Financial services by banks
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  • 1. CHAPTER- 1 AN INTRODUCTIONBanks are the most significant players in the Indian financial market.They are the biggest purveyors of credit, and they also attract most ofthe savings from the population. Dominated by public sector, thebanking industry has so far acted as an efficient partner in the growthand the development of the country. Driven by the socialist ideologiesand the welfare state concept, public sector banks have long beenthe supporters of agriculture and other priority sectors. They actascrucial channels of the government in its efforts to ensure equitableeconomic development.The Indian banking can be broadly categorized into nationalized(government owned), private banks and specialized bankinginstitutions. The Reserve Bank of India acts a centralized bodymonitoring any discrepancies and shortcoming in the system. Sincethe nationalization of banks in 1969, the public sector banks or thenationalized banks have acquired a place of prominence and hassince then seen tremendous progress. The need to become highlycustomer focused has forced the slow-moving public sector banks toadopt a fast track approach. The unleashing of products andservices through the net has galvanized players at all levels of thebanking and financial institutions market grid to look anew at theirexisting portfolio offering. Conservative banking practices allowed 1
  • 2. Indian banks to be insulated partially from the Asian currency crisis.Indian banks are now quoting al higher valuation when compared tobanks in other Asian countries (viz. Hong Kong, Singapore,Philippines etc.) that have major problems linked to huge NonPerforming Assets (NPAs) and payment defaults. Co-operativebanks are nimble footed in approach and armed with efficientbranch networks focus primarily on the ‗high revenue‘ niche retailsegments. 2
  • 3. ABOUT THE REPORT Title Of The Study:The present study titled as ―A project report on the FINANCIALSERVICES PROVIDED BY BANKS‖. Objective of the study:The following objectives of the present study are: o To understand about the banking sector and financial services. o To know about the different financial services provided by banks. Limitations of the study:The following limitations of the present study are: o The period for the study is limited. o The study deals only with specialized financial services. 3
  • 4. Data And Methodology: For the purpose of the present study the secondary data wasused. The secondary data were collected from journals, internet,book and newspaper. Presentation of the study: Following are the Presentation of the study; Chapter-1Gives an introduction to the study. Chapter-2Deals with a Theoretical view of financial services. Chapter-3 Deals with Financial services provided by banks in India. Chapter-4 Conclusion 4
  • 5. CHAPTER- 2 A THEORETICAL VIEWAfter independence, the government of India started establishingseveral corporations and other institution to promoter industrialdevelopment of the country. As the number of such institution wenton increasing, it become necessary to co-ordinate the activities of allthese institution in a systematic manner.An attempt was made by the government to gear the entire economyto the needs of rapid industrialization. The necessary for increasingproduction and increasing the standard of living of people as speedilyas possible, was felt very badly. This warranted the establishment ofan institution, which will look after the co-ordination of such financialinstitutions working to achieve this objective. This was responsible forthe establishment of industrial development bank of India.The bank was established with the following objective:a) To co-ordinate the activities of the financial institutions establishedin the country after independenceb) To participate in the activities of such institution if and whennecessary. 5
  • 6. c) To ensure that the activities of all these institution are planned andexecuted in such a manner that the priorities of the plans are propertyobserved:d) To function as an apex institution for all the financial institutionfunctioning in country:e) To promote and ensure the success of the being developmentproject in the country. Commercial banks differ from investmentbanks. Most financial consumers think of the bank as a place to keepliquid financial resources such as checking accounts and savingsaccounts. A consumer may have personal accounts at a commercialbank. The commercial bank‘s primary business involves taking infinancial assets as deposits then lending these assets to othercustomers at a rate of interest. The interest rate the bank chargeson loans and revolving lines of credit or other credit facilities willdepend on the current interest rate environment.A consumer bank, such as a credit union or savings bank, may focuson the personal banking needs of a specific group or industry.An investment bank raises capital for businesses. The investmentbank works with businesses to sell loans offered by the companycalled bonds. Bonds are debts owed by the company to investors.The investment bank distributes the bond issue to customers. Theinvestment bank may choose to distribute publicly traded bonds to 6
  • 7. clients, or arrange a private placement of the client company‘s debtdirectly with another company. The investment bank prices the debtaccording to the current yield curve and the company‘s creditrating. A companys credit rating, like a consumers FICA credit scorehelps the company pay less to sell bonds in the public or privatemarkets.Investment banks also raise capital for client companies byarranging equity issues, called stock. Investment banks receive feesfrom clients to raise capital. Many investment banks employprofessional sales and marketing teams to distributeclients‘ debt and equity issues.As a capital market banking institution, investment banks also helpclients to restructure debt loans. In some instances, the bank createsnew structured financial products or collateralizes debt with otherfinancial assets. Investment banks may also utilize derivativeinstruments—stand-in, synthetic investment products—to assistclients‘ achievement of financial goals.Consumers use banks to keep financial resources safe and readilyavailable for use. Deposits made by customers of the bank areinsured by the Federal Deposit Insurance Corporation (FDIC).Customers of the bank rely upon its ability to liquidate financialresources held on account when they request the bank to do so.Banks provide customers with specially 7
