UNIT 1 INDIAN BANKING SYSTEM

Banking basics – Structure of Indian banking system – Types of Banks – Role and functions of
Bank – Role of commercial banks as a Financial Intermediary – RBI and its role as the central
bank – Recent developments in Banking Sector: Core Banking, E-Banking – Impact of
Technology in Banking Sector – Payment Banks.

Introduction

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector
acts as the backbone of modern business. Development of any country mainly depends upon the
banking system. A bank is a financial institution which deals with deposits and advances and
other related services. It receives money from those who want to save in the form of deposits and
it lends money to those who need it. It deals with deposits and advances and other related
services like lending money to grow the economy. Banks act as bridge between the people who
save and people who want to borrow i.e., It receives money from those people who want to save
as deposits and it lends money to those who want to borrow it. The money you deposited in bank
will not be idle. It will grow by means of interest to your bank account they will earn interest in
return for lending out the same money.

History of Banking
The earliest example of banking activities has been recorded at various times in ancient
history. During 2000 BCE, in Babylonia, temples were the center of economic activity as trade
was limited to the internal borders. Both palaces and temples issued loans and wealth to the
people.
Ancient Greece was more sophisticated in their banking system as the lenders based in
temples not only provided loans but also deposited and offered change of money. Merchants
used goldsmiths vault to store their wealth and gold in exchange for a fee. With passing time,
goldsmiths started lending money to people. The first bank to open in the world is Banca Monte
deiPaschi di Siena, established by Giovanni Medici in 1397, Italy. This bank is headquartered at
Siena, Italy and continues to operate. Meanwhile, modern banking practices emerged in the 17th
and 18thcenturies.
 When it comes to ancient India, there is proof of banking activities in the form of the
lending system during the Vedic period. However, modern banking in India emerged in the last
decade of the 18th century when the very first bank of India originated. Bank of Hindustan was
established in the year 1770 and dissolved in 1829. General Bank of India was the second bank
to establish in India in the year 1786 and liquidated in 1791. It was Bank of Calcutta that was
incepted in the year 1806 and grew to become the largest bank of India that still exists in the
form of State Bank of India.
This was one of the three banks founded by presidency government of India. The other
two were Bank of Bombay and Bank of Madras. All three were merged into Imperial Bank of
India in 1921. Years after independence, it became State Bank of India. As for Reserve Bank of
India, it was established and registered under the Reserve Bank of India Act, 1934, in 1935. It
was in 1949 when Banking Regulation Act was enacted, RBI was made the apex bank that could
control, regulate and, monitor the banks of India.
Under the nationalization phase, the Indian banking industry was recognized as an
important instrument of development of economy, especially after the independence. During the
first phase of nationalization, the Government of India nationalized 14 banks in 1969. This
includes Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of
India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank,
Syndicate Bank, UCO Bank, Union Bank, and United Bank of India.
In the second wave of nationalization, six more banks were nationalized in the year 1980.
These banks were Punjab and Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank,
Andhra Bank, and New Bank of India.

Another landmark movement for the Indian Banking industry was liberalization in the
1990s. During this time, the government opened the economy for private and foreign banks.
These banks were termed as New Generation tech-savvy banks. This move along with
technological development and rapid growth of the Indian economy caused a massive
transformational shift in the banking sector. Banks started adopting technology and opened itself
to new opportunities.

In 1984, MICR technology was introduced. In the year 1988, the computerization of
banks started. Since then the industry has experienced massive technological upliftment. There
has been a digital revolution of sorts that has changed Indian banking system from conventional
banking to convenient banking. Over the decades, banks have developed enormously with the
help of information technology and artificial intelligence.
Recently, Indian Government created another milestone in the development of Indian
banking industry by launching online payment systems United Payments Interface (UPI) and
Bharat Interface for Money (BHIM) by National Payments Corporation of India (NPCI). Today,
banks in India aim to provide fast, accurate, and quality banking experience to their customers
with the help of internet banking and online banking.
Origin of the word ‘Bank’

The word Bank is derived from

⚫ Greek –Banque

⚫ French – Banke means chest(deposits)

⚫ German – Banck means heap or mound (a group/collection ofthings

⚫ Italians - Banco means accumulation of money orStock

It referred to a bench for keeping, lending and exchanging of money or coins in the market place
by money lenders and money changers.

Bank - Meaning

A bank is a financial institution which deals with deposits and advances and other related
services. It receives money from those who want to save in the form of deposits and it lends
money to those who need it. It deals with deposits and advances and other related services like
lending money to grow the economy. Banks act as bridge between the people who save and
people who want to borrow i.e., It receives money from those people who want to save as
deposits and it lends money to those who want to borrow it. The money you deposited in bank
will not be idle. It will grow by means of interest to your bank account they will earn interest in
return for lending out the same money to borrowers. This would ensure smooth money flow to
develop our economy.
Banking - Definition

Chamber’s Twentieth century Dictionary defines a bank as, “an institution for the keeping,
lending and exchanging etc. of money”.

According to Banking Regulation Act, “Banking means the accepting for the purpose of
lending or investment of deposits of money from the public, repayable on demand or otherwise
and withdrawable by cheque, draft, and an order orotherwise”.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out
on customer's order."

Prof. Kent defines a bank as, “an organization whose principal operations are concerned with
the accumulation of thetemporarily”.

Section5 (b) of Banking Regulation Act, 1949 (BR Act): According to BRAct. “Banking means
accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.”
“Banking Company “means any company which transacts the business of banking in
[Link], 2013 and includes a foreign
company within the meaning of thatAct.

Difference between Bank and Banking

[Link]. Factors Bank Banking

1 Nature Bank is a financial intermediary Banking is the summation of all
institution activities of bank.
2 Organizational Banking may be sole Banking has no Organogram
Structure proprietorship, partnership or any
other form of organization
3 Functions Bank performs the banking Collection of deposits, granting
functions loans etc is the functions of
banking.
4 Liability Banker is liable for the Bank’s Bank is liable for the banking
 activities activities.
5 Success Success of bank depends on the The success of banking depends on
efficiency of the banker the size and for of the bank.
6 Relationships Bank makes relationship with the Banking make relationship
Customers. with bank
7 Dissolution The dissolution of bank is done by When a bank dissolve then the
the local banking law banking activities end.
8 Dependency Bank is dependent on banker Banking is depended on the bank
9 Initiation Banker initiates bank Bank initiates Banking
10 Entity As a financial institution it has a Banking has no separate entity. It is
separate entity based on the entity of the bank.

Form and business in which banking companies may engage

(1) In addition to the business of banking, a banking company may engage in any one or more of
the following forms of business, namely,-

(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon
or without security; and drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bill of lading, railway
receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit, travelers' cheques
and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of
foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms
of securities on behalf of constituents or others; the negotiating of loan and advances; the
receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise;
the providing of safe deposit vaults; the collecting and transmitting of money andsecurities;

(b) acting as agents for any government or local authority or any other person or persons; the
carrying on of agency business of any description including the clearing and forwardingof
goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of
customers, but excluding the business of a 30[Managing Agent or Secretary and Treasurer] of a
company;

(c) contracting for public and private loans and negotiating and issuing thesame;

(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying
out of any issue, public or private, of State, municipal or other loans or of shares, stock,
debentures or debenture stock of any company, corporation or association and the lending of
money for the purpose of any suchissue;

(e) carrying on and transacting every kind of guarantee and indemnitybusiness;

(f) managing, selling and realizing any property which may come into the possession of the
company in satisfaction or part satisfaction of any of itsclaims;

(g) acquiring and holding and generally dealing with any property or any right, title or interest in
any such property which may form the security or part of the security for any loans or advances
or which may be connected with any suchsecurity;

(h) undertaking and executingtrusts;

(i) undertaking the administration of estates as executor, trustee orotherwise;

(j) establishing and supporting or aiding in the establishment and support of associations,
institutions, funds, trusts, and conveniences calculated to benefit employees or ex-employees of
the company or the dependents or connections of such persons; granting pension and allowances
and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent object or for any exhibition or for any public, general or usefulobject;

(k) the acquisition, construction, maintenance and alteration of any building or works necessary
or convenient for the purpose of thecompany;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or
turning into account or otherwise dealing with all or any part of the property and rights of the
company;

(m) doing all such other things as are incidental or conducive to the promotion or advancement
of the business of thecompany;

(o) any other form of business which the Central Government may, by notification in the Official
Gazette, specify as a form of business in which it is lawful for a banking company to engage.

(2) No banking company shall engage in any form of business other than those referred to in sub-
section(1).

Characteristics/Features of banks

(a) Dealing in money – Bank is a financial institution which deals with other people’s
money [Link] given bydepositors.
(b) Individual/Firm/Company – A bank may be a person, firm or a company. A banking
company means a company which is in the business ofbanking.
(c) Acceptance of Deposit – A bank accepts money from the people in the form of deposits
which are usually repayable on demand or after the expiry of a fixed period. It gives
safety to the deposits of its customers. It also acts as a custodian of funds of its
customers.
(d) Giving Advances – A bank lends out money in the form of loans to those who require it
for differentpurposes.
(e) Payment and Withdrawal – A bank provides easy payment and withdrawal facility to
its customers in the form of cheques and drafts. It also brings bank money in circulation.
This money is in the form of cheques, draftsetc.
(f) Agency and Utility services – A bank provides various banking facilities to its
customers. They include general utility services and agencyservices.
(g) Profit and Service Orientation – A bank is a profit seeking institution having service
orientedapproach.
 (h) Ever increasing functions – Banking is an evolutionary concept. There is continuous
expansion and diversification as regards the functions, services and activities of abank.
(i) Connecting Link – A bank acts as a connecting link between borrowers and lenders of
money. Banks collect money from those who have surplus money and give the same to
those who are in need ofmoney.
(j) Banking Business –A bank’s activity should be to do business of banking which should
not be subsidiary to any otherbusiness.
(k) Name Identity – A bank should always add the word ‘bank’ to its name to enable people
to know that it is a bank and that it is dealing inmoney.
Importance of Banks

Importance of Banking System

Before the banking system originated, banking activities were performed by merchants, money
lender, and individuals. This was certainly not the best way to handle currency and people’s
personal wealth. The system lacked regulations and standardization making general public
vulnerable to debauchery and fraud. Therefore, there was an urgent need of organized banking
sector that will enable smooth functioning of the economy and safe way to handle money.
Additionally, a well-organized banking system provides:
(a) Money for the economic growth of the country.
(b) It is the main pillar of the financial sector of the country.
(c) It offers a safe place to the individuals or group of individuals to deposit their wealth and
keep it secure.
(d) It offers loans for the personal or developmental purpose to dealers, households, small
and large enterprises.
(e) It provides government money and power to carry out development work.
(f) To equally distribute the money to the citizens of the country and prevent the focus of
financial power in the hands of a few.
(g) It helps in implementing monetary policies.
(h) It ensures financial stability in the country.
(i) It provides financial assistance to the industrial sector of the economy.
(j) It helps in generating employment opportunity.
(k) In India, it plays a major role in providing assistance to the agricultural sector.
 (l) It ensures balanced economic development of the country.
(m) It enables capital formation and promotes the habit of saving.
(n) And provides finance for trade and industries that is essential to our
economic development.
Scope for Banking

(a) Banking activity is useful for trade and Industry

(b) Distributors & protectors of liquid capital

(c) Money and precious metals can be kept safe

(d) Provides credit facility to customers

(e) It encourages the habit of saving

(f) It meets the financial needs of small scale businesspeople.

(g) It also provides payment settlements through cheque, pay orders, DD, debit and
credit cards etc.

(h) Rural banks provide financial support for agriculture, cottage industries and to buy
the raw materials etc.

(i) Regional rural banks provide credit facilities to small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs.

Various types of Banking

There are several different types of Banking, all serving different types of needs of the
customers. In this eBook, we will learn about various types of Banking and relevance of each
type.

(a) Branch Banking:

• Branch banking is engaging in banking activities such as accepting deposits or

extending loans at facilities or locations away from a bank's home office orheadquarters.
 • Branch banking allows a financial institution to expand its services to an area outside of the
home location, functioning as an extension of the home location. It can be a more cost-
effective approach because not all the locations are required to offer the same levels of
services as the home location, allowing smaller offices to provide key services while larger
locations provide additionalservices.

• The advantage of branch banking is that it helps in better management, more inclusion and
riskdiversification.

• The disadvantage of branch banking is that it might encourage outside localinfluences.

(b) Unit Banking:

• In unit banking, all the operations are performed from a singlebranch.

• It is a limited way of banking where banks operate only from a single branch or a few branches
in the same area taking care of the local population of thatarea.

• The size of the unit banks is small as compared to branchbanking.

• Due to the small size of the Unit Banks, decision making is very fast as the management
enjoys more autonomy and discretionary powers at theirdisposal.

• Due to the single unit of the Bank, the risks are notdiversified.

• A customer having an account in a specified branch must undergo all banking activities
through that branch.

(c) Mixed Banking:

• Mixed Banking is the system in which banks undertake activities of commercial and
investment bankingtogether.

• It can also be described as the dual functioning of investment banking and commercial banking.
These banks give short-term and long-term loans to industrial concerns. Industries don’t have to
run to different places for differential financial needs. Mixed Banking thus promotes rapid
industrialization.
• Mixed Banking may however pose a grave threat to liquidity of a bank and lead to baddebts.

4. Wholesale Banking:

• Wholesale banking involves banking services for high net-worth clients like corporate,
commercial banks, mid-size companiesetc.

• It is provided by banks to organizationslike Corporate Clients, Institutional Customers (such as

pension funds & government agencies), International Trade Finance Businesses, Medium Scale
Companies, Mortgage Brokers, Real Estate Developers and Investors and services offered to
other banks or financialinstitutions.

5. RetailBanking:

• Retail banking means where banking transactions are held directly with customers. The Bank
provides all kinds of personal banking services like savings accounts, current accounts,
transactional accounts, mortgages, personal loans, debit and credit cards etc. to the customers
directly.

• Retail banking is the type of banking that is visible to generalpublic.

6. UniversalBanking:

• Universal banking is a system of banking under which big banks undertake a variety of banking
services like commercial banking, insurance, investment banking, merchant banking, mutual
fundsetc.

• It involves providing all the above services to the customers under one roof by financial experts
who can handle multiple financialproducts.

• This makes the banking operations economical and boosts investor confidence. However, if
these kinds of banks fail, it costs huge losses as well as causes a huge dip in consumer
confidence.

• The concept of Universal Banking was conceptualized by R.H. Khan inIndia.

7. RelationshipBanking:

• In Relationship Banking, the customer needs are understood by the banks and then appropriate
banking services are offered to the customers according to theirneeds.

• This type of Banking helps banks to gather important information about the borrowers which in
turn helps them to determine the creditworthiness of thecustomers.

8. VirtualBanking:

• Virtual Banking refers to a banking system wherein the Banking operations are performed
online.

• One of the biggest advantages of Virtual Banking is that Banking operations become very cost
effective as banks don’t need to have physicaloffices.

• Low Banking operations costs are passed on to the customers by the Banks in the form of
waiver of fee or offering higher rate of interests onaccounts.

• The Indian markets still have fears instilled in them with respect to virtual banking and they
consider branch banking more suitable as they can visit the branch and be assured of their
transactions.

9. ChainBanking:

• Chain banking system refers to the type of banking wherein a group of persons come
together to own and control three or more independently charteredbanks.

• Despite of common control and ownership, each of the banks can maintain their individual
existence andoperations.

• The banks in the chain are assigned different functions so that there is no overlapping
of interests and no loss in profits of the respectivebanks.

10. CorrespondentBanking:

• Correspondent Banking is considered the most profitable way of doing business as the
Banks do not have any physical presence or any limited permissions in respect to
Bankingoperations.
• Correspondent banks thus act as banking agent for a home bank and provide various banking
services to customers where otherwise the home bank does notoperate.

• It helps Banks’ customers perform banking operations and transactions at any place with ease
without the physical presence of their Bank branchesthere.

11. SocialBanking:

• Social Banking refers to the system of Banking wherein Banking Services are oriented towards
the public welfare and financial inclusion of the unbanked population, poor and vulnerable
section of thesociety.

The Central Bank of India on the directions of the Government of India has taken some
commendable initiatives for the financial inclusion of the unbanked populace living in the
remotest areas of the country.

12. Narrow Banking:

• The system of narrow banking involves mobilizing the funds towards risk-free investments
mostly governmentsecurities.

• It can be considered the opposite of UniversalBanking.

13. Islamic Banking:

• Islamic Banking also known as non-interest Banking is a banking system purely based on the
principles of Islam (Sharia Law) and is guided by Islamic law.

• Two fundamental principles of Islamic banking are the sharing of profit and loss and the
prohibition of the collection and payment of interest by lenders and investors. Islamic law
prohibits collectinginterest.

14. ShadowBanking:

• Shadow Banking is a system of Banking wherein Non-Banking Financial Entities provide

banking services like those of commercialBanks.
• These Banking Institutions carry out regular banking functions but do so outside the
traditional system of regulated depositoryinstitutions.

15. Para-Banking:

• In this system of Banking, Banks perform banking activities different from the regular banking
activities (deposit and withdrawal ofmoney).

• Banks under Para-Banking can take up activities by setting upsubsidiaries.

 Structure of Indian banking system

RESERVE BANK OF INDIA

SCHEDULED BANKS
NON-SCHEDULED BANKS

Co-operative Micro Finance Development Financial

Commercial
Banks Development Institutions Institution
Banks
Banks

State
SBI andits
Cooperative
Associates IFCI

Nationalised Central
Banks Cooperative NABARD

Primary
Private Sector Agricultural EXIM
Banks (Indian Credit Societies
& Foreign)
NHB

Regional rural
Banks SIDBI

MUDRA
Central Banking – Meaning & Definition

A Central bank is an independent national authority that conducts monetary policy,

regulates banks and provides financial services including economic research. Its goals are to
stabilize the nation’s currency, keep unemployment and prevent inflation.

An institution charged with the responsibility of managing the expansion and contraction
of the volume of money in the interest of general public welfare. - Prof Kent

One which constitute the apex of the monetary and banking structure of its country - Prof
.M.H. DeKock

Establishment

The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, [Link] Central Office of the Reserve Bank was
initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated. Though originally privately
owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of
India.

Preamble

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve
Bank as:

"to regulate the issue of Bank notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage; to have a modern monetary policy framework to meet the
challenge of an increasingly complex economy, to maintain price stability while keeping in
mind the objective of growth."

As per the RBI Act, the organizational structure of the bank consists of the Central
Board and the LocalBoard
 THE CENTRAL BOARD-The central board comprises 20 members asfollows:

a. One governor who is the chairman of the central board appointed by the central governor for a
period of fiveyears.

b. Four Directors nominated by the central government from each of the four local boards, four
deputy governors appointed by the centralgovernment.

c. Four Directors nominated by the central government from each of the four local boards. Ten
directors nominated by the central government representing various field from Industry,finance
andco-operations.

d. One government official nominated by the central government usually the secretary, Ministry
ofFinance.

LOCAL BOARD - The RBI has four local boards in tour regions-the Western, the Eastern the
Northern and the southern parts of India. These local boards are headquartered at Mumbai,
Kollkata, New Delhi and Chennai respectively. The Central government nominates five
members on each local board for tenure of four years. The chairman of each local board is
elected from amongmembers.

Functions: To advise the Central Board on local matters and to represent territorial and economic
interests of local cooperative and indigenous banks; to perform such other functions as delegated
by Central Board from time totime.

Board for Financial Supervision

The Reserve Bank of India performs the supervisory function under the guidance of the Board
for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee
of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India
(Board for Financial Supervision) Regulations,1994.
Objective

The primary objective of BFS is to undertake consolidated supervision of the financial sector
comprising Scheduled Commercial and Co-operative Banks, All India Financial Institutions,
Local Area Banks, Small Finance Banks, Payments Banks, Credit Information Companies, Non-
Banking Finance Companies and Primary Dealers.

Constitution

The Board is constituted by co-opting four Directors from the Central Board as Members and is
chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members.
One Deputy Governor, traditionally, the Deputy Governor in charge of supervision, is nominated
as the Vice-Chairman of the Board.

In April 2018, a Sub-committee of the Board for Financial Supervision was constituted, under
Para 11 & 12 of the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.
The Sub-committee performs the functions and exercises the powers of supervision and
inspection under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, in
relation to Payments Banks, Small Finance Banks, Local Area Banks, small Foreign Banks,
select scheduled Urban Co-operative Banks, select Non-Banking Financial Companies and
Credit Information Companies. The Sub-committee is chaired by the Deputy Governor in charge
of supervision and includes the three Deputy Governors and two Directors of the Central Board
asMembers.

