to have
been induced by undue influence and therefore, a banker has to be extra
cautious while dealing with her.

Joint Accounts:
 A joint account is an account opened by two or more persons.
 The account opening form should be signed by all the joint account
holders.
 The names, addresses and other details of all of them should also be
obtained on the account opening form.
  The account holders should also indicate how the account is to be
operated – the banker should obtain specific directions as to one or
more of them will operate on the account.
 When a joint account is in the name of two persons, the operations may
be by:
 both jointly or by the survivor
 both jointly
 either or survivor
 former or survivor
 A joint account in the name of more than two persons may be operated
upon by:
• all of them jointly or by survivors of them jointly or by the last survivor
• any one of them or by more than one of them jointly or by one or more
of the survivors of them or by the last survivor.

Sole Proprietorship Firm:

• Account should be opened in the name of the proprietorship firm and to
be operated by the proprietor concerned or by any other person as per
mandate in absence of the proprietor.
• In case of the death of the proprietor the balance of the account be
payable to the nominee and in the absence of the nominee, to the
successor(s) on production of the succession certificate from the court.
• While opening of the account the owner of the sole proprietorship
concern is required to produce the following documents:
o Valid trade license
o Tax Identification Number (TIN)
o Mandate, if necessary
o Photograph
o Transaction profile.

Partnership Account:
• Partnership firm’s account cannot be opened in the name of an individual
partner.
• A banker should get a written request from all the partners for jointly
opening an account.
• Banker should go through the partnership deed and carefully study the
objects, capital, borrowing power etc. The banker should see that the
 firm is a registered one and business, names and addresses of all the
partners.
• The partners should give clear instruction as to the operation of the
accounts of the firm.
• Any partner has the right to stop payment of a cheque issued by any of
the partners.
• If there is any dispute among the partners regarding the operation of the
account, the operations should be stopped and fresh instructions
obtained.
• A partner has no authority to give a guarantee on behalf of the firm.

Company's A/c:
While opening A/c’s of companies banker should obtain & examine the
following documents:
• Certificate of Incorporation
• Certificate of Commencement of business (In case of Public Limited Co.)
• Memorandum & Article of Association
• List & address of all Directors
• Board's Resolution to open the account & the names of the person
authorized to operate the account. The chairman of the Board of
Directors should sign the resolution.
• Balance Sheet.
Mandate:
Along with resolution the banker must call for a mandate from the company
which will contain the following points:
• The names of persons authorized to operate the account and their
specimen signature must be specifically given. It is essential that the
signature on the Cheque must be expressed to be on behalf of the
company. Otherwise, the company may not be liable, only the directors
will be liable personally.
• The nature and the extent of the powers delegated to the authorized
persons must be laid down in the mandate. The banker should see
weather the authority given is extended to the transaction, advances,
securities and safe custody as well.
• Whenever the company wants to introduce any change in the operation
in the account, fresh resolution and mandate be given.
Trust Account:
• According to the Trusts Act, 1882, a ‘Trust’ is an equitable obligation
annexed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owner, or declared and accepted by him,
for the benefit of another, or of another and the owner.
• The person who reposes the confidence is called the author of the trust.
Trustee is the person in whom the confidence is reposed. The person for
whose benefit the trust is formed is called the beneficiary.
• A trust is usually formed by means of a document called the ‘Trust
Deed’.
• While opening an account in the names of persons in their capacity as
trustees the banker should take the following precautions:
 The banker should thoroughly examine the Trust Deed appointing the
applicants as the trustees. The Trust Deed contains the names of the
trustees, power vested in them for administering the trust property and
other terms and conditions.
 The trustees are authorized to act jointly and are not competent to
delegate their powers unless the Trust Deed authorizes them to do so.
 The banker should examine the trust deed to ascertain the powers and
functions of the trustees.
• In case of two or more trustees, the banker should ask for clear
instruction regarding the person or persons who shall operate the
account.
• In the absence of such instruction all the trustees must sign the cheques,
etc., because the estate is placed under their joint charge.
• If one or more of the trustees dies or retires, the authority vested in the
remaining trustees depends upon the provisions of the Trust Deed.
• When all the trustees are dead , new trustees may be appointed by the
court.
• The insolvency of a trustee does not affect the Trust property and the
creditor of the trustee cannot recover their claims from such property.
• The banker should take all possible precautions to safeguard the interest
of the beneficiaries of a trust, failing which he shall be liable to
compensate the latter for any fraud on the part of the trustee.
• The trustees may borrow money from the banker and pledge or
mortgage the Trust property only if the Trust Deed specifically confers
such power on them.
 • The banker should, therefore, grant loans to the trustee after thorough
examination of the borrowing powers as given in the Trust Deed.
Papers to be required to open Trust Account:
• Trust Deed copy for scrutiny of the rules regarding the opening and
operation of deposit account.
• Resolution for opening account by trustee Board stating Bank’s name.
• List of Trustees & signed Mandate.
• Resolution regarding operation of account.
• Account opening Form (AOF), Specimen signature card (SSC), Cheque
Requisition Form properly filled in.
Special Features of Trust Account:
• Trustee can open the account in the name of the trust or in the name of
the Trustees.
• Trust property to be controlled for the benefit of the beneficiary.
• Violation of Trust Deed/Rules by the Trustees is called Breach of trust.
• A/C will be operated as per delegation laid down in the trust Deed.
• No Trustee can delegate his power to 3rd party.
Breach of Trust:
• A banker should be very careful whenever an account of this type is
opened.
• It is so because, whenever something goes wrong the banker will be held
liable for not protecting the interest of the beneficiaries.
• If a banker comes to know that the funds are misapplied he can not
escape from his liability.
• A banker will be justified in dishonouring a cheque drawn by a trustee, if
a breach of trust is intended.
Operation:
• Account will be opened and operated jointly.
• Cash transactions should be done cautiously.
• Bankers should prefer open A/C in the name of Trust.
• In case of death, Lunacy, retirement, or change of trustee, new Trustee
will be appointed in writing. Trustees should have financial soundness.
• Bankers should have vigilant eye on ‘Breach of trust’.
• No transfer from Trust A/C to personal account.
 • Mark ‘Trust Account’ on Ledger boldly.
• No borrowing will be allowed without H.O approval.
• There should always be a clause in the mandate binding the trustees to
be jointly and severally liable to the bank for any liability incurred by
them in account.

