Banking system

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Banking system

  1. 1. Introduction A banking company is defined as a company which transacts the business of banking in India. The Banking Regulation Act defines the business of banking by stating the essential function of the banker. It also states the various other businesses of banking company may be engaged in and prohibits certain businesses to be performed by it. The term ‘banking’ is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise.” The term ‘customer’ of a bank is not defined by law. Ordinarily, a person who has an account in a bank is considered its customer. Banking experts and the legal judgments in the past, however, used to qualify this statement by laying emphasis on the period for which such account has actually been maintained with the bank. In Sir John Paget’s view “to constitute the customer there must be some recognizable course or habit of dealing in the nature of the regular business.” This definition of the customer of as bank lays emphasis on the duration of the dealings between the banker and the customer and is, therefore, called the ‘duration theory’. The relationship between a banker and his customer begins with the opening of an account with the former in the name of the latter. Initially, all the accounts are opened with the deposit of money by the customer and hence these accounts are called deposits accounts. The bulk of resources from the bank are mobilized by accepting deposits from the public. Accepting of deposits of money from the public, as already noted, is one of the essential functions of a banker, according to the definition of banking given in the Banking Regulation Act, 1949. The banker solicits deposits from the members of the public belonging to the different walks of life, engaged in numerous economic activities and having different financial status. The nature of banking facilities sought by them, therefore, varies widely. The bank have therefore introduced different types of account with various privileges and facilities. Let us discuss about the measure adopted to regulate competition amongst the banks in India in the field of deposit mobilization. 1
  2. 2. Regulation of Competition in Banking Competition in the business of accepting deposits takes two forms: • Improvement in the customer services • Offer a high rate of interest to the depositor. Such competition, though essential for the growth of industry, is undesirable if it becomes unhealthy. Bankers realized the urgency of regulating competition amongst themselves in the field of deposit mobilization as early as 1958 when the leading banks in the country entered into a voluntary agreement. The Inter-Bank Agreement on the Deposit Rates prescribed the maximum rates of interest payable by the members banks. After the commercialization of 14 major commercial banks in july 1969, the Reserve Bank of India exercised its right to issue directives to the banks in regard to the deposit rate. A notable feature of the Reserve Bank directives is that the freedom to compete in the banking business is controlled and regulated rather than completely abolished. The smaller banks with comparatively less deposits cannot compete with the bigger banks by offering the same rate of interest. In the directives of the Reserve Bank, therefore, smaller banks are permitted to compete with the bigger ones by offering reasonably higher rates of interest. Thus both the maximum and the minimum rates of interest payable on deposits are prescribed for smaller banks. These banks are liberty to determine their own rates within the limits prescribed by the Reserve Bank according to their own judgment and discretion. 2
  3. 3. Bank Fixed Deposits Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 7days to 10 years. The interest is compounded annually and is added to the principal amount. Minimum deposit amount is Rs 1000/- and there is no upper limit. Loan / overdraft facility is available against bank fixed deposits. Premature withdrawal is permissible but some penalty is levied. Tax Deductible at Source, if the interest paid/ payable on deposit exceeds Rs.5000/- per customer, per year, per branch. Renewal Before Maturity The Reserve Bank has permitted the banks to renew an exting term deposits before maturity without invoking the penalty provide: 1. It is renewed before the date of maturity. 2. The period of renewal is longer than the remaining period of the original deposit. In such cases interest will be payable as follows:- 1. On the original deposit at the rate applicable to the period of which the deposit has actually run (i.e.., from the date of the deposit to the date of the renewal), prevailing at the time of original deposit (without levying any penalty); 2. Interest for the period from the date of renewal will be allowed at the rate prevailing on the date of the renewal. If you are planning to open a fixed deposit account, you have a variety of choices. There are fixed deposit accounts that offer you safe and high 3
  4. 4. returns. And there are fixed deposit accounts that offer you the flexibility of a savings account as well. The ABN AMRO Bank EasyDraw Fixed Deposit offers you all this...and much more. Making it the most powerful fixed deposit account in the country. The minimum deposit required to open an EasyDraw Fixed Deposit is Rs 50,000*. This is to be maintained at month-end across both your EasyDraw Fixed Deposit and the linked Savings account. • Maximised Returns • High Liquidity • Cheque Book and Debit Card Convenience • NetBanking • SMS/Email alerts • Choice of Tenure, Choice of Interest Payments • Automatic Renewal • Extended Banking Hours • National Access • Cash Delivery • Courier Pick Ups • 24 Hours Bank by Phone • Other Fixed Deposit Options 4
  5. 5. Specimen Of Fixed Deposits Receipt 5
  6. 6. Specimen Of The Backside Of Fixed Deposits Receipt 6
  7. 7. Savings Bank Account’s Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. On top of that Savings Bank Account earn moderate interest too. The rate of interest is decided and periodically reviewed by the Government of India. Presently, the rate of interest is 3.5% compounded half yearly. Savings Bank Account can be opened in the name of an individual or in joint names of the depositors. Savings Bank Accounts can also be opened and operated by the minors provided they have completed ten years of age. The minimum balance to be maintained in an ordinary savings bank account varies from bank to bank. It is less in case of public sector banks and comparatively higher in case of private banks. In most of the public sector banks, minimum balance to be maintained is Rs. 100. In accounts where cheque books are issued, a minimum balance of Rs. 500/- has to be maintained. For Pension Savings Accounts, minimum balance to be maintained is Rs. 5/- without cheque facility and Rs. 250/- with cheque facility. Growth With the advent of the internet, high yield savings accounts have become more prevalent from virtual banks. The internet savings account business model is to offer interest rates generally higher than those available at storefront banks while maintaining few if any retail locations and keeping customer service costs low through automated and computer systems. The growth of online high yield accounts have pushed many brick and mortar banks to create their own high yield savings accounts Costs Withdrawals from a savings account are occasionally costly and are sometimes much higher and more time-consuming than the same financial transaction being performed on a demand account. However, most savings accounts do not limit withdrawals, unlike certificates of deposit. In the United States, violations of Regulation D often involve a service charge, or even a downgrade of the account to a checking account. With online accounts, the main penalty is the time required for the Automated Clearing 7
  8. 8. House to transfer funds from the online account to a "brick and mortar" bank where it can be easily accessed. During the period between when funds are withdrawn from the online bank and transferred to the local bank, no interest is earned. In some countries, such as the United Kingdom, an account called the "notice deposit" account is available. A slight interest premium is paid, with the caveat that one must give up to 90 days notice to make a withdrawal without a fee. Often, withdrawals can be made without notice by paying a penalty equivalent to the interest earned in the notice period. 8
  9. 9. Recurring Deposits Account’s Under a Recurring Bank Deposit, a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor. Recurring Bank Account provides the element of compulsion to save at high rates of interest applicable to Tern Deposits along with liquidity to access those savings any time. There is great flexibility in period of deposit with maturity ranging from 6 months to 120 months. The minimum monthly deposit varies from bank to bank. In most of the public sector banks, one can start a Recurring Deposit Account with monthly installment of Rs.100/-. Loan/overdraft facility is also available against Recurring Bank Deposits. The rate of interest on the recurring deposit account stands favourably as compared to the rate of interest on the saving bank account because the former partly resembles the fixed deposit accounts. According to the directive of the Reserve Bank, banks are required to ensure that the rate interest offered by them on recurring deposits are generally in accord with the rates prescribed for various term deposits. The rate of interest is, therefore, almost equal to that of the fixed deposit account. The recurring deposit account can be opened by any person, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor. While opening the account, the depositor is given a Pass Book which is to be presented to the bank at the time of monthly deposits and repayment of amount. Installment for each month should be paid before the last working day of the month. Accumulated amount with the interest will be payable after a month of the payment of the last installment. Recurring Deposits are meant for steady and gradual saving for individuals to build-up the savings through regular monthly deposits of a fixed sum over a fixed period of time. You do not need to open a savings account with us for opening a recurring deposit account. 9