BFS Meetings

The Board is required to meet normally once every month. It deliberates on inspection reports,
periodic reviews related to banking and non-banking sectors and policy matters arising out of or
having relevance to the supervisory functions of the Reserve Bank.

The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of
Non-Banking Supervision (DNBS) and Department of Co-operative Bank Supervision (DCBS)
and gives directions on regulatory and supervisory issues.
 Functions

Some of the initiatives taken by the BFS include:

i. Fine-tuning the supervisory processes adopted by the Bank for regulatedentities;

ii. Introduction of off-site surveillance system to complement the on-site supervision of regulated
entities;
iii. Strengthening the statutory audit processes of banks and enlarging the role of auditors in the
supervisoryprocess;
iv. Strengthening the internal defences within supervised institutions such as corporate governance,
internal control and audit functions, management information and risk control systems, review of
housekeeping inbanks;
v. Introduction of supervisory rating system for banks and financialinstitutions;
vi. Supervision of overseas operations of Indian banks, consolidated supervision ofbanks;
vii. Technical assistance programme for cooperativebanks;
viii. Introduction of scheme of Prompt Corrective Action Framework for weakbanks;
ix. Guidance regarding fraud risk management framework inbanks;
x. Introduction of risk based supervision ofbanks;
xi. Introduction of an enforcement framework in respect ofbanks;
xii. Establishment of a credit registry in respect of large borrowers of supervised institutions;and
xiii. Setting up a subsidiary of RBI to take care of the IT requirements, including the cyber
security needs of the Reserve Bank and its regulated entities,etc.

Legal Framework

I. Acts administered by Reserve Bank ofIndia

 Reserve Bank of India Act,1934

 Public Debt Act, 1944/Government Securities Act,2006
 Government Securities Regulations,2007
 Banking Regulation Act,1949
 Foreign Exchange Management Act,1999
 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (ChapterII)
 Credit Information Companies(Regulation) Act,2005
 Payment and Settlement Systems Act,2007
o Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and
BPSS Regulations,2008
o The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of2015
 Factoring Regulation Act,2011

II. Other relevantActs

 Negotiable Instruments Act,1881

 Bankers' Books Evidence Act,1891
 State Bank of India Act,1955
 Companies Act, 1956/ Companies Act,2013
 Securities Contract (Regulation) Act,1956
 State Bank of India Subsidiary Banks) Act,1959
 Deposit Insurance and Credit Guarantee Corporation Act,1961
 Banking Companies (Acquisition and Transfer of Undertakings) Act,1970
 Regional Rural Banks Act,1976
 Banking Companies (Acquisition and Transfer of Undertakings) Act,1980
 National Bank for Agriculture and Rural Development Act,1981
 National Housing Bank Act,1987
 Recovery of Debts Due to Banks and Financial Institutions Act,1993
 Competition Act,2002
 Indian Coinage Act, 2011 : Governs currency andcoins
 Banking SecrecyAct
 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act,2003
 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,1993
Functions of RBI

Major functions of the RBI are as follows:

I. Traditional Functions Traditional functions are those functions which every central bank of
each nation performs all over the world. Basically these functions are in line with the objectives
with which the bank is set up. It includes fundamental functions of the Central Bank. They
comprise the followingtasks.

1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency notes
are legal tender issued by the RBI. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500,
and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these
currency notes for other denominations. It issues these notes against the security of gold bullion,
foreign securities, rupee coins, exchange bills and promissory notes and government of India
bonds.

2. Banker to other Banks: The RBI being an apex monitory institution has obligatory powers to
guide, help and direct other commercial banks in the country. The RBI can control the volumes
of banks reserves and allow other banks to create credit in that proportion. Every commercial
bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in
urgency these banks approach the RBI for fund. Thus it is called as the lender of the lastresort.

3. Banker to the Government: The RBI being the apex monitory body has to work as an agent of
the central and state governments. It performs various banking function such as to accept
deposits, taxes and make payments on behalf of the government. It works as a representative of
the government even at the international level. It government accounts, provides financial advice
to the government. It manages government public debts and maintains foreign exchange reserves
on behalf of the government. It provides overdraft facility to the government when it faces
financialcrunch.

4. Exchange Rate Management: It is an essential function of the RBI. In order to maintain

stabilityintheexternalvalueof rupee,[Link]
it needs to prepare and implement the foreign exchange rate policy which will help in attaining
the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand
and supply of the foreign currency (U.S Dollar) close to each other.

5. Credit Control Function: Commercial bank in the country creates credit according to the
demand in the economy. But if this credit creation is unchecked or unregulated then it leads the
economy into inflationary cycles. On the other credit creation is below the required limit then it
harms the growth of the economy. As a central bank of the nation the RBI has to look for growth
with price stability. Thus it regulates the credit creation capacity of commercial banks by using
various credit controltools.

6. Supervisory Function: The RBI has been endowed with vast powers for supervising the
banking system in the country. It has powers to issue license for setting up new banks, to open
new branches, to decide minimum reserves, to inspect functioning of commercial banks in India
and abroad, and to guide and direct the commercial banks in India. It can have periodical
inspections an audit of the commercial banks inIndia.

II. Developmental / Promotional Functions of RBI Along with the routine traditional
functions, central banks especially in the developing country like India have to perform
numerous functions. These functions are country specific functions and can change according to
the requirements of that country. Some of the major development functions of the RBI are given
below.

1. Development of the Financial System: The financial system comprises the financial
institutions, financial markets and financial instruments. The sound and efficient financial system
is a precondition of the rapid economic development of the nation. The RBI has encouraged
establishment of main banking and non-banking institutions to cater to the credit requirements of
diverse sectors of theeconomy.

2. Development of Agriculture: In an agrarian economy like ours, the RBI has to provide special
attention for the credit need of agriculture and allied activities. It has successfully rendered
service in this direction by increasing the flow ofcredit to this sector. It has earlier the
Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National
Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

3. Provision of Industrial Finance: Rapid industrial growth is the key to faster economic
development. In this regard, the adequate and timely availability of credit to small, medium and
large industry is very significant. In this regard the RBI has always been instrumental in setting
up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANKetc.

4. Provisions of Training: The RBI has always tried to provide essential training to the staff of
the banking industry. The RBI has set up the bankers' training colleges at several places.
National Institute of Bank Management [Link], Bankers Staff College [Link] and College of
Agriculture Banking [Link] are few tomention.

5. Collection of Data: Being the apex monetary authority of the country, the RBI collects process
and disseminates statistical data on several topics. It includes interest rate, inflation, savings and
investments etc. This data proves to be quite useful for researchers and policymakers.

6. Publication of the Reports: The Reserve Bank has its separate publication division. This
division collects and publishes data on several sectors of the economy. The reports and bulletins
are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report
on Trend and Progress of Commercial Banks India., etc. This information is made available to
the public also at cheaperrates.

7. Promotion of Banking Habits: As an apex organization, the RBI always tries to promote the
banking habits in the country. It institutionalizes savings and takes measures for an expansion of
the banking network. It has set up many institutions such as the Deposit Insurance Corporation-
1962, UTI-1964, IDBI-1964, NABARD- 1982, NHB-1988, etc. These organizations develop and
promote banking habits among the people. During economic reforms it has taken many
initiatives for encouraging and promoting banking inIndia.

8. Promotion of Export through Refinance: The RBI always tries to encourage the facilities for
providing finance for foreign trade especially exports from India. The Export-Import Bankof
India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are
supported by refinancing their lending for export purpose.

III. Supervisory Functions of RBI RBI has authority to regulate and administer the entire
banking and financial system. Some of its supervisory functions are givenbelow.

1. Granting license to banks: The RBI grants license to banks for carrying its business. License is
also given for opening extension counters, new branches, even to close down existingbranches.

2. Bank Inspection: The RBI grants license to banks working as per the directives and in a
prudent manner without undue risk. In addition to this it can ask for periodical information from
banks on various components of assets andliabilities.

3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the working
of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time
regarding their functioning. Through periodic inspection, it can control theNBFIs.

4. Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit Insurance
Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits
below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit
Insurance Scheme in case of a bankfailure.

Role of RBI in Credit Control (Tools and techniques of credit control / weapons of RBI for
credit control)

Probably the most important of all the functions performed by a central bank are that of
controlling the credit operations of commercial banks. In modern times, bank credit has become
the most important source of money in the country, relegating coins and currency notes to a
minor position. Moreover, it is possible for commercial banks to expand credit and thus intensify
inflationary pressure or contract credit and thus contribute to a deflationary situation. It is, thus,
of great importance that there should be some authority which will control the credit creation by
commercial banks. As controller of credit, the central bank attempts to influence and control the
volume of Bank credit and also to stabilize business condition in thecountry.
I) General / Quantitative Credit Control Methods:- In India, the legal framework of RBI’s
control over the credit structure has been provided Under Reserve Bank of India Act, 1934 and
the Banking Regulation Act, 1949. Quantitative credit controls are used to maintain proper
quantity of credit of money supply in market. Some of the important general credit control
methods are:-

1. Bank Rate Policy:- Bank rate is the rate at which the Central bank lends money to the
commercial banks for their liquidity requirements. Bank rate is also called discount rate. In other
words bank rate is the rate at which the central bank rediscounts eligible papers (like approved
securities, bills of exchange, commercial papers etc) held by commercial banks. Bank rate is
important because it is the pace setter to other market rates of interest. Bank rates have been
changed several times by RBI to control inflation andrecession.

2. Open market operations:- It refers to buying and selling of government securities in open
market in order to expand or contract the amount of money in the banking system. This
techniqueis superior to bank rate policy. Purchases inject money into the banking system while
sale of securities do the opposite. During last two decades the RBI has been undertaking switch
operations. These involve the purchase of one loan against the sale of another or, vice-versa. This
policy aims at preventing unrestricted increase inliquidity.

3. Cash Reserve Ratio (CRR) The Cash Reserve Ratio (CRR) is an effective instrument of credit
control. Under the RBl Act of, l934 every commercial bank has to keep certain minimum cash
reserves with RBI. The RBI is empowered to vary the CRR between 3% and 15%. A high CRR
reduces the cash for lending and a low CRR increases the cash for lending. The CRR has been
brought down from 15% in 1991 to 7.5% in May 2001. It further reduced to 5.5% in December
2001. It stood at 5% on January 2009. In January 2010, RBI increased the CRR from 5% to
5.75%. It further increased in April 2010 to 6% as inflationary pressures had started building up
in the economy. As of March 2011, CRR is 6% and now it is 4%w.e.f.09/02/2013.

4. Statutory Liquidity Ratio (SLR) Under SLR, the government has imposed an obligation on the
banks to; maintain a certain ratio to its total deposits with RBI in the form of liquid assets like
cash, gold and other securities. The RBI has power to fix SLR in the range of 25%and 40%
between 1990 and 1992 SLR was as high as 38.5%. Narasimham Committee did not favour
maintenance of high SLR.

5. Repo and Reverse Repo Rates In determining interest rate trends, the repo and reverse repo
rates are becoming important. Repo means Sale and Repurchase Agreement. Repo is a swap deal
involving the immediate Sale of Securities and simultaneous purchase of those securities at a
future date, at a predetermined price. Repo rate helps commercial banks to acquire funds from
RBI by selling securities and also agreeing to repurchase at a laterdate.

Reverse repo rate is the rate that banks get from RBI for parking their short term excess funds
with RBI. Repo and reverse repo operations are used by RBI in its Liquidity Adjustment
Facility. RBI contracts credit by increasing the repo and reverse repo rates and by decreasing
them it expands credit

II) Selective / Qualitative Credit Control Methods:- Under Selective Credit Control, credit is
provided to selected borrowers for selected purpose, depending upon the use to which the control
tries to regulate the quality of credit - the direction towards the credit flows. The Selective
Controlsare:-

1. Ceiling on Credit: The Ceiling on level of credit restricts the lending capacity of a bank to
grant advances against certain controlledsecurities.

2. Margin Requirements: A loan is sanctioned against Collateral Security. Margin means that
proportion of the value of security against which loan is not given. Margin against a particular
security is reduced or increased in order to encourage or to discourage the flow of credit to a
particular sector. It varies from 20% to 80%. For agricultural commodities it is as high as 75%.
Higher the margin lesser will be the loansanctioned.

3. Discriminatory Interest Rate (DIR) :Through DIR, RBI makes credit flow to certain priority
or weaker sectors by charging concessional rates of interest. RBI issues supplementary
instructions regarding granting of additional credit against sensitive commodities, issue of
guarantees, making advances etc.
 4. Directives: The RBI issues directives to banks regarding advances. Directives are regarding
the purpose for which loans may or may not begiven.

5. Direct Action: It is too severe and is therefore rarely followed. It may involve refusal by RBI
to rediscount bills or cancellation of license, if the bank has failed to comply with the directives
ofRBI.

6. Moral Suasion: Under Moral Suasion, RBI issues periodical letters to bank to exercise control
over credit in general or advances against particular commodities. Periodic discussions are held
with authorities of commercial banks in thisrespect.

Offices

 Has 27 regional offices, most of them in state capitals and 04Sub-offices.

Training Establishments

Have six training establishments

 Three, namely, RBI Academy, College of Agricultural Banking and Reserve Bank of India Staff
College are part of the ReserveBank.
 Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi
Institute for Development Research (IGIDR), Institute for Development and Research in
Banking Technology(IDRBT)

Subsidiaries

Fullyowned:

Deposit Insurance and Credit Guarantee Corporation of India (DICGC),

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),

Reserve Bank Information Technology Private Limited (ReBIT),

Indian Financial Technology and Allied Services (IFTAS)

Departments in RBI

To carry out its functions/operations smoothly and efficiently, the Reserve Bank of India has the
following departments.

1. Banking Department: The Banking Department is responsible for rendering the bank’s
services as a banker to the Government and to the [Link] consists of four sub-divisions: (i)
Public Accounts Department; (ii) Public Debt Department; (iii) Deposit Accounts Department;
and (iv) SecuritiesDepartment.

There are 14 branches of the Banking Department, each headed by a Joint/Deputy Manager.

2. Issue Department: The Issue Department is concerned with the proper and efficient
management of the note issue. For the conduct of monetary transactions, the country has been
divided into 14 circles of issue, each having an Office of Issue — the branch of the Issue
Department. Each branch of the Issue Department consists of: (i) theGeneral Department and
(ii) the Cash Department controlled by the currency officer. The General Department deals with
resource operations, i.e., arrangement of supply of notes and coins from the presses and
Government Mints. The Cash Department deals with the cash transactions.

3. Department of Currency Management: This department is concerned with the forecasting

of the long-term requirements of the currency, indenting and allocation of currency notes to
various branches of the Issue Department taking into account the demand pattern, storage
facilities, etc. It is headed by the Chief Officer.

4. Department of Expenditure and Budgetary Control: This department is concerned with the
preparation of the bank’s budget and monitoring of the expenditure of the different units. It is
headed by the FinancialController

5. Department of Government and Bank Accounts: This department is concerned with the
maintenanceandsupervisionofthebank’saccountsintheIssueandtheBankingDepartments
and the compilation of weekly statements of affairs and the Annual Profits & Loss Account and
Balance Sheet. It is headed by the Chief Accountant.

6. Exchange Control Department: The Exchange Control department is responsible for

controlling foreign exchange transactions and maintaining exchange ratestability.

7. Department of Banking Operations and Development: This Department was entrusted with
the responsibility of the supervision, control and development of the commercial bank system in
the country. Till July 1982, it was also concerned with the Lead Bank Scheme and bank credit to
the prioritysectors.

8. Industrial Credit Department: The Industrial Finance Department is basically concerned

with the administration of the Credit Guarantee Scheme for small scale industries or as agent of
the Government of India, with the operational and organizational aspects of the State Financial
Corporation’s (SFCs), work connected with the Industrial Development Bank of India (IDBI),
data collection about financing of small-scale industries and other relevantproblems.

It also deals with the operation and administration of the Credit Authorization Scheme.

9. Agricultural Credit Department: This department is mainly responsible for building up of a

sound cooperative credit structure in rural financing, supplementing the financial resources of
state co-operative banks, providing financial assistance to State Governments to strengthen the
co-operative structure, advising Central and State Governments on agricultural and rural credit,
formulating policies for taking over of PACs for financing by commercial banks, coordinating
the long-term credit activities of State Land Development Banks,etc.
The department alsokeeps liaison with the Agricultural Refinance and Development
Corporation, the Agricultural Finance Corporation, SCBs and LDBs.

With the establishment of the NABARD now, all functions of the Agricultural Credit
Department have been transferred to this new institution, except for the supervision and control
over the operations of the primary (urban) co-operative banks. The responsibility of supervision
and control of PCBs are now shifted to the Department of Banking Operations andDevelopment.
10. Rural Planning and Credit Department: This department was established in 1982. It is
basically concerned with issues like District Credit Plans, Lead Bank Scheme, provision of
expert guidance/assistance and processing and sanction of general lines of credit for short-term
advances to the NABARD, special studies for promoting IRDP, and for framing the Reserve
Bank’s policy on ruraldevelopment.
11. Department of Non-BankingCompanies:
This department administers and controls as well as regulates deposits of non-banking financial
companies.

12. Credit PlanningCell:

The Credit Planning and Banking Development Cell have been constituted for the formulation
and monitoring of credit policies as well as the developmental aspects of commercial banking.

It chalks out macro-level monetary budgets of the country.

13. Department of Economic Analysis andPolicy:

This department conducts economic research and reviews financial and banking conditions in the
country. The Economic Department comprises five units: (i) the Internal Finance Unit; (ii)
International Finance Unit; (iii) Prices, Production and General Unit; (iv) Analysis of National
Economic Parameters Unit; and (v) General Unit.

The Economic Department prepares the Bank’s Annual Report, the Report on Trend and
Progress of Banking in India, the Report on Currency and Finance, and the Reserve Bank of
India Bulletins. It also undertakes ad hoc studies on emerging aspects of banking and other
importantissues.

14. Department of Statistical Analysis and ComputerServices:

Its main function involves the generation, collection, processing and compilation of statistical
data relating to the banking and financial sectors from the operational as well as research point of
view.
15. LegalDepartment:

It tenders legal advice on various matters referred to it by the Bank.

16. InspectionDepartment:

It carries out internal inspections of the offices and departments of the bank.

17. Department of Administration andPersonnel:

It looks after the general administration and personnel policy, such as recruitment, training,
placements, promotions, transfers, discipline, appeals, service conditions, wage structure, etc.

18. PremisesDepartment:

It is mainly concerned with the construction of buildings for the Bank’s offices, training
institutions and staff quarters.

19. Management ServicesDepartment:

It is basically concerned with organisational analysis, systems research and development, work
procedure studies and codification, manpower planning, costing studies, etc.

20. Reserve Bank of India ServiceBoard:

Its functions involve conducting of examinations/interviews for the selection and promotion of
staff in the Reserve Bank.

21. Central Records and DocumentationCentre:

It is meant for the preservation of non-current records of the Bank. It provides arrangement for
the scientific preservation of records, retrieval service to the enquirer departments, tools of
reference such as catalogues, indices, etc.
22. Secretary’sDepartment:

It attends to the secretarial work connected with the meetings of the Central Board and its
committee and of the Administrators of the RBI Employee’s Provident Fund and RBI
Employees’ Co-operative Guarantee Fund.

23. TrainingEstablishments:

The Reserve Bank has set-up three prominent training institutions for imparting training in
different areas of banking.

These are:

(i) the Banker’s Training College,Bombay

(ii) the College of Agricultural Banking,Pune

(iii) the Reserve Bank Staff College,Madras

There are also Zonal Training Centres situated in Bombay, Calcutta, Madras and New Delhi for
conducting induction, functional and short-term preparatory courses for the clerical staff.

Scheduled Banks

Scheduled Banks as the name suggest are the banks, which are accounted in the Second
Schedule of the Reserve Bank of India (RBI) Act, 1934. To qualify as a scheduled bank, the
bank should conform to the following conditions:

Scheduled Banks are those banks which are listed in 2nd schedule of RBI Act 1934. In other
words, the banks which follow the guidelines of the 2nd schedule of RBI Act 1934. Scheduled
banks can take loans from RBI at Repo rateor bank rate. Some major criteria to be scheduled
banks are as follows.

Banks must deposit 500 crores to RBI as a paid-

upcapital. Banks must open 25% of its branches in
ruralareas.
 At least 40% of loan must be distributed to priority sectors like SC/ST, PH, Housing,
Educationetc.

The bank requires satisfying the central bank that its affairs are not carried out in a way that
causes harm to the interest of thedepositors.

The bank needs to be a corporation rather than a sole-proprietorship or partnership firm.