Executors and Administrators Account:

Executors and administrators are persons who are appointed to conduct the
affairs of a person after his death. When a person known as testator (person
making the will) appoints another person to administer the estate of testator
in the event of his death through a ‘Will’ is known as an executor.
• Any alteration or addition in the original will might have been made in a
separate instrument called ‘codicil’ which also forms a part of the will.
• When an Executor is not named in the ‘will’ or if the person appointed
as executor dies or refuses to act or is incapable of acting, the court
appoints a person for the purpose. He is known as administrator.
• Both the executor and the administrator perform the same duties, i.e.,
to realise the assets of the deceased and to pay off his debts.
• The executor is appointed by the will. His powers and authority are
vested therein. He has to act according to the directions given in the will,
but he is required to obtain a probate (official confirmation of the will)
from the court.
• The administrator is appointed by the court through a letter of
administration and is directed, in the absence of the will, to settle the
affairs according to the provision of the law.
• The administrator derives his power from the letter of administration.
This letter may give full/limited power to deal with the estate.
• The banker should take the following precautions while dealing with the
executors and administrators:
 On the death of a customer, the banker must stop payments from
his account. The executor should be permitted to operate the
account of the deceased after he has obtained the probate from
the court.
 The administrator is authorised to do so after securing the letter
of administration.
 The banker should examine these documents before the
appointed person is permitted to operate the account.
 • An account in the name of an executor / administrator is opened in the
following style and the balance in the account of the deceased is
transferred to such account:

ABC executors (or administrators) to the estate of XYZ deceased:

In case two or more persons are appointed as executors or
administrators, they shall have joint interest in the estate of the
deceased. This is not divisible.
The banker should be very cautious in conducting the account of
executors / administrators so as to prevent them from misappropriating
the funds of the deceased.
Executors Account opening and operation:
a) Account may be opened after H.O approval.
b) Must produce grant of probate certified copy for scrutiny the name and
address of executors.
c) Identity of Executors to be ensured.
d) List of executors name with signature and account will be opened in official
capacity.
e) Executor’s power to open & operation of Banks account.
f) AOF/SSC/ Photo properly filled in.
g) Not to mix with personal account.
h) Mode of operation – jointly or all to sign.
i) After death/ retirement /lunacy new executors will be appointed as per
probate.
Administrators Account opening and operation:
• Account may be opened after H.O approval.
• Certified copy of letter of Administration will be obtained.
• Request letter for opening bank account.
• Account opening and operation as per letter of administration.
Administrator can only operate upon account.
• Mode of operation should be joint in case of several administrators.
 • AOF/SSC/ Photo properly filled in.
• Not to mix with personal account.
• Administrator can not delegate his power to third party.

When an administrator becomes insolvent or lunatic his appointment stands

terminated. A new Administrator is appointed under fresh letter of
Administration. On the death of administrator Court will appoint the new
one.

Government ,Local Bodies & corporations Account:

Every wing of govt. authority and Local authority shall make arrangement for
the proper administration of their financial affairs and shall secure that one of
their officers has responsibility for the administration of those affairs. Officers
deal these financial affairs through the opening of a bank account.
Opening and Operation:
• Before opening the account any Govt. or semi Govt. or local body a
certified copy of the STATUTE will be taken.
• Or, certified copy of any other Law/Regulations by which the body is
created and governed.
• Request letter for opening bank account.
• Copy of resolution is passed by the local authority authorizing an officer
to open bank account with the bank name and branch.
• Branch manager specially satisfies himself as regards the provision about
the dealings with the fund, opening, operation of the bank account in
the ‘Statute’.
• Name, style, and nature of account must be stated in the statute or
resolution.
• Any Govt. account will be opened and operated as per official capacity,
subject to the permission from the competent authority.
• Account of Regimental fund (Army account) should be opened and
operated as per the letter of authority from the ‘Controller of Military
Account’.
• Operation of account in contravention of ‘Statute’ will not be allowed.
• Cash transaction should be done cautiously. Pre advice should be taken
in case of cheque drawings.
 • In case of changing officer or office bearer new authorization letter will
be taken issued by competent authority.
• Monthly statement of account & quarterly balance confirmation to be
served.

Club, Societies Etc. : Bye laws, Resolution of the managing Committee,

Registration certificate, etc. and other usual formalities.

School, College, Madrasa etc.: Approved list of the managing committee,

Resolution of the managing committee to open account in a bank etc.

Closing of a Bank Account:

The relationship between banker and customer is a contractual relationship.
Like any other contract, therefore, it may be terminated as and when the
parties so desire. Moreover, the banker is under certain legislative provisions.
The position of banker regarding closing of customer’s account may be
summed-up as follows:
• Customer’s Request
• Unclaimed Deposit Account
• Death of customer
• Insanity of the customer
• Insolvency of the customer
• Undesirable customer
• Attachment order issued by the income Tax authorities
• On receipt of Garnishee Order.

Garnishee Order:
• Garnishee order refers to the order issued by a court attaching the funds
of the judgment debtor (i.e., the customer) in the hands of a third party
(i.e., the banker.)
• The term ‘garnishee’ refers to the person who has been served with the
order.
• This Garnishee proceedings comprise of two steps. As a first step
‘Garnishee Order Nisi’ will be issued.
• ’Nisi’ means ‘unless’. In other words, this order gives an opportunity to
the banker to prove that this order could not be enforced.
• If the banker does not make any counterclaim, this order becomes an
absolute.
 • This ‘Garnishee Order absolute’ actually attaches the account of the
customer.
• If it attaches the whole amount of a customer’s account, then, the
banker must dishonour the cheque drawn by that customer.
• He can honour his cheques to the extent of the amount that is not
garnished.
• Hence, the banker should go through the terms of the order very
carefully.

DIFFERENT TYPES OF
DEPOSITS/PRODUCTS/SERVICES
TERM DEPOSITS
Term Deposits is an investment instrument in which a lump-sum sum amount
is deposited at an agreed rate of interest for a fixed period of time, ranging
from 1 month to 5 years. Term Deposits can be availed at financial institutions
like Banks, Non-Banking Financial Companies (NBFC), credit unions, post offices
and building societies.