  10. 10. Current Account’s Current Account is primarily meant for businessmen, firms, companies, public enterprises etc. that have numerous daily banking transactions. Current Accounts are meant neither for the purpose of earning interest nor for the purpose of savings but only for convenience of the business, hence they are non-interest bearing accounts. In a Current Account, a customer can deposit any amount of money any number of times. He can also withdraw any amount as many times as he wants, as long as he has funds to his credit. Current Account can be opened by: • an individual who has attained majority. • two or more individuals in their joint names. • sole proprietorship concerns. • partnership concerns. • Hindu Undivided Family. • Limited Companies. • Clubs, Societies. • Trusts, Executors and Administrators. • Others - Govt. and semi Govt. bodies, local authorities etc. Current Account is primarily meant for businessmen, firms, companies, public enterprises etc. that have numerous daily banking transactions. In a Current Account, a customer can deposit any amount of money any number of times. He can also withdraw any amount as many times as he wants, as long as he has funds to his credit. Current Accounts are meant neither for the purpose of earning interest nor for the purpose of Savings but only for convenience of the business. Opening of Current and Saving Accounts 10
  11. 11. By opening an account with the banker. The special features of this relationship impose several obligations on the banker. He should, therefore, be very careful in opening an account in the name of the customer. Though any person may apply for opening of an account in his name but the banker reserves the right to do so on being satisfied about the identify of the customer. The following precautions to be taken in this regard: 1. Application on the prescribed Form: The request for opening a saving or current account is made on the prescribed form on the bank concerned. Banks provide separate application forms for opening savings and current account for individuals, partnership firms and companies. The applicant is required to mention his name , occupation, full address, specimen signature and the name signature of the referee. He also undertakes to comply with the banks rules in force from time to time for the conduct of the account. It means that the rules prevalent at the time of opening of an account may be changed or modified by the banker and such modified rules shall be acceptable to the customer. 2. Introduction of the Applicant: Before opening a savings or current account in the name of an intending customer, the banker must get true identity of the former in order to ensure that he is respectable person. The banker, thus. Reserves the right not to open an account in the name of the person whose true identity has not been established or who is considered ton be an undesirable person, eg.., a thief, robber, etc. The applicant may be introduced to the banker in any of the three forms: • A respectable person- either a customer of the same branch of the bank or who is known to the staff of the branch- introduces him by signing on the applicant form itself along with his full address. • The Applicant may give the name of any respectable person or that of another bank as referee. The banker enquires from the said referee about the integrity, honesty, respectability and the financial standing of the applicant and his past experience in dealing with the applicant. If the referee sends no reply, the banker should not open the account unless satisfactory introduction is given otherwise. 11
  12. 12. • The Reserve Bank has advised the banks that pay books or postal identification cards or identity cards of armed forces/police/government departments or passports may be considered or passports may be considered sufficient for establishing the identity of persons desiring to open deposit accounts without cheque facility. Specimen Of Account Opening Form 12
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  16. 16. Types of Accounts While banks may use different names for the accounts, the following types of checking and savings accounts are offered by most financial institutions. Regular Checking — Generally, this type of account is for the customer who does not maintain a high balance and uses a checking account for paying bills and daily expenses. Some basic accounts may require either direct deposit or a low minimum balance to avoid any fees. Look for a bank that offers a checking account linked to another account. Your savings balance may offset your checking account balance requirement Interest-bearing Checking — A simple way to earn interest on the funds • you have on deposit. With these accounts, the higher your balance, the more interest you earn. This type of account usually requires a minimum balance to open and an even higher balance to maintain in order to avoid fees. Interest is usually compounded daily on the average daily available balance. If you cannot maintain high minimum balances, avoid these accounts as it may cost you more in fees than the low interest you'll earn on your balance. • Joint Checking — An account owned by two or more people, usually sharing a household and the associated expenses. Each person has equal access to the account. Most accounts, be it checking, savings or money market, allow for joint use. • Express Checking — For people who rarely step inside a bank, these accounts are a good way to get low-priced checking from a large bank. They usually offer unlimited check writing, low minimum balance requirements and low or no monthly fees. The downside to this type of account is that teller fees can be as high as $3 per visit. These accounts are popular with students and young customers who are always on the go and don't want to spend a lot of time on banking transactions. Because these accounts are being offered by some of the top competitors in each market, regional and smaller banks are expected to develop express checking accounts of their own. 16
  17. 17. • No Frills Checking — These "no-frills" accounts are for people who don't write many checks on a monthly basis and cannot meet minimum required balances to avoid regular checking fees. No-frills accounts usually have monthly fees ranging from zero to $6, require low, if any, minimum balance and allot a certain number of checks per month. • Savings — Savings accounts allow you to make withdrawals, but without the flexibility of using checks. The number of withdrawals or transfers you can make on the account each month may be limited. Many banks offer more than one type of savings account (i.e., passbook savings, statement savings). With a passbook savings account, you have a record book to enter withdrawals, deposits and keep track of transactions. With a statement savings account, the institution mails you a statement that shows your withdrawals and deposits. As with other accounts, there may be various fees on savings accounts, such as minimum balance fees. • Senior/Student/Special Accounts — Some banks offer special accounts for children, students, senior citizens or special savings plans such as Christmas Clubs or Vacation Plans. These special accounts usually don't carry any fees. The benefits vary from bank to bank, but may include free checks, ATM use, better rates on loans and credit cards, or discounts on everything from travel to prescriptions. • Money Market — This account combines checking with savings and/or investment opportunities and helps you pursue higher earnings. It requires a high minimum balance to open ($1,000 - $10,000), and higher balances must often be maintained to avoid fees. While you are able to make withdrawals, it is not as convenient as doing so from a checking account and there are limitations on the number of checks you are allowed to write. A Money Market account is for people who want to put their money where it will earn a market interest rate. These accounts pay more interest than basic checking or savings accounts; however, the interest rates can fluctuate, depending upon market conditions. • Certificates of Deposit (CDs) — Time deposits are often called CDs and are for people who want to lock-in an interest rate. They usually offer a guaranteed rate of interest for a specified period of time (e.g., one year). Banks offer CDs that allow you to choose the length of time, or term that your money is on deposit. Terms can range from several days to several years with the longer term typically having a higher annual percentage yield. Once you choose the term you want, 17