Scheduled banks enjoy certain rights such as:

Right to receive refinance facility from the apexbank

Entitled for currency chestfacility.
Right to become members of clearinghouse

However, they are required to fulfill certain obligations like maintenance of an average daily
balance of CRR (Cash Reserve Ratio) with the central bank at the rates specified by it. Add to
that these banks need to submit returns at regular intervals, to the central bank subject to the
rules of Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.

The Scheduled Commercial Banks are Nationalized Banks, Private Banks,

Developmental Banks, Regional Rural Banks, Foreign Banks and CooperativeBanks.

Non Scheduled Banks

Non-Scheduled Bank refers to the banks which are not listed in the Second Schedule of Reserve
Bank of India. Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled
banks. Unlike scheduled banks, they are not entitled to borrow from the RBI for
normal banking purposes, except, in emergency or “abnormalcircumstances."

In finer terms, the banks which do not comply with the provisions specified by the central bank,
within the meaning of the Reserve Bank of India Act, 1934, or as per specific functions, etc. or
as per the judgement of the RBI, are not able to serve and protect the depositor’s interest, are
known as non-scheduledbanks.
Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the
RBI, but with them. These are local area banks. Jammu & Kashmir Bank is an example of
a non-scheduled commercialbank.

Characteristics of non-scheduled commercial banks

1. They are not included in the second schedule of RBI act 1934 and as such they
cannot avail any loan facilities withRBI
2. They get licenseto conduct as per Banking Regulation act1949
3. They can be started by individuals, trusts etc apart fromcorporate
4. They can function only in three districts and not morethat
5. All local area banks are non-scheduledbanks

Difference between Scheduled and Non- Scheduled Banks

Basis for comparison Scheduled Banks Non- Scheduled banks

Meaning Scheduled banks is a banking Non-scheduled banks are the
corporation whose minimum banks which do not comply
paid up capital is Rs. 25 lakhs with the rules specified by the
and does not harm the interest Reserve Bank of India, or say
of the depositors the banks which do not come
under the category of
scheduled banks.

Second Schedule Listed in the second schedule Not-listed in the second

schedule.

Cash Reserve Ratio Maintained with RBI. Maintained with them.

Borrowing Scheduled banks areallowed Non-Scheduled banks arenot

to borrow money from RBI allowed to borrow money
for regular bankingpurposes. from RBI for regularbanking
 purposes
Returns To be submitted periodically. No such provision of
submitting periodicreturns.

Members of clearing house It can become a member of It cannot become member of

clearing house. clearing house.

What is Commercial Bank?

A commercial bank is a kind of financial institution which carries all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment, etc.
These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank
receives the deposits and gives money to various projects to earn interest (profit). The rate of
interest that a bank offers to the depositors is known as the borrowing rate, while the rate at
which banks lends the money is called the lendingrate.

Commercial banks are formed under the Schedule II of the RBI Act, 1934 which satisfies the
following criteria:

- Minimum Paid-up capital of 5lakhs

- Must be a corporation orsociety
- No activities must adversely affect the depositor’sinterest.
Functions of Bank

There are two types of functions of banks:

1. Primary functions – being primary are also called bankingfunctions.

2. SecondaryFunctions

Both the types of functions of bank are explained below in detail:

Primary Functions of Bank

All banks have to perform two major primary functions namely:

1. Accepting ofdeposits
2. Granting of loans andadvances

Accepting of Deposits

A very basic yet important function of all the commercial banks is mobilizing public funds,
providing safe custody of savings and interest on the savings to depositors. Bank accepts
different types of deposits from the public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary
and wage earners. The rate of interest is low. There is no restriction on the numberand
 amount of withdrawals. The account for saving deposits can be opened in a single name
or in joint names. The depositors just need to maintain minimum balance which varies
across different banks. Also, Bank provides ATM cum debit card, cheque book, and
Internet bankingfacility.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure.
No withdrawal money during this period allowed. In case depositors withdraw before
maturity, banks levy a penalty for premature withdrawal. As a lump-sum amount is paid
at one time for a specific period, the rate of interest is high but varies with the period of
deposit.
3. Current Deposits: are opened by businessmen. The account holders get overdraft facility
on this account. These deposits act as a short term loan to meet urgent needs. Bank
charges a high-interest rate along with the charges for overdraft facility in order to
maintain a reserve for unknown demands for theoverdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular
interval. Money can be withdrawn only after the expiry of a certain period. A higher rate
of interest is paid on recurring deposits as it provides a benefit of compounded rate of
interest and enables depositors to collect a big sum of money. This type of account is
operated by salaried persons and pettytraders.

Granting of Loans & Advances

The deposits accepted from the public are utilized by the banks to advance loans to the
businesses and individuals to meet their uncertainties. Bank charges a higher rate of interest on
loans and advances than what it pays on deposits. The difference between the lending interest
rate and interest rate for deposits is bankprofit.

Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to
withdraw money anytime more than available in bank balance but up to the provided
limit. An overdraft facility is granted against collateral security. The interest for overdraft
is paid only on the borrowed amount for the period for which the loan istaken.
 2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks
allow the customer to take a loan against a mortgage of certain property (tangible assets
and / guarantees). Cash credit is given to any type of account holders and also to those
who do not have an account with a bank. Interest is charged on the amount withdrawn in
excess of the limit. Through cash credit, a larger amount of loan is sanctioned than that of
overdraft for a longerperiod.
3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5
years against tangible assets. Nowadays, banks do lend money for the long term. The
borrower repays the money either in a lump-sum amount or in the form of installments
spread over a pre-decided time period. Bank charges interest on the actual amount of loan
sanctioned, whether withdrawn or not. The interest rate is lower than overdrafts and cash
creditsfacilities.
4. Discounting the bill of exchange: It is a type of short term loan, where the seller
discounts the bill from the bank for some fees. The bank advances money by discounting
or purchasing the bills of exchange. It pays the bill amount to the drawer(seller) on behalf
of the drawee (buyer) by deducting usual discount charges. On maturity, the bank
presents the bill to the drawee or acceptor to collect the billamount.

Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:

1. Agencyfunctions
2. UtilityFunctions

Agency Functions of Bank

Banks are the agents for its customers; hence it has to perform various agency functions as
mentioned below:

Transfer of Funds: Transferring of funds from one branch/place to another.

Periodic Collections: collecting dividend, salary, pension, and similar periodic collections on
the clients’behalf.
Periodic Payments: making periodic payments of rents, electricity bills, etc on behalf of the
client.

Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the
money of the cheques through the clearing section of its customers.

Portfolio Management: banks manage the portfolio of their clients. It undertakes the activity to
purchase and sell the shares and debentures of the clients and debits or credits the account.

Other Agency Functions: under this bank act as a representative of its clients for other
institutions. It acts as an executor, trustee, administrators, advisers etc. of the client.

Utility Functions of Bank

Issuing letters of credit, traveller’s cheque,etc.

Undertaking safe custody of valuables, important documents and securities by providing
safe deposit vaults orlockers.
Providing customers with facilities of foreign exchangedealings
Underwriting of shares anddebentures
Dealing in foreignexchanges
Social Welfareprogrammes
Projectreports
Standing guarantee on behalf of its customers,etc.
Types of Commercial Banks

Public Banks: Banks in which 50% of the capital is provided by central Government 15% by the
State Government and 35% by the sponsoring commercial bank. State Bank of India

Bank ofIndia
Punjab NationalBank
AllahabadBank
Central Bank ofIndia
IndianBank
Bank ofBaroda
UCO Bank
 CanaraBank

Private Banks: Bank in which the major share capital is subscribed by private investors. Private
Sector banks are those banks where major stakes (51%) is of private entities. The shares of
private sector banks are also listed in the stockexchange.

Few big names of private banks are below.

HDFCBank
ICICIBank
AxisBank
YesBank
Kotak MahindraBank
IndusIndBank
IDFCBank
Foreign Banks: Banks which are incorporated outside India. The banks which are incorporated
or have their headquarters in a foreign country and open their branches in India as per RBI Act
1934 is known as foreign banks.

Some examples of the foreign bank

are: CityBank
HSBCBank
Standard CharteredBank

Co-operative banks: Co-operative banks are banks incorporated in the legal form of
cooperatives. Any cooperative society has to obtain a license from the Reserve Bank of India
before starting banking business and has to follow the guidelines set and issued by the Reserve
Bank of India. Currently, there are 68 co-operatives banks in India. There are three types of co-
operatives banks with different functions:

Primary Credit Societies: Primary Credit Societies are formed at the village or town
[Link]
society are restricted to a small area so that the members know each other and are able to watch
over the activities of all members to prevent frauds.

Central Co-operative Banks: Central co-operative banks operate at the district level
having some of the primary credit societies belonging to the same district as their members.
These banks provide loans to their members (i.e., primary credit societies) and function as a link
between the primary credit societies and state co-operative banks.

State Co-operative Banks: These are the highest level co-operative banks in all the states
of the country. They mobilize funds and help in its proper channelization among various sectors.
The money reaches the individual borrowers from the state co-operative banks through the
central co- operative banks and the primary creditsocieties.

Regional rural Banks: The regional rural banks are banks set up to increase the flow of credit to
smaller borrowers in the rural areas. These banks were established on realizing that the benefits
of the co-operative banking system were not reaching all the farmers in rural areas. Currently,
there are 196 regional rural banks in India. Regional rural banks perform the following two
functions:

1. Granting of loans and advances to small and marginal farmers, agricultural workers, co-
operative societies including agricultural marketing societies and primary agricultural credit
societies for agricultural purposes or agricultural operations or relatedpurposes.

2. Granting of loans and advances to artisans small entrepreneurs engaged in trade, commerce or
industry or other productiveactivities.

Development Banks: Development Banks are banks that provide financial assistance to
business that requires medium and long-term capital for purchase of machinery and equipment,
for using latest technology, or for expansion and modernization. A development bank is a
multipurpose institution which shares entrepreneurial risk, changes its approach in tune with
industrial climate and encourages new industrial projects to bring about speedier economic
growth. These banks also undertake other development measures like subscribing to the shares
and debentures issued
by companies, in case of under subscription of the issue by the public. There are three important
national level development banks. They are;

Industrial Development Bank of India (IDBI): The IDBI was established on July 1, 1964
under an Act of Parliament. It was set up as the central co-ordinating agency, leader of
development banks and principal financing institution for industrial finance in the country.
Originally, IDBI was a wholly owned subsidiary of RBI. But it was delinked from RBI w.e.f.
Feb. 16, 1976. IDBI is an apex institution to co-ordinate, supplement and integrate the activities
of all existing specialised financial institutions. It is a refinancing and re-discounting institution
operating in the capital market to refinance term loans and export credits. It is in charge of
conducting techno-economic studies. It was expected to fulfil the needs of rapid industrialisation.
The IDBI is empowered to finance all types of concerns engaged or to be engaged in the
manufacture or processing of goods, mining, transport, generation and distribution of power etc.,
both in the public and privatesectors.

Industrial Finance Corporation of India (IFCI): The IFCI is the first Development Financial
Institution in India. It is a pioneer in development banking in India. It was established in 1948
under an Act of Parliament. The main objective of IFCI is to render financial assistance to large
scale industrial units, particularly at a time when the ordinary banks are not forth coming to
assist these concerns. Its activities include project financing, financial services, merchant
banking and investment. Till 1993, IFCI continued to be Developmental Financial Institution.
After 1993, it was changed from a statutory corporation to a company under the Indian
Companies Act, 1956 and was named as IFCI Ltd with effect from October1999.

Industrial Credit and Investment Corporation of India (ICICI) ICICI was set up in 1955 as a
public limited company. It was to be a private sector development bank in so far as there was no
participation by the Government in its share capital. It is a diversified long term financial
institution and provides a comprehensive range of financial products and services including
project and equipment financing, underwriting and direct subscription to capital issues, leasing,
deferred credit, trusteeship and custodial services, advisory services and business consultancy.
The main objective of the ICICI was to meet the needs of the industry for long term funds in the
private sector.
Apart from this the Industrial Reconstruction Corporation of India (IRCI) established in 1971
with the main objective of revival and rehabilitation of viable sick units and was converted in to
the Industrial Reconstruction Bank of India (IRBI) in 1985 with more powers Development
banks have been established at the state level too. At present in India, 18 State Financial
Corporation’s (SFCs) and 26 State Industrial investment/Development Corporations (SIDCs) are
functioning to look over the development banking in respective areas/states.

Specialized Banks In India, there are some specialized banks, which cater to the requirements
and provide overall support for setting up business in specific areas of activity. They engage
themselves in some specific area or activity and thus, are called specialized banks. There are
three important types of specialized banks with differentfunctions:

Export Import Bank of India (EXIM Bank): The Export-Import (EXIM) Bank of India
is the principal financial institution in India for coordinating the working of institutions engaged
in financing export and import trade. It is a statutory corporation wholly owned by the
Government of India. It was established on January 1, 1982 for the purpose of financing,
facilitating and promoting foreign trade of India. This specialized bank grants loans to exporters
and importers and also provides information about the international market. It alsogives guidance
about the opportunities for export or import, the risks involved in it and the competition to be
faced, etc. The main functions of the EXIM Bank are as follows: (i) Financing of exports and
imports of goods and services, not only of India but also of the third world countries; (ii)
Financing of exports and imports of machinery and equipment on lease basis; (iii) Financing of
joint ventures in foreign countries; (iv) Providing loans to Indian parties to enable them to
contribute to the share capital of joint ventures in foreign countries; (v) to undertake limited
merchant banking functions such as underwriting of stocks, shares, bonds or debentures of
Indian companies engaged in export or import; and (vi) To provide technical, administrative and
financial assistance to parties in connection with export and import.

Small Industries Development Bank of India This specialized bank grant loan to those
who want to establish a small-scale business unit or industry. Small Industries Development
Bank of India (SIDBI) was established in October 1989 and commenced its operation from April
1990withitsHeadOfficeatLucknowasadevelopmentbank,exclusivelyforthesmallscale
Industries. It is a central government undertaking. The prime aim of SIDBI is to promote and
develop small industries by providing them the valuable factor of production finance. Many
institutions and commercial banks supply finance, both long-term and short-term, to small
entrepreneurs. SIDBI coordinates the work of all of them. Functions of Small Industries
Development Bank of India (SIDBI):

(i) Initiates steps for technology adoption, technology exchange, transfer and upgradation
and modernization of existing units.

(ii) SIDBI participates in the equity type of loans on soft terms, term loan, working capital
both in rupee and foreign currencies, venture capital support, and different forms of resource
support to banks and other institutions.

(iv) SIDBI facilitates timely flow of credit for both term loans and working capital to SSI in
collaboration with commercial banks.

(iv) SIDBI enlarges marketing capabilities of the products of SSIs in both domestic and
international markets.

(v) SIDBI directly discounts and rediscounts bills with a view to encourage bills culture and
helping the SSI units to realize their sale proceeds of capital goods / equipment’s and
components etc.

(v) (vi) SIDBI promotes employment oriented industries especially in semi-urban areas to create
more employment opportunities so that rural-urban migration of people can bechecked.

National Bank for Agricultural and Rural Development It was established on 12 July
1982 by a special act by the parliament. This specialized bank is a central or apex institution for
financing agricultural and rural sectors. It can provide credit, both short-term and long-term,
through regional rural banks. It provides financial assistance, especially, to co-operative credit,in
the field of agriculture, small-scale industries, cottage and village industries handicrafts and
allied economic activities in rural areas .its important functionsare:
a) Takes measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, training of personnel,etc.

b) Co-ordinates the rural financing activities of all institutions engaged in developmental work at
the field level and maintains liaison with Government of India, State Governments, Reserve
Bank of India (RBI) and other national level institutions concerned with policyformulation

c) Undertakes monitoring and evaluation of projects refinanced byit.

d) NABARD refinances the financial institutions which finances the ruralsector.

e) The institutions which help the rural economy, NABARD helpsdevelop.

f) NABARD also keeps a check on its clientinstitutes.

g) It regulates the institution which provides financial help to the ruraleconomy.

h) It provides training facilities to the institutions working the field of ruralupliftment.

i) It regulates the cooperative banks and the RRB Indian Bank-like financial institutions In India,
there are some Bank-like financial institutions that provide financial services. There are two
types of such institution that are important to the development onIndia:

Microfinance Institutions Microfinance Institutions are Bank-like financial institutions

that providing financial services, such as microcredit, micro savings or micro insurance to poor
people. In addition, they also perform the following important functions:

1. provide financing facilities, with or without collateral security, in cash or in kind, for
such terms and subject to such conditions as may be prescribed, to poor persons for all types of
economic activities including housing, but excluding business in foreign exchange transactions

2. To buy, sell and supply on credit to poor persons industrial and agricultural inputs,
livestock, machinery and industrial raw materials

3. To provide professional advice to poor persons regarding investments in small

business and such cottage industries as may beprescribed;

Development financial institutions (DFIs) DFIs are specialized financial institutions

the Government established to promote investments in the manufacturing and agricultural
[Link].Extendingfinancialassistanceintheformofmedium-and
long-term loans, participating in equity capital, underwriting and wherever relevant, acting as
issuing house for public shares issues and providing guarantees for loans 2. Specialize in
medium- and long-term financing in addition to supplying financial services not normally
provided by commercial banks and finance companies 3. In addition, they help in identifying
new projects, participate in their promotion, and where appropriate, provide ancillary financial,
technical and managerialadvice

Local Area Banks (LAB)

 Introduced in India in the year1996

 These are organized by the privatesector
 Earning profit is the main objective of Local AreaBanks
 Local Area Banks are registered under companies Act,1956
 At present, there are only 4 Local Area Banks all which are located in SouthIndia
 Examples: (i) Coastal Local Area BankLimited

(ii) Capital Local Area BankLimited

(iii) Krishna Bhima Samruddhi Local Area BankLimited

(iv) Subhadra Local Area Bank Limited

Small Finance Banks

As the name suggests this type of bank looks after the micro industries, small farmers, and the
unorganized sector of the society by providing those loans and financial assistance. These banks
are governed by the central bank of the country.

Given below is the list of the Small Finance Banks in our

country: AU Small Finance Bank
Equitas Small Finance Bank
Jana Small Finance Bank
Northeast Small Finance Bank
Capital Small Finance Bank
Fincare Small Finance Bank
Suryoday Small Finance Bank
Ujjivan Small Finance Bank
 Payments Banks

A newly introduced form of banking, the payments bank has been conceptualized by the Reserve
Bank of India. People with an account in the payments bank can only deposit an amount of up to
Rs.1, 00,000/- and cannot apply for loans or credit cards under this account.

Options for online banking, mobile banking, the issue of ATM, and debit card can be done
through payments banks. Given below is a list of the few payments bank in our country:

 Airtel PaymentsBank
 India Post PaymentsBank
 FinoPaymentsBank
 Jio PaymentsBank
 Paytm PaymentsBank
 NSDL PaymentsBank

Distinguish between Central and Commercial Bank

S.N Point of Central Bank Commercial Banking
o. Distinction
1 Formation Central Bank is the sole banking Institution Commercial Bank is
which is established through ordinance or formed on the basis of
special law of the Government. Banking Company Laws.

2 Ownership Central Bank is established under Commercial Bank is

Government ownership established under both
govt. and private
Ownership.

3 Purpose To earn profit is not the main purpose of The main purpose of
central bank. Its main purpose is to control commercial bank is to
credit system and money market. earn profit. Recovery of
loan is the main stay for
generation of profit.

4 Number In a country there is only one Central Bank In a country there may
be more number of
commercial banks.

5 Control Central bank is conducted exclusively under Commercial Bank is

Government control conducted under central
bank's control.

6 Government Government has direct influence on Central Government has indirect

Influence Bank influence On
 Commercial Bank
through Central Bank.

7 Currency Central Bank organizes, controls and Commercial Banks are

Market administers currency market. the members of the
currency market.

8 Competition Central Bank does not compete with other Commercial Bank has to
banks. face to face lot of
competition

9 Representative Central Bank represents the country or state Commercial Bank

represents the Customers

10 Foreign Branch Central Bank has no branch abroad Commercial Bank may
have many Branches
abroad

11 Note issue Note issue is the primary function of central Commercial Bank
bank cannot issue notes

12 Credit control Central Bank controls credit. Commercial Bank assists

central bank In
controlling credit

13 Clearing House Central Bank acts as a clearing house for Commercial banks are
settlement of inter-bank transactions. the members of the
clearing house. They
settle transactions
through clearing house

14 Lender of In case of any crisis, central bank Last Commercial Bank gets
resort lends commercial bank as a last assistance from central
resort. bank in case of need

15 Nature of work Central bank is not engaged in general Commercial bank is

banking activities i.e. to receive deposits, to engaged in receiving
lend, to create loan etc deposits, paying money,
creating loan etc.