FEATURES:
 Fixed rate of interest: The rate of interest for term deposits are fixed
and are not subject to fluctuations in the market.
 Safety of investment: Since interest rates of the term deposit are not
affected by the changes in the economy, it is one of the safest
investment options available.
 Interest Payment: The investor has the option to choose to receive the
interest income either on maturity or periodically – monthly, quarterly
or yearly.
 Wealth Generation: The stable interest received on the investment
ensures that the investors’ wealth grows even during difficult times in
the market.
 Rollover: An investor who does not require their money on the maturity
of the term deposit has an option to roll over the deposit for a fresh
term. ‘Rollover’ refers to the reinvesting of maturity proceeds in a new
term deposit and adding on to the interest. So, an investor doesn’t have
to utilize their money as soon as the term deposit matures.
 Penalty on premature withdrawal: Since term deposits come with a
fixed tenor, it is considered ‘locked-in’. If the investor opts to withdraw
 from the deposit before the lock-in period ends they are liable to pay a
penalty to the financial institution along with lowered interest income.
 Loan against deposit: If in a contingent situation the investor needs
financial liquidity, they can avail a loan of up to 60-75% of the deposit
amount.
 Taxation on interest: Under the Income Tax Act, the interest earned on
the deposit is taxable income and can be subject to a Tax Deducted at
the Source (TDS).
MERITS:
 It’s low risk: A term deposit ensures your money will earn interest at a
fixed rate, for a fixed term. There’s little to no chance of losing your
money, so it’s a good option for cautious savers.
 It’s low maintenance: Once you lock your cash away in a term deposit,
there’s not a lot you can do with it until the term is up. So it makes for a
great out-of-sight-out-of-mind saving plan.
 No service or start-up fees: One of the best things about a term deposit
is that as long as you don’t withdraw early, it’s entirely fee free.
 Protected from slumps in the market: The fixed interest rate on a term
deposit means that even if market interest rates are falling a mile a
minute, your savings will keep earning the same level of interest.
 Impulse spending control: Are you a bit of an impulse spender? Once
your money is in a term deposit, hefty penalties apply for taking it out
early, so it can actually help to curb bad spending habits.
DEMERITS:
 Your money isn’t accessible: The number one term deposit rule is that
once your money is locked away, it’s hands off until the term ends! If
you need to withdraw your money from a term deposit early, you’ll wind
up paying a penalty fee, plus your interest rate will be reduced.
 No extra deposits: You’ll need to make a lump sum deposit when you
open your term deposit, and there’s no option to add to your savings as
you go. This might be a hassle for regular savers, but one way to combat
it is by having multiple term deposits with staggered maturity dates.
 Less flexibility: A term deposit is low risk - but the flip side is that it’s not
a very flexible savings option. Other products with comparable rates,
such as high interest savings accounts, offer much more in terms of
flexible features and options.
  No bonus interest: Your fixed interest rate may be secure, but on the
other hand, it means there’s no way to earn bonus interest on your term
deposit, like there is with a savings account.
 Rollover terms are often less competitive: If you forget to make plans
for your money after your term deposit matures, it could roll over into
another term. This rollover term often comes with a rock-bottom
interest rate attached, and you’ll have to pay the early withdrawal
penalty to get out of it.
 Won’t benefit from rises in market: Your fixed interest rate may not
look so hot if market interest rates rise and your savings are left behind
in the dust.

FIXED DEPOSITS:
As an investment instrument offered by banks and NBFCs (non-banking
financial companies), Fixed Deposit is a great way to grow your savings
with utmost safety.
It is one of the most preferred avenues that enables you to deposit a
lump sum amount with your financier, and choose a tenure as per your
convenience.
On completion of the pre-decided tenure, your deposit starts earning an
interest, throughout the chosen duration, as per the interest rate at
which you locked in your deposit.
FEATURES:
The returns on your deposit are assured and remain unaffected by
market fluctuations
FD interest rates offered by NBFCs are higher than FD rates offered by
banks
Fixed Deposit can be easily renewed, and you can also reap additional
rate benefits on renewing your deposits
Tax is deducted at source, from interest on Fixed Deposit as applicable,
as per the Income Tax Act, 1961.

ADVANTAGES:
 Assured rate of return: The major reason why people prefer investing
their funds in a fixed deposit is the assured rate of return. Once you
invest your funds in a fixed deposit account, you can be guaranteed of
receiving the stated rate of return. Banks publish the fixed deposit rate
of interest on their website and in bank branches which makes it easy
for a customer to ascertain how much return he will get. Banks also have
a fixed deposit interest calculator on their websites where a customer
can calculate the interest he will receive on investing a particular sum of
money for a particular period of time.
Tax threshold for interest: Banks are not mandated to deduct tax on any
interest until it crosses Rs. 10,000. This means unless the total interest
earned by a customer on different fixed deposits totals Rs. 10,000, the
bank will not deduct any tax. This provides comfort to small deposit
holders.
Flexible tenure: The tenure for a fixed deposit is flexible and depends on
the deposit holder. Each bank has their own minimum tenure rules
however, the final decision can be taken by the deposit holder. It is also
possible to decide whether to redeem the fixed deposit or to extend it
for the same period of time.
Easy liquidation: It is relatively easy to liquidate a fixed deposit. For FDs
booked online, they can be liquidated online via net banking as well.
Otherwise, most bank branches have a form to liquidate the FD.
Loans against fixed deposit: An FD is a dependable instrument to keep
in case of financial emergencies. Taking a loan against a fixed deposit is
very easy. You can take a loan up to 95% of the fixed deposit amount
depending on the bank. This makes it a dependable investment.
DISADVANTAGES:
Reducing interest rates: Even though fixed deposits have a lot of
advantages, the interest rates do not move in line with inflation. This
means in some cases, they may actually earn less than the inflation rate.
The interest rates for fixed deposits have been falling in recent times
which has reduced the attractiveness of this investment.
Locked in funds: Fixed deposits lock in your funds for a fixed duration.
These funds are not available for you to use unless you withdraw the
funds prematurely. Fixed deposits are not at all liquid and cannot be
converted into cash easily.
 Penalties on withdrawal: Banks charge penalty to the depositors who
withdraw their fixed deposits prematurely. This penalty is in the form of
a reduced rate of interest.
No tax benefit: The interest earned on fixed deposit is added to the
taxable income of the deposit holder. There is no deduction on any
interest earned. However, senior citizens get a deduction up to Rs.
50,000 on interest.
Fixed interest rate: The rate of interest on a fixed deposit remains the
same for the entire duration of the fixed deposit. Even if the rates
increase, the bank does not pay additional interest to the deposit holder.