  • 8. printed checkbooks. Customers pay creditors and other financialobligations by writing a check on the bank account. The bank paysthe check written by its customer. Overdrafts and other fees arecharged in accordance with the bank‘s customer policy. If a customerwithdraws more money than he has in account with the bank, thebank charges the customer a fee. Customers may arrangefor overdraft protection with the bank. Overdraft protection is a loanthat is accessed when the customer‘s available fund balance isnegative.Banks lend money to private and business customers. These loanstake the form of personal loans, commercial/business loans, andhome/property loans (mortgages).Banks also issue credit cards to customers. A credit card is a form ofdemand loan available to the customer. The bank also supports itscredit card business by processing payments to settle customer creditcard bills. To support merchants accepting customers‘ credit cards,banks may offer a merchant network service. Merchant networkservices include card terminals or credit card machines.Banks provide debit cards to their customers. Sometimescalled check cards, debit cards provide ready access for customeruse without the need to make a physical check or cash withdrawal.Customers may use debit or credit cards in the bank‘s automaticteller machine (ATM). 8
  • 9. Banks facilitate fund transfers for customers via wiretransfer and electronic transfer of funds. Banks utilizean interbank network to transfer funds for clients. Banks also providecertified or cashiers‘ checks for customers. The bank guarantees thecheck so that the customer may offer it as certified available funds toa payee. In order to create a certified check, the bank usuallywithdraws client funds.Banks offer the services of a notary public to validate clients‘important documents.The financial needs of high net worth individuals, families, and theirbusinesses differ from those of most consumers. Private bank clientsmust usually present a certain minimum net worth to obtain privatebanking services. Private bank services include tax and estateplanning, tax planning, and philanthropic gift planning.The Financial system and Economic growthThe financial system of a country greatly influences its economy. Theclose relationship between financial structure and economicdevelopment is reflected in the prevailing institutional arrangementand intermediation process. The main function of the financialstructure especially the banking system is to gather funds from thepeople who has more savings and lend the amount in bulk to peoplewho have productive investment opportunities. The Financial system 9
  • 10. will progress both quality and quantity of actual investment, this willlead to better per capital income and better standard of living.(Levine, 1997) he argued in this literature that a review in the financialdevelopment will definitely have a positive impact on economicgrowth.Authors including Franklin Allen and Hiroko Oura (2004)emphasized that the financial system played a critical role in ignitingindustrialization in England by facilitating the mobilization of capital.Role of Financial SystemFinancial system will help in the mobilization of household savings tocorporate sector and distribute capital to different firms. This will helpin sharing the risk by household savings and firms. Thisintermediation is the root cause for the link between financialdevelopment and financial constitution on economic growth.Grahame Thompson definedfinancial development ― as the processmeant the gradual evolution, in the course of economic development,of financial institutions – money, banks and other financialintermediaries, and organised securities markets‖. Many economistspointed out that in developing countries financial liberalization indeedleads to financial frailty and incidents of crises; however financialliberalisation also has led to higher GDP growth. A large empiricalliterature has proved that in practice financial systems are importantfor growth.Franklin Allen and Hiroko Oura (2004) in his researchdiscussed about few models where financial intermediaries arise toproduce information, to generate information and trade to the different 10
  • 11. investors. In his model he defined that financial intermediariesproduce better information, develop resource allocation and promotegrowth. Hagemann and Seiter discussed about a research model inwhich the financial institution will generate the best information byproperly allocating the resources i.e. funding the firm with the finesttechnology for the robust economic growth.The Indian financial system has witnessed phenomenal changesduring last five decades. Indian economy may be termed as a Mixedeconomy where both private and public sectors co-exist. India hasinstigated economic development of the nation with thecommencement of planning commission. The main objective of theFive year plans was to boost domestic savings for the growth of theeconomy. The industrialisation strategy highlighted on the expansionof heavy industries, however the economic growth achieved in thefirst three Five-year plans was insufficient to meet the goals ofdevelopment. Indian economy has witnessed drastic increase in therate of growth since 1980‘s, the annual growth rate of the country was5.5 percent, A high rate of investment was a major factor for the risein economic growth, there was a move up in investment from19percent of GDP in 1970‘s to 25percent of GDP in 1980‘s. During1980‘s Indian government had implemented liberalisation policy andamended several government regulations especially in foreign tradesector, new strategies were adopted to pool up private capital in formof foreign direct investment (FDI), New reforms were formulated to 11