16 Foreign Central Bank controls foreign exchange Commercial bank helps

Exchange central bank in
controlling foreign
exchange

17 Investments Central bank does not Make any investment Commercial bank makes
for profitability purpose. investments in various
sectors for the purpose of
profitability
18 Refinance Central bank refinances commercial bank Commercial bank takes
Facility against first class securities, bill of refinance facility from
exchange the central bank.

19 Development Central Bank formulates policy on Commercial bank

work development Work participates in the
development program
Initiated by the central
bank.

Role of Commercial Banks as a Financial Intermediary

Commercial banks play several roles as financial intermediaries.

First, they repackage the deposits received from investors into loans that are provided to firms. In this way,
small deposits by individual investors can be consolidated and channeled in the form of large loans to firms.
Individual investors would have difficulty achieving this by themselves because they do not have adequate
information about the firms that need funds.

Second, commercial banks employ credit analysts who have the ability to assess the creditworthiness of
firms that wish to borrow funds. Investors who deposit funds in commercial banks are not normally capable of
performing this task and would prefer that the bank play this role.

Third, commercial banks have so much money to lend that they can diversify loans across several
borrowers. In this way, the commercial banks increase their ability to absorb individual defaulted loans by reducing
the risk that a substantial portion of the loan portfolio will default. As the lenders, they accept the risk of default.
Many individual investors would not be able to absorb the loss of their own deposited funds, so they prefer to let
the bank serve in this capacity. Even if a commercial bank were to close because of an excessive amount of
defaulted loans, the deposits of each investor are insured up to $100,000 by the FDIC. Thus the commercial bank is
a means by which funds can be channeled from small investors to firms without the investors having to play the
role of lender.

Fourth, some commercial banks have recently been authorized (since the late 1980s) to serve as financial
intermediaries by placing the securities that are issued by firms. Such banks may facilitate the flow of funds to
firms by finding investors who are willing to purchase the debt securities issued by the firms. Thus they enable
firms to obtain borrowed funds even though they do not provide the funds themselves.
Recent developments in Banking Sector

Core Banking

Core banking is normally defined as the business conducted by a banking institution with its retail and small
business customers. Many banks treat the retail customers as their core banking customers and have a separate line
of business to manage small business. Larger business is handled by the corporate banking division of the
institution. Core banking basically is depositing and lending of money.

Now a days, most banks use core banking applications to support their operations where ‘CORE’ stands for
“Centralized Online Real-time Environment’. This basically means that all the bank’s branches access applications
from centralized data centres.
It means that the deposits made are reflected immediately on the servers of banks and the customer can withdraw
the deposited money from any of the branches of bank throughout the world. These applications now also have the
capability to address the needs of corporate customers providing a comprehensive banking solution.

Normal core banking functions will include deposit accounts, loans, mortgages and payments. Bank makes these
services available across multiple channels like ATMS. Internet banking and branches.
Features of Core Banking

1. Customer relationship management features including a 360 degree customer view.

2. The ability to originate new products and customers.
3. Banking analytics including risk analysis, profitability analysis and provisions for capital reserve allocation and
collateral management.
4. Banking finance including general ledger and reporting.
5. Banking channels such as teller systems, side counter applications, mobile banking and online banking solutions.
6. Best practice workflow process.
7. Content management facilities
8. Governance and compliance capabilities such as internal controls management and auditing.
9. Security control and audit capabilities
10. Core banking solutions to help maximize growth, increase productivity and mitigate risk.
Advantages of Core Banking

1. Limited professional manpower to be utilized more effectively.

2. Customer can have anywhere, more convenient and easier banking.
3. ATM, Interest Banking, Mobile Banking, Payment Gateways etc.
4. More strong and economical way of management information system.
 5. Reduction in branch manpower.
6. Additional manpower can be available for marketing, recovery and personalized banking.
7. Instant information available for decision support
8. Quick and accurate implementation of policies
9. Improved recovery process causing reduction on recovery costs, NPA provisions
10. Innovative, redefined or improved processes i.e Inter Branch Reconciliation causing reduction in manpower
at Head office.
[Link] in software maintenance at branch and Head office.
12. Centralized printing and backup resulting in reduction in capital and revenue expenditure on printing
and backup devices and media at branches
13. Electronic Transactions with other financial institutions.
14. Increased speed in working resulting in more business opportunities and reduction in penalities and
legal expenses.
Disadvantages of core banking:

1. Excessive reliance on era

2. Any failure in pc structures can cause whole community to head down
3. If records aren’t included nicely and if right care isn’t always taken, hackers can advantage get admission to
the data.

Elements of Core Banking Include:

⚫ Making and servicing loans.

⚫ Opening new accounts.
⚫ Processing cash deposits and withdrawals.
⚫ Processing payments and cheques.
⚫ Calculating interest.
⚫ Customer relationship management (CRM) activities.
⚫ Managing customer accounts.
⚫ Establishing criteria for minimum balances, interest rates, number of withdrawals allowed and so on.
⚫ Establishing interest rates.
⚫ Maintaining records for all the bank’s transactions.
E-Banking

• The term online became popular in the late '80s and referred to the use of a terminal, keyboard and TV
(or monitor) to access the banking system using a phone line.
• Stanford federal credit union was the first who offer online internet banking services to all of its members
in 1994.
• Later on snapped up by other banks like Well Fargo, Chase Manhattan and Security First Bank.
• Opening up of economy in 1991 marked the entry of foreign banks. They brought new technology with
them.
• Banking products became more and more competitive. Need for differentiation of products and services
was felt.
• The ICICI Bank kicked off online banking in 1996. Currently 78% of its customer base is registered for
online banking.
• 1996 to 1998 marked the adoption phase, while usage increased only in 1999, owing to lower ISP online
charges, increased PC penetration and a tech-friendly atmosphere. Ex: Answering routine queries, Bill
payment service, Electronic Fund transfer (ETF), Electronic Clearing System (ECS), Credit card customers,
Railway Pass, Investing through internet banking, Recharging, Shopping, etc..
Electronic banking has many names like e banking, virtual banking, online banking, or internet 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.

Types of e banking

Banks offer various types of services through electronic banking platforms. These are of three types:

Level 1 – This is the basic level of service that banks offer through their websites. Through this service, the bank
offers information about its products and services to customers. Further, some banks may receive and reply to queries
through e-mail too.

Level 2 – In this level, banks allow their customers to submit instructions or applications for different services,
check their account balance, etc. However, banks do not permit their customers to do any fund-based
transactions on their accounts.

Level 3 – In the third level, banks allow their customers to operate their accounts for funds transfer, bill payments,
and purchase and redeem securities, etc.
Most traditional banks offer e-banking services as an additional method of providing service. Further, many new
banks deliver banking services primarily through the internet or other electronic delivery channels. Also, some
banks are ‘internet only’ banks without any physical branch anywhere in the [Link], banking websites
are of two types:

1. Informational Websites – These websites offer general information about the bank and its products and
services to customers.

2. Transactional Websites – These websites allow customers to conduct transactions on the bank’s website.
Further, these transactions can range from a simple retail account balance inquiry to a large business-to-
business funds transfer. The following table lists some common retail and wholesale e-banking services
offered by banks and financial institutions:

Importance of e-banking

We will look at the importance of electronic banking for banks, individual customers, and businesses separately.

Banks

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.
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 certainbanking
transactions. However, with e-banking, geographical barriers are reduced.

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.

Popular services covered under E-Banking

1. Automated TellerMachines,

2. CreditCards,

3. DebitCards,

4. SmartCards,
5. Automated TellerMachines,

6. CreditCards,

7. DebitCards,

8. SmartCards,

9. Electronic Funds Transfer (EFT)System,

10. MobileBanking,

11. InternetBanking,

12. Tele-banking

13. Homebanking

14. Dematfacility

15. Cheques Truncation PaymentSystem

1. Automated Teller Machine: An ATM is a computerized Tele-communication device which

provides the customers the access to financial transactions in public places without human inters-
mention. It enables the customers to perform several banking operations such as withdrawals of
cash, request of mini-statement etc. The advantages of ATMare:

(a) ATM provides 24 hours service: ATMs provide service round the clock. The customer can
withdraw cash up to a certain a limit during any time of the day ornight.
(b) ATM gives convenience to bank's customers: ATMs provide convenience to the customers.
Now-a-days, ATMs are located at convenient places, such as at the air ports, railway stations,
etc. and not necessarily at the Bank'spremises.

(c) ATM reduces the workload of bank's staff.: ATMs reduce the work pressure on bank's staff
and avoids queues in bankpremises.

(d)ATM provides service without any error: ATMs provide service without error. The customer
can obtain exact amount. There is no human error as far as ATMs areconcerned.

(e) ATM is very beneficial for travellers: ATMs are of great help to travellers. They need not
carry large amount of cash withthem.

(f) ATM may give customers new currency notes: The customer also gets brand new currency
notes from ATMs. In other words, customers do not get soiled notes fromATMs.

(g) ATM provides privacy in banking transactions: Most of all, ATMs provide privacy in
banking transactions of thecustomer.

2. Electronic Transfer of Funds: This is an electronic debit or credit of customers account.

Bank customers can buy goods and services without caring cash by using credit or debit cards.
There cards are issued to the customers by the bankers. This system works on a pin (personal
identification number). The Customer swipes the card by using the card reader device to make
the transactions. The development of electronic banking and internet banking helped the
customers to utilize theirservices.

3. Tele-Banking: It is increasingly used in these days. It is a delivery channel for marketing,

banking services. A customer can do non-cash business related banking over the phoneanywhere
and at any time. Automatic voice recorders are used for rendering tale-bankingservices.

4. Mobile Banking: It is another important service provided by the banks recently. The
customers can utilize it with the help of a cell phone. The bank will install particular software
and provide a password to enable a customer to utilize thisservice.

5. Home Banking: It is another important innovation took place in Indian banking sector. The
customers can perform a no. of transactions from their home or office. They can checkthe
balance and transfer the funds with the help of a telephone. But it is not that popularly utilized in
our country.

6. Internet Banking: It is the recent trend in the Indian banking sector. It is the result of
development took place in information technology. Internet banking means any user or customer
with personal computer and browser can get connected to his banks website and perform any
service possible through electronic delivery channel. There is no human operator present in the
remote location to respond. Allthe services listed in the menu of bank website will be available.
7. Demat Banking: It is nothing but de-materialization. This is a recent extant in the Indian
banking sector. The customer who wants to invest in stock market or in share and stock needs to
maintain this account with the commercial banks. The customer needs to pay certain annual
charges to the banks for maintaining this type ofaccounts.

8. Credit Cards A credit card is a small plastic card issued to users as a system of payment. It
allows its holder to buy goods and services based on the holder's promise to pay for these goods
and services. The issuer of the card creates a revolving account and grants a line of credit to the
consumer (or the user) from which the user can borrow money for payment to a merchant or as a
cash advance to the user. A credit card is different from a charge card: a charge card requires the
balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing
balance of debt, subject to interest being charged. A credit card also differs from a cash card,
which can be used like currency by the owner of the card. Most credit cards are issued by banks
or creditunions.

9. Debit Card A debit card (also known as a bank card or check card) is a plastic card that
provides the cardholder electronic access to his or her bank account/s at a financial institution.
Some cards have a stored value against which a payment is made, while most relay a message to
the cardholder's bank to withdraw funds from a designated account in favour of the payee's
designated bank account. The card can be used as an alternative payment method to cash when
making purchases. In some cases, the cards are designed exclusively for use on the Internet, and
so there is no physical card. In many countries the use of debit cards has become so widespread
that their volume of use has overtaken or entirely replaced the check and, in some instances, cash
[Link],debitcardsareusedwidelyfortelephoneandInternetpurchases.
However, unlike credit cards, the funds paid using a debit card are transferred immediately from
the bearer's bank account, instead of having the bearer pay back the money at a later date.

10. Cheques Truncation Payment system (CTPS) Truncation is the process of stopping the
flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument
will be truncated at some point en- route to the drawee branch and an electronic image of the
cheque would be sent to the drawee branch along with the relevant information like the MICR
fields, date of presentation, presenting banks etc. Thus with the implementation of cheque
truncation, the need to move the physical instruments across branches would not be required,
except in exceptional circumstances. This would effectively reduce the time required for
payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up
the process of collection or realization of thecheques.

Role of Commercial Banks in Economic Development

1. CapitalFormation
Banks play an important role in capital formation, which is essential for the economic
development of a country. They mobilize the small savings of the people scattered over a wide
area through their network of branches all over the country and make it available for productive
purposes.

Now-a-days, banks offer very attractive schemes to attract the people to save their money with
them and bring the savings mobilized to the organized money market. If the banks do not
perform this function, savings either remains idle or used in creating assets, which are low in
scale of planpriorities.
2. Creation ofCredit
Banks create credit for the purpose of providing more funds for development projects. Credit
creation leads to increased production, employment, sales and prices and thereby they cause
faster economic development.

3. Channelizing the Funds to ProductiveInvestment

Banks invest the savings mobilized by them for productive purposes. Capital formation is not the
only function of commercial banks. Pooled savings should be distributed to various sectors of
the
economy with a view to increase the productivity of the nation. Then only it can be said to have
performed an important role in the economic development of the nation.

Commercial Banks aid the economic development of the nation through the capital formed by
them. In India, loan lending operation of commercial banks subject to the control of the RBI. So
our banks cannot lend loan, as they like.

4. Fuller Utilization of Resources

Savings pooled by banks are utilized to a greater extent for development purposes of various
regions in the country. It ensures fuller utilization of resources.

5. Encouraging Right Type ofIndustries

The banks help in the development of the right type of industries by extending loan to right type
of persons. In this way, they help not only for industrialization of the country but also for the
economic development of the country. They grant loans and advances to manufacturers whose
products are in great demand. The manufacturers in turn increase their products by introducing
new methods of production and assist in raising the national income of the country.

6. Bank RatePolicy
Economists are of the view that by changing the bank rates, changes can be made in the money
supply of a country. In our country, the RBI regulates the rate of interest to be paid by banks for
the deposits accepted by them and also the rate of interest to be charged by them on the loans
granted by them.

7. Bank Monetize Debt

Commercial banks transform the loan to be repaid after a certain period into cash, which can be
immediately used for business activities. Manufacturers and wholesale traders cannot increase
their sales without selling goods on credit basis. But credit sales may lead to locking up of
capital. As a result, production may also be reduced. As banks are lending money by
discounting bills of exchange, business concerns are able to carry out the economic activities
without anyinterruption.
 8. Finance toGovernment
Government is acting as the promoter of industries in underdeveloped countries for which
finance is needed for it. Banks provide long-term credit to Government by investing their funds
in Government securities and short-term finance by purchasing TreasuryBills.

9. Bankers as Employers
After the nationalization of big banks, banking industry has grown to a great extent. Bank’s
branches are opened in almost all the villages, which leads to the creation of new employment
opportunities. Banks are also improving people for occupying various posts in their office.

10. Banks areEntrepreneurs

In recent days, banks have assumed the role of developing entrepreneurship particularly in
developing countries like India. Developing of entrepreneurship is a complex process. It includes
the formation of project ideas, identification of specific projects suitable to local conditions,
inducing new entrepreneurs to take up these well-formulated projects and provision of
counseling services like technical and managerialguidance.

Banks provide 100% credit for worthwhile projects, which is also technically feasible and
economically viable. Thus commercial banks help for the development of entrepreneurship in
the country.

Further, under Internet banking, the following services are available in India:

1. Bill payment – Every bank has a tie-up with different utility companies, service
providers, insurance companies, etc. across the country. The banks use these tie-ups to offer online payment of
bills (electricity, telephone, mobile phone, etc.). Also, most banks charge a nominal one-time registration fee
for this service. Further, the customer can create a standing instruction to pay recurring bills automatically
every month.

2. Funds transfer – A customer can transfer funds from his account to another with the same bank or even a
different bank, anywhere in India. He needs to log in to his account, specify the payee’s name, account
number, his bank, and branch along with the transfer amount. The transfer is effected within a day or so.

3. Investing – Through electronic banking, a customer can open a fixed deposit with the bank online through
funds transfer. Further, if a customer has a demat account and a linked bank account and trading account, he
can buy or sell shares online too. Additionally, some banks allow customers to purchase and redeem mutual
fund units from their online platforms as well.

4. Shopping – With an e-banking service, a customer can purchase goods or services online and also pay for
them using his account. Shopping at his fingertips.
 Impact of Technology in Banking Sector:

Positive impact of technology on banking sector:-

 The biggest revolution came in banks is Digitization.

 Banking process is faster than before and more reliable. Maintenance and retrieval of documents and records
have become much faster and easier.
 Computerized banking also improves the core banking system. With CBS (core banking system) all branches
have access to common centralized data and are interconnected.
 With the innovation of MICR cheque processing system, the processing of cheques becomes more faster and
efficient h than before.
 USSD (Unstructured supplementary service data) was launched by Government, so people with no internet-
connectivity too can access their bank accounts without visiting the branch.
 With increasing internet reach, Internet Banking was developed and now offered by almost every bank.
Through this, every transaction details and inquiries can be performed online without visiting the bank.
 It offered more transparency in transactions.
 The scope of frauds in banks is being minimized through the use of passwords, double authentication in
online banking.
 Technology also leads to competition among the banks which eventually provides better services to people.
 With introduction of mobile banking, one can access their bank from anywhere-anytime. Everything is one
quick tap away.
 To facilitate better services, Banks have introduced Automated Banking Services Solution like Cash
Deposit Machine, Cheque Deposit Machine, Passbook Printing Machine through these service have become
easier.

Negative impact of technology on banking sector:-

 The biggest negative impact of technology is loss of Jobs as automation has replaced number of jobs in
banking sector.
 Through technology comes the threat of Cyber Attack, a loophole in the system, millions of data can be lost in
the blink of an eye.
 These technologies consumes less time, it also sometimes makes people careless-which causes loss of
personal details as happened last year in 2016,many debit cards details of big banks were compromised.

PAYMENT BANKS

What are Payment Banks?

 A payments bank (Airtel Payments Bank, India Post Payments Bank, etc.) is like any other bank,
but operating on a smaller or restricted scale.
 Credit risk is not involved with the Payments Bank. It can carry out most banking operations but
cannot advance loans or issue credit cards.
 It can accept demand deposits only i.e. savings and current accounts, not time deposits.
 The Payment Banks cannot set up subsidiaries to undertake non-banking financial services activities.
 A committee headed by Dr. NachiketMor recommended setting up of 'Payments Bank' to cater to the
lower income groups and small businesses.
 Benefits: Expansion of rural banking, access to diversified services, social & financial inclusion are some
of the benefits.
 Challenges: Lack of customer awareness, lack of incentives for agents, lack of infrastructure, technological
issues are some of the challenges.
Note:

 There are two kinds of banking licences that are granted by the Reserve Bank of India - universal bank licence
and differentiated bank licence.
 Payments bank comes under a differentiated bank licence since it cannot offer all the services that
a commercial bank offers. In particular, a payments bank cannot lend.
 It can take deposits upto ₹1 lakh per account and it can issue debit cards but not credit cards.
 Commercial banks in India like State Bank of India or ICICI Bank, do not have any such
restrictions. Objectives

 The objectives of setting up of a payments bank is to further financial inclusion by providing small savings
accounts and payments/remittance services to migrant labour workforce, low income households, small
businesses, other unorganised sector entities and other users.
Scope of Activities

 Acceptance of demand deposits initially restricted to holding a maximum balance of Rs 100,000 per
individual customer.
 Issuance of ATM/debit cards.
 They cannot issue credit cards.
 They are not allowed to give loans.
 Payments and remittance services through various channels.
 Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.
 They are only allowed to invest the money received from customers' deposits into government securities.
 They cannot accept NRI deposits.
 A payments bank account holder would be able to deposit and withdraw money through any ATM or other
service providers.
 Payments licensees would be granted to mobile firms, supermarket chains and others to cater to individuals
and small businesses.
Eligible Promoters

 Existing non-bank Pre-paid Payment Instrument (PPI) issuers;

 Other entities such as

o individuals/professionals;
o Non-Banking Finance Companies (NBFCs),
o Corporate Business Correspondents (BCs), mobile telephone companies,
 o Supermarket chains, companies, real sector cooperatives; that are owned and controlled by
residents; and
o Public sector entities may apply to set up payments banks.
 A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up
a payments bank.
 Scheduled commercial banks can take equity stake in a payments bank to the extent permitted under
the Banking Regulation Act, 1949.
Regulation

 The Payments Bank will be registered as a public limited company under the Companies Act, 2013. It is
governed by the provisions of the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange
Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and Directives.
 They need to maintain a Cash Reserve Ratio (CRR).
 Required to invest a minimum 75% of its "demand deposit balances" in Statutory Liquidity Ratio (SLR)
eligible Government securities/treasury bills with maturity up to one year.
 Need to hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for
operational purposes and liquidity management.
Other Important Provisions

 Capital requirement: The minimum paid-up capital for payments bank is Rs 100 crore.
 Promoter's contribution: Minimum initial contribution to the paid-up equity capital shall at least be 40%
for the first five years from the commencement of its business.
 Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign
Direct Investment (FDI) policy for private sector banks as amended from time to time.
 UNIT 2 BANKING PRODUCTS AND SERVICES

Products/Services offered by banks – Deposit products – Credit Products – Payment and

Custodial Services; Credit appraisal Techniques – Approach to lending; Credit Management –
credit monitoring – NPA management – Priority Sector Lending – Factoring – Ancillary
Services; Remittances, safe Deposit lockers etc; Payment and Collection of Cheque – duties and
responsibilities of paying and collectingbanker.