RECURRING DEPOSITS
A recurring deposit is a special kind of term deposit offered by banks
which help people with regular incomes to deposit a fixed amount every
month into their recurring deposit account and earn interest at the rate
applicable to fixed deposits.
A Recurring Deposit, commonly known as RD, is a unique term-deposit
that is offered by Indian Banks.
FEATURES:
Recurring Deposit schemes aim at inculcating a regular habit of saving in
people
The minimum amount for deposits often varies from one bank to
another. You could invest with an amount as small as Rs. 1000.
The minimum period of deposit is six months, while the maximum
period of a deposit is 10 years
The rate of interest is equivalent to that offered for a Fixed Deposit.
Therefore, the interest rates are higher than Savings Account.
Premature withdrawals are However, depending on the bank, they may
allow you to close your account before the maturity period on certain
conditions.
ADVANTAGES:
A very good saving scheme for small investors like women and children.
Interest rate will be equal to fixed deposit interest rate.
Small deposit fetching a lump sum on maturity.
Saving for future contingency.
Loan is also available in case you need in exigency.
 Pass book is issued for your monitoring.
If not desired to continue, you will be paid by premature closing with
interest for the period deposit run.
You can give standing instruction for regular deposit so as to avoid bank
visits.
DISADVANTAGES:
Thinking of future exigency, usually customers have RD in mind and
reach to break it even on small needs.
On default of regular deposit you will be penalised based on instalment
amount and period.
You will face a penalty loss on premature closing.
It will be an exertion to visit for monthly deposit in case the customer
does not used to have sufficient balance in saving bank account as main
part of customers consists of ladies and children.

RE-INVESTMENT DEPOSITS
 A Reinvestment Deposit Plan basically allows you to reinvest the interest
earned on your deposit.
 A “reinvestment plan” refers to a Mutual Fund (MF) where one of the
options is to apply for a “dividend reinvestment plan”. Any dividend
declared by the MF is reinvested and is used in buying more units at the
NAV going at the time of reinvestment. So the units in your account
increase by that number.
FEATURES:
The interest on your deposit also earns interest.
You can avail loans of up to 90% on the principal and also on the interest
accrued.
You can close your deposit prematurely without any difficult.

DEMAND DEPOSITS
 A demand deposit account (DDA) consists of funds held in a bank
account from which deposited funds can be withdrawn at any time, such
as checking accounts.
 DDA accounts can pay interest on a deposit into the accounts but aren’t
required.
  A DDA allows funds to be accessed anytime, while a term deposit
account restricts access for a predetermined time.
FEATURES:
 Funds are payable on demand
 Funds can be interest bearing
 No eligibility requirements
 No limit on the number of withdrawals or transfers
 No maturity period
SAVINGS BANK ACCOUNT
A savings account is a basic type of bank account that allows you to deposit
money, keep it safe, and withdraw funds, all while earning interest. Savings
accounts offered by most banks, credit unions, and other financial institutions
are FDIC insured and typically pay interest on your deposits.
Features:
 Promote saving.
 There is no restriction on the number of deposits.
 Withdrawals are allowed subject to certain restriction.
 Can be opened by depositing Rs. 100 to Rs. 5000.
Advantages:
 Earn Interest: A savings account helps you earn interest on the
deposited amount. To attract new customers, banks now offer higher
interest rates and a host of other benefits such as discounts on locker
rentals, unlimited ATM transactions, and more. Moreover, some of the
banks also offer many different types of savings account to meet the
different needs of the customers.
 Safest Investment Option: One of the biggest advantages of saving
account is unlike most other investment options, a savings bank account
does not invest your money but still offers modest returns. All you need
to do is to deposit money in your savings account to take advantage of
this feature.
 Minimum Investment Amount: Browse through the different
investment options and you’ll see that a savings account is also the most
affordable. You are simply required to keep the minimum balance in
 your account to keep earning interest. This minimum deposit amount
can be different for every bank.
Disadvantages:
 Interest Rates Can Change: One important disadvantage of a savings
bank account is that the interest rates offered by the bank are variable.
This means that the bank has the right to make changes to the interest
rate. While the changes are generally minimal, it is possible that the
interest rate of a savings account now can be lower 6 months down the
line.
 Easy Access: While easy access to funds is seen as one of the most
important features of savings account, it can also work as a disadvantage
for some people. As these accounts allow you to access your funds
anytime you like, people are more tempted to spend. This can make
long-term savings challenging.
 Minimum Balance Requirement: When you open a savings bank
account, you’ll be required to maintain a minimum average balance in
your account. If you fail to maintain this balance, the bank charges a
penalty for the same. So, before opening an account, make sure that you
check the minimum balance requirements of the bank and always
maintain this balance to avoid the penalty.
CURRENT DEPOSIT ACCOUNT
Current deposit account is a type of savings deposit with no deposit term
specified. It can be used for personal transfer, exchange, outward and inward
remittance.
Features:
 Currency types including EUR, USD, RMB, GBP and so on ;
 Transfer and exchange between the customer's account and the current
deposit accounts of other depositors of the bank;
 Domestic and overseas remittance;
 Fees will be charged on account management according to the price
table in force

Advantages:
  Capable of handling large volumes of receipts and/or payments
dexterously, a current account carries out all business transactions
promptly and properly.
 It enables limitless withdrawals in line with the levied cash transaction
fees, if any.
 Cheques, pay-orders, or demand-drafts can be issued via a current
account for making direct payments to creditors.
 It enables banks to collect receipts on behalf of customers and credit the
same into the customer’s current account.
 Current account holder can enjoy overdraft (or short-term borrowing)
facilities.
 The credit-worthiness information of account holders is freely available
to creditors via inter-bank connections.
Disadvantages:
 The applicable rate of interest earned on the available balance is really
low.
 Most package accounts offer services at additional costs, thereby
increasing the overall operational burden.
 The involved paperwork and fine print serves to be lengthy and
confusing.
 Corporate business transactions usually attract huge fees.
 There is a limit on the amount of funds that can be withdrawn in a day.

DIFFERENCE BETWEEN SAVINGS ACCOUNT AND CURRENT

ACCOUNTS
Basis Savings Account Current Account
[Link] Meant for individuals who like Refers to a running account
to save for meeting their in which there is no limit on
 future financial requirements. the operation during a
working day.
[Link] To encourage savings of a To support frequent and
person. regular transactions.

[Link] for Individual Businessman or company.

[Link] Paid Not paid

[Link] Limited Unlimited.
s
[Link] Provided by banks Not issued by banks.
[Link] Not allowed Allowed.
8. Opening Fewer amounts are required. High amount is required.