  • 12. attract foreign investors which contributed to progress of Indianeconomy discussed by Roland (2007), Since 1992 till 1994, theoverall value of imports surpassed that of India‘s exports and by 1996the export figures raised from 0.84 trillion rupees to 1.1 trillion Indianrupees, During 1993 Indian economy had witnessed major growth bythe commencement of computer software business and adoptedglobalisation policy which helped in creating new job market, in theyear 1995 Indian government was associated with World TradeOrganisation (WTO), During 1990-2005 the annual growth rate ofGDP was 5.9percent which was second among the world‘s largesteconomies only after China with 10.1percent.The republic of Indiasince 2004 had accepted free market policy, Service sectors played avital role by generating 52% of country‘s GDP. In 2007 Indianeconomy was termed as twelfth-largest economy in the world withGDP $1.237trillion and per capita income of $1043, Despitesignificant high economic growth rate Indian economy had manypitfalls and socio-economic variance at various levels, on an average80% of Indian population survived on less than $2 a day.The Financial Intermediaries: The financial institution acts as a properchannel for the transfer of funds between investors and firms throughthis process certain assets or liabilities are converted into differentassets or liabilities.Financial organisations may be defined as economic agents focusingin the buying and selling activities and at the same time may be very 12
  • 13. often termed as financial bonds and securities. Banks may beclassified as a division of the financial institutions, Banking institutionswill buy the securities issued by the borrowers and will sell them tothe lenders.The Indian banking sector played a significant role in the financialdevelopment with deposits of more than half a trillion US dollars andcontributes about three-quarters of nation‘s financial assets. TheIndian banking system has a long and detailed history of more than200years. The General Bank of India was considered to the first bankto be established in the nation followed by The Bank of Hindustan inthe year 1870 however these banks are now obsolete neverthelessthe country witnessed the commencement of theBank of Bengal in Calcutta in 1806 which is now known as the StateBank of India the largest bank of the nation detail given in the IndianFinancial System (Anon., 2008).During 1900s the financial market has expanded with thecommencement of banks such as Allahabad Bank, Punjab Nationalbank and Bank of India, in the year 1935 Reserve Bank of Indiawhich was considered to the Central Bank of India started regulatingthe banking sector in India. During the period of First World War(1914-1918) functioning of 94 banks failed in the country and thesame phase continued till India achieved Independence in 13
  • 14. 1947. The Reserve bank of India was nationalized and waspossessed by the Indian government in the year 1948 and after theenforcement of the Banking Regulation Act RBI got the authorizationto standardize, direct and inspect the banks in the country in 1949and it also instructed that no institute should be started without itslicense. In the year 1969, Indian government has nationalised 14largest public banks resulted in the raise ofPublic Sector Banks‘ (PSB) share of deposits from 31% to 86%(Roland, n.d.). The primary purpose of Nationalisation policy was toset up more branches and to mobilise the deposits. During 1980 sixmore banks were nationalised as a result the public sector‘scontribution of deposits moved up to 92%. The banking industryestimates indicate that out of 274 commercial banks operating in thenation, 223 banks are in the public sector and 51 fall into privatesector including 24 foreign banks that had started their operations inthe country. Over the decades, banking sector has grown graduallyin size, Since Indian government had adopted the liberalisation policybanking sector had undergone several changes in its structure by theestablishment of several private sector and foreign banksaccounting for over 80% of deposits and credits. 14
  • 15. PRODUCTS ANDFINANCIALSERVICES OFFERED BY BANKSBroad Classification of Products in a bank:The different products in a bank can be broadly classified into: Retail Banking. Trade Finance. Treasury Operations.Retail Banking and Trade finance operations are conducted at thebranch level while the wholesale banking operations, which covertreasury operations, are at the hand office or a designated branch.Retail Banking: Deposits Loans, Cash Credit and Overdraft Negotiating for Loans and advances Remittances Book-Keeping (maintaining all accounting records) Receiving all kinds of bonds valuable for safe keepingTrade Finance: Issuing and confirming of letter of credit. 15
  • 16. Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.Treasury Operations: Buying and selling of bullion. Foreign exchange Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents.The banks can also act as an agent of the Government or localauthority. They insure, guarantee, underwrite, participate in managingand carrying out issue of shares, debentures, etc.Apart from the above-mentioned functions of the bank, the bankprovides a whole lot of other services like investment counseling forindividuals, short-term funds management and portfolio managementfor individuals and companies. It undertakes the inward and outwardremittances with reference to foreign exchange and collection ofvaried types for the Government.Common Banking Financial services Available:Some of common available banking products are explained below: 16