Products/ Services offered by banks - Introduction

A product is a packaged offer made by a bank. It has a structure, a target audience and a
price tag. It can be quantified easily.

It becomes a service, when you utilize it. This is about the actual delivery - the people
and processes that deliver, customer satisfaction, customer retention etc. It is the qualitative
aspect.

Broad Classification of Products Offered by Banks

The different products in a bank can be broadly classified into:

(a) RetailBanking.
(b) Trade Finance.
(c) TreasuryOperations.

Retail Banking and Trade finance operations are conducted at the branch level while the
wholesale banking operations, which cover treasury operations, are at the head office or a
designated branch.

(a) Retail Banking:

- Deposits
- Loans, Cash Credit andOverdraft
 - Negotiating for Loans andadvances
- Remittances
- Book-Keeping (maintaining all accountingrecords)
- Receiving all kinds of bonds valuable for safekeeping

(b) Trade Finance:

- Issuing and confirming of letter of credit.

- Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and othersecurities.

(c )Treasury Operations:

- Buying and selling of bullion, Foreignexchange.

- Acquiring, holding, underwriting and dealing in shares, debentures,etc.
- Purchasing and selling of bonds and securities on behalf ofconstituents.

The banks can also act as an agent of the Government or local authority. They insure, guarantee,
underwrite, participate in managing and carrying out issue of shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other
services like investment counseling for individuals, short-term funds management and portfolio
management for individuals and companies. It undertakes the inward and outward remittances
with reference to foreign exchange and collection of varied types for the Government.
Common Banking Products Available

Some of common available banking products are explained below:

1) Credit Card: Credit Card is “postpaid” or “pay later” card that draws from a credit line-
money made available by the card issuer (bank) and gives one a grace period to pay. If the
amount is not paid full by the end of the period, one is charged interest. A credit card is nothing
but a very small card containing a means of identification, such as a signature and a small photo.
It authorizes the holder to change goods or services to his account, on which he is billed. The
bank receives the bills from the merchants and pays on behalf of the card holder. These bills are
assembled in the bank and the amount is paid to the bank by the card holder totally or by
installments. The bank charges the customer a small amount for these services. The card holder
need not have to carry money/cash with him when he travels or goes for purchasing. Creditcards
have found wide spread acceptance in the ‘metros’ and big cities. Credit cards are joining
popularity for online payments. The major players in the Credit Card market are the foreign
banks and some big public sector banks like SBI and Bank of Baroda. India at present has about
10 million credit cards incirculation.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value. Debit
Cards quickly debit or subtract money from one’s savings account, or if one were taking out
cash. Every time a person uses the card, the merchant who in turn can get the money transferred
to his account from the bank of the buyers, by debiting an exact amount of purchase from the
card. To get a debit card along with a Personal Identification Number (PIN). When he makes a
purchase, he enters this number on the shop’s PIN pad. When the card is swiped through the
electronic terminal, it dials the acquiring bank system — either Master Card or Visathat validates
the PIN and finds out from the issuing bank whether to accept or decline the transaction. The
customer never overspread because the amount spent is debited immediately from the customer’s
account. So, for the debit card to work, one must already have the money in the account to cover
the transaction. There is no grace period for a debit card purchase. Some debit cards have
monthly or per transaction fees. Debit Card holder need not carry a bulky checkbook or large
sums of cash when he/she goes at for shopping. This is a fast and easy wayof payment one can
get debit card facility as debit cards use one’s own money at the time of sale, so they are often
easier than credit cards to obtain. The major limitation of Debit Card is that currently only some
shops in urban areas accepts it. Also, a person can’t operate it in case the telephone lines
aredown.

3) Automated Teller Machine: The introduction of ATM’s has given the customers the facility
of round the clock banking. The ATM’s are used by banks for making the customers dealing
easier. ATM card is a device that allows customer who has an ATM card to perform routine
banking transaction at any time without interacting with human teller. It provides exchange
services. This service helps the customer to withdraw money even when the banks are closed.
This can be done by inserting the card in the ATM and entering the Personal Identification
Number and secretPassword.
ATM’s are currently becoming popular in India that enables the customer to withdraw their
money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or
deposit funds, check account balances, transfer funds and check statement information. The
advantages of ATM’s are many. It increases existing business and generates new business. It
allows the customers.

 To transfer money to and fromaccounts.

 To view accountinformation.
 To ordercash.
 To receivecash.

Advantages of ATM’s:

 To theCustomers

 ATM’s provide 24 hrs., 7 days and 365 days a yearservice.

 Service is quick andefficient
 Privacy intransaction
 Wider flexibility in place and time ofwithdrawals.
 The transaction is completely secure — you need to key in Personal
Identification Number (Unique number for everycustomer).

To Banks

 Alternative to extend bankinghours.

 Crowding at bank counters considerablyreduced.
 Alternative to new branches and to reduce operatingexpenses.
 Relieves bank employees to focus an more analytical and innovativework.
 Increased marketpenetration.

ATM’s can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business
arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash.
The ATM services provided first by the foreign banks like Citibank, Grind lays bank and now by
many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc.
The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India.
By the end of 1990 Indian Private Banks and public sector banks have come up with their own
ATM Network in the form of “SWADHAN”. Over the past year upto 44 banks in Mumbai,
Vashi and Thane, have became a part of “SWADHAN” a system of shared payments networks,
introduced by the Indian Bank Association(IBA).

4) E-Cheques: The e-cheques consists five primary facts. They are the consumers, the merchant,
consumer’s bank the merchant’s bank and the e-mint and the clearing process. This cheaqing
system uses the network services to issue and process payment that emulates real world
chequeing. The payer issues digital cheques to the payee ant the entire transactions are done
through internet. Electronic version of cheques are issued, received and processed. A typical
electronic cheque transaction takes place in the followingmanner:

 The customer accesses the merchant server and the merchant server presents its goods
to the customer.
 The consumer selects the goods and purchases them by sending an e-cheque to the
merchant.
 The merchant validates the e-cheque with its bank for paymentauthorization.
 The merchant electronically forwards the e-cheque to itsbank.
 The merchant’s bank forwards the e-cheque to the clearing house forcashing.
 The clearing house jointly works with the consumer’s bank clears the cheque
and transfers the money to the merchant’sbanks.
 The merchant’s bank updates the merchant’saccount.
 The consumer’s bank updates the consumer’s account with the withdrawalinformation.

The e-chequeing is a great boon to big corporate as well as small retailers. Most major banks
accept e-cheques. Thus this system offers secure means of collecting payments, transferring
value and managing cashflows.
 5) Electronic Funds Transfer (EFT): Many modern banks have computerized their cheque
handling process with computer networks and other electronic equipment’s. These banks are
dispensing with the use of paper cheques. The system called electronic fund transfer(EFT)
automatically transfers money from one account to another. This system facilitates speedier
transfer of funds electronically from any branch to any other branch. In this system the sender
and the receiver of funds may be located in different cities and may even bank with different
banks. Funds transfer within the same city is also permitted. The scheme has been in operation
since February 7, 1996, in India. The other important type of facility in the EFT system is
automated clearing houses. These are the computer centers that handle the bills meant for
deposits and the bills meant for payment. In big companies pay is not disbursed by issued
cheques or issuing cash. The payment office directs the computer to credit an employee’s
account with the person’spay.

6) Telebanking: Telebanking refers to banking on phone services.. a customer can access

information about his/her account through a telephone call and by giving the coded Personal
Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective
innature.

 To get a particular work done through the bank, the users may leave his instructions
in the form of message withbank.
 Facility to stop payment on request. One can easily know about the chequestatus.
 Information on the current interestrates.
 Information with regard to foreign exchangerates.
 Request for a DD or payorder.
 DeMat Account related services.
 And other similarservices.

7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of mobile
banking. On-line banking is now moving to the mobile world, giving everybody with a mobile
phone access to real-time banking services, regardless of their location. But there is much more to
mobile banking from just on-lie banking. It provides a new way to pick up information and interact
with the banks to carry out the relevant banking business. The potential ofmobile
 banking is limitless and is expected to be a big success. Booking and paying for travel and even
tickets is also expected to be a growth area. According to this system, customer can access
account details on mobile using the Short Messaging System (SMS) technology where select
data is pushed to the mobile device. The wireless application protocol (WAP) technology, which
will allow user to surf the net on their mobiles to access anything and everything. This is a very
flexible way of transacting banking business. Already ICICI and HDFC banks have tied up
cellular service provides such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer
these mobile banking services to theircustomers.

8) Internet Banking: Internet banking involves use of internet for delivery of banking products and
services. With internet banking is now no longer confirmed to the branches where one has to
approach the branch in person, to withdraw cash or deposits a cheque or request a statement of
accounts. In internet banking, any inquiry or transaction is processed online without any reference
to the branch (anywhere banking) at any time. The Internet Banking now is more of a normal rather
than an exception due to the fact that it is the cheapest way of providing banking services. As
indicated by McKinsey Quarterly research, presently traditional banking costs the banks, more than
a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents
approximately. ICICI bank was the first one to offer Internet Banking inIndia.

Benefits of Internet Banking:

 Reduce the transaction costs of offering several banking services and diminishes the
need for longer numbers of expensive brick and mortar branches andstaff.
 Increase convenience for customers, since they can conduct many banking transaction
24 hours aday.
 Increasecustomerloyalty.
 Improve customeraccess.
 Attract newcustomers.
 Easy online application for all accounts, including personal loans andmortgages
Financial Transaction on the Internet:

 Electronic Cash: Companies are developing electronic replicas of all existing payment
system: cash, cheque, credit cards andcoins.
 Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bankaccount.
 Direct Deposits: Earnings (or Government payments) automatically deposited into bank
accounts, saving time, effort andmoney.
 Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,
laundry service, library fees and schoollunches.
 Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants
for payment of goods and services. This system has made functioning of the stock Market
very smooth andefficient.
 Cyber Banking: It refers to banking through online services. Banks with web site
“Cyber” branches allowed customers to check balances, pay bills, transfer funds, and
apply for loans on theInternet.

9) Demat: Demat is short for de-materialisation of shares. In short, Dematis a process where at
the customer’s request the physical stock is converted into electronic entries in the depository
system. In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT
ACCOUNT System to regulate and to improve stock investing. As on date, to trade on shares it
has become compulsory to have a share demat account and all trades take place throughdemat.

How to Operate DEMAT ACCOUNT?

One needs to open a DematAccount with any of the branches of the bank. After opening an
account with any bank, by filling the demat request form one can handover the securities. The
rest will be taken care by the bank and the customer will receive credit of shares as soon as it is
confirmed by the Company/Register and Transfer Agent. There is no physical movement of
share certification any more. Any buying or selling of shares is done via electronictransfers.
  If the investor wants to sell his shares, he has to place an order with his broker and give a
“Delivery Instruction” to his DP (Depository Participant). The DP will debit hi s account
with the number of shares sold by him.
 If one wants to buy shares, he has to inform his broker about his Depository Account
Number so that the shares bought by him are credited in to hisaccount.
 Payment for the electronic shares bought or sold is to be made in the same way as in the
case of physicalsecurities.

10) WealthManagement:

Wealth management is one of the many investment services offered by banks. It allows the
customers to plan their finances to grow long-term wealth. Apart from all this, banks also offer
several auxiliary services to the customers such as solvency certificates, mutual funds, insurance
services, gold coins, and more. Today, we have a fairly well-organized and highly sophisticated
banking system that includes new-generation banks along with traditional banks. In the banking
industry of India, there has been extraordinary growth that has replaced traditional banking
methods with simplified, accurate, and fast banking methods. Indian banks are subject to
tremendous change and are expected to expand invariably.
SERVICES OFFERED BY BANKS

The services offered by banks can be broadly classified into four categories.

1. Payment services: The Payment service is the backbone of the entire money flow in an
economy. Previously the payment system was supported by cheques, demand drafts etc., which
have now been replaced with direct online money transfer with the evolution oftechnology.

2. Financial intermediary: This is one of the oldest functions of the bank which specifies
accepting deposits from customers and then lending these funds to borrowers. This is the main
core business of the banking system and will continue as long as the banking systemexists.

3. Financial Services: Financial services include new services which were launched by different
financial institutions with time. These services include investment banking, foreign exchange
business, line of credit services, wealth management and broking services. These services
generateincomeforthecommercialbankintheform ofcommissionsetc.,whichisalsotermed
as non- fund income for banks. 4. Ancillary Services: other services that the banks offer to the
common men along with the necessary banking services. These ancillary services form a very
minuscule of the services offered by the banks. Typical ancillary services include safe deposits
lockers for gold, cheque pick up facility, door step banking etc.

Traditional Vs. New services offered by Banks

[Link] Traditional Services offered by Banks New Services offered by banks

1 Offering savings deposits Financial Advisory services
2 Currency exchange transactions Credit, debit cards and gift cards
3 Providing business or personal loans Cash management
4 Providing car and home loans to retail customers Equipment Leasing
5 Safe keeping of Valuables Venture Capital loans and
private equity funds
6 Supporting government activities with credit by Insurance services
purchasing government bonds
7 Offering trust services, other property and financial Retirement plans
management related services for a fee.
8 Equity trading and Investment
services
9 Mutual fund
10 Investment banking services
11 Wealth management
DEPOSIT PRODUCTS

- SavingsAccount
- CurrentAccount
- Recurring DepositAccount
- Fixed DepositAccount

CREDIT PRODUCTS

Consumer Loan - Consumer loan is a credit, lent to an individual for personal usage for
purchasing specific item or service. With the consumer loan you can purchase domestic
equipment, small household items, everyday items ro finance travel or other ongoing expenses.
As a rule, consumer loan is a short-term loan. Thus, in comparing with the other loan is more
expensive. Interest rate depends on loan term, volume and your income.
Mortgage Loan-Mortgage is a long-term, secured loan, whereas you can buy, build or repair
immobile property, like apartment, cottage house, parcel of land. Securing of mortgage with
immobile property means that if you fail to fulfill the taken liabilities during the loan period,
Bank is entitled to realize the immobile property.

Auto Loan-Auto Loan is a determined type of loan, whereas consumer is allowed to purchase
desirable car, new or secondary one. Generally, loan is secured by the purchased vehicle and
until full coverage of the loan, bank keeps it under security. Insurance of the vehicle is a must,
insurance fee is based on vehicle price and purchased package. In case of Auto loan, one can
secure immobile property, instead of thevehicle

Installment-Installment is a consumer kind of loan, aimed for purchasing specific item or

service from the shop/shopping center. Unlike the consumer loan, installment has specific
purpose, for example, purchasing of domestic appliances, vehicle. As a rule, installment is an
instant, directly in the shop or shopping center. Please consider that in some cases, price of the
item/service purchased via installment is higher than the price purchased directly with own
existing funds.

Overdraft-Overdraft is a short term loan, allowed on the card account of the costumer.
Sometimes, overdraft is called thirteenth salary and is launched corresponding to the salary (as a
rule, amount of overdraft is 90% of the salary, though in some banks it could be more than
salary). Usually, overdraft term is 1 year, only accrued interest rate is cut off from monthly
transferred salary and principle sum is covered at the end of theterm.

Overdraft allows the customer to use the sum, more than the customer deposits/owns. Maximum
sum is verified individually, based on the credit history and income of the customer. Overdraft is
almost similar to credit card though, the difference is that it is attached to the salary and
privileged period doesn't affect on consumed funds.

Credit Cards - Credit Card is the hybrid creature of the two bank products - plastic card and
consumer loan. This is bank product allowing the customers to purchase item or service,
including via internet and/or withdraw cash from the ATM.

Credit limit or maximum amount of loan, is verified individually, based on the credit history and
income of the customer.
Credit limit can be increased. Customer can consume money at any time and period, under the
given limit. Correspondingly, credit card has no standard schedule of coverage. Most of the
credit cards have privileged period, whereas interest rate is not accrued on consumed sum in case
of full coverage. If the costumer failed to cover the consumed sum during the privileged period,
customer is obliged to cover specific part of the consumed sum at the end of the contractual
period. It should be considered that commission rate for cash withdrawal is very high, so it is
recommended to use the credit card via POS terminals at shoppingcenters.

What is Custody?

“Custody means holding, directly or indirectly, client funds or securities, or having any
authorityto obtain possession of them. You have custody if a related person holds, directly or
indirectly, client funds and securities, or has any authority to obtain possession of them, in
connection with advisory services you provide toclients.

Custody includes: •

(i) Possession of client funds or securities (but not of checks drawn by clientsand
made payable to thirdparties)

(ii) Any arrangement (including a general power of attorney) under which you are
authorized or permitted to withdraw client funds or securities maintained with
a custodian upon your instruction to the custodian;and

(iii) any capacity (such as general partner of a limited partnership, managing member
of a limited liability company or a comparable position for another type of pooled
investment vehicle, or trustee of a trust) that gives you or your supervised person
legal ownership of or access to client funds orsecurities.

Meaning of Custodial Services

It is one of the financial services in which a brokerage or other financial institution holds and
manages a client's securities or other assets on their behalf.
 A Custodian provides an investor a place to store assets with little risk. This reduces the risk
of the client losing their assets or having them stolen. They are also available to sell through the
brokerage at the client's demand.

The custody business provides a range of security services, like safekeeping and settlement,
dividends collection and distribution, proxy voting, tax reclaim services, fund administration and
providing market news.

Who needs Custody Services?

- Private Banking & Wealth Managementcustomers

- Corporations

- Investmentfirms

- Insurance Companies

- Finance Firms

- Institutionalinvestors

- Domestic & InternationalBrokers

- Sub-Custodians

- Fund & AssetManagers

- Medium to small sizedBanks

- SecuritiesIssuers

- Private Investors

How does a Custodian generate fee income by offering Custodial Services?

• Stock Borrow Lending financing &servicing

• Trade finance settlement – fees can be charged for assets under management that are used
as security in trade finance, provision on loans etc

• Fee generation and income collection facilities andcapabilities

• The generation of fees through the management of Corporateactions

• The generation of fees through Proxy votingservices

• The generation of fees through Banking transactions for dividend paymentsetc

• The generation of fees through Reporting of actions toclients

• The generation of fees through Provision of market information toclients

• The generation of fees through FX transactions when the Securities are heldoverseas

Why the Need for a Custodian?

• The use of a custodian in both mature and emerging securities markets is considered
an international bestpractice

• In most jurisdictions there is often a regulatory requirement to provide CustodialServices

• It allows Investors, Fund & Asset Managers to concentrate on their expertise on

the management ofinvestments

• The safe keeping of assets helps to reduce market and counterpartyrisk

• It provides an opportunity for the Custodian to generate fees and income from Asset
Servicing activities

Attributes of a Custody Service

A Custody Service should include facilities for the Deposit and Safekeeping, Withdrawal,
Regular Transfer, Restricted Deposits and Transfer, Reorganization, Branch Deposits, and
Physical Clearance and Settlement services. A Custody Service provides:
• A Custodian provides Security for your assets in an approved Securevault.

• A Custodian should provide the assignment of a unique reference identification number to all
securities custodydeposits.

• An Asset Servicing & Custody Service should provide a continuous & random audit checks on
asset undermanagement.

• It should provide reasonable availability of detailed information on every certificate held under
custody.

• Choice of interface and access to the Banks’ CustodyService

• Availability of end-of-day positions and activity reports on the same files as other positions and
activities

• Availability of images of all certificates and other documents held incustody.

What a Custodian does not do?