CASA DEPOSITS
CASA stands for Current Account and Savings Account which is mostly used in
West Asia and South-east Asia. CASA deposit is the amount of money that gets
deposited in the current and savings accounts of bank customers. It is the
cheapest and major source of funds for banks. The savings accounts portion
pays more interest compared to current accounts. Banks offer mainly two
types of accounts. These could be term deposits- like fixed or recurring
deposits or non-term deposits - like current or savings accounts.

NRO, NRE AND FCNR ACCOUNTS

NRO ACCOUNT: A Non-Resident Ordinary (NRO) Account is a popular way for
many Non-Resident Indians (NRIs) to manage their deposits or income earned
in India such as dividends, pension, rent, etc. This account allows you to
receive funds in either Indian or foreign currency. However, only Indian
currency can be withdrawn as NRO Accounts are kept in Indian currency and
cannot be freely repatriated into any foreign currency.
Features:
 With an NRO Account, you are free to repatriate or transfer the interest
you earn on the principal amount deposited. You can also transfer the
 principal amount within specified limits. As per rules, you can transfer up
to USD 1 million in one financial year post payment of applicable taxes.
 The interest you earn on an NRO Account is taxable at 30%, deductible
at source. It is noteworthy that the income you earn in India, deposited
in an NRO Account can include rent, dividend, pension, etc.
 If your finances include your income earned in India and you want an
account to manage it within India, an NRO Account is an ideal option.
NRE ACCOUNT: The NRE account is an Indian rupee-denominated account,
offering complete security. These accounts can be in the form of savings,
current, recurring, or fixed deposits. The foreign currency you deposit into the
account is converted to INR.
Features:
 An NRE account can contain funds remitted from abroad, or obtained
from another NRE / FCNR account maintained in India.
 Funds can be transferred from an NRE account to an NRO account
without any restriction.
 An NRE account can be held jointly provided the other person is also an
NRI.
 The interest earned on deposits in an NRE account is exempt from tax in
the hands of the NRI.

DIFFERENCE BETWEEN NRO AND NRE ACCOUNTS

FCNR DEPOSITS
Foreign Currency Non-Resident or FCNR account is a fixed term account
opened by NRIs or PIOs with the purpose to transfer their money in foreign
currency to India.
An FCNR bank account is a fixed-term (minimum 1 year and a maximum of 5
years) account that can be opened by an NRI or a PIO to transfer their foreign
income in the same currency.
Features:
 Can be held jointly by an NRI.
 The account is fully repatriable.
 Principal amount and interest accrued are tax-free.
 A loan can be availed against the money in the account except for
agricultural or plantation, Re-lending, real estate, and speculative
investments.
 Nomination facility is available.

CREDIT SERVICES
Credit Services means the services provided by Bank to Cardholders in
connection with a Credit Product Program, and all customer service provided
by Bank to Cardholders in connection therewith, all as set forth in the
applicable Credit Agreement or this Agreement.
FUND BASED CREDIT: Fund Base Credit is the any credit facility which involves
direct outflow of Bank's fund to the borrower. Types:
Term Loan: A term loan is a loan from a bank for a specific amount that has a
specified repayment schedule and either a fixed or floating interest rate. A
term loan is often appropriate for an established small business with sound
financial statements.
Features:
 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.
 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 instalments.
 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.
 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.
Advantages:
[Link] 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.
Control: Since term loans represent debt financing, the interest of the equity
shareholders are not diluted.
[Link] point of view of 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:
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.
[Link] 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.
Leasing: A lease is a contract outlining the terms under which one party agrees
to rent property owned by another party. It guarantees the lessee, also known
as the tenant, use of an asset and guarantees the lessor, the property owner or
landlord, regular payments for a specified period in exchange.
Features:
  The lease finance is a contract.
 The parties to contract are lessor and lessee.
 Equipment are bought by lessor at the request of lessee.
 The lease contract specifies the period of contract.
 The lessee uses these equipment’s.
 The lessee, in consideration, pays the lease rentals to the lessor.

Overdraft: An overdraft is an extension of credit from a lending institution that

is granted when an account reaches zero. The overdraft allows the account
holder to continue withdrawing money even when the account has no funds in
it or has insufficient funds to cover the amount of the withdrawal.
Cash credit: A Cash Credit (CC) is a short-term source of financing for a
company. In other words, a cash credit is a short-term loan extended to a
company by a bank. It enables a company to withdraw money from a bank
account without keeping a credit balance. The account is limited to only
borrowing up to the borrowing limit.
Packing credit: Packing credit is basically a loan provided to exporters or sellers
to finance the goods’ procurement before shipment. The bank will make the
funds available to a letter of credit issued favoring the seller and a confirmed
order for selling the goods or services. The advance is provided to purchase
raw materials, process, manufacture, pack, market and transport the required
goods and services.
Retail/ Consumption Loan: A retail loan is given to an individual by a
commercial bank, a credit union, or a financial institution to purchase assets
like property, vehicles, consumer electronics, etc. Banks offer retail loans to
consumers to meet their personal needs.
Credit Cards: A credit card is a thin rectangular piece of plastic or metal issued
by a bank or financial services company, that allows cardholders to borrow
funds with which to pay for goods and services with merchants that accept
cards for payment. Credit cards impose the condition that cardholders pay
back the borrowed money, plus any applicable interest, as well as any
additional agreed-upon charges, either in full by the billing date or over time.
Some other fund based credit facilities are bill discounted, house building loan,
agriculture loan-farming or non-farming, consortium loan, lease financing, hire
purchase, import financing, payment against document.

DIFFERENCE BETWEEN OVERDRAFT AND CASH CREDIT

NON FUND BASED CREDIT: The Non-Fund based Credit Facilities are nature of
promises made by Banks in favour of a third party to provide monetary
compensation on behalf of their clients, where the lending bank does not
commit any physical outflow of funds. Types:
Letter of credit: A letter of credit is a letter from a bank guaranteeing that a
buyer's payment to a seller will be received on time and for the correct
amount. In the event that the buyer is unable to make payment on the
purchase, the bank will be required to cover the full or remaining amount of
the purchase.
Bank Guarantee: A bank guarantee is a guarantee from a lending institution
ensuring the liabilities of a debtor will be met. In other words, if the debtor
fails to settle a debt, the bank covers it. A bank guarantee enables the
customer, or debtor, to acquire goods, buy equipment or draw down loans,
and thereby expand business activity.
Buyer’s Credit: Buyer's credit is a short-term loan facility extended to an
importer by an overseas lender such as a bank or financial institution to
finance the purchase of capital goods, services, and other big-ticket items. The
importer, to whom the loan is issued, is the buyer of goods, while the exporter
is the seller.
Supplier’s Credit: Suppliers credit is a trade credit funded to the importer on
basis of Letter Of Credit (LC). Under the LC method of payment, the overseas
suppliers or financial institutions preferably from the seller's country finances
the importers at cheaper rates than the local source of funding, which are
close to Libor rates.