  • 17. 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 ofidentification, such as a signature and a small photo. It authorizes theholder to change goods or services to his account, on which he isbilled. The bank receives the bills from the merchants and pays onbehalf of the card holder.These bills are assembled in the bank and the amount is paid to thebank by the card holder totally or by installments. The bank chargesthe customer a small amount for these services. The card holderneed not have to carry money/cash with him when he travels or goesfor purchasing.Credit cards have found wide spread acceptance in the ‗metros‘ andbig cities. Credit cards are joining popularity for online payments. Themajor players in the Credit Card market are the foreign banks andsome big public sector banks like SBI and Bank of Baroda. India atpresent has about 3 million credit cards in circulation. 2) Debit Cards: Debit Card is a ―prepaid‖ or ―pay now‖ card with some stored value. Debit Cards quickly debit or subtract 17
  • 18. 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 getthe money transferred to his account from the bank of the buyers, bydebiting an exact amount of purchase from the card.When he makes a purchase, he enters this number on the shop‘s PINpad. When the card is swiped through the electronic terminal, it dialsthe acquiring bank system – either Master Card or Visa that validatesthe PIN and finds out from the issuing bank whether to accept ordecline the transaction. The customer never overspread because theamount spent is debited immediately from the customer‘s account.So, for the debit card to work, one must already have the money inthe account to cover the transaction. There is no grace period for adebit card purchase. Some debit cards have monthly or pertransaction fees.Debit Card holder need not carry a bulky checkbook or large sums ofcash 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‘sown money at the time of sale, so they are often easier than creditcards to obtain.The major limitation of Debit Card is that currently only some 3000-4000 shops country wide accepts it. Also, a person can‘t operate it incase the telephone lines are down. 18
  • 19. 3) Automatic 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 ate closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password.ATM‘s are currently becoming popular in India that enables thecustomer to withdraw their money 24 hours a day and 365 days. Itprovides the customers with the ability to withdraw or depositfunds, check account balances, transfer funds and checkstatement information. The advantages of ATM‘s are many. Itincreases existing business and generates new business. It allowsthe customers. To transfer money to and from accounts. To view account information. To order cash. To receive cash. 19
  • 20. CHAPTER 3 FINANCIAL SERVICES PROVIDED BY BANKS IN INDIAFinancial services by Banks means the following services provided bya banking company or a financial institution including non-bankingfinancial company or any other body corporate or commercialconcern, namely: Financial leasing services including equipment leasing and hire purchase, Credit card services, Merchant banking services, Securities and foreign exchange (forex) broking, Asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and Mi trust services, but does not include cash management Advisory and other auxiliary financial services including investment Sub and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy Provision and transfer of information and data processing and 20
  • 21. Other financial services namely lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, providing bank guarantee, over draft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts. The Banking and Financial Service sectors provide significant opportunities for Document Imaging software and hardware including document scanners as this market is currently paper driven and prospects are looking for ways to improve their existing manual processes.LETTER OF CREDITA letter of credit is a document that a financial institution or similarparty issues to a seller of goods or services which provides that theissuer will pay the seller for goods or services the seller delivers to athird-party buyer. The issuer then seeks reimbursement from thebuyer or from the buyers bank. The document serves essentially as aguarantee to the seller that it will be paid by the issuer of the letter ofcredit regardless of whether the buyer ultimately fails to pay. In thisway, the risk that the buyer will fail to pay is transferred from theseller to the letter of credits issuer. 21
  • 22. Letters of credit are used primarily in international trade for largetransactions between a supplier in one country and a customer inanother. In such cases, the International Chamber ofCommerce Uniform Customs and Practice for DocumentaryCredits applies (UCP 600 being the latest version).They are alsoused in the land development process to ensure that approved publicfacilities (streets, sidewalks, storm water ponds, etc.) will be built. Theparties to a letter of credit are the supplier, usually calledthe beneficiary, the issuing bank, of which the buyer is a client, andsometimes anadvising bank, of which the beneficiary is a client.SYNDICATION OF LOANA syndicated loan is one that is provided by a group of lenders andis structured, arranged, and administered by one orseveral commercial banks or investment banks known as arrangers.The syndicated loan market is the dominant way for corporations inthe U.S. and Europe to tap banks and other institutional financialcapital providers for loans. The U.S. market originated with thelarge leveraged buyout loans of the mid-1980s, and Europes marketblossomed with the launch of the euro in 1999.At the most basic level, arrangers serve the investment-banking roleof raising investor funding for an issuer in need of capital. The issuer 22