• A Custodian does not Executetrade

• A Custodian does not generally advise on investmentselection

• A Custodian does not advise on corporate actionselection

• A Custodian does not advise on proxyvoting

• A Custodian does not organise trades between clients

• A Custodian acts only as a custodian or an administrator ofsecurities

• Clients’ assets are separated from those of the Custodian Bank often through the establishment
of a nominee company to safeguard clients’ assets Custodians are Not Beneficial Owners of
Securities!
Example:

Kotak Group, a premier financial services provider and one of the leading private sector banks
in India, proudly launches Custody Services as part of its diversified services portfolio in capital
markets industry. A dedicated team of experienced professionals and emphasis on the latest state
of the technologies have made Kotak Group being at the forefront of financial products and
services in Indian capital markets for overseas and domestic investors.

The Custody Services division at Kotak Mahindra Bank Ltd., (KMBL) iscommittedto delivering
top of the securities services to institutional investors, both foreign anddomestic,that would be
investing in the Indian capital markets across debt and equity instruments, derivatives,
Depository Receipts and mutualfundunits.

Key Features

Custody and Settlement Services

Depository Receipts

Escrow Accounts

Foreign Direct Investment

Internet Interface for Clients

Custodial services provided by KMBL

1. Account Opening: Kotak Mahindra Bank would assist clients for the custody account opening
documentation requirements and facilitate clients during the SEBI registrationprocess.

2. Securities Safekeeping: Provides safekeeping services for securities held both in electronic as
well as physicalforms

3. Corporate Actions: KMBL custody tracks for corporate actions processing on behalf of its
clients. This involves application made to issuers on behalf of clients, income collection and
following-up for corporate action events like dividend, interest, redemption,bonus,

4. Foreign Exchange Services: KMBL has a dedicated foreign exchange desk that takes care of
client needs for currency conversions and risk managementproducts.

5. Proxy Services: KMBL would act on client instructions and participate and vote on their
behalf in shareholders' meetings ofcompanies.
6. Compliance Monitoring and Regulatory Reporting: KMBL would monitor compliance to
existing guidelines by investors and facilitate reporting to regulators and local authorities on
behalf of theclient.

7. Transaction Settlement: As a Clearing Member with the clearing houses ofleading

8. Standardized and Customized Reporting: Investors need meaningful information that offers
insight to their investment portfolios. It also provides customized reports to clients at various
frequencies to enable clients to efficiently manage their securities portfolio, cash balances and
take more informed investmentdecisions.

Credit Appraisal – Overview

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions, which are involved in providing
financial funding to its customers. Credit risk is a risk related to non-repayment of the credit
obtained by the customer of a bank. Thusit is necessary to appraise the credibility of the customer
in order to mitigate the credit risk. Proper evaluation of the customer is performed this measures
the financial condition and the ability of the customer to repay back the Loan in future. Generally
the credits facilities are extended against the security known as collateral. But even though the
Loans are backed by the Collateral, banks are normally interested in the actual loan amount to be
repaid along with the interest. Thus, the customers cash flows are ascertained to ensure the
timely payment of principal and theinterest.

It is the process of appraising the credit worthiness of a Loan applicant. Factors like age, income,
number of dependents, nature of employment, continuity of employment, repayment capacity,
previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of
a person. Every bank or lending institution has its own panel of officials for thispurpose.

If any one of these is missing in the equation then the lending officer must question the viability
of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper
credit evaluation techniques and monitoring are implemented then naturally the Loan loss
probability/problems will be minimized, which should be the objective of every lending officer.
Credit Appraisal – Meaning

“An investigation/assessment done by the company before providing my loans &advances also
checks the commercial, financial &technical viability of the project proposed its findings pattern
and further checks the collateral security cover for the recovery of such funds”.

If any one of these is missing in the equation then the lending officer must question the viability
of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper
credit evaluation techniques and monitoring are implemented then naturally the Loan loss
probability/problems will be minimized, which should be the objective of every lending officer.
 Components of Credit Appraisal process/Mechanism

We can tabulate all the conditions under three parameters:

`
CREDIT APPRAISAL PROCESS
 Principles of Credit Appraisal
1. Pay attention to quality of credit, rather than quantity
2. Every loan must have a 3-way exist route to meet all eventualities
3. Focus on the character and antecedents and decedents of the borrower
4. Do not lend to a business you don’t understand
5. Lend only when feel comfortable about doing so
6. Know all the facts
7. Be conscious of the business cycles and their impact
8. Understand the management and its style of operation
9. Collateral is desirable, but it never is a replacement for repayment
10. Size does matter
11. Pay attention to even small details
12. Stay away from borrowers who can’t get loans from local banks
13. Don’t be rushed
14. Concentrate on where is the loan money is going?
15. Bank comes first – never make a loan to someone you personally won’t give a loan

Loan products of Bank

Bank’s loan products are a very sensitive area of operation. There are six basic principles of
lending that have been followed by banks since long. These principles are Safety, Liquidity,
Profitability, Purpose, Diversification of Risks and Security. Each bank is having its own
internal guidelines to ensure that the basic principles of lending are followed. However, though
the products may vary in their names, the Asset products which are almost common to all banks.
Basically, Banks are required to lend 40% of advances to `Priority Sector’, 25% of which should
be lent to `Weaker Section’ in terms of Reserve Bank of India guidelines.

Fund Based and Non-Fund based lending

Broadly, the lending function can be Fund Based or Non-Fund Based. As the name suggests, Fund
Based Loan product Facility involves actual outlay of Cash from Bank to the Loan Borrower who
needs the fund for personal or business activity. There are various types of loanand we shall learn
about the same in due course. Let’s understand the concept of Fund Based Lending, below is the
classification.

 Fund Based Credit Facilities – Direct Loans tocustomer

 Non-Fund Based Lending – Bank Guarantee & Letter ofCredit
Types of Fund BasedCredit
CashCredit
In practice, the operations in cash credit facility are similar to those of overdraft facility except
the fact that the company need not have a formal current account. Here also a fixed limit is
stipulated beyond which the company is not able to withdraw the amount. Legally, cash credit is
a demand facility, but in practice, it is on a continuous basis. Interest is payable on amount
actually availed, and is calculated on a daily productbasis.

Bills Discounting/Bills Purchase

This form of assistance is comparatively of recent origin. This facility enables a company to get
immediate payment against credit bills raised by them. The bank holds the bill as a security till
payment is made by the customer. The entire amount of bill is not paid to the company.

The Company gets only the present worth of the amount of bill, the difference between the face
value of the bill and the amount of assistance being in the form of discount value. On maturity,
bank collects the full amount of bill from the customer. While granting this facility to the
company, the bank inevitably satisfies itself about the credit worthiness of the customer. A fixed
limit is stipulated in case of the company, beyond which the bills are not purchased or discounted
by the bank.

Working Capital Term Loans

To meet the working capital needs of a company, banks grant working capital term loans for a
period ranging between 3 to 7 years, payable by yearly or half yearly installments.

Packing Credit
This type of assistance may be considered by banks to take care of specific needs of the company
when it receives some export order. Packing credit is a facility given by a bank to enable the
company to buy the goods to be exported. If the company holds a confirmed export order placed
by the overseas buyer or a letter of credit in its favor, it can approach the bank for packing credit
facility.
Buyer’s / Supplier’s Credit
These are similar to Bills Discounting / Bills Purchase. A manufacturing venture requires such
types of Credit facilities, which are self-liquidating in nature. These facilities are more relevant
to Financing of Foreign Trade: Imports &Exports

Term Loans
Term loans are a type of long-term loans that can last anywhere between one year to thirty years.
It is repaid throuh regular payments at a fixed or floating interest rate. Term loans are sanctioned
for acquisition of fixed assets like land and building, plant and machinery, equipment and
furniture fixtures, vehicles etc.

Banker has to ensure the end use of the amount lent and hence amount lent is directly given to
the supplier of the fixed asset and proper invoice is obtained for record. Banks have been
financing new business ventures and also have been funding the total financial needs, including
term loans of both new and existing units of all sizes. The company / firm has to provide margin
money through company’s capital to get the loan whereby the cost of project is partly funded
through own funds (called margin) and the balance through borrowing from financial institutes
like banks

Working Capital Facility

Working Capital facility is the credit taken out for a short term, usually for a year renewable
periodically, for financing the day-to-day operations of a company. This working capital is used
to fund the employees’ salaries, accounts payable, raw materials, advertising etc.

In case of working capital finance the stock of material purchased through the finance from
banks, the outstanding gets cleared from the proceeds of sale of finished goods and thus working
capital finance is self-liquidating through the completion of operating cycle and is a continuous
process.

Whereas the term loan once paid off through the profits of the business is not raised for the same
purpose. When Term Loans are given the repayment should be feasible from the profits of the
company.

Non-Fund based credit facilities

Non-Fund based Credit facilities do not involve actual fund flow from bank to customer, ie,
there is no credit extended to the customer. It is a sort of assurance or security to the third party
involved in a transaction on behalf of its customer that in the event thef customer fails to pay
back the dues, Bank takes the onus for the same. The Non-Fund based Loan Facilities provided
by banksare:

Bank Guarantee (BG)

In a BG or Bank Guarantee, the bank gives a commitment in the approved format on behalf of
its customer to a third party, for a fixed sum of money for a fixed period of time. The bank
charges the customer a percentage of that amount as commission (normally near about 3%p.a.).

The bank does not have to part with any money. However, the liability arises as and when the
customer defaults on payments. The banker makes good the loss of money as per the guarantee
contract, which is called invocation of guarantee by the beneficiary. Banker then recovers this
money from the customer on whose behalf the guarantee was issued. Part of the BG is secured
by margin money and balance is secured by collateral security like immovable property or stocks
and book debts or any tangibleasset.

Customers can avail services or buy goods without borrowing money which means they don’t
have to pay interest either. Customers can also service contracts or obtain contracts without
borrowing interest-heavy funds.

Letters of Credit (L/C)

LC is an integral part of all import and export transactions. The Letter of Credit helps the seller
to get his money from the buyer living in another City or Country. LCs can either be inland or
foreign.

Generally, in an international trade, seller may not be willing to sell the goods to the buyer unless
he is certain about payment. The risk in dealing with unknown buyer can be very high. The
buyer may not retire the bill in which case the seller has to incur substantial expenditure for
finding an alternate buyer, import of goods etc. So, seller wants an assurance that he will be paid
in full within the agreedtime.

Similarly, a buyer wants an assurance that he does not have to pay the seller until he is certain
that a seller has fulfilled his obligations as per agreement. Under these circumstances, banks
issue an LC or letter of credit to facilitate the payment of the tradetransactions.

The main documentation required to avail L/C are:

 Value of Raw materials consumed and of which on credit fromsupplier.
 Time taken for reaching L/C to thebeneficiary
 Time for shipment & consignment to reach customer’sdestination
 Period granted by the seller to the buyer
 The entire time taken from issue of L/C to retirement of L/C and MPBFworkings
Risks involved in Lending and mitigation processes
 If staff misjudge either the business or the borrower, it is difficult to fix the problem once
the loan isgranted.
 Careful evaluation of the business viability and borrower character are essential to lending unless
the organization can rely on (a) collateral, (b) cross-guarantees within agroup of borrowers, or
(c) social pressure networks.
 While alternatives to traditional collateral have worked well in certain developing countries,
they have worked less well in othercountries
 Prudent judgments of business viability and borrower character areessential.

Credit Monitoring
• Credit Information Bureau India Limited or more commonly known as CIBIL is the most critical player in
the finance industry. Set up in August 2000, they help many financial institutions with providing loans to
customers and even help them manage their business. CIBIL is the credit monitors on the country, they
maintain records of an individual's financial transaction history pertaining to loans, credit cards etc. from
the many banks and lending institutions in the country. With this information they create reports with will
pertain to the individual's financial transaction history, called Credit Information Report which also provide
the individual with a score. The score of the individual will allow many banks and financial institutions to
provide a loan of any kinds to an individual, since CIBIL has checked his/her repaying capability.

Benefits on Credit Monitoring

• It provides individuals with reports if any changes occur on their history, with also provides your score
and report.
• With credit monitoring, the possibility of credit fraud and identity theft is curtailed due to monitoring.
• Alerts provided to the individuals on their important activities, such as credit history, credit
inquires, delinquency, records of public nature, and even any other negative information.

7 Things you won’t find on your CIBIL report

• Savings and investment data
• Credit approval status and analysis
• How to improve your credit score
• Your credit utilization ratio
• Reason for settlements
• Defaulters list
• Monthly payment history beyond 3 years
Performing Asset
An account does not disclose any problems and carry more than normal risk attached to the business
• All loan facilities which are regular.
Non-Performing asset
Non-Performing Asset means a loan or an account of borrower, which has been classified by a bank or
financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI.

Factors Impacting rise in NPAs

• External factors :
Ineffective legal framework & weak recovery tribunals
Lack of demand / economic recession or slowdown
Change in Govt. policies
Willful defaults by customers
Alleged political interferences
• Internal factors :
Defective Lending process
Inappropriate / non –use of technology like MIS , Computerization
Improper SWOT analysis
Inadequate credit appraisal system
Managerial deficiencies
Absence of regular industrial visits & monitoring • Deficiencies in re-loaning process
Alleged corruption
Inadequate networking & linkages b/w banks
Why Loan accounts go Bad?
• BORROWER-SIDE
- Lack of Planning
- Diversion of Funds Disputes within No contribution No modernization Improper monitoring
Industrial Relations Natural Calamities
BANKER – SIDE
-Defective Sanction
 -No post-sanction supervision, etc
-Delay in releases
-Directed lending
-Slow decision-making process
Non-Performing Assets – Types
• Sub-Standard Assets: An asset which has remained NPA for a period less than or equal to 12 months.
• Doubtful Assets: An asset that has remained in the substandard category for a period of 12 months.
• Loss Assets: An asset where loss has been identified by the bank or internal or external auditors or the
RBI inspection but the amount has not been written off wholly.
NPA -Management Strategies
a. Preventive Management - It is rightly said that prevention is better than cure.
- Developing ‘Know Your Client’ profile (KYC)
-Monitoring Early Warning Signals
-Installing Proper Credit Assessment and Risk Management Mechanism
-Reduced Dependence on Interest
-Generating Watch-list/Special Mention Category
b. Curative Management
- Re-phasement of loans
- Pursuing Corporate Debt Restructuring (CDR)
-Encouraging rehabilitation of potentially viable units
-Encouraging acquisition of sick units by healthy units
- Entering compromise schemes with borrowers / Entering one-time settlement
Tools for Recovering NPA
- Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category.
- Using Securitization & SARFAESI Act (Securitisation and Reconstruction of Financial Assets
and Enforcement of Securities Interest Act, 2002)
- Using Asset Reconstruction Company (ARC)
- Approaching Debt Recovery Tribunals (DRTs).
- Recovery Action against Large NPAs
- Circulation of Information of Defaulters
- Strengthening Database of Defaulters
Priority Sector Lending
• Priority sector as the sectors of economy involving Agriculture Finance, Retail Trade, Small
Enterprises, Education Loans, Micro Credit and housing loans.

• The Reserve Bank of India, describes Priority sector lending norms to include the following areas:

Categories under Priority Sector Lending

(i) Agriculture
(ii) Export credit
(iii) Education
(iv) Housing
(v) Social Infrastructure
(vi)Renewable energy and
others Priority Sector Lending:
The PS advances relates to the facilities granted to

 Agriculture (Direct andIndirect)

 MSME (Micro Small and Medium Enterprises)
 SmallBusiness
 RetailTraders
 Professional and selfemployed
 EducationLoan
 Vehicle Loan
 House/Home Loans
 Mortgage Loans
 Small and Water TransportOperators
 Loan to WeakerSections
Also, the Retail Loan sector is growing these days very fast, which include, Consumer Loans,
Salary Loans, Personal Loans, Credit Card Loans and Retail Sectors. The Indian Loan market
through banks and non-banking financial companies have grown multi-fold during the last
 decade and the growth is stillcontinuing.

Priority sector lending norms to include the following areas:

• Small scale industries, this includes loans for setting up of industrial estates also.
• Small road and water transport operators with a limit for owning upto 10 vehicles.
• Small business, where the cost of equipment used for business does not to exceed 20 lakh rupees.
• Retail trade, with loans upto rupees 10 lakh.
• Professional and self-employed persons, with the borrowing limit upto 10 lakh rupees, with many
terms and conditions.
• State sponsored organizations for upliftment of Scheduled Castes/Scheduled Tribes
• Education sector, includes educational loans to individuals.
• Housing includes both direct and indirect loans with different limits set for rural and urban areas
• Consumption loans covered under Consumption Credit scheme being run for weaker sections.
• Micro-credit to self-help groups(SHGs) or Non-Governmental Organizations (NGOs).
• Loans to the software industry upto Rs 1 crore rupees.
• Loans to the specified industries operating in the Food and Agro-processing sector, which have
an investment in plant and machinery not exceeding Rs 5 crore.
• Loans to sanitation, health care and drinking water facilities and renewable energy. (newly added)
• Bank Investment in venture capital funds or companies that are registered with SEBI.

Minimum Limits for Priority Sector Lending

• The minimum limits are prescribed by RBI according to the ownership pattern of banks.
• For all local banks in both public and private sectors are required to lend 40% of their net
bank credit (NBC), to the priority sector.
• For foreign banks the minimum limit is 32% of their NBC (Net Banking Credit) to the
priority sector.
Factoring -Meaning and Definition

Factoring is derived from a Latin term “facere” which means ‘to make or do’. Factoring is an arrangement wherein
the trade debts of a company are sold to a financial institution at a discount. The factor is an agent who buys the
accounts receivables (Debtors and Bills Receivables) of a firm and provides finance to a firm to meet its working
capital [Link] main advantage of factoring is that the small or big business firm receives short term
finance (working capital) to meet day-to- day payments.

In a report submitted to the Reserve Bank of India, [Link] defines factoring as “a continuing
arrangement under which a financing institution assumes the credit and collection functions for its clients,
purchases receivables as they arise (with or without recourse for credit losses, i.e., the customer’s financial
inability to pay), maintains the sales ledgers, attends to other book-keeping duties relating to such accounts, and
performs other auxiliary duties”.

The Factoring Regulation Act 2011 governs the registration of factors and regulating the assignment of receivables
and the associated obligations.

It is an arrangement between a factor and his client which includes any two of the following services provide4d by
the factor to the client –
Finance
Maintenance of account
Collection of debts
Protection against credit risk
Through factoring an organization (client) relieves itself from the procedures and expenses of collecting
receivables arising out of a sale and receives immediate cash to finance its business operations.
A factoring agreement involves three parties:
The Factor
The Client (sells receivables to factor)
Customer (pays to factor)

Features of factoring
1. It is very costly.
2. In factoring there are three parties: The seller, the debtor and the factor.

3. It helps to generate an immediate inflow of cash.

4. Here the full liability of debtor has been assumed by the factor.

5. Factor has the right to take any legal action required to recover the debts.

Functions of a Factor
(a) Maintaining Accounts – Preparing and updating sales ledger and providing periodic reports with
useful information
(b) Providing advisory services – Advices the client regarding credit worthiness of a buyer,
potentialcustomers, market trends etc.
(c)Providing Short term finance – Provide money in advance up to 80% of the receivables
(d) Providing Credit Protection – Protects the client against bad-debts/non-payment.
(e)Providing collection facilities – Collect money on behalf of the client and remits the money back after
deducting his charges.

Factoring has several advantages, some of which are:

The company receives advance payment from the factor which improves its immediate cash inflows.
Factoring does not require to chase the debtors for collecting outstanding amount and consequently the
management may concentrate on other important issues.

Disadvantages of Factoring:

Factoring is also associated with some disadvantages such as:

(i) It is very costly, as a huge discount is to be paid to the factor.

(ii) Factors may adopt some harsh techniques for the recovery of debt which is not always acceptable to the

debtors and ultimately the relationship between company and debtors deteriorates.

(iii) Factors only purchase the invoices of a reputed company; a new company does not get the benefit of factoring.

Mechanism of Factoring

A factoring contact for sale of receivables -

It starts with a credit sale and agreement between the client and the buyer/customer.

The client (seller)

Sells goods on credit to buyer/customer

Prepares invoice, delivery challan, factoring agreement and other documents

Hands over the documents to factor (financial institution/Banking

Institution) Receives payment in advance upto 80% of cost of good by the

factor.

The Factor

Makes an advance payment to factor on receiving all the documents (invoice, challan, agreement etc.)

Prepares and sends periodical account statements to customer.

Receives payment from customer/buyer on due date

Remits the balance (20%) from the money collected to the clients/seller after deducting its commission,
fees,sevices charges etc.
Advantages of Factoring

To Client/Seller

The client gets immediate cash on sale which can be invested somewhere else.

It protects the client against credit risk [Link] of non-payment by buyer.