DIFFERENCE BETWEEN LETTER OF CREDIT AND BANK GUARANTEE

PAYMENT AND REMITTANCE SERVICES AND PRODUCTs
Cheque: Cheque refers to a negotiable instrument that contains an
unconditional order to the bank to pay a certain sum mentioned in the
instrument, from the drawer’s account, to the person to whom it is issued, or
to the order of the specified person or the bearer.
Types of cheques:
Open cheque: An open cheque is a cheque that is not crossed on the left
corner and payable at the counter of the drawee bank on presentation of the
cheque.
Bearer cheque: A bearer cheque does not have any name written on it, but
just the amount authorized for withdrawal. Bearer cheque can be transferred
by mere delivery; there's need of endorsement. In simple words a cheque
which is payable to any person who presents it for payment at the bank
counter is called 'Bearer cheque'.
Order Cheque: An order cheque is one that can only be paid to a particular
payee, who can only pass the cheque to another person by signing his or her
name behind it.
Crossed Cheque: A crossed cheque is a cheque that has been marked
specifying an instruction on the way it is to be redeemed. A common
instruction is for the cheque to be deposited directly to an account with a bank
and not to be immediately cashed by the holder over the bank counter.
//Self Cheque: A self-cheque is drawn when the drawer wishes to withdraw
money from the bank in cash for his use. This cheque can only be encashed in
the account holder's or the drawer's bank. This cheque must be used carefully
because if it is lost, another person may easily get it encashed by visiting the
drawer's bank.
State Cheque: Stale Cheque refers to a cheque which is expired because it is
held by the payee for too long. So, it cannot be honoured and is of no use to
the payee.
Post Dated Cheque: A post-dated check (or post-dated cheque) is a check
written with a future date. In other words, the date that appears on the check
is after the date when the check was written. Even with a future date
appearing on the check, the check could clear (be paid from) the bank account
prior to that date.
Multiple Cheques: It is a cheque drawn by a customer of the Bank in favour of
a person/entity named therein and is payable at par at all branches of the
Bank, subject to detailed terms and conditions as under. The payee can
present the cheque directly at any of our Core Banking branch or in clearing
through his bank.
DEMAND DRAFT:
A demand draft is a negotiable instrument similar to a bill of exchange. A bank
issues a demand draft to a client, directing another bank or one of its own
branches to pay a certain sum to the specified party. A demand draft can also
be compared to a cheque. However, demand drafts are difficult to
countermand.

DIFFERENCE BETWEEN DEMAND DRAFT AND CHEQUE

PAY ORDER OR BANKER’S CHEQUE:
Pay order is a financial instrument which is issued by the bank on customer’s
behalf giving an order to pay a particular amount to a particular person in a
same city. Payment orders are not negotiable and even this thing is printed in
words on the instrument. In pay order as well there is no chance of
dishonouring as the amount is already paid hence pay order is also a pre-paid
instrument. The validity of pay order is for 3 months from the day it has been
issued. Pay orders are also known as banker’s cheque.

DIFFERENCE BETWEEN PAY ORDER AND DEMAND DRAFT

COLLECTION SERVICES:
RTGS TRANSFER: The term real-time gross settlement (RTGS) refers to a funds
transfer system that allows for the instantaneous transfer of money and/or
securities. RTGS is the continuous process of settling payments on an individual
order basis without netting debits with credits across the books of a central
bank.
Features:
 Realtime online fund transfer.
 Used for high value transactions.
 Safe and secure.
 Reliable and backed by RBI.
 Immediate clearing.
 Funds credited on a one-on-one basis.
 Transactions executed on an individual and gross basis.
NEFT TRANSFER: National Electronic Funds Transfer (NEFT) is a mode of online
funds transfer that is introduced by the Reserve Bank of India (RBI). It quickly
transfers money between banks throughout India. A bank branch must be
NEFT-enabled for a customer to be able to transfer the funds to another party.
Features:
  NEFT is an electronic payment system that uses a secure mode of
transferring funds from one bank branch to another bank branch.
 There is no minimum or maximum limit of amount of funds that could
be transferred using NEFT.
 The remitter can track the NEFT transaction through the originating
branch.
IMPS TRANSFER: Immediate Payment Service (IMPS) is an instant payment
inter-bank electronic funds transfer system in India. IMPS offers an inter-bank
electronic fund transfer service through mobile phones. ... The sender requires
to know the bank account number and the Indian Financial System Code of the
beneficiary to transfer money.
Features:
 It is amongst the fastest and authentic ways to conduct inter-account
money transfers. Also, the Unified Payment Interface (UPI) is built on
this platform.
 IMPS is one of the safest and secure ways to send and receive money.
 IMPS works on both net banking and mobile banking platforms.
LOCAL CLEARING AND UPCOUNTRY
Local Cheque Collections involve collection of local instruments from various
locations on behalf of customers. Cheques payable in local clearing are
processed and credit is given based on local clearing at the drawee location.
The two variants offered here are:
 For cheques drawn and presented at ICICI Bank locations
 For cheques drawn and presented at a location where ICICI Bank has a
correspondent bank tie-up.
Upcountry Cheque Collections (UCC): Upcountry cheques are collected
through our branches and through a huge network of correspondent banks.
You can manage your cash flow by using our services to expedite your
collections. We also provide you with collection reports to help you monitor
the status of cheque clearing and to facilitate easy reconciliation of account
receivables. Three variants offered under this service are:
 Cheques presented at and drawn at ICICI Bank locations
 Cheques presented at and drawn at locations where ICICI Bank has a
correspondent bank tie-up
  Cheques presented at and drawn at a location where ICICI Bank has no
presence and no correspondent bank tie-up.
The Clearing Process: The Clearing house is a central place or office where the
representatives of all banks in a particular area meet and exchange cheques
and other instruments drawn on each other’s bank. The clearing system is a
working arrangement for clearance of cheques drawn on each other.
DROP BOX SERVICES:
Drop box services have been developed and implemented to extend
convenience to customers. It is a service where you can instruct your dealers
or other channel partners to drop cheques at any ICICI Bank ATM drop box for
making payments. The cheques dropped would be cleared at a pre-defined
frequency. Detailed and customised MIS can be provided for the facility.
ELECTRONIC CLEARING 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 instalment repayments, periodic investments in mutual funds, insurance
premium etc.