  18. 18. generally you must leave the money in the account until the term ends, known as maturity. Some banks will let you withdraw the interest, while your initial deposit amount (the principal) must remain in the account. If the bank allows you to withdraw your principal funds before maturity, a penalty is usually charged. As suggested by the Working Group on the Money Market, Reserve Bank of India has permitted the banks to issue Certificates of Deposits. Reserve Bank has issued guidelines also in this regard, which have been relaxed from time to time. Certificates of Deposit can be issued by scheduled commercial banks only and not by the Regional Rural Banks. Through CDs bank accept short term deposits of substantial amount from the investor who have liquid funds for temporary period. Such CDs can be issued by the individual, corporation, companies, trusts, funds, association, etc. Non- resident Indians (NRI) may subscribe to such certificates but not on a non-repatriable basis and such CDs cannot be endorsed to another NRI in the secondary market. A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. Such CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest Rates In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid- 2004, with interest rates expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during 18
  19. 19. the term of the CD. Sometimes, CDs which are indexed to the stock market, the bond market, or other indices are introduced. A few general rules of thumb for interest rates are: • The larger the principal, the higher the interest rate. • The longer the term, the higher the interest rate. (Unless the yield curve is inverted.) • The smaller the bank, the higher the interest rate. • Personal CD accounts receive higher interest rates than business CD accounts. How CDs work The consumer who opens a CD may receive a passbook or paper certificate, but it now is common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such. At most institutions, the CD purchaser can arrange to have the interest periodically mailed as a check or transferred into a checking or savings account. This reduces total yield because there is no compounding. Some institutions allow the customer to select this option only at the time the CD is opened. Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to "roll over" the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened to not "roll over" the CD). CDs typically require a minimum deposit, and may offer higher rates for larger deposits. In the US, the best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000 (though some, recognizing that some investors don't want more in the account than is covered by FDIC insurance, have lowered the minimum deposit to $95,000). However there 19
  20. 20. are also institutions that do the opposite and offer lower rates for their "Jumbo CDs". Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity—unless they have another investment with significantly higher return or have a serious need for the money. Terms and conditions It is vital that a consumer study the terms and conditions for a CD before purchase. Employees of the institution are generally not familiar with this information. In the US, the Federally required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. The standard practice, however, is to provide the booklet to the consumer only after they have purchased a Certificate of Deposit. • If purchasing at a branch office, the consumer should obtain the disclosure document and check the CD terms before buying a CD. • If purchasing online or by telephone, the consumer should have the disclosure document faxed or mailed and check the CD terms before buying. In those cases where the terms are posted online, the consumer should print a copy. 20
  21. 21. What Constitutes Proper Introduction  It is necessary that the person introducing the applicant to the banker must himself be a respectable person ,because the latter’s opinion about applicant carries value if he himself commands respect and goodwill. The banker should, therefore, take reasonable care in accepting the introduction or reference from any person.  What should be the contents of proper introduction and what is the duty of the banker in this regard was considered by the Madras High Court in Indian Bank v. Catholic Syrian Bank. In this case the applicant for opening a current account was introduced to the bank by the well known customer of the bank. But what he did was to take the applicant to the bank and informed the branch manager that he was the man from Indore and he wanted to open the bank account to enable him to purchase carpets at that place. The introducer had not given any assurance that the applicant was known to him or that they had long standing business association and that he was a bona-fide customer and account could safely opened in his name. The high court therefore held that the bank was negligent in securing proper introduction of the applicant. In the circumstances of the case, bank ought to have made more enquiries than usual to test the credentials of the prospective customer before allowing him to open the account. It may be concluded from the above, that the banker should fully ascertain the true identity of the applicant by other means also, and should not depend exclusively on the casual words of the introducer. The Reserve Bank of India has reiterated that the commercial banks should invariably obtain satisfactory introduction in respect of all types of deposits. It has advised the banks to incorporate a certificate in the account opening from in respect of all deposit accounts confirming the identity, occupation and address of the person by the introducer. The bank has also suggested to the banks to keep the careful watch on the operation of large amounts in new accounts. About the mode of securing introduction, Reserve Bank has advised the banks that they should send a letter by the registered post to the 21
  22. 22. introducer for confirming the introduction in all such cases where the introducer is not in the position to come to the bank at the time of opening the account. Risk in Opening Accounts Without Proper Introduction The applicant must be properly introduced to the banker. If the latter opens an account without proper introduction or shows carelessness in this regard cases of fraud or misrepresentation may occur frequently. Not only the banker runs the risk in such cases but the general public may also be deceived by the undesirable customers. The risks inherent in such cases are as follows:- 1. The banker cannot avail of the statutory protection:- Section 131 of the Negotiable Instruments Act provides to the banker, if he collects the cheque, bill, etc.., on behalf of the customer who has no title thereto or his title is defective. The collecting banker will incur no liability to the true owner of the cheque provided the former has acted in good faith and without negligence. The banker cannot avail of this statutory protection if he opens an account in the name of an undesirable person without proper introduction and such person sends a stolen or the forged cheque for the collection and the banker does so, because his failure or carelessness to find out the true identity of the customer will constitute a negligence on his part. If such undesirable persons are permitted to open accounts in the name of the somebody else and they realise the stolen or forged cheque through such accounts and latter on disappear, the banker remains liable to the true owner of such cheques. 2. Risk in case of overdrafts:- If a banker grants an overdrafts, even by mistake or by negligence, to a customer who is not properly introduced, he bears the risk of loss in case it is not repaid by the customer. The banker remains unaware of the assets of such customer. 3. Risk in case of undischarged insolvent:- In case of the persons who are declared insolvent, all assets or funds are attachable, until or unless he is discharged. The deposits received by a banker from an undischarged insolvent, without proper introduction, carries the risk of attachment. 22
  23. 23. 4. Risk in case of issue of bogus cheque:- If the banker provides a cheque book to an undesirable customer not properly introduced, there is the risk that he might defraud the general public by issuing bogus cheques on his account without having sufficient balance. The banker must, therefore, seek proper introduction of the applicant for pening a current account, because all the above mentioned risks may be faced by the banker in case of current accounts. The banker may not insist on introduction if the applicant applied for opening a savings account where only cash operations are permitted, because, neither a cheque book is issued to him nor he permitted to deposit cheque, etc.., for collection or to take overdraft. But in other cases proper introduction is necessary. No introduction is necessary in case of opening a fixed deposit account for the same reasons.  Specimen Signature-The applicant is required to give his specimen signature on a prescribed form, generally a card for the purpose of bank’s record. The signature card are preserved by the banker and the signature of the account holder on the cheques is compared with his specimen signature. If the former differs from the latter, the banker can refuse to honour the cheque. The specimen signature thus protects the banker against forger. He should be very careful in comparing the signature of the customer given on a cheque with his specimen signature.  Opening the account-After the above formalities are over, the banker opens an account in the name of the applicant. It is essential that the applicant deposits some at the time of opening an account.these amounts will also be the minimum balances to be maintained by the account holder. The banker, thereafter, provides the customer with 1. Pay-in-Slip Book 2. Cheque Book & 3. Pass Book and he is authorised to operate the account. 23