It allows the client to offer lucrative credit schemes to customers and increase his sales and profit.

It reduces the financial burden of the client and relieves him maintain accounts and collection of receivables.

It acts as an additional source of finance for the client and allows him to explore new markets.

To Customers/Buyers –

It allows customers to save bank charges and expenses

It allows customers to purchase expensive products through flexible credit schemes

The factoring procedure is simple and easy than applying for a bank loan, it saves time, money and effort.

Types of Factoring

(a) Full-service factoring or Without recourse factoring:

When a factor agrees to provide complete set of services which includes financing, maintenance of sales ledger,
debt collection at his own risk, and providing consultancy services as and when necessary, it is called as full
servicing factoring.

(b) With recourse factoring

When the factor does not undertake credit risk, it is known as with recourse factoring. In case the debtor fails to
make the payment on due date, it is assigned back to the firm by the factor. Here the responsibility of collecting the
amount lies with the selling firm.

(c) Maturity factoring

In this type, the factor agrees to finance the firm only after collecting the amount on maturity from debtors.

(d)International factoring

When the claims of an exporter are assigned to a financial institution and the finance is advanced on the basis of
export invoice it is called as international factoring.
Factoring Process

a. The firm enters into a factoring arrangement with a factor, which is generally a financial institution,
for invoice purchasing

b. Whenever goods are sold on credit basis, an invoice is raised and a copy of the same is sent to the factor.

c. The debt amount due to the firm is transferred to the factor through assignment and the same is
intimated to the customer.

d. On the due date, the amount is collected by the factor from the customer.

e. After retaining the service fees, the remaining amount is sent to the firm by the factor

Ancillary services
Each bank has two main activities as the sourcing or borrowing of funds (as deposits and capital from the market)
and the deploying or lending the funds as Loans and Investments): these form the traditional and coreactivities of
all the banks.

Apart from these basic activities, the banks provide a variety of other services or [Link] most popular
ones are listed below.

1) Funds transfer service: Useful for sending and receiving money from all over the [Link] products that
cover these services are Demand Drafts, Bankers Checks/Pay orders, EFT(Electronic Funds Transfer ),etc.
The names given to these services may vary among the banks but basically, they are the same.

2) Forex service: You can buy the foreign exchange for any purpose of expenditures like travel, buying
merchandise, [Link] sell the same to the bank when you earn or receive from abroad. Of course, these forex
transactions are subject to the rules and regulations prevailing in a country and they are provided by only those
bank branches which are approved by the Banking Authority or Regulator for this purpose.

3) Custodial Service: You can keep your valuables like jewels, documents, [Link] this service which is
commonly known as Locker facility(Safe Deposit Vaults in banking [Link] bank will collect a nominal fee
for the service.

4) Gold sale: You can buy pure gold for self-consumption or for trading by the jewellery [Link] also,
only a few selected branches of banks or banks are allowed to provide this. The products usually range from a
coin to a 100gm biscuit or bar.

5) Investment service: Invest your money in the mutual funds run by the [Link] service comes as Portfolio
service( the decision to maximize the returns on your money is left with the banker or portfolio manager) and as
Stand-alone product where the decision to get maximum returns is borne by you. Bothhave the plus and minus but
these products are offered to suit the convenience of the investors.

6) Insurance sale: A range of insurance products covering the risk of life, health, assets like vehicle, credit and
debit cards, travel, etc. are offered by almost all the banks by themselves or in collaboration with the leading
insurer companies, which again may be local or multinational entities.

7) Card services: Primarily intended for safety and convenience purpose but now, has become a payment
mode and a symbol of economic [Link] card products usually are called as Debit card, Credit card .

8) E-Banking: also known as Netbanking or Internet banking is the latest and most convenient facility of the
banks. You can get id and password to operate your account online: for transfer of funds to another account in the
same bank or another bank. You can keep the surplus funds in fixed deposit by using this [Link] best use of
this facility is for shopping online.
 UNIT 3 – BANKING REGULATIONS

Banking Regulation Act,1949 - KYC and AML guidelines, Banking Fraud, Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR), Asset Liability Management - Capital
Adequacy in Banks - Basel norms - CAMELS rating of Banks –Banking Ombudsman -
SARFAESI Act.

What is Banking Regulation Act,1949?

⚫ The Banking Regulation Act 1949 is a legislation in India, that states all banking firms
will be regulated under this Act.
⚫ There are a total of 55 Sections under the banking Regulation Act.

⚫ Initially the law was only applicable to banks, but after 1965, it was amended to make it
applicable too CO-operative banks and also to introduce other changes.

⚫ The act provides a framework that regulates and supervises commercial banks in India.

⚫ This act gives power to the RBI to exercise control and regulate banks under supervision.

Introduction of Banking Regulation Act 1949

⚫ The act came into force on March 16th 1949.

⚫ It relates to various aspects vis-à-vis banking in India.

⚫ The main objective of the banking regulation act is to ensure sound banking through
regulations covering the opening of branches and the maintenance of liquid assets.

Objectives of Banking Regulation Act, 1949

The Banking Regulations Act was enacted in February 1949 with the following objectives:
⚫ The provision of the Indian Companies Act 1913 was found inadequate to regulate banks
in India. Therefore a need was felt to introduce a specific legislation having
comprehensive coverage on issues relating to the banking business in India.

⚫ Due to inadequacy of capital, many banks failed and therefore prescribing a minimum
capital requirement was felt necessary. The Banking Regulation act brought in certain
minimum capital requirement for banks.
⚫ The key objectives of this act was to cut competition among banks. The act has regulated
the opening of branches and also changing the location of existing branches.
 ⚫ To prevent random opening of new branches and ensure balanced development of banks
through system of licensing.

⚫ Assigning power to RBI to appoint, reappoint and remove the chairman, director and
officers of the banks. This could ensure the smooth and efficient functioning of banks in
India.

⚫ To protect the interest of depositors and public at large by incorporating certain

provisions like prescribing cash reserve ratio and liquidity reserve ratios.

⚫ Provide compulsory amalgamation of weaker banks with senior banks and thereby
strengthen the banking system in India.

⚫ Introduce provisions to restrict foreign banks investing funds of Indian depositors outside
India.

⚫ Provide quick and easy liquidation of banks, when they are unable to continue operations
or amalgamate with other banks.

History of Banking Regulation Act, 1949

⚫ Banking in India originated in the last decades of the 18th Century.

⚫ Prior to Nationalization, the majority of the banks were private banks.

⚫ Private Banks were class based and there would be monopolies that would only benefit a
few people.

⚫ With the nationalization of the banks, the credit scenario changes benefitted all sections
of society and contributed to overall prosperity.

⚫ The Indian Government recognized the need to bring the banks under some form of
Government control, to be able to finance India’s growing financial needs.

⚫ On 19th July 1969, 14 major Indian Commercial banks of the country were nationalized .
⚫ After independence, the Government of India came up with the Banking Companies Act,
1949, later changed to Banking Regulation Act, 1949 as per the amending Act of 1965,
under which the Reserve Bank of India was bestowed with extensive powers for the
supervision of banking in India as the central banking authority

Provisions of Banking Regulation Act, 1949

⚫ Prohibition of trading(Section 8): According to Section 8 of the Banking Regulation Act,
a bank cannot directly or indirectly deal with buying or selling or bartering of goods.
 However it may barter the transactions relating to bills of exchange received for
collection or negotiation.

⚫ Non-banking asset(Section 9): A bank cannot hold any immovable property, howsoever
acquired except for its own use, for any period exceeding seven years from the date of
acquisition thereof. The company is permitted within a period of seven years, to deal or
trade in any such property for facilitating its disposal.

⚫ Management(Section 10): This rule states that every bank shall have one of its directors
as chairman on its Board of Directors. It also states that not less than 51% of the total
number of members of the Board of Directors of a bank shall consist of persons who have
special knowledge or practical experience in accountancy, agriculture, banking,
economics, finance, law and co-operatives.
⚫ Minimum Capital (section 11) -prescribes a minimum capital of Rs.5.00 lakh only,
Reserve Bank currently prescribed a minimum paid-up capital of Rs.100 crore for setting
up a new banking company. In the case of foreign banks setting up office of business in
India, they are required to bring in a minimum of ten million US dollars to India as
Capital. (A million is equal to ten lakhs). The minimum capital required to start a Local
Area Bank is fixed at Rs. 5.00 crores.
⚫ Prohibition of charge on unpaid capital: Section 14 - No banking company shall create
any charge upon its unpaid capital, and any such charge if created, shall be invalid.
⚫ Limiting the payment of dividends : Section 15 (Preliminary expenses, Brokerage and
Commission on issue of shares)

⚫ Transfer to Reserve Fund: Section 17 -Under Section 17, Banking companies

incorporated in India are obligated to transfer to the reserve fund a sum equivalent to not
less than 20% of the profit each year, unless the amount in such fund together with the
amount in the share premium account is more than or equal to its paid-up capital.

⚫ Maintenance of cash reserve by non-scheduled banks: Section 18 According to Section

18, every banking company not being a scheduled bank (i.e., a non-scheduled bank) has
to maintain in India by way of cash reserve with itself or in current account opened with
the Reserve Bank or the State Bank of India or any notified Bank or partly in cash with
itself and partly in such account or accounts a sum equivalent to at least 3% of its total
time and demand liabilities.
⚫ Restrictions on loans and advances: Sections 20 & 21

Section 20 lays down the restrictions on banking companies from entering into any
commitment from granting any loan to any of its director or to any firm in which a director is
interested or to any individual or whom a director stands as a guarantor. Further the banking
companies are prohibited from granting loans or advances on the security of its own shares.

Under Section 21, the RBI has been empowered to determine the policy to be followed
by the banks in relation to advances. Thus, RBI gives directions to banking companies on the
following matters:

(i) The purposes for which an advance may or may not be granted

(ii) The margins to be maintained in case of secured advances

(iii) The rate of interest charged on advances, other financial accommodation and
commission on guarantees

(iv) The maximum amount of advance or other financial accommodation that a bank may
make to or guarantee that it may issue for, a single party, having regard to the paid-up capital,
reserves and deposits of the concerned bank.
⚫ The Reserve Bank may cancel a license granted to a banking company under this section:
⚫ (i) If the company ceases to carry on banking business in India; or
⚫ (ii) If the company at any time fails to comply with any of the conditions imposed upon
it; or*
⚫ (iii) Any banking company aggrieved by the decision of the Reserve Bank cancelling a
license under this section may, within thirty days from the date on which such decision is
communicated to it, appeal to the Central Government. The decision of the Central
Government shall be final.
⚫ Thus, every banking company which likes to start banking business in India must obtain
license from RBI.
⚫ Control on the opening of new business: Section 23 -cording to this section, the RBI
has been empowered to control the opening of new and transfer of existing places of
business of banking companies. As such, no banking company shall open a new place of
business in India or outside India and change the place without obtaining the prior
permission of the RBI.
⚫ No permission is required for opening a branch within the same city, town or village and
for opening a temporary place of business for a maximum period of one month within a
city, where the banking company already has a place of business for the purpose of pro-
viding banking facilities to the public on the occasion of an exhibition, a conference, a
mela, etc.

⚫ Maintenance of a percentage of liquid assets (SLR): Section 24

Under this section, every banking company shall maintain in India in liquid assets for an
amount not less than 25% of the total of its time and demand liabilities at the close of business
on any day. The liquid assets include cash, gold or unencumbered approved securities and they
are valued at a price not exceeding the current market price.
 ⚫ Maintenance of Assets in India: Section 25
Section 25 requires for the maintenance of assets equivalent to at least 75% of its demand
and time liabilities in India, at the close of business of the last Friday of every quarter.

⚫ Submission of Returns of unclaimed Deposits: Section 26

According to this section, every banking company shall submit a return in the prescribed
form and manner to the RBI, giving particulars, regarding unoperated accounts in India for 10
years. This return is to be submitted within 30 days after the close of each calendar year.
In the case of fixed deposits, the 10 years period is counted from the date of expiry of such fixed
period. RRBs are however required to forward such returns to NABARD

⚫ Submission of Return, Forms, etc., to RBI: Section 27

Under this section, every banking company shall submit to be RBI a return in the
prescribed form (form 13) and manner showing its assets and liabilities in India on the last
Friday of every month, (if that Friday is a public holiday under the negotiable instruments Act,
1881, on the preceding working day.)

Besides, the RBI may at any time direct a banking company to furnish the statements and
information relating to the business or affairs of the banking company within the specified period
mentioned therein.

Such directions may be issued when the RBI considers it is necessary or expedient to
obtain for the purpose of the Act. And the RBI may call for information every half year,
regarding the investments of banking company and the classifications of advance given in
respect of industry, commerce and agriculture.

⚫ Powers to Publish Information: Section 28

Under this section, the RBI is authorized to publish in the public interest any information
obtained under the Banking Regulation Act. The information is published in the consolidated
form as the RBI may think fit.

⚫ Maintenance of Accounts and Balance Sheets: Section 29

This section provides for the preparation of Balance Sheet and Profit & Loss Account as
on the last working day of the year in respect of all business transacted by a banking company
incorporated in India and in respect of all business transacted through its branches in India by a
banking company incorporated outside India. It is prepared in the forms set out in the Third
Schedule.
 The central government after giving not less than three months notice of its intention so
to do by a notification in the official gazette, may from time to time by a like notification amend
the forms set out in the Third Schedule.

In the view of the fact that in the opinion of experts, as well as the Banking enquiry
committee, that form “f ” required to be used by every company in preparing its balance sheet.

⚫ Inspection of books of accounts: Section 35

⚫ This Section was incorporated with a view to safeguard the interest of shareholders and
depositors of banking companies, as a result of which bank directors and managers are
likely to be cautious in employing the funds of their institutions.

⚫ This section provides wide powers to RBI to cause an inspection of any banking com-
pany and its books and accounts.

⚫ Giving directions to Banking Companies: Section 35A

Under Section on 35A, the Reserve Bank may caution or prohibit banking companies
generally or any banking company in particular against entering into certain types of operations.

Prior approval from RBI for appointment of Managing Director, etc. Section 35 AB

According to this section, prior approval of RBI should be obtained for the appointment,
re-appointment, remuneration and removal of the chairman or a director of a banking company.
And for the amendments of provisions in the Memorandum or Articles or Resolutions of a
General Meeting or Board of Directors, the prior approval of RBI is necessary.

Removal of managerial and any other persons from office: Section 36AA and Section
36AB

Under these sections, the RBI has power to remove managerial and other persons from
office and to appoint additional directors.

⚫ Winding up of Banking Companies: Section 38 to 44

⚫ Sections 38 to 44 of the Act lay down the provisions for winding up of a banking
com- pany. The RBI may apply for the winding up of a banking company if,

⚫ (i) It fails to comply with the requirements as to minimum Paid-up capital and reserves
as laid down in Section 11, or

⚫ (ii) Is disentitled to carry on the banking business for want of license under Section 22, or
⚫ (iii) It has been prohibited from receiving fresh deposits by the Central Government
or the Reserve Bank, or
 ⚫ (iv) It has failed to comply with any requirement of the Act, and continues to do so even
after the Reserve Bank calls upon it to do so,

⚫ (v) The Reserve Bank thinks that a compromise or arrangement sanctioned by the court
cannot be worked satisfactorily, or

⚫ (vi) The Reserve Bank thinks that according to the returns furnished by the company it is
unable to pay its debts or its continuance is prejudicial to the interests of the depositors.

⚫ The banking company cannot be voluntarily wound up unless the Reserve Bank certifies
that it is able to pay its debts in full.

⚫ Amalgamation of Banking Companies: Section 44A

The procedures for amalgamation of banking companies are given under this section. As
per this section the scheme of amalgamation (i.e., the terms and conditions of amalgamation) is
to be approved by a majority – 2/3 of the total voting ratios – of the shareholders in a general
meeting.

The unwilling shareholders are entitled to receive the value of their shares as may be
determined by the RBI. The RBI has to sanction the scheme of amalgamation after the
shareholders’ approval.

The assets and liabilities are transferred to the acquiring bank according to the directions
of RBI mentioned in the sanction order. The RBI issues order for the dissolution of the first bank
on a specified date.

Money Laundering – Introduction

⚫ Banks were advised to follow certain customer identification procedure for opening of
accounts and monitoring transactions of a suspicious nature.
⚫ The Prevention of Money Laundering Act (PMLA), 2002 is an Act of the Parliament of
India enacted in January, 2003. The Act has come into force w.e.f. 1st July, 2005.

⚫ KYC Guideline revisited on recommendations made by the Financial Action Task Force
(FATF) on Anti Money Laundering (AML) standards and on Combating the Financing of
Terrorism (CFT).

⚫ PMLA (Amendment) Act, 2012 as passed by Lok Sabha on 29/11/2012 has come into
force w.e.f. 15th February 2013.

Definition as per PMLA 2002

⚫ Sec.3 of PML Act defines ‘money laundering’ as: “whosoever directly or indirectly
attempts to indulge or knowingly assists or knowingly is a party or is actually involved in
 any process or activity connected with the proceeds of crime and projecting it as
untainted property shall be guilty of the offence of money-laundering”.

Objective of Anti-Money Laundering Policy

⚫ To prevent banks from being used, intentionally or unintentionally, by criminals
for Money Laundering activities or terrorist activities.
⚫ To enable banks to know/ understand their customer and their financial dealings better.
⚫ To put in place a proper control mechanism for detecting and reporting
suspicious transaction.
⚫ It will also enhance fraud Prevention.
⚫ To ensure compliance with guidelines issued by the regulators including FIU-IND
& RBI.

Obligations Under PMLA 2002

⚫ Appointment of Principal Officers and designated Director,

⚫ Maintaining record of prescribed transactions,

⚫ Furnishing information of transaction to the specified authority,

⚫ Verifying & maintaining record of the identity of its clients,

⚫ Preserving records for 5 years from the date of each transactions between bank &
clients or for 5 years after business relationship ended.

Punishment for Money Laundering

⚫ Punishment for non-adherence of the Act would be rigorous imprisonment for not
less than 3 years but up to 7 years.

⚫ But in case of offences done under Narcotic Drugs and Psychotropic Substance Act
1985 the maximum punishment may extend to 10 years.

Money Laundering Risks

Bank is exposed to the following risks:

⚫ Reputational Risk: Risk of loss due to severe impact on bank’s reputation which is
most valuable asset of the organization.
 ⚫ Compliance Risk: Risk of loss due to failure to comply with key regulations governing
the bank’s operations.

⚫ Operational Risk: The risk of direct or indirect loss resulting from inadequate or failed
internal processes, people and systems or from external events.

⚫ Legal Risk: Risk of loss due to any legal action the bank or its staff may face due to
failure to comply with the law resulting in adverse judgments, unenforceable contracts,
fines and penalties, generating losses, increased expenses for an institutions or even
closure of such institutions.

Way of Money Laundering

⚫ Money laundering generally refers to ‘washing’ of the proceeds or profits generated
from:

(i) Drug trafficking

(ii) Arms, antique, gold smuggling

(iii) Prostitution rings

(iv) Financial frauds

(v) Corruption, or

(vi) Illegal sale of wild life products and other specified predicate offences.

Indicators of Money Laundering

⚫ Turn over in dormant account;

⚫ Receipt/payment of large sums of cash;

⚫ Reluctance to provide normal information;

⚫ Depositing high value third party cheques;

⚫ Large credits from abroad;

⚫ Employees leading lavish life style;

⚫ Hawala Transaction.

Combating the financing of Terrorism (CFT) measures

⚫ Money to fund terrorist activities moves through the global financial system via wire
transfers and in and out of personal and business accounts.
 ⚫ It can sit in the accounts of illegitimate charities and be laundered through buying and
selling securities and other commodities, or purchasing and cashing out insurance
policies.

⚫ Before opening of the new account branches should ensure the name is not listed in:- I.
Al-Qaida sanction list II. 1988 sanction list N.B.:- Banks are regularly putting in KRISH
MENU updated list.

KYC Standards

The key elements of policy are as under :

⚫ CAP ( Customer Acceptance Policy )

⚫ Risk management

⚫ CIP ( Customer Identification Procedure )

⚫ Monitoring of transactions

Customer Acceptance Policy not to Open accounts of following persons

⚫ Anonymous /Fictitious/Benami Names and with Criminal Background.
⚫ Branch should prepare a profile for each new customer based on risk categorization Risk
categorization should be reviewed once in a 6 months.

⚫ Occupation code field made Mandatory in the system.

⚫ No account should be opened where bank is unable to apply due diligence measures.
Bank can close those a/c where customer is not co-operating in submission of documents
( decided by DZM or AGM after giving notice to customer).