  • 23. pays the arranger a fee for this service, and this fee increases withthe complexity and risk factors of the loan. As a result, the mostprofitable loans are those to leveraged borrowers—issuerswhose credit ratings are speculative grade and who are payingspreads (premiums or margins above the relevant LIBOR in the U.S.and UK, Euribor in Europe or another base rate) sufficient to attractthe interest of non-bank term loan investors. Though, this thresholdmoves up and down depending on market conditions.OVERDRAFTAn overdraft occurs when money is withdrawn from a bank accountand the available balancegoes below zero. In this situation theaccount is said to be "overdrawn". If there is a prior agreement withthe account provider for an overdraft, and the amount overdrawn iswithin the authorized overdraft limit, then interest is normally chargedat the agreed rate. If the negative balance exceeds the agreed terms,then additional fees may be charged and higher interest rates mayapply.Overdrafts occur for a variety of reasons. These may include: Intentional short-term loan - The account holder finds them short of money and knowingly makes an insufficient-funds debit. 23
  • 24. They accept the associated fees and cover the overdraft with their next deposit. Failure to maintain an accurate account register - The account holder doesnt accurately account for activity on their account and overspends through negligence. ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholders bank, it may automatically authorize a withdrawal based on limits preset by theauthorizing network. Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees. Unexpected electronic withdrawals - At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with 24
  • 25. the same bank, or a direct-deposit chargeback in order to recover an overpayment. Merchant error - A merchant may improperly debit a customers account due to human error. For example, a customer may authorize a $5.00 purchase which may post to the account for $500.00. The customer has the option to recover these funds through chargeback to the merchant. Chargeback to merchant - A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone elses account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchants account that received the chargeback.UNDERWRITINGUnderwriting refers to the process that a large financial serviceprovider (bank, insurer, investment house) uses to assess theeligibility of a customer to receive their products (equity capital,insurance, mortgage, or credit). The name derives from the Lloyds ofLondon insurance market. Financial backers, who would accept someof the risk on a given venture (historically a sea voyage with 25
  • 26. associated risks of shipwreck) in exchange for a premium, wouldliterally write their names under the risk information that was writtenon a Lloyds slip created for this purpose. In banking, underwriting isthe detailed credit analysis preceding the granting of a loan, based oncredit information furnished by the borrower, such as employmenthistory, salary and financial statements; publicly available information,such as the borrowers credit history, which is detailed in a creditreport; and the lenders evaluation of the borrowers credit needs andability to pay. Examples include mortgage underwriting.Underwritingcan also refer to the purchase of corporate bonds, commercial paper,government securities, municipal general-obligation bonds bya commercial bank or dealer bank for its ownaccountor for resale toinvestors. Bank underwriting of corporate securities is carried outthrough separate holding-company affiliates, called securitiesaffiliates or Section 20 affiliates.MORTGAGEMortgage is transfer (conveyance) of interest in the specificimmovable property (real estate) belonging to the debtor in favour ofthe creditor (lender).Section 3 of General clauses act says immovable property includesland, benefit to arise out of land and things attached to the earth orpermanently fastened to anything attached to the earth. There is noprovision for mortgage of movables. 26
  • 27. The property should be such as can be clearly described .The legalownership remains with the borrower. The actual physical possessionof the property need not always be transferred to the creditor Videsection 58 of Transfer of property Act 1862.Different types of Mortgages 1. Simple/Registered MortgageAs per Section 58 (b), the mortgagor undertakes (binds himselfpersonally) expressly or impliedly to pay the advance (Mortgagemoney). He does not deliver the possession of mortgaged property(non-possessory mortgage). The property can be sold only with thecourt intervention (permission). It always requires registration(irrespective of the amount of advance). It is got registered with theconcerned Sub-Registrar/Registrar of Assurances (section 28 ofIndian Registration Act). Mortgage deeds of properties valued at Rs.100 or more attract ad valorem stamp duty. The registration should be done within 4 months fromthe date of execution of the document (Sec 23 of Indian RegistrationAct). If the value of the property involved is less than Rs. 100 , theregistration is not necessary (Section 59 of Transfer of Property Act).Simple mortgage can be created at any centre.If the document is not presented for registration within this stipulatedperiod of 4 months the Registrar (not sub-Registrar) may permit the 27