  24. 24. Operating The Bank Account The word operate in relation to a bank account means that the customer deposits further sums of money and cheques, etc.., into the bank and withdraws money according to his nned or convenience. A special feature of banking business is that each and every transaction of money with the customer is supported by a separate slip or document. A customer is, therefore, required to make use of 1. Pay-in-Slips for depositing money and 2. Cheques for withdrawing money from the bank.  The Pay-in-Slip Book contains slips perforated counterfoils to be filled in by the depositor himself or by his agent at the time of depositing cash, cheques, drafts, bills,..etc., to the credit of his account .Usually every bank supplies free of cost to the customers separate pay-in-slips for depositing cash and cheque etc. Though the size and the design of such slios vary from bank to bank but the contents include information relating to the date of deposit, name and account number of the customer, amount to be deposited, the denomination of currency notes, etc., the cheque number and the name of the drawee. After filling in all such details on the counterfoil, the customer hands over the same together with cash to the cashier orcheques, etc., to any other responsible officer who acknowledges receipt of the same by signing the counterfoil along with the stamp of the bank and returns it to the customer. The slip retained by the bank is passed on to the clerk concerned for making necessary credit entries in the account of the customer. 24
  25. 25. Specimen Form of Pay-in-Slip For Depositing Cash 25
  26. 26. Pay-in-Slip For Local Cheques Only 26
  27. 27.  The Cheque Book contains blank forms of the cheque which are used as the instrument to withdraw money from the bank. In case of savings bank account a cheque book is provided to only those customers who undertake to maintain a minimum balance to their credit. Other customers may withdraw from their savings bank account through a withdrawal form available from the bank. But in the latter case it is essential that the Pass Book must accompany the withdrawal form everytime. The blank forms of the cheques and their counterfoils are serially numbered. The Cheque Book also contains a Requisition Slip which, dully filled in, is presented by the customer for obtaining another cheque book from the bank.  The Pass Book is a small handy book issued by the banker to his customer to record all dealings between them. In fact, it is an authenticated copy of the customer’s account books of the banker. The purpose of issuing a pass book to the customer ia to acquaint him periodically with the state of the affairs of his account with the bank. The Pass Book also contains rules and regulations governing the savings account. The customer deposits the pass book periodically with the bank for the purpose of recording entries therein. As it passes from the hands of the customer to the banker and vice versa, it is called a ‘Pass Book’. A Pass book is very important to a customer because it enables him to know some of the entries made by the banker in his ledger account, e.g. the amount of interest allowed or charged, the incidental or other charges made by the banker. In business where such entries are many, businessmen prepare Bank Reconciliation Statements with the help of the Pass Book to tally the balance shown in the Cash Book with that given in the Pass Book. 27
  28. 28. The Following points are important in this connection:- 1. Entries in the Pass Book are to be recorded by the clerk of the bank and must bear the initials of the accountant. The customer should not write any write any entry himself, even for the purpose of reconciling the bank balance. 2. whenever the banker sends a pass book to the cuatomer, it must show up-to-date entries. 3. if the Pass Book is lost by the customer, a duplicate Pass Book may be issued by the banker and marked as ‘Duplicate’ 4. in case of a Savings Bank account, the Pass Book must accompany the withdrawal form every time when money is withdrawn through a withdrawal form. Some banks,especially the State Bank of India,send to the customers a Statement of Account periodically, i.e.., fortnightly or monthly, in place of providing the customer with a Pass Book. Such statement shows the relevant entries in the customer’s account during the given period and are filed by the customer. 28
  29. 29. Legal Aspects Of Entries In The Pass Book Through the Pass book contains true and authenticated record of the customer’s account with the banker, no unanimous view prevails regarding the validity of the entries in the Pass Book. The question, therefore, arises whether the Pass Book constitutes a conclusive proof of the accuracy of the entries made therein. Sir John Paget’s View:- According to Sir John Paget, “The proper function which the Pass book ought to fulfill is to constitute a conclusive and unquestionable record of transaction between the banker and the customer and it should be recognized as such. After full opportunity of examination on the part of the customer all entries, at least to his debit, out to be subsequently final, and not liable to the subsequently reopened at any rate to the detriment to the banker.” In fact this viewpoint resets on the presumption that the customer is under any obligation to verify the entries made in the Pass Book periodically and if he detects any mistake, he ought to bring it to the notice of the banker within the reasonable period. If he does not do so and remains silent after the receipt of the Pass Book, customer’s concurrence with the correctness of the entries is taken for granted. In some of the legal judgments, specially in the United States this viewpoint was upheld by the Court. According to this viewpoint, negligence or omission on the part of the customer to examine the correctness of the entries in the Pass Book is a fault on his part and thus renders Pass Book as an evidence of settled and accepted account. Effect of Entries to the Advantage of the Customer:- The account of the customer may sometimes wrongly show the credit balance, which is larger than the correct balance because of the duplicate of credit entries or incorrectly entering higher amounts for such entries or incorrectly entering higher amounts for such entries or due to omission of any debit entry. The legal position of the banker and his customer shall be as follows:- 1. The Pass Book is written by the banker and hence the entries therein may form an evidence against the banker. The customer is rightly entitled to believe them as correct and to act on the basis of such entries. If the Pass Book shows the higher balance and the customer withdraws such balance treating as his own and subsequently spends is away, the banker shall not be entitled to recover such amount 29
  30. 30. wrongly paid to the customer. But the customer shall have to prove that • He acted in such manner relying on the correctness of the balance shown in the Pass Book and had no knowledge of the mistakes therein • He altered his position by spending the same 2. There are some expectation to the above-mentioned principle of estoppel. If the customer regularly maintains his account books and the bank regularly sends him the Pass Book the customer cannot act on the basis of the above presumption. Though it is not obligatory for him to check the Pass Book. But in such circumstances, it is difficult to establish that he was ignorant about the mistakes in the Pass Book, because he regularly maintained the account books. Effects of the Customer Signing Confirmation Slips:- The Pass Book itself is not a conclusive proof of the settled account. Banks nowadays periodically issue to the customers confirmation slips, which give the balance in the account as on the given date. By putting in the signature on the confirmation slips, the customer accepts and confirms such balance. The legal effect of the customer’s signing the confirmation slip by the Kerala High Court. The Court observed that “unless there is evidence to show that the practice or the custom indicated a stated or the settled account, the customer is not precluded from questioning the debit entries in the Pass Book but, when confirmation slips are signed by the customer, he will be bound by the debits made.” In this case the confirmation slips were signed by the customer or his authorized agent. Hence the same were binding on him and his heirs and could not be challenged by them. The banker is entitled to point out the customer any mistake or the omission and to rectify it as soon he knows about it. On the receipt of such information the customer is not entitled to withdraw the excees amount wrongly credited to his account. But the should not dishonour the cheque drawn and issued by the customer before the notice of such wrong entry is served on him. If he does so, he will be liable for the consequences of their wrongful dishonour. 30
  31. 31. Specimen Of Bank Pass Book Effect of Wrong Entries in favour of the Banker:- When a credit entry has been totally omitted or its figure has ben wrongly stated or any debit entry has been erroneously made in the account of the customer, such entries are favourable to the banker and against the customer. The customer is entitled to get the mistake rectified as soon as he happens to detect it. This right of the customer does not lapse even if he returns the Pass Book without raisisg the objection regarding any entry or he remains silent after the receipt of the Pass Book because, as already noted, the customer is not bound to examine the Pass Book periodically and regularly. He is entitled to recover the amount wrongly credited to his account. The right of the customer to get the mistake rectified is, however, subject to one limitation. The High Court also held that an implied contract as to the settlement of accounts does not arise between a customer and his banker merely by reason of the banker sending the Pass Book to the customer with the 31
