Practise of principles of banking & insurance (ppbi)
Origin of banking
• The term “BANK” derived from German word
“Bancus”, “Banque” means bench.
• Jews were the early bankers
• Babylonian developed banking system in 2000BC
• In 14th century Royal exchangers did banking on
behalf of kings
• Then goldsmith did the job of accepting money
• Bank of England was started in 1694
• 1708 Act provided the note issue power to them
• 1844 Act restricted power of note issue by private
• Lack of increase in circulation of notes led to need for
Banking in India
Origin was in vedic period
In 3rd century Vedic scholar Manu gave the idea of
accepting deposits& lending money
He laid rule for interest charging
During Mogul period indigenous bankers lend money
Many started this function like Shroof, sheth, shah,
Money lenders in India
• They transferred money from place to place &
person to person
• They used their money for lending
• Not accepted deposits from public
• They collected money through hundies
• Because of high risk high interest was collected
• No banks in villages. No alternative for farmers to
get money. So they depend on these people
• The English traders also depend on them
Banks started by East India Company
The Bank of Bengal in 1809
The Bank of Bombay in 1840
The Bank of Madras in 1843
These 3 banks were known as Presidency Bank.
The Imperial Bank of India Act was passed in
1920.These 3 banks were amalgamated into one and
known as Imperial Bank of India in 1921.This bank was
nationalized in 1955 by the State Bank of India Act
Banking in the pre independence period:
• Lack of development of banking due to the
• I and II world war
• Partition of the country in 1947
• Adversely affected states like Punjab and West
• Most of the private banks collapsed
• Many of the exchange banks owned by Europeans
concentrated to finance on foreign trade
• Indian joint stock companies were under capitalized
and lacked the experience and maturity to compete
with the Presidency banks and exchange banks.
Banking after independence
In 1949 the Banking Regulation Act was enacted
which empowered RBI to regulate, control and
inspect the banks in India
In 1955 it nationalised the Imperial Bank of India.
State bank of India became the principal agent of
RBI to handle banking transactions
In 1960s the banking industry gained momentum in
the devt. of the economy
In 1969, 14 major banks were nationalised
In 1980, 6 more banks were nationalised
Banking system has reached even in the remote villages
Funds were largely given to traders
Insurance cover extended to the deposits
creation of regional rural banks
Emergence of private sector banks and foreign banks
To day’s condition…
There are 27 public sector banks accounting for more
than 80% commercial banking assets
Banking system in India consists of commercial banks
and co operative banks of which the former account
for 98% of the banking system assets
Reforms introduced in banking sector
The main intention of reforms is to bring
competitiveness, operational flexibility, efficiency and
banking became market oriented sector
SLR to be brought down to 25% in 5 years
CRR to be reduced progressively
Interest rate to be on par with other market rates
Entry of many private sector banks were encouraged
Dealing in money: They accept deposits from
public- savings, current, fixed, recurring etc. They
advance money as loans to the needy people – cash
credit, term loans, bill discounting overdrafts etc.
Agency: Banks act as agents of the customer. They
provide agency services like transfer of money,
credit cards, telebanking, cheque clearing, bill
collection are some of the services provide by the
banks as an agent.
Credit creation: The banks create credit. It is an
additional function of the bank. It is the unique
function of banks. Every deposit can create credit.
Additional money can be created for the purpose of
lending. But there is a limit for such credit. The RBI
has adopted certain measures to control credit
created by the banks.
Commercial nature: All banking functions are
carried out with the profit motive. They pay interest
on deposits and these deposits are advanced to the
needy persons at a higher rate of interest. There is a
margin of profit in banking operations. It also charge
for the services rendered by them.
Withdraw able deposits: The deposits made by
the public can be withdrawn by cheques, draft or
otherwise. The banks issue books to the customers.
The customers have an option of withdrawing
money by using cheques or withdrawal slips. The
deposits are also withdrawal on demand. There are
certain restrictions on the number of withdrawals
in case of saving deposit. Fixed deposit can be
withdrawn at maturity and these deposits can not
be withdrawn by cheques by the customers.
Concepts of banking
• Banking: Banking means accepting for the purpose
of lending or investment of deposits of money from
the public repayable on demand otherwise and
withdraw able by cheque, draft order or otherwise
• Banker: banker is a person who accept deposits,
money on current accounts issue and pay cheques
for his customers.
• Customer: He is a person who has an account with
the bank, performs at least a transaction of a
banking activity nature.
• Banking company : Banking company means a
company, which transact the business of banking in
1949 Enactment of Banking Regulation
1955 Nationalisation of SBI
1959 Nationalisation of SBI subsidiaries
1961 Insurance cover extended to deposits
1969 Nationalisation of 14 major banks
1975 Creation of regional rural banks
1980 Nationalisation of 6 major banks
1982-83 Establishment of NABARD
1985-86 Introduction of MICR technology,permission to
banks to float Mutual funds
1999-00 Introduction of Kisan Credit cards
2000-01 Banks and NBFCs permitted to undertake insurance
Scope for banking
Banking activity is useful for trade and industry
Distributors & protectors of liquid capital
Money and precious metals can be kept safe
Provides credit facility to customers
It encourages the habit of saving
It meets the financial needs of small scale business people
it also provide payment settlements through cheque, pay orders, DD,
debit and crdeit cards etc
Rural banks provide financial support for agriculture, cottage
industries and to buy the rawmaterials etc.
Regional rural banks provide credit facilities to small and marginal
farmers, agricultural labourers,artisands and small entrepreneurs
Financial assistance in indian money or in foreign
currency is available to start any industry
Financial support in the form of loan, equity
participation, guarantees, refinance and other
forms of credit are available from the banks to the
Scheduled commercial banks and financial
institutions get financial assistance from the exim
bank against their export-import financing
Corporate sectors also get assistance from banks
for many of their acitivities.
Main Functions of Banking
I Accepting deposits:
To know about…..
Customer’s relationship with the bank
Opening a new account
Closing of a bank account
Insurance of bank deposits
II. Lending money: Banks act as brokers and dealers of
Mobilise funds for needy like agriculture, industry etc.
By this banks earn interest, discounts and conversion
Principles of lending :
Principle of safety and security
Principle of liquidity
Principle of profitability
Liquidity means ability of the bank to produce cash on
demand. Bank must ensure that it get backs the
money in time. So its obligation to pay his depositor is
Safety becoz it is using the money received from the
public. To ensure safety he must see the ability and
willingness of the borrower.
Profitability to cover the cost of funds, interest and risk
cost, some money for its growth’
Types of Loan
On the basis of time:
Short and medium term loan(Less than 1 year)
Long term loan (1 to 5 years)
On the basis of purpose:
Consumption loan(education, medical loan)
Composite loan(to buy capital assets, working capital)
On the basis of security
Modes of creating charges
Types of charge Nature of securities
Lien Goods and securities
Assignment Book debt
Mortgage Immovable property
• Lien: right of the debtor to retain goods and securities of
debtor until he pays the debt. Bank cannot sell ; cannot
transfer the ownership of the goods from customer to
• Pledge: It is a bailment of goods as security for debt.
Shares, FD, units of UTI; NSC can be used for security.
Transfer of possession is compulsory. Ownership is
retained with the customer. Bank can sell if he fails to
• Mortgage: customer gets advance against immovable
property. Bank can sell and recover the loan amount if he
fails. In case of limited company the charge must be
registered with the Registrar of companies within 30days.
Differences between Legal and