  • 28. registration, if the delay in presentation does not exceed 4 months. Insuch cases, a penalty not exceeding 10 times of the usual registrationfee can be levied by the Registrar under section 25 of Registrationact.The mortgage under a simple mortgage does not have the right offoreclosure. That is the mortgagee cannot get the propertypermanently in his own legal right. Foreclosure means that themortgagor absolutely loses his right to redeem (get lack)mortgagedproperty in the case of non-payment of mortgage moneysection 67 of Transfer of Property Act. 2. Mortgage by conditional saleThe possession of the mortgaged property is not transferred tomortgagee. It is an ostensible sale (and not a real sale). In the caseof non-payment of mortgage money, the ostensible sale becomes areal/absolute sale (i.e. the property is deemed as sold). On liquidationof the advance in full, the property is transferred to mortgagor. Themortgagee can sue for foreclosure but not for sale of mortgagedproperty, by foreclosure, the conditional sale becomes absolute/real. 3. Usufructuary mortgageIt is a possessory mortgage, that is, a mortgagee possesses themortgaged property full the advance is repaid (there is no lower/uppertime limit for this). Actual physical possession is not necessary. 28
  • 29. The mortgagee has the right to receive profits and rents accruingfrom the property. The mortgagor does not bind himself personally forrepayment of the mortgage money. The mortgagee (lender) thereforecannot sue the mortgagor for repayment of the mortgage debt. Hecannot file suit for sale or foreclosure of the mortgaged property. Themortgagee is left with only one remedy i.e. he can appropriate therents/profits towards liquidation of mortgage money and interestthereon.Bankers do not advance against such mortgage. 4. English mortgageThe mortgaged property is transferred absolutely to the mortgagee.That is, all interests and rights in the property are conveyed. It isdifferent from simple mortgage. Thus the English mortgage is entitledto immediate possession of mortgaged property. The mortgagorbinds himself personally to repay the mortgage money.The property is reconvened (transferred) to the mortgagor uponrepayment of mortgage money.In the case non-payment of mortgage money, the English mortgagee(cannot sue for foreclosure but) can sue for a decree for sale. Themortgaged property can be sold without count‘s intervention undersome circumstances detailed in section 69 of Transfer of Property Act(different from simple mortgage). 5. Mortgage by deposit of title deeds 29
  • 30. Equitable mortgage (as per English law), the mortgagor [owner or hisauthorised (only constituted) attorney] in any of the notified townsdelivers to the creditor (or his agent), documents of title to immovableproperty (title deeds) with intent to create a security thereon.The immovable property proposed to be equitably mortgaged (and/orthe financing branch) may be located/situated anywhere in India butthe title deeds should be delivered at the notified centre only. If it is asine qua non (an indispensable requisite) for equitable mortgage adeposit made outside the notified centres creates neither a mortgagenor a charge. The debt may be existing or future. 6. Anomalous mortgageA mortgage which does not belong to any of the five types is calledanomalous mortgage. It possesses a mixed character of any two ormore types of mortgages. The understanding of the above aspectswill keep the borrowers persons of ordinary prudence and lenders ingood stead.PLEDGEAs per the Contract Act, 1872, pledge means bailment of goods forthe purpose of providingsecurity for payment of a debt orperformance of a promise. 30
  • 31. Bailment is nothing but delivery of goods to the financier. The personoffering the goods assecurity is the bailer, pawneror pledger. Theperson to whom the goods are given is thebailee, pawneeor pledgee.At times, the delivery of goods may not be actual, but constructive.For instance, goods ina warehouse may be pledged by handing overthe warehouse receipt. This constructivelyimplies delivery of goods ofthe pledgee.There is no legal necessity for a pledge agreement;pledge can be implied. However, it isalways preferable for the bankerto insist on a pledge agreement.The pledger is bound to inform thepledgee about any defects in the goods pledged, or anyrisks that gowith possession of the goods. He is also bound to bear any incidentalexpensesthat arise on account of such possession.Pledge becomes onerous for the pledger, because he has to part withpossession. For thesame reason, the pledgee is generallycomfortable with a pledge arrangement. He does notneed to take anyextra effort or incur any cost for realizing the security. He is howeverboundto take reasonable care of the goods.The pledgee has a general lien on the goods i.e. he is not bound torelease the goods unlesshis dues are fully repaid.A point to note is that the banker‘s lien is limited to the recovery of thedebt for which thepledge is created – not to other amounts thatmaybe due from the borrower. This is thereason that banks oftenprovide a protective clause in their pledge agreement that the 31
  • 32. pledgeextends to all dues from the borrower.In the event of default bythe borrower, the pledgee can sell the assets to recover his dues.Thedues may be towards the original principal lent, or interest thereon orexpenses incurredin maintaining the goods during the pledge.HYPOTHECATIONHypothecation means a charge in or upon any movable property,existing or future, created by a borrower in favor of a securedcreditor, without delivery of possession of the moveableproperty tosuch creditor, as a security for financial assistance, and includesfloating charge and crystallization of such charge into fixed charge onmoveable property.As with pledge, hypothecation is again adopted for movable goods.But, unlike pledge, the possession of the asset is not given to thebank. Thus, the borrower continues to use the asset, in the normalcourse.A good example is vehicle financing, where the borrower usesthe vehicle, but it is hypothecated to the bank. The bank protectsitself by registering the hypothecation in the records of theRegionalTransport Officer (RTO).Therefore, ownership cannot be changedwithout a NOCfrom the bank. Further, to prevent any unauthorizedtransfers, the bank takes possession of the vehicle (re-possession) inthe event of default by the borrower.In the business context, it is normal to obtain working capital facilitiesagainst hypothecation of stocks and debtors. Since these areinherent to the business, the stocks and debtors keep changing form 32