  32. 32. accounts written up and the customer failing to point out any irregularities therein. Effect of False Entry in the Pass Book The liability of the banker to his customer in case his employee commits an act of embezzlement and makes false entries in the Pass Book was considered by the Supreme Court in State Bank of India. The brief of the case were as follows: A lady opened a saving bank account in State Bank of India with the introduction by an employee of the bank, who was a close neighbour and fast friend of her husband. The customer entrusted to the said employee moneys and cheques, duly endorsed, for being credited to her account. The employee misappropriated the same and to cover up his fraud made false entries in the Pass Book. It was argued on behalf of the customer that the entries in the Pass Book showing the deposits of these amounts in the savings bank account had admittedly been made by the employee had manipulated the accounts of three other depositors also and the bank had reimbursed those customers for the loss. It was urged that the entries in the Pass Book were prima facie sufficient tom establish the customer’s claims. The banker argued that the customer had entrusted the employee moneys from time to time for depositing in her savings account. In such situation the employee could not be said to have been acting in due course of his employment or as an agent of the bank. He was also an agent of the customer. If he did not deposit those amounts as directed by the customer and misappropriated the same and to cover up his fraud made false entries in the Pass Book, the bank could not be liable for the loss. The Supreme Court, therefore, considered the question whether the amounts were handed over by the customer to the said employee in the course of the bank’s business, i.e…, whether the employee acted as the gent of the customer or of the bank in the course of the employment. It was established that the said employee was not, as the relevant times, in charge of the savings bank counter at which the saving account of the customer was dealt with. In such a situation he acted as an agent of the customer. His act of misappropriation could not be said to have been committed in the course of his employment with the bank. Similarly, it cannot be said that false and fictitious entries made by the employee to cover 32
  33. 33. up his fraud made the embezzlement an act committed by the employee in the course of his employment with the bank. The bank was, therefore, not liable to make good the loss caused to the customer. The Supreme Court laid down the legal principle which governs liability of an employer for the loss caused to the customer through the misdemeanour or negligence of the employee as follows:- The employer is not liable for the act of the servant if the cause of the loss or damage arose without his actual fault of his agent or servant in the course of his employment. Precautions to be taken by the Banker and the Customer 1. The Pass Book must be sent by the customer to the bank periodically and regularly for recording the necessary entries, so that mistakes, if any, may be detected by the customer soon thereafter. Reserve Bank has advised the banks tom issue a simple receipt to the tender of savings bank if it is retained by the bank for updating. 2. The Pass Book must be initialed by the accountant or other responsible officer of the bank, who must ascertain the accuracy of the balance on the date of recording the entries, otherwise the customer will be entitled to act upon the same, if it is wrongly stated. 3. The customer must tally the entries with his own record either the account books or the counterfoils of pay-in-slips and cheques, etc. If any inaccuracy is found, the customer must inform the bank immediately to get the mistake rectified. 4. While sending the Pass Book to the customer, the banker should take steps to ensure the secrecy of its contents. The Pass Book must be sent in a closed cover. 33
  34. 34. Closing Of A Bank Account The relationship between a banker and his customer is a contractual one and continues as long as both of them so desire. The relationship may be terminated by either of them by giving notice of his intension to the other party. Moreover, the banker is bound to suspend payment out of the customer’s account under the compulsions of law. The rights and obligations of a banker in this regard are as follows: 1. If a customer directs the banker in writing to close his account , the banker is bound to comply with such direction. The latter need not ask the reasons for the former’s direction. The account must be closed with immediate effect and the customer be required to return the unused cheques. 2. If an account remains unoperated for a very long period, the banker may request the customer to withdraw the money. Such step is taken on the presumption that the customer no longer needs the account. If the customer could not be traced after reasonable effort, the banker usually transfers the balance to an “Unclaimed Deposit Account”, and the accounts is closed. The balance is paid to the customer as and when he is traced. 3. The banker is also competent to terminate his relationship with the customer, if he finds that the latter is no more a desirable customer. The banker takes this extreme step in circumstances when the customer is guilty of conducting of account in an unsatisfactory manner, i.e…,if the customer is convicted for forging cheques or bills or if he issues cheques without sufficient funds or does not fulfill his commitment to pay back the loans or overdrafts, etc. The banker should take the following steps for closing such an account: • The banker should give to the customer due notice of his intention to close the account and request him to withdraw the balance standing to his credit. This notice should give sufficient time to the customer to make alternative arrangements. The banker should not, on his own, close the account without such notice or transfer the same to any other branch. 34
  35. 35. • If the customer does not close the account on receipt of the aforesaid notice, the banker should give another notice intimating the exact date by which the account be closed otherwise the banker himself will close the account. During this notice period the banker can safely refuse to accept further credits from the customer and can also make him liable to the customer and will be in consonance with the intension of the notice to close account by a specified date. The banker should, however, not refuse to honour the cheques issued by the customer, so long as his account has a credit balance which will suffice to pay the cheques. If the banker dishonours any cheque without sufficient reasons, he will be held liable to pay damages to his customer under Section 31 of the Negotiable Instruments Act, 1881. • In case of default by the customer to close the account, the banker should close the account and send the money by draft to the customer. He will not be liable for dishonouring cheques presented for payment subsequently. 4. On receipt of the notice of death of a customer, the banker must stop the operation of his account because the authority of the customer terminates as he dies. 5. If the banker receives the notice regarding the insanity of his customer, he is bound to stop payments from his account. 6. The relationship between the banker and his customer is also affected if the customer becomes insolvent or the corporate customer goes into liquidation. The credit balance of the customer is transferred to the Official Receiver of the insolvent customer. 7. On receipt of a Garnishee order from the court, the banker is bound to suspend payment from the account of the customer. If the order prohibits the payment of a specified sum from the account, the banker may honour the cheque out of the remainder amount. 8. When the banker has received a notice of assignment of the credit balance in the account of a customer to a third party, the banker is bound to pay the same amount to the said third party. 35
  36. 36. Insurance of Bank Deposits An important feature of Indian banking is that deposits of the public with the bank are insured up to the limit of Rs. 30,000 in such account. After the failure of the Palai Central Bank, a scheduled bank of the South India in 1960, the Government and the Reserve Bank felt the necessity of insuring the deposits in the banks so that public confidence in the banking institution was not shaken whenever any bank failed to operate or was merged with other bank. The Deposit Insurance Corporation of India was established by an Act of Parliament to insure the deposits in the commercial banks and the scheme of deposits insurance was introduced with effect from January 1, 1962. the corporation has been renamed as Deposit Insurance and Credit Guarantee Corporation with effect from July 15, 1978. Salient Feature of Deposit Insurance:- 1. The scheme of deposit insurance applies since its inception to all commercial banks in India, scheduled and non-scheduled. The deposit insurance cover has been extended to co-operative banks also in 16 states and 3 Union Territories upto the end of June, 1988. The Regional Rural Bank have also been included in this scheme. All these banks are called insured banks. 2. The insurance cover is extended to all deposits with the insured banks except the deposits of the Central and State Governments, foreign Governments and the commercial banks. 3. The deposits with the insured banks are insured up to a specified limit only. With effect from July 1, 1980 the insurance cover is available in respect of all unpaid balances due to a depositor held in bank in the same capacity and in the same right up to Rs. 30,000. this means that every account of a depositor in every insured bank is insured to the extend of RS. 30,000. the accounts with credit balance up to Rs. 30,000 each are called fully protected accounts. 36