PORTFOLIO MANAGEMENT
Portfolio management is the art and science of selecting and overseeing a
group of investments that meet the long-term financial objectives and risk
tolerance of a client, a company, or an institution.
Portfolio management requires the ability to weigh strengths and weaknesses,
opportunities and threats across the full spectrum of investments. The choices
involve trade-offs, from debt versus equity to domestic versus international
and growth versus safety.
OBJECTIVES:
Liquidity: A commercial bank needs a higher degree of liquidity in its assets.
The liquidity of assets refers to the ease and certainty with which it can be
turned into cash. The liabilities of a bank are large in relation to its assets
because it holds a small proportion of its assets in cash. But its liabilities are
payable on demand at a short notice.
Safety: A commercial bank always operates under conditions of uncertainty
and risk. It is uncertain about the amount and cost of funds it can acquire and
about its income in the future. Moreover, it face two types of risks. The first is
the market risk which results from the decline in the prices of debt obligations
when the market rate of interest rises. The second is the risk by default where
the bank fears that the debtors are not likely to repay the principle and pay the
interest in time.
Profitability: One of the principle objectives of a bank is to earn more profit. It
is essential for the purpose of paying interest to depositors, wage to the staff,
dividend to shareholders and meeting other expenses. It cannot afford to hold
a large amount of funds in cash for that will mean forgoing income.
Conflict between the Objectives:
Liquidity vs. Profitability: Liquidity and profitability are very closely related.
When one increases the other also increases. There is also a direct relationship
between higher risk and higher return risk on the one hand endangers the
liquidity-- the firm, higher return on the other hand increases its profitability.
A company may increase its profitability by having a very high debt equity
ratio.
Solvency vs profitability: It is the difference between measuring a business
ability to use current assets to meet its short term obligations vs its long term
focus. Solvency improves when assets increase and liabilities decrease.
However, a company might improve solvency by selling some assets to pay
down debt. Increased owner equity improves solvency. Solvency also improves
with reinvestment of assets and capital in the business, avoidance of new debt
and proper care of existing assets. Although solvency is a prerequisite for
profitability, increased profitability improves solvency. Plan for improved
profitability by examining income statements and developing an action plan
that includes reducing business expenses, creating a marketing plan to
generate more customers and researching new markets.

THE SOLUTIONS:
The Real Bill Doctrine: The real bills doctrine or the commercial loan theory
states that a commercial bank should advance only short-term self-liquidating
productive loans to business firms. Self-liquidating loans are those which are
meant to finance the production, and movement of goods through the
successive stages of production, storage, transportation, and distribution.
The Shiftability Theory: The shiftability theory of bank liquidity was
propounded by H.G. Moulton who asserted that if the commercial banks
maintain a substantial amount of assets that can be shifted on to the other
banks for cash without material loss in case of necessity, then there is no need
to rely on maturities.
The Anticipated Income Theory: The anticipated income theory was
developed by H.V. Prochanow in 1944 on the basis of the practice of extending
term loans by the US commercial banks. According to this theory, regardless of
the nature and character of a borrower’s business, the bank plans the
liquidation of the term-loan from the anticipated income of the borrower. A
term-loan is for a period exceeding one year and extending to less than five
years.

CREDIT CREATION
Credit creation separates a bank from other financial institutions. In simple
terms, credit creation is the expansion of deposits. And, banks can expand
their demand deposits as a multiple of their cash reserves because demand
deposits serve as the principal medium of exchange.
Basic Concepts:
Bank as a business institution – Bank is a business institution which tries to
maximize profits through loans and advances from the deposits.
Bank Deposits – Bank deposits form the basis for credit creation and are of
two types:
 Primary Deposits – A bank accepts cash from the customer and opens a
deposit in his name. This is a primary deposit. This does not mean credit
creation. These deposits simply convert currency money into deposit
money. However, these deposits form the basis for the creation of
credit.
 Secondary or Derivative Deposits – A bank grants loans and advances
and instead of giving cash to the borrower, opens a deposit account in
 his name. This is the secondary or derivative deposit. Every loan crates a
deposit. The creation of a derivative deposit means the creation of
credit.
Cash Reserve Ratio (CRR) – Banks know that all depositors will not withdraw
all deposits at the same time. Therefore, they keep a fraction of the total
deposits for meeting the cash demand of the depositors and lend the
remaining excess deposits. CRR is the percentage of total deposits which the
banks must hold in cash reserves for meeting the depositors’ demand for cash.
Excess Reserves – The reserves over and above the cash reserves are the
excess reserves. These reserves are used for loans and credit creation.
Credit Multiplier – Given a certain amount of cash, a bank can create multiple
times credit. In the process of multiple credit creation, the total amount of
derivative deposits that a bank creates is a multiple of the initial cash reserves.
Techniques of Credit Creation:
[Link] habits of people: If people have the habit of using cheque, DD, bills
in their business over currency then banks have the ability to create more
credit as money keeps rotating in the banking system. That is why banks in the
advanced countries are able to create more credit. This is also one of the
reason why the Modi government encourages digital mode of payment over
the currency mode, apart from the reason of reducing the parallel economy.
[Link] of cash reserve to deposit: Banks are required to keep Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR). The smaller the amount of cash
reserve the more will be the power of banks to create credit.
[Link] policies of the central Bank: The monetary policies of the Central
Bank i.e. the Reserve Bank Of India (RBI) plays a huge role in effecting the
ability of commercial banks to create credit. The RBI uses a number of methods
to regulate the credit creation in the economy, some of them are: –
 Bank Rate: It is the rate at which RBI gives loans to or rediscounts the
bill of exchange of the commercial banks. This is also known as the repo-
rate. The bank rate and the rate of interest charged by the commercial
banks to its customer are inter-related.
 Open Market operations: It refers to the sale and purchase of securities
by the RBI in the money and capital markets. During inflation the RBI
sells its securities. Buyer of the securities pays the amount by
 withdrawing their deposits from the banks. This reduces the cash
holdings of the commercial banks and a reduction of cash reserve would
reduce the loans and advances given by them and hence reduce the
credit flow in the economy.
 Cash Reserve Ratio: Commercial banks are required to keep a portion of
the total deposits with the RBI as cash reserve. During inflation RBI
increases the CRR and during recession RBI reduces it.
ASSUMPTIONS OF CREDIT CREATION:
 The banks, while granting loans, do not give the amount in cash, instead
it credits the accounts of the customers with the amount of [Link]
 The customers do not withdraw the entire amount of loan.
 While drawing the money from his account he uses cheque system.
 The persons who are receiving the cheques against their claims from
others also deposit the money into their respective banks.
 The accounts are settled with mere book entries.
LIMITATIONS OF CREDIT CREATION:
Lack of Securities: Banks cannot expand deposits by granting loans and
advances unless proper securities are available. Crowther observes: “The bank
does not create money out of thin air; it transmutes other forms of wealth into
money.” The total volume of income- yielding securities available in the
country sets the overall limit to the process of credit creation.
The Business Environment: Loans are taken only when sound investment
opportunities are available. During recessions and depressions, deposits tend
to go down. The business situation in the country is an important factor which
determines the volume of credit.
Lack of Cash: The total amount of cash, available to the banking system limits
the volume of credit that can be created. Credit is based on cash. The banks
must keep a certain percentage of cash reserve. The total volume of credit
cannot ordinarily be larger than the total amount of cash available multiplied
by the customary reserve-ratio. The Central Banks control credit by measures,
like open market operations and variations of the reserve ratio, which affect
the quantity of cash in the hands of the banks and thereby influence their len-
ding policy.
The Habits of the People: The habit regarding the holding of cash can affect
credit creation. If liquidity-preference increases, there will be less cash in the
hands of the bank and they will be forced to lend less. In countries with an
under-developed banking system, the people tend to hoard cash. This reduces
the power of banks to create credit.
Leakages: In the chain of deposit creation, as shown in the example given
above, there may occur leakages. Some borrowers may keep a part of their
money in hand without putting it in a bank. The total volume of deposits will
then be lower than the maximum possible. A similar leakage may occur at the
bank’s vaults. A particular bank in the chain may choose to keep a higher
reserve ratio and lend less.
The Central Bank’s Policy: The policy regarding open market operations etc.
may affect the total cash reserves of the banking system and may make the
total created credit less or more than what it would otherwise be.