  • 33. (some debtors clear their dues; new debtors are created based oncredit sales by the borrower) and value. The bank only insists on aminimum asset cover. If thehypothecated assets are worth Rs.40lakhs and the outstanding to the bank is Rs. 25 lakhs, the assetcover is Rs. 40 lakhs ÷ Rs. 25 lakhs i.e. 1.6 times.Since the form and value of the assets charged keep changing (theoutstanding amount also keeps changing), this kind of a charge istherefore referred to as floating charge. In the event of default by theborrower, the bank will seek possession of the assets charged. Thatis when it becomes a fixed charge viz. the assets charged as well asthe borrower‘s dues against thoseassets get crystallised.Since possession is with the borrower, there is a risk that non-recoverable debts are included in debtors, or non-moving or obsoletegoods are included in inventory. Further, an unethical borrower,despite all provisions in the hypothecation deed, may hypothecate thesame stockto multiple lenders. Therefore, banks go for hypothecationin the case of reputed borrowers,with whom they have comfort.Companies have a requirement of registering the charge with theRegistrar of Companies(ROC). Under the Companies Act, if thecharge is not registered with ROC within 30 days, (ora further periodof 30 days on payment of fine), then such charge cannot be invokedin theevent of liquidation of the company. This is a protection againstmultiple charges created onthe same property, in case a company isa borrower. This is also a reason, why banks pursueborrowers untilthey register the charge with the ROC.At times, when the asset cover 33
  • 34. is high, banks may permit other bankers to have a charge onthesame property. Such a charge in favour of multiple lenders, all havingthe same priorityof repayment in the event of default, is calledparipassucharge.Not all banks are comfortable with paripassu charge. There aresituations, where the firstlender insists on priority in repayment.Subject to such priority, it may not object to thecreation of anadditional charge in favour of a second lender. The first lender is saidto havea first charge on the property; the second lender has secondcharge. Similarly, third charge,fourth charge etc are possible, but notcommon.ASSIGNMENTThe Banker may provide finance against the security of an actionableclaim. Under the Transfer of Property Act, an actionable claim is aclaim to any debt other than a debt secured by mortgage ofimmovable property or by hypothecation or pledge of movableproperty.Since security depends on the quality of the debt, bankers arecomfortable if the dues to the borrower are from the Government.With such a structure, the bank can earn a return that is higher thanwhat is normal for taking a sovereign risk. 34
  • 35. In housing loans, where repayment depends on the earning cycle ofthe borrower, financiers tend to ask for assignment of life insurancepolicy that covers the life of the borrower. This can be done bymentioning the same in the reverse of the insurance policy document,along with signature of the assigner. Alternatively, a separate deed ofassignment can be signed. Either way, the insurance company needsto be informed about the assignment.HIRE PURCHASEHire purchase is a type of installment credit under which the hirepurchaser, called thehirer, agrees to take the goods on hire at astated rental, which is inclusive of therepayment of principal as wellas interest, with an option to purchase. Under thistransaction, the hirepurchaser acquires the property (goods) immediately on signingthe hire purchase agreement but the ownership or title of the same istransferred onlywhen the last installment is paid. The hire purchasesystem is regulated by the HirePurchase Act 1972. This Act defines ahire purchase as ―an agreement under whichgoods are let on hireand under which the hirer has an option to purchase theminaccordance with the terms of the agreement and includes anagreement under which:1) The owner delivers possession of goods thereof to a person oncondition thatsuch person pays the agreed amount in periodicinstallments. 35
  • 36. 2) The property in the goods is to pass to such person on thepayment of the lastof such installments, and3) Such person has a right to terminate the agreement at any timebefore theproperty so passes‖.Hire purchase should be distinguishedfrom installment sale wherein property passes to the purchaser withthe payment of the first installment. But in case of HP (ownershipremains with the seller until the last installment is paid) buyer getsownership after paying the last installment. HP also differs fromleasing.BANKER’S ACCEPTANCEThe Group, less than one of its terms of reference, also examined therole and scopeof introducing ‗Banker‘s Acceptance‘ (BA) facility in theIndian Financial Markets.BA has been in use in markets like USA andEurope primarily in financing internationaltrade. Historically, BAbacked by Trade Bills had readily available discount windowslike theDiscount Houses in the U.K. and the Central Banks like the Bank ofEnglandand Fed Reserve.BA is a time draft or bill of Exchange drawn on and ―accepted‖ by abank as itscommitment to pay a third party. The parties involved in abanker‘s acceptanceare the Drawer (the bank‘s customer - importeror exporter), the Acceptor (a bankor an Acceptance House), theDiscounter (a bank which could be the acceptingbank itself or adifferent bank or a discount house) and the Re-discounter 36