  37. 37. 4. The corporation reimburses the depositors in case the insured bank fails or is amalgamated with another bank and defaults in paying the balances due to the depositors in cash or by crediting the same to the full extent in the books of the transferee banks. The difference between the amount so paid or credited and the limit of the insurance cover per account is paid by the Corporation. For example, if bank X, on its merger with bank Y, gives a credit equal to 75% of the deposit, a depositor having a credit balance of Rs.10,000 will get credit of RS.7,500. the balance of Rs.2,500 will be reimbursed to him by the Corporation. 5. The rate of insurance premium is 4 paise per annum for every hundred rupees of assessable deposits. It is payable by the insured banks and not by the depositors at half-yearly intervals. Premium is thus payable on the total assessable deposit whereas the ‘Insured Deposits’ are those which are below the limit of insurance cover, i.e…, RS.30,000 in each account. 6. The Corporation maintains two funds: (a) Deposit Insurance Fund (b) General Fund. The income from insurance premia is credited to the Deposit Insurance Fund and is invested in the Central Government securities. Income from such investments is credited to and the insurance losses are debited to the Revenue Account of the Fund. The General Fund meets all other expenses of the Corporation. 37
  38. 38. Attractive Savings Schemes Though the terms and conditions regarding deposits are largely prescribed by the Reserve Bank of India, the banks have recently introduced various attractive savings schemes. For example, the State Bank of India at present offers the following deposit scheme to the public: 1. Re-investment Plan: This is just like fixed deposits with the difference that deposits with the difference that the deposits are accepted for a fixed period ranging between 12 and 120 months and interest, though calculated periodically, is payable at the time of maturity. This plan provides for the re-investment of interest also. According to the Reserve Bank directive, in case of premature withdrawal or renewal under such plan, compound interest with quarterly rests at prescribed rate is to be allowed. If an advance is granted against a deposit under re- investment scheme, accrued interest is also to be taken into account for determining the margin. 2. Cash Certificates These certificates are issued with different values payable after specified maturity period. The issue prices for different maturity periods are specified in advance ; for example, one can get a Cash Certificate with face value of Rs. 100 after 12 months by paying Rs. 92.38. Thus interest is payable on maturity. 3. Perennial Pension Plan This plan provides for (i) the payment of the monthly deposit with bank in specified denomination for the period of 84 months. (ii) the payment of monthly pension by the bank from the 86th month onwards. 38
  39. 39. (iii) further specified sum payable to depositor when pension is discontinued. 4. Annuity Deposit Under this plan the depositor opts for the monthly annuity for Rs. 36, 60, 84, or 120 months. He makes the initial deposits of the specified amount and thereafter receives monthly annuity amount for the selected period of time. For example, by making an initial deposit of RS.1551 one gets the monthly annuity of Rs. 50 for 36 months. 5. Super Savings Package Under this plan a depositor makes monthly deposits for a longer period ranging from 15 to 40 years and gets the lumpsum thereafter. 6. State Bank Education Plan This plan is to help the parents to save for meeting the educational expenses of the children. Parents are required to make a monthly deposit of RS. 100 per month during the period the child studies from nursery to 7th class. Thereafter. The parents gets specified sums annually when the child reaches 12th class and completes his 5th year of university education. This plan provides for further studies including study abroad. 39
  40. 40. Classification of Deposits The Reserve Bank of India publishes the classification of deposits with the commercial banks into two broad heads, namely o Demand Deposits o Time Deposits The various types of deposits included in these heads are as follows: 1.Demand Deposits include o Current Deposits o Demand liabilities portion of savings bank deposits o Margins held against letter of creditguarantees o Balances in overdue deposits, cash certificate and recurring deposits o Outstanding telegraphic and mail transfers, demand drafts o Unclaimed deposits o Credit balance in cash credit account o Deposits held as security for advances which are repayable on demand 2. Time Deposits include o Fixed deposits o Cash certificates, recurring deposits o Time liabilities portion of savings bank deposits o Staff security deposits o Margins held against letter of credit if not payable on demand o Fixed deposits held for securities for advances It is to be noted that the savings deposits are apportioned in both of the above categories. The portion which can be withdrawn without notice is treated as demand deposits and the rest as time deposits. 40
  41. 41. Facility of Nomination The Banking Laws Act, 1983 has inserted a new section 45 ZA in the Banking Regulation Act, 1949 to provide for the facility of nomination by the depositor in banks. The above section and the rules framed therein provides as follows: 1. A single depositor may nominee, in the prescribed manner, a person to whom, in the event of the death of the depositor, the amount of his credit may be paid by the banking company. 2. In case of a joint account, all the depositors together may nominate a person to who, in the event of the death of all the joint depositors, the amount to their credit may be paid by the banking company. Thus the nominee’s right to receive deposit money arises only after the death of the depositors. There cannot be more than one nominee in respect of the joint account. 3. A nomination can be made in favour of individuals only and not associates, societies, trusts or any organization or their office-bearers. 4. Nomination facility is available to all types of deposit accounts, including the accounts opened for credit of pension. 5. Such nomination confers upon the nominee the right to receive the amount of deposit from the banking company. On the death of the depositor/all the joint depositor, the nominee shall become entitled to all the rights of the latter to such deposit, to the exclusion of all person. 6. If the nominee is a minor, the depositor may also appoint any person to receive the amount of deposit in the event of his death during the minority of the nominee. 41
  42. 42. 7. The nomination may be varied or cancelled by the depositor in the prescribed manner. In case of a joint account variation or cancellation of a subsiting nomination can be made the surviving depositors acting together. 8. On making payment under the provisions of this section, the banking company shall be fully discharged from its liability in respect of the deposit. 9. The right of claim of any other person against the nominee, to whom any payment is made under this section, shall not be affected by such payment. 10.No other person shall be able to get notice of his claim to such deposits to the banking company. Nor shall the banking company be bound by such notice even though expressly given to it. The above provisions in the act have been made to facilitate expeditious settlement of claim in the accounts of deceased depositors and to minimize the hardship caused to the family members on the death of the depositor. 42
  43. 43. Legal Status Of The Nominee It is necessary to understand the legal position of the nominee as regards the amount of deposits received by him from the banking company. Does he become absolute owner of such amount or the claims of other legal heirs of the deceased remain unaffected by such nomination? This question was decided by the Supreme Court in connection with nomination made in case of the insurance policy. In this case the wife of the policy holder was the nominee. His mother and the minor son claimed their shares from the life insurance money received by the deceased’s wife from L.I.C. The Supreme Court held that- “A mere nomination made under section 39 of the Insurance Act, does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured.” “The nomination only indicates the hand which is authorized to receive the amount, on the payment of which the insurer gets the valid discharge of its liability under the policy. The amount, however, claimed by the heirs of the assured in accordance with the Law of Succession governing them.” Thus it is clear that nominee does not become the absolute owner of the amount received by him. The Law of succession will still pevail. 43