BANKING OMBUDSMAN SCHEME

Banking Ombudsman is a quasi judicial authority created in 2006, and the
authority was created pursuant to a decision made by the Government of India
to enable resolution of complaints of customers of banks relating to certain
services rendered by the banks. The Banking Ombudsman Scheme was first
introduced in India in 1995, and was revised in 2002. The current scheme
became operative from 1 January 2006, and replaced and superseded the
banking Ombudsman Scheme 2002. Presently the Banking Ombudsman
Scheme 2006 (As amended upto July 1, 2017) is in operation. The Banking
Ombudsman Scheme is an expeditious and inexpensive forum for bank
customers for resolution of complaints relating to certain services rendered by
banks. The Banking Ombudsman Scheme is introduced under Section 35 A of
the Banking Regulation Act, 1949 by RBI with effect from 1995.
Grounds of Complaint:
 Non-payment or inordinate delay in the payment or collection of
cheques, drafts, bills, etc.;
 Non-acceptance, without sufficient cause, of small denomination notes
tendered for any purpose, and for charging of commission for this
service;
 Non-acceptance, without sufficient cause, of coins tendered and for
charging of commission for this service;
 Non-payment or delay in payment of inward remittances ;
 Failure to issue or delay in issue, of drafts, pay orders or bankers’
cheques;
 Non-adherence to prescribed working hours;
 Failure to honour guarantee or letter of credit commitments;
 Failure to provide or delay in providing a banking facility (other than
loans and advances) promised in writing by a bank or its direct selling
agents;
 Delays, non-credit of proceeds to parties' accounts, non-payment of
deposit or non-observance of the Reserve Bank directives, if any,
applicable to rate of interest on deposits in any savings, current or other
account maintained with a bank ;
 Delays in receipt of export proceeds, handling of export bills, collection
of bills etc., for exporters provided the said complaints pertain to the
bank's operations in India;
 Refusal to open deposit accounts without any valid reason for refusal;
 Levying of charges without adequate prior notice to the customer;
 Non-adherence by the bank or its subsidiaries to the instructions of
Reserve Bank on ATM/debit card operations or credit card operations;
 Non-disbursement or delay in disbursement of pension to the extent the
grievance can be attributed to the action on the part of the bank
concerned, (but not with regard to its employees);
 Refusal to accept or delay in accepting payment towards taxes, as
required by Reserve Bank/Government;
 Refusal to issue or delay in issuing, or failure to service or delay in
servicing or redemption of Government securities;
 Forced closure of deposit accounts without due notice or without
sufficient reason;
 Closure of account without customer concern.
 Refusal to close or delay in closing the accounts;
 Non-adherence to the fair practices code as adopted by the bank; and
 Financial loss incurred to customer due to wrong information given by
bank official.
 Any other matter relating to the violation of the directives issued by the
Reserve Bank in relation to banking or other services.
  complaints from Non-Resident Indians having accounts in India in
relation to their remittances from abroad, deposits and other bank-
related matters.

SOCIAL RESPONSIBILITY OF BANKS:

CSR enhances eminent business insight. For instance, banks exist in a symbiotic
relationship with their external environments where their exchange with the
larger environment determines to a large extent how well they do in their
profit generation. Socially responsible business practices are indeed in the
interest of the firm and disapprove of imposing hidden social taxes on the
firms by undertaking socially responsible business practices which entails that
it is all about how well the firm exists in harmony with its external environment
and how this exchange of inputs and outputs with the environment
determines the quality of its operations.
 Construction of Toilets for schools under Swachh Bharat Abhiyan
 Solar street lights and Hand pump sets in Rural areas.
 Rain water harvesting mechanism / equipments agriculture / drinking
water / development of the area.
 Ambulances to Hospitals catering to economically challenged sections of
the society, rural areas, etc..
 Ultra-modern medical equipments to Family Planning Centres and other
hospitals.
 Wheel chairs to physically challenged sportspersons and others.
 Assistance for creating awareness against cancer and help for cancer
patients.
 Construction of classrooms / providing school kits for the economically
challenged students of the society.
 Support to orphaned / blind / differently able students / persons.
 Vehicles for institutions providing food / mid-day meal to government
/local bodies schools catering to poorer sections of the society.
 Contribution to Relief Funds for assistance of people affected by natural
calamities.
 Skill development training to SC/ST/OBC and under poor people.
 Assistance for welfare of defence personnel / families of bereaved ex-
service men.