Partial Freezing /Closure of NON-KYC compliance account

In the case of non-compliance of KYC guideline account, RBI advised the bank to take the
following steps:

⚫ Initially, a notice of 3 moths should be given for KYC compliance,

⚫ It should be followed reminder for further 3 months,

⚫ Thereafter, Partial freeze the debit and allowing credit only,

⚫ If partial freeze continue for 6 months and accounts are still non- KYC complaint, both
credit and debit freeze and may be close the account.
 ⚫ Closure of account shall be approved by Branch Manager.

⚫ Reason for partial freeze and closure should be communicated to account holder.

Customer Acceptance Policy

⚫ Bank have introduced a Customer Profile Sheet (CPS) which is required to be obtained
at account opening time. Indicative parameters of CPS are:

a) Constitution: Individual, Proprietorship, Partnership, Society, public/private limited

company, Trust etc,

b) Product Subscription: Salary A/c, Business, NRI etc

c) Nationality

d) Social status

e) Financial status, Volume of turn over etc

f) Nature of business

g) Activity engaged

h) Clients and their geographical location

Customer Risk Rating/Categorization

⚫ Low Risk category: (Full KYC in10 years)

1. Salaried employed whose salary structure is well defined, Pensioners, benefit recipients.

[Link] belonging to lower economic strata of society showing small balances.

[Link]. department and govt. owned companies, Regulators, Statutory Bodies etc.

[Link] with a long term and active business relationship.

5. Customer other than High & Medium risk.

⚫ Medium Risk Customer: (Full KYC in 8 years)

1. NBFC,

2. Builders,

3. Stock Brokers.
 ⚫ High Risk Customer: (Full KYC in2years)

1. Non resident customer,

2. HNI, Non-face to face customer,

3. Trust, Charities, NGOs, Sleeping Partner firms, Investment Company,

4. Donation receiving organization, Religious institution,

5. Shopping malls, Jewelers, Petrol pump, Liquor stores,

6. Antique dealers, Arms dealer, Agent, Brokers, Bullion dealers,

7. Politically Exposed Persons of foreign origin,

8. Customer with dubious reputation etc,

9. Companies having close family share holding etc.

10. Person living in High Risk Countries

Officially Valid KYC Document

⚫ Officially valid KYC document”:- The below mentioned six officially valid documents
will serve the purpose for both identification of customer and also the address proof of
customer.

1. Passport (within validity),

2. Driving License (within validity),

3. PAN Card ( Only Identity proof),

4. Voter’s Identity Card,

5. Job Card issued by NREGA,

6. Letterissued by UIDAI – Aadhaar number .NB:- If the customer is providing the Passport, the
full detail of the passport to be captured mandatorily in the Finacle system/CUMM along with
customer nationality of all NRI/PIO or Domestic customer.

FRAUD IN THE BANKING SECTOR – Introduction

⚫ Banks are an essential part of the Indian economy.

⚫ While the primary responsibility for preventing frauds lies with banks themselves.
 ⚫ Banks are dealing with public's money and hence it is imperative that employees should
exercise due care and diligence in handling the transactions in banks.

The RBI has been advising banks from time to time about the major fraud prone areas and the
safeguards necessary for prevention of frauds

Definition of fraud
⚫ Fraud can loosely be defined as “any behaviour by which one person intends to gain a
dishonest advantage over another“ fraud, under section 17 of the Indian contract act,
1872,

⚫ RBI not defined the term “fraud” in its guidelines on frauds which reads as under.

“A deliberate act of omission or commission by any person, carried out in the course of a
banking transaction or in the books of accounts maintained manually or under computer system
in banks, resulting into wrongful gain to any person for A temporary period or otherwise, with or
without any monetary loss to the bank”.

Types of Frauds
⚫ Account opening fraud: this involves a deposit and cashing of fraudulent cheques.

⚫ Cheque kiting: is a method where by a depositor utilizes the time required for cheques to
dear to obtain an unauthorized loan without any interest charge.

⚫ Cheque fraud: most common cases of this kind of fraud are through stolen cheques and
forged signatures.

⚫ Counterfeit securities: documents, securities, bonds and certificate could be forged,

duplicated, adjusted or altered and presented for loan collection.

⚫ Computer fraud: hacking, tampering with a diskette to gain access to unauthorized areas
and give credit to an account for which the funds were not originally intended.

⚫ Loan fraud: when funds are lent to a non-borrowing customer or a borrowing customer
that has exceeded his credit limit.

⚫ Money laundering fraud: this is a means to conceal the existence, source or use of
illegal obtained money by converting the cash into untraceable transactions in banks.

⚫ Money transfer fraud: alteration of a genuine Funds transfer request. e.g Mail,
telephone, electronic process, telex.
⚫ Telex Fraud: The messages that are passed through telex in form of codes could be
altered to divert the funds to another account
 ⚫ Letters of Credit: Most common in international trading, these are instruments used
across borders ads can be forged, altered, adjusted and take longer to identify.

⚫ Advanced Fees Fraud: Popularly known as ‘419’, advanced fees fraud may involve
agent with an offer of a business proposition which would lead to access often for a long
term.

Category of frauds

Technology related

⚫ The Technology related fraud around 65% 10 of the total fraud cases reported by banks.
(covering frauds committed through /at internet banking channel, ATMs and other
alternate payment channels like credit/debit/prepaid cards)
⚫ Banks are adopt newer service delivery platforms like mobile, internet and social media,
for enhanced efficiency and cost-cutting.
⚫ Banks’ customers have become tech savvy and started using online banking services and
products. .

KYC related (mainly in deposit accounts)

⚫ KYC (Know Your Customer) is a framework for banks which enables them to know /
understand the customers and their financial dealings to be able to serve them better.

⚫ RBI has advised banks to make the KYC procedures mandatory while opening and
operating the accounts.

⚫ Issued the KYC guidelines under section 35 (A) of the banking regulation act, 1949.

⚫ For this purpose, the fraudsters generally use deposit accounts in banks with lax KYC
drills.

⚫ Therefore, customers to guard against such temptations for easy money but should also
ensure that deposit accounts maintained with them are fully KYC compliant.

Advances related
⚫ Frauds related to the advances portfolio accounts for the largest Share of the total amount
involved in frauds in the banking sector. (Involving amount of Rs. 50 crore and above)

⚫ Another point that public sector banks account for a substantial chunk of the total amount
involved in such cases.
 ⚫ Declaration of frauds by various banks in cases of consortium/ multiple financing we
have on occasions observed more than 12– 15 months lag in declaration.

⚫ The large value advance related frauds, which pose a significant challenge to all
stakeholders, are mainly concentrated in the public sector banks. Majority of the credit
related frauds are on account of deficient appraisal system, poor post disbursement
supervision and inadequate.

⚫ Reserve bank has also advised banks to audit periodically so that cases of
multiple financing may be detected in the initial stages itself.

Guidelines for Reporting Frauds to POLICE/CBI

Private Sector Banks/Foreign banks (operating in India)

⚫ While reporting the frauds, banks are required to ensure that, besides the necessity of
recovering the amount expeditiously, the guilty persons do not get unpunished.
⚫ Cases that are required to be referred to State Police include:-

a) Cases of fraud involving an amount of Rs. 1.00 lakh and above committed by
outsiders on their own and/or with the connivance of bank staff/officers.

b) Cases of fraud involving amount exceeding Rs. 10,000/-committed by bank employees.

c) Fraud cases involving amounts of Rs 1.00 crore and above should also be reported to
the Serious Fraud Investigation Office (SFIO), GOI,

Public Sector Banks

⚫ Cases to be referred to CBI

a) Cases of fraud involving amount of Rs. 1.00 crore and above upto Rs. 7.50 crore:-

• Where staff involvement is prima facie evident

– CBI (Anti Corruption Branch).

• Where staff involvement is prima facie not evident- CBI (Economic Offences
Wing)

a) All cases involving more than Rs.7.50 crore - Banking Security and Fraud Cell of the
respective centres, which is specialized cell of the Economic Offences Wing of the CBI
for major bank fraud cases.

b) Cases to be referred to Local Police

 Cash Reserve Ratio (CRR) RBI meaning, CRR rate: The Cash Reserve Ratio in India is
decided by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy.
The Reserve Bank of India takes stock of the CRR in every monetary policy review, which,
at present, is conducted every six weeks. CRR is one of the major weapons in the RBI’s
arsenal that allows it to maintain a desired level of inflation, control the money supply, and
also liquidity in the economy. The lower the CRR, the higher liquidity with the banks, which
in turn goes into investment and lending and vice-versa. Higher CRR can also negatively
impact the economy as lesser availability of loanable funds, in turn, slows down investment.
It thereby reduces the supply of money in the economy.

What is CRR or Cash Reserve Ratio?

The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the
form of cash so that the same can be given to the bank’s customers if the need arises. The
percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the
Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or is sent to the RBI.
Banks do not get any interest on the money that is with the RBI under the CRR requirements.

How is Cash Reserve Ratio calculated? CRR formula:

If the current CRR rate is 4%, a bank is required to store 4% of the total NDTL or the Net
Demand and Time Liabilities in the form of cash. The bank cannot use this money for
investment or lending.
Objectives of Cash Reserve Ratio
There are two primary purposes of the Cash Reserve Ratio:
 Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security
of the amount. It makes it readily available when customers want their deposits back.
 Also, CRR helps in keeping inflation under control. At the time of high inflation in the
economy, RBI increases the CRR, so that banks need to keep more money in reserves so
that they have less money to lend further.
How does Cash Reserve Ratio help in times of high inflation?
At the time of high inflation, the government needs to ensure that excess money is not available
in the economy. To that extent, RBI increases the Cash Reserve Ratio, and the amount of money
that is available with the banks reduces. This curbs excess flow of money in the economy. When
the government needs to pump funds into the system, it lowers the CRR rate, which in turn,
helps the banks provide loans to a large number of businesses and industries for investment
purposes. Lower CRR also boosts the growth rate of the economy.
Statutory Liquidity Ratio -Definition
Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank
has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve
requirement that banks are expected to keep before offering credit to customers. The SLR is
fixed by the RBI and is a form of control over the credit growth in India.

The government uses the SLR to regulate inflation and fuel growth. Increasing the SLR will
control inflation in the economy while decreasing the statutory liquidity rate will cause growth in
the economy. The SLR was prescribed by Section 24 (2A) of Banking Regulation Act, 1949.

Why is the SLR fixed?

 To check the expansion of bank credit.

 To ensure the solvency of commercial banks.
 To compel banks to invest in government securities like bonds.
 To fuel growth and demand; this is done by decreasing the SLR so that there is
more liquidity with the commercial banks.
If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Reserve Bank of
India. The defaulter bank has to pay a penalty of 3% above the bank rate on the deficient amount
for that particular day.

SLR plays a very important role in fixing the minimum rate at which a bank can lend money to
its customers. This minimum amount is called the base rate. This helps in building transparency
between the Reserve Bank of India and other public dealing banks.

The Reserve Bank of India is the body which sets the SLR. The Reserve Bank of India increases
the SLR at the time of inflation to control bank credit. At the time of recession, RBI decreases
the SLR to increase bank credit.

Asset Liability Management - Meaning

Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by
a bank due to a mismatch between assets and liabilities either due to liquidity or changes in
interest rates. Liquidity is an institution's ability to meet its liabilities either by borrowing or
converting assets.
Objectives of Asset/Liability Management

The primary objective of the Asset/Liability Management (ALM) Policy is to maximize earnings
and return on assets within acceptable levels of risk: Interest Rate - impact on earnings and net
worth from potential short- and long-term changes in interest rates.

Camels Rating – Overview

The concept was initially adopted in 1979 by the Federal Financial Institutions
Examination Council (FFIEC) under the name Uniform Financial Institutions Rating
System (UFIRS).
⚫ Definition: CAMELS Rating is the rating system wherein the bank regulators or
examiners (generally the officers trained by RBI), evaluates an overall performance of
the banks and determine their strengths and weaknesses.

⚫ CAMELS Rating is based on the financial statements of the banks, Viz. Profit and loss
account, balance sheet and on-site examination by the bank regulators.

⚫ In this Rating system, the officers rate the banks on a scale from 1 to 5, where 1 is
the best and 5 is the worst. The parameters on the basis of which the ratings are done are
represented by an acronym “CAMELS”.

CAMELS is an international rating system used by regulatory banking authorities to rate

financial institutions, according to the six factors represented by its acronym.
The CAMELS acronym stands for "Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity."

Camels Rating
Framework Capital
Adequacy
- Capital adequacy focusses on the total position of bancapital.
- It assures the depositors that they are protected from the potential shocks of
losses that a bank incurs.
 - Financial managers maintain company’s adequate level of capitalization by
following it. It is the key parameter of maintaining adequate levels of
capitalization.

Asset Quality
- Asset quality determines the robustness of financial institutions against loss of
value in the assets.
- All commercial banks show the concentration of loans and advances in total assets.
- The high concentration of loan and advances indicates vulnerability of assets to
credit risk, especially since the portion of non-performing assets is significant.

Management Soundness
- It is also depends on compliance with set norm, planning ability; react to
changing situation, technical competence, leadership and administrative quality.
- A sound management is the most important pre-requisite for the strength and
growth of any financial institution.

Earnings and profitability

-It is the prime sources of increasing capital of any financial institution.

-Strong earnings and profitability profile of a bank reflect its ability to support present
and future operations.

-Increased earning ensure adequate capital and adequate capital can absorb all losses and
give shareholder adequate dividends.

Liquidity
- An adequate liquidity position refers to a situation, where an institution can obtain
sufficient funds, either by increasing liabilities or by converting its assets quickly at a
reasonable cost.
- It accesses in terms of asset and liability management.
- Liquidity indicators measured as percentage of demand and time liabilities (excluding
interbank items) of the banks.
- It means that the percentage of demand and time liabilities gets a bank as per its liquid
assets.

Sensitivity to Market Risk

 -The sensitivity to market risk is evaluated from changes in market prices, notably
interest rates; exchange rates, commodity prices and equity prices adversely affect a bank’s
earnings and capital.
Camels Reporting - Process

⚫ What are Basel norms?

Basel norms or Basel accords are the international banking regulations issued by the
Basel Committee on Banking Supervision.

The Basel norms is an effort to coordinate banking regulations across the globe, with
the goal of strengthening the international banking system.

It is the set of the agreement by the Basel committee of Banking Supervision which
focuses on the risks to banks and the financial system.

What is the Basel committee on Banking Supervision?

⚫ The Basel Committee on Banking Supervision (BCBS) is the primary global
standard setter for the prudential regulation of banks and provides a forum for
 regular cooperation on banking supervisory matters for the central banks of different
countries.
⚫ It was established by the Central Bank governors of the Group of Ten countries
in 1974.
⚫ The committee expanded its membership in 2009 and then again in 2014. The
BCBS now has 45 members from 28 Jurisdictions, consisting of Central Banks
and authorities with responsibility of banking regulation.
⚫ It provides a forum for regular cooperation on banking supervisory matters.
⚫ Its objective is to enhance understanding of key supervisory issues and improve the
quality of banking supervision worldwide.

Why these norms?

⚫ Banks lend to different types of borrowers and each carries its own risk.
⚫ They lend the deposits of the public as well as money raised from the market i.e, equity
and debt.

⚫ This exposes the bank to a variety of risks of default and as a result they fall at times.

⚫ Therefore, Banks have to keep aside a certain percentage of capital as security against the
risk of non – recovery.

⚫ The Basel committee has produced norms called Basel Norms for Banking to tackle this
risk.

Why the name Basel?

⚫ Basel is a city in Switzerland.
⚫ It is the headquarters of the Bureau of International Settlement (BIS), which fosters
cooperation among central banks with a common goal of financial stability and common
standards of banking regulations.

⚫ It was founded in 1930.

⚫ The Basel Committee on Banking Supervision is housed in the BIS offices in Basel,
Switzerland.

What are these norms?

The Basel Committee has issued three sets of regulations which are known as Basel-I, II, and III.

Basel-I
⚫ It was introduced in 1988.
 ⚫ It focused almost entirely on credit risk.

⚫ Credit risk is the possibility of a loss resulting from a borrower's failure to repay a
loan or meet contractual obligations. Traditionally, it refers to the risk that a
lender may not receive the owed principal and interest.

⚫ It defined capital and structure of risk weights for banks.

⚫ The minimum capital requirement was fixed at 8% of risk weighted assets
(RWA).

⚫ RWA means assets with different risk profiles.

⚫ For example, an asset backed by collateral would carry lesser risks as compared
to personal loans, which have no collateral.

⚫ India adopted Basel-I guidelines in 1999.

Basel-II In 2004, Basel II guidelines were published by
BCBS.
⚫ These were the refined and reformed versions of Basel I accord.
⚫ The guidelines were based on three parameters, which the committee calls it
as pillars.
⚫ Capital Adequacy Requirements: Banks should maintain a minimum
capital adequacy requirement of 8% of risk assets
⚫ Supervisory Review: According to this, banks were needed to develop and use
better risk management techniques in monitoring and managing all the three types
of risks that a bank faces, viz. credit, market and operational risks.
⚫ Market Discipline: This needs increased disclosure requirements. Banks need to
mandatorily disclose their CAR, risk exposure, etc to the central bank.

⚫ Basel II norms in India and overseas are yet to be fully implemented though
India follows these norms.

Basel III In 2010, Basel III guidelines were released.

⚫ These guidelines were introduced in response to the financial crisis of 2008.

⚫ A need was felt to further strengthen the system as banks in the developed economies
were under-capitalized, over-leveraged and had a greater reliance on short-term
funding.

⚫ It was also felt that the quantity and quality of capital under Basel II were
deemed insufficient to contain any further risk.
⚫ Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (Sarfaesi) Act of 2002.
⚫ Banks utilize Sarfaesi Act as an effective tool for bad loans (Non Performing
Asset) recovery.

SARFAESI ACT
⚫ The Sarfaesi Act is effective only against secured loans where banks can enforce
the underlying security.

⚫ Following are the main objectives of the Sarfaesi Act.

⚫ Provides the legal framework for securitization activities in India.

⚫ It gives the procedures for the transfer of NPAs to asset reconstruction companies
for the reconstruction of the assets.

⚫ Enforces the security interest without Court’s intervention.

⚫ Gives powers to banks and financial institutions to take over the immovable
property that is pledged to enforce the recovery of debt.

⚫ Major feature of Sarfaesi is that it promotes the setting up of asset

reconstruction companies (ARCs) and asset securitization companies (SCs) to
deal with NPAs accumulated with the banks and financial institutions.

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

⚫ Securitisation

Securitization is the practice of pooling together various types of debt

instruments (assets) such as mortgages and other consumer loans and selling
them as bonds to investors.

⚫ Asset Reconstruction

Asset reconstruction is the activity of converting a bad or non-performing

asset into performing asset with the help of Asset reconstruction companies

⚫ Enforcement of Security without the intervention of the Court.

If the borrower defaults, the bank may enforce security interests by:
⚫ Take possession of the security;

⚫ Sale or lease or assign the right over the security;

⚫ Appoint Manager to manage the security;

⚫ Ask any debtors of the borrower to pay any sum due to
the borrower.
Reporting cases of theft, burglary, dacoity and bank robberies
⚫ Occurrence of any bank robberies, dacoities, thefts and burglaries are required to be
reported immediately by Fax/e-mail to RBI, Department of Banking Supervision, Central
Office and Regional Office, Security Adviser, and Ministry of Finance of Economic
Affairs (Banking Division), GOI with details of modus operandi and other information as
required in FMR-4.
⚫ Banks are also required to submit a quarterly consolidated statement (FMR-4) to RBI
Central Office/RO within 15 days of the end of the quarter it relates.

BANKING OMBUDSMAN
⚫ An official appointed to investigate individual’s complaint against maladministration
especially that of public authorities.

⚫ The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank
customers for resolution of complaints relating to certain services rendered by banks.
JURISDICATION OF BANKING OMBUDSMAN
⚫ Applies to whole India (including Jammu and Kashmir)
⚫ Banking Ombudsman have jurisdiction over

- All commercial banks (scheduled and non-scheduled, public and private)

- Regional Rural Banks
- Scheduled primary co-operative banks
- NBFC
APPOINTMENT AND TENURE
⚫ The Reserve Bank may appoint one or more of its officers in the rank of Chief
General Manager or General Manager to be known as the banking
ombudsmen
⚫ They carry out the functions entrusted to them by or under the scheme
⚫ This appointment may be made for a period not exceeding three years at a time
QUALIFICATION

The Banking Ombudsman shall be a person of repute experience in the field of

• Law
• Banking
• Financial services
• Public administration or
• Management sectors
• If such person is a civil servant he should be in the rank of joint secretary or above in
the Government of India and