  44. 44. Small savings schemes lose out to bank deposits Small savings have declined 21% during the financial year 2006-07 compared to the compound annual growth rate (CAGR) of 13% during the six year period from 2000-01 to 2005-06. Small savings have lost out to commercial banks which are offering higher interest rates on deposits. During the same period, saving deposits with banks increased by 14% maintaining the CAGR of 19%. These are some of the findings of the Eco Pulse Study on “Growth trend of small savings schemes,” released by Assocham. According to Mr Venugopal Dhoot, President, Assocham, “a high interest regime has introduced small saving schemes to direct competition from commercial banks. With the advent of private fund managers gaining strength in the financial market, small savings could face some more loss in its deposits”. Total receipts under the small savings schemes during the financial year 2006-07 dipped to Rs 1,37,560 crore as against Rs 1,73,283 crore in the previous year. However, saving bank deposits with commercial banks stood at Rs 6,55,274 crore at the end of FY07. Small savings schemes include post office saving bank deposits, national saving schemes, monthly income schemes, national saving certificates, Indira Vikas Patra etc,which are meant to mobilize savings from small investors since they carry attractive interest rates, sovereign guarantee and tax benefits. Commercial banks raised the deposit rates by 200 basis points during the financial year 2006-07, as RBI tightened money flow in the market. The rate of return on deposits of one-month to a year was 7% as compared to 5% in 2005-06, and the rate on deposits of more than one year was 9%. Consequently, flow of savings changed their course from, Small Saving Schemes in which rate of return is Government administered, to saving deposits with banks. Interest rates offered by small saving schemes range between 3.5% on saving deposit account and 7.5% on one-year time deposits and 8% on two-year deposits. 44
  45. 45. Analysis of small savings Monthly Income Scheme:Savings under Monthly Income Scheme which account for one-third of total small savings, declined by 47% in last financial year even as they recorded CAGR of 25% during the period from FY2000- 06. Collections in FY07 was Rs 25007 crore as compared to Rs 47273 crore in the previous year. The total amount outstanding at the end of fiscal 2007 was Rs 1,53,636 crore. Kisan Vikas Patra(KVP): Savings invested with KVP recorded a decline of 26% during 2006-07 as compared to a 25% increase in the previous year and an overall compound annual growth of 4.5% in the six-year period extending from FY00-06. Amount of Rs 153636 crore is outstanding in KVP, which is around 27% of total small savings. Post Office Recurring Deposits (PORDS): Receipts of PORDS grew by mere 1% compared to previous year’s growth rate of 18% and CAGR of 19% during FY2000-06. The scheme accounts for 10.5% of total small savings. The amount outstanding at the end of fiscal 2007 was Rs 59279 crore. National Saving Certificate VIII Issue: It accounted for 10.5% of the total small savings, registering a decline of 28% in last financial year as against the compound annual growth of 6% during six years preceding the fiscal 2007. The amount outstanding with the Scheme was Rs 59110 crore. Post Office Time Deposits (POTD): These consisit of one, two, three and five-year time year deposits, accounting for 6.64% of small savings. Receipts with total POTD witnessed 11% decline in FY2007 as compared to the CAGR of 25% over the period of 2000-06. Two and five-year time deposits, bore maximum brunt with 18% and 6.5 downfall in collections. They had recorded compound annual growth of 34% and 23%, accounting for 5% and 30% of total amount invested in POTD. One year time deposits, which have a maximum share of 48% in time deposits, registered growth of 9% in FY007 as compared to 27% in previous year and compound annual growth of 51%. Growth rate of three-year time deposits also came down to 1% as against 25% growth in fiscal 2006 and CAGR of 63%. 45
  46. 46. Post Office Saving Banks Deposits: Receipts in this scheme grew by merely 1% in FY2007 as compared to a growth rate of 27% in fiscal 2006. The share of post office saving deposits in total small savings is around 3%. The dcheme was growing at compound annual growth rate of 18% in the six-year period preceding FY2007. Deposits Scheme for Indians Abroad A large number of Indian citizen and aliens of Indian origin live abroad and are in a position to save a good deal of money. The government of Indian realized the urgency of mobilizing their savings in the form of bank deposits in India and therefore, offered them certain concessions and incentives to remit money to India for investment. Banks in India at present operate various types of deposit accounts for Indian nationals abroad in the Indian rupee and Foreign currency. Definition of Non-Resident Indians To open an account under any of the schemes meant for Non-Resident Indians, one must qualify as a Non-Resident Indian, by fulfilling anyone of the conditions as given in the Foreign Exchange Regulation Act: 1. He is an Indian citizen, who stays abroad for employment or for carrying on a business or vocation, or for any other purpose in the circumstances indicating an indefinite period of stay outside India. 2. He is an Indian citizen working abroad with international organizations like the UNO, IMF, etc. 3. He is an official of CentralState Government and public sector undertaking deputed abroad for temporary assignments 4. He is a person of Indian origin. A person is deemed to be of Indian origin if he at any time held an Indian passport ,or he or either of his parents or any of his grant parents was an Indian and a permanent resident in undivided India at any time. Wife of a citizen of India or of a person of Indian origin is also deemed to be of Indian origin even though her parents are non-Indians. 46
  47. 47. These accounts can be maintained with banks which are authorized dealers in the foreign exchange or which are specifically authorized in this behalf by the reserve Bank is not required to open these accounts. Features of various deposit schemes available to Non-Resident Indians (NRIs) Particulars Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR(B) Account) Non-Resident (External)Rupee Account Scheme (NRE Account) Non-Resident Ordinary Rupee Account Scheme (NRO Account) (1) (2) (3) (4) Who can open an account NRIs (individuals / entities of Bangladesh/ Pakistan nationality/ownership require prior approval of RBI) NRIs (individuals / entities of Bangladesh / Pakistan nationality / ownership require prior approval of RBI) Any person resident outside India (other than a person resident in Nepal and Bhutan) (individuals / entities of Bangladesh / Pakistan nationality / ownership as well as erstwhile OCBs require prior approval of RBI) Joint account In the names of two or more non-resident individuals In the names of two or more non- resident individuals May be held jointly with residents 47
  48. 48. Nomination Permitted Permitted Permitted Currency in which account is denominated Pound Sterling, US Dollar, Jap. Yen, Euro, Canadian Dollar and Australian Dollar Indian Rupees Indian Rupees Repatriable Repatriable Repatriable Not repatriable except for the following in the account - 1) Current income 2) Upto USD 1 Million per financial year (April- March), for any bonafide purpose out of the balances in NRO account / sale proceeds of assets in India acquired by way of inheritance / legacy inclusive of assets acquired out of settlement subject to certain conditions. Type of Account Term Deposit only Savings, Current, Recurring, Fixed Deposit Savings, Current, Recurring, Fixed Deposit Period for fixed deposits For terms not less than 1 year and not more than 5 years. At the discretion of the bank As applicable to resident accounts. 48
  49. 49. Rate of Interest Subject to cap : LIBOR / SWAP rates for the respective currency / corresponding maturities minus 25 basis points Subject to cap : Fixed Deposits : LIBOR / SWAP rates, as on the last working day of the previous month, for US dollar of corresponding maturities plus 50 basis points with effect from close of business on January 31, 2007. Savings Bank Account Interest rate shall be at the rate applicable to domestic savings account with effect from close of business in India on 17-11-2005. Banks are free to determine interest rates for term deposits. Operations by Power of Attorney in favour of a resident by the non- resident account holder Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels. Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels. - 49
  50. 50. Loans a. In India i) to the Account holder ii) to Third Parties Permitted up to Rs.20 lakhs Permitted upto Rs.20 lakhs Permitted upto Rs.20 lakhs Permitted upto Rs.20 lakhs Permitted Permitted b. Abroad i) to the Account holder ii) to Third Parties Permitted upto Rs.20 lakhs Permitted upto Rs.20 lakhs Permitted upto Rs.20 lakhs Permitted upto Rs.20 lakhs Not Permitted Not Permitted c. Foreign Currency Loans in India i) to the Account holder ii) to Third Parties Not Permitted Not Permitted Not Permitted Not Permitted Not Permitted Not Permitted Purpose of Loan a. In India i) to the Account holder i) Personal purposes or for carrying on business activities. * ii) Direct investment in India on non- repatriation basis by way of contribution to the capital of Indian firms / companies iii) Acquisition of flat / house in India for i) Personal purposes or for carrying on business activities. * ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms / companies iii) Acquisition of Personal requirement and / or business purpose * 50