  • 37. (anotherbank, discount house or the Central Bank). A ―BA‖ isaccepted, when a Bankwrites on the draft its agreement to pay it onmaturity. The Bank becomes theprimary obligator of the draft or bill ofexchange drawn on and accepted by it. Ineffect, BA involvessubstituting bank‘s creditworthiness for that of a borrower.Theaccepted bill bears an irrevocable, unconditional guarantee of abank to pay thebill on maturity, in the process creating a negotiableinstrument that is also attractiveto investors in short term paper. BAcompared favourably as a funding avenuein terms of cost vis-à-visLIBOR based loans. However, in the US market in recent years thepopularity of BA has been on the wane due to a host of marketdevelopments, particularly the emergence of cost-effectiveinstruments from borrower‘s point ofview like the asset-backedCommercial Paper and Euro-Commercial Paper andnarrowingspreads between yields on Euro-dollar deposits and BA,leading to investor indifferencebetween the two as the preferredinvestment avenue.BILL DISCOUNTINGBill discounting is a major activity with some of the smaller Banks.Under this type of lending,Bank takes the bill drawn by borrower onhis (borrowers) customer and pays him immediately deducting someamount as discount/commission. The Bank then presents the Bill totheborrowers customer on the due date of the Bill and collects thetotal amount. If the bill is delayed, the borrower or his customer pays 37
  • 38. the Bank a pre-determined interest depending upon the terms oftransaction.FACTORINGFactoring is a financial transaction whereby a business sellsits accounts receivable (i.e., invoices) to a third party (called a factor)at a discount. In "advance" factoring, the factor provides financing tothe seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of thepurchase price being paid, net of the factors discount fee(commission) and other charges, upon collection from the accountclient. In "maturity" factoring, the factor makes no advance on thepurchased accounts; rather, the purchase price is paid on or aboutthe average maturity date of the accounts being purchased in thebatch. Factoring differs from a bank loan in several ways. Theemphasis is on the value of the receivables (essentially a financialasset), whereas a bank focuses more on the value of the borrowerstotal assets, and often also considers, in underwriting the loan, thevalue attributable to non-accounts collateral owned by the borrower.Such collateral includes inventory, equipment, and real property, Thatis, a bank loan issuer looks beyond the credit-worthiness of the firmsaccounts receivables and of the account debtors (obligors) thereon.Secondly, factoring is not a loan – it is the purchase of afinancialasset 38
  • 39. (the receivable). Third, a nonrecourse factor assumes the "credit risk‖that a purchased account will not collect due solely to the financialinability of account debtor to pay. In the United States, if the factordoes not assume credit risk on the purchased accounts, in mostcases a court will characterize the transaction as a secured loan.It is different from forfaiting in the sense that forfaiting is atransaction-based operation involving exporters in which the firm sellsone of its transactions, while factoring is a Financial Transaction thatinvolves the Sale of any portion of the firms Receivables.Factoring is a word often misused synonymously with invoicediscounting, known as "Receivables Assignment" in AmericanAccounting ("Generally Accepted Accounting Principles")"GAAP" propagated by FASB - factoring is the sale of receivables,whereas invoice discounting is borrowing where the receivable isused as collateral.However, in some other markets, such as the UK,invoice discounting is considered to be a form of factoring involvingthe assignment of receivables and is included in official factoringstatistics.It is therefore not considered to be borrowing in the UK. Inthe UK the arrangement is usually confidential in that the debtor is notnotified of the assignment of the receivable and the seller of thereceivable collects the debt on behalf of the factor. 39
  • 40. CHAPTER-4 CONCLUSIONThe banking scenario has changed drastically. The changes whichhave taken place in the last ten years are more than the changestook place in last fifty years because of the institutionalisation,liberalisation, globalisation and automation in the banking industry.Indian banking system has several outstanding achievements to itscredit, the most striking of which is its reach. Indian banks are nowspread out into the remote corners of our country. In terms of thenumber of branches, India‘s banking system is one of the largest inthe world. According to the Banker 2004, India has 20 banks withinthe world‘s top 1000 out of which only 6 are within the top 500 banks.Today banking sector is marked by high customer expectations andtechnological innovations. Technology is playing a crucial role in theday to day functioning of the banks. These banks that haveharnessed and leveraged technology best have a strategicadvantage. To face competition it is necessary for banks to absorbthe technology and upgrade their services.In today‘s context banks are following the strategy of ―relationshipbanking‖ than ―mass banking‖ which is need of the hour. Thecustomer services are playing a very significant role in bankingbusiness. In India major events leading to deregulation, liberalisation 40
  • 41. and privatisation have unleashed forces of competition, making thebanks run for their business, not only to create the customer, butmore difficult to run for their business, not only to create thecustomer, but more difficult to retain the customer. Prompt andefficient customer service, thus, has become very significant.Financial services in banking are the new paradigm for survival andsuccess, embracing a ‗share of customer‘ approach to growth byidentifying, protecting and expanding customer relationship. 41