  51. 51. his own residential use. flat / house in India for his own residential use. ii) to Third Party Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. Personal requirement and / or business purpose * b. Abroad To the account holder and Third Party Fund based and / or non-fund based facilities for bonafide purposes. Fund based and / or non-fund based facilities for bonafide purposes. Not permitted. * The loans cannot be utilised for the purpose of re-lending or for carrying on agriculture or plantation activities or for investment in real estate business. Note : a. When a person resident in India leaves India for Nepal and Bhutan for taking up employment or for carrying on business or vocation or for any other purpose indicating his intention to stay in Nepal and Bhutan for an uncertain period, his existing account will continue as a resident account. Such account should not be designated as Non-resident (Ordinary) Rupee Account (NRO). b. ADs may open and maintain NRE / FCNR (B) Accounts of persons resident in Nepal and Bhutan who are citizens of India or of Indian origin, provided the funds for opening these accounts are remitted in free foreign exchange, Interest earned in NRE / FCNR (B) accounts can be remitted only in Indian rupees to NRIs and PIO resident in Nepal and Bhutan. c. In terms of Regulation 4(4) of the Notification No.FEMA.5/2000-RB dated May 3, 2000, ADs may open and maintain Rupee accounts for a person resident in Nepal / Bhutan. 51
  52. 52. d. The regulations relating to the various deposit schemes available to Non- Resident Indians have been notified vide Notification No.FEMA.5 dated 3rd May 2000, as amended from time to time. The relevant Notifications and A P (DIR Series) Circulars have been placed on our website www.rbi.org.in and may please be referred to for full details. Foreign Currency Account’s If your business exports or imports goods or services, you need to consider how you will protect yourself against changes in the exchange rate. A tiny variation in the rate could cost your business thousands of pounds. You'll also need to decide how to make and receive payments in foreign currencies. This guide is aimed at businesses which regularly deal with foreign customers. It explains how to price goods or services, how to combat the risk of exchange rate changes and the practicalities of dealing in foreign currencies. Identify foreign Currency Exchange When your business deals in a foreign currency you are exposed to certain risks. For example, you might find that after agreeing a price for exported or imported goods the exchange rate changes before delivery. Clearly, this can work both for and against you. Some countries' currencies are more volatile than others because of their inflationary or unstable economies. This makes their exchange rates more liable to extreme movements. Your bank should be able to advise you. Of course, because exchange rates can go both up and down, it can be tempting to gamble that this will work out in your favour. However, this is extremely risky and could land you with a significant financial loss. It's safer to reduce the risk by using one of the forms of hedging available through a bank. Hedging simply means insuring against the price of an item - in this case, currency - moving against you in the future. Three types of 52
  53. 53. hedging are discussed in this guide. See the pages in this guide on forward foreign exchange contracts, opening foreign currency accounts and buying currency options. You could, of course, consider trading overseas in sterling - effectively transferring the foreign exchange risk to the business you're dealing with. Whether this is an appropriate solution will probably depend on the product in question and the relative bargaining strength of you and your trading partner. Bear in mind that exchange rates could have an effect on your business' competitiveness even if you don't trade overseas. When a country's currency loses value against the pound, imports from that country into the UK become cheaper, so you may have to respond to aggressive pricing from competitors who source from that country. Similarly, if a country's currency gains currency against sterling, UK exports to that country become cheaper. Foreign currency and exchange risk Opening foreign currency accounts An alternative way of hedging your currency risk is to open a foreign currency account - a bank account operated in the UK in a foreign currency of your choice. Foreign currency accounts can be a good option for importers and exporters. They are offered by most of the UK clearing banks including Barclays, Co- operative Bank, HSBC, Lloyds TSB, NatWest, and the Royal Bank of Scotland. If you open an account in the currency in which you make the bulk of your transactions you can hedge against exchange rate changes by keeping money in the account until the rate is beneficial to you. Although the UK isn't in the eurozone, you can open a euro account here - which could be useful if you conduct a lot of business with European customers. It allows you to hedge risks for a range of EU countries at the same time. This option suits businesses with: 53
  54. 54. • a large number of dealings in a particular currency • a strong cashflow - which means they're unlikely to require immediate access to funds Advantages • Ease of access. • Potential interest earned on your deposits. • The ability to discuss transactions in English with your own bank. • Avoiding the cost of exchanging currency. Disadvantages • There will be charges for setting up and running the account. • If you need to convert funds in your foreign currency account into sterling for UK use, you will face a loss if the pound is strong against that currency. Buying currency options Buying currency options is a more flexible form of hedging than setting up a forward foreign exchange contract - but it's also more expensive. Currency options give you the right, but not the obligation, to buy a certain amount of currency at a specific exchange rate on or before a specified date. But unlike a forward foreign exchange contract, you're not obliged to buy the currency at the end of the period. To enjoy this flexibility you'll have to pay a premium, which typically might be a minimum of £500. The exact amount will depend on the amount of currency involved and the length of the option. This option suits businesses that: • want to protect themselves from unfavourable rate changes while retaining the flexibility to benefit from advantageous ones • are entering into a deal and there's a fair chance of it not going ahead Advantages • You're protected from any adverse movements in the exchange rate. • Your business can benefit if the exchange rate moves in your favour. 54
  55. 55. Disadvantage • The expense of setting the option up. • The ability to buy currency options is offered by most of the UK clearing bank Survey 55
  56. 56. 1.Do you have an account with the bank ? o Yes o No Yes 78% No 22% 2.Do you think the procedure for opening an account is ? o Convenient o Lengthy Yes 95% No 5% 3. What type of an account according to you is more preferable? 56
  57. 57. o Fixed Account o Current Account o Savings Account o Recurring Account 4. What type of an account do you have with the bank? o Fixed Account o Current Account o Savings Account o Recurring Account 5. What type of rate of interest do you prefer? Fixed Account 9% Current Account 32% Savings Account 50% Recurring Account 9% Fixed Account 3% Current Account 25% Savings Account 60% Recurring Account 12% 57
  58. 58. o Fixed o Fluctuating Fixed 45%Flctuating 55% 58
  59. 59. Questionnaire with the banker 59
  60. 60. I had visited Punjab National Bank at Borivli (west) branch and met Mrs. Merle D’Souza who is a customer care officer of the bank . Even though of her busy schedule she helped me out by giving answers to few questions. First of all she gave me a brief introduction on PNB Bank. That is PNB is 113 years old bank and almost stands No. 1 in Public Sector Bank in India. They have 4900 branches all over India. Out of which 2900 branches are connected by core banking solution (CBS) and due to this connectivity person can withdraw money anywhere in India. PNB have branches in rural areas also. The Questions are as follows:- 1. Which type of account do the customer prefer the most while opening an account with the bank? Ans.- Savings Bank Account’s 2. On which account do you pay the highest rate of interest and what is the interest rate provided by the bank? Ans.- Highest rate of interest is paid on Fixed Deposit Account’s. interest rate provided by the bank is 1 year- 8%, 2 year- 8.75%, 5 year- 8.50% 3. What is the minimum and maximum commission charged by your bank on the demand draft? Ans.- Minimum- Rs.50/- Maximum- 2000/- 4. What are the Penalty charges if the Pass Book is lost? 60
  61. 61. Ans.- Duplicate 100 or 150 depending on the pages 5. What is the main document needed for opening an account? Ans.- Address proof, Photo id, Photograph, Minimum Rs.1000/- 6. Which is the latest account PNB have started? Ans.- It have started with a new scheme of PNB Vidyarthi Account specially for students for internet banking and credit card. 7. What do you mean by Premium Customer? Ans.- Premium customers are one who maintains Rs.25000/- in previous 3 month in savings account and Rs.50000/- in current account. For premium customer there are waiver of charges and commission. 8. Does PNB have any account for NRI? Ans.- PNB have NRE Account under Fima Act. So, here the interview between the manager and myself got over and I was provided by the true and the right information. ] Conclusion 61
  62. 62. Overall, this project has helped to understand the different types of accounts that are in the current Indian Banking System, specifically the savings & current bank accounts. I have also understood the procedures and functions of recurring and fixed deposit Account. The various formalities and legal aspects in operations of a bank account have been explained in the project. This project also helped me understand the various types of Deposits & what are the opportunities in India for Indians Abroad. Thus, with the help of this project I have learned many new things in the banking sector and customer accounts in particular. Bibliography 62
  63. 63.  Banking Law And Practice- P.N. Varshney  www.google.com  www.banks.com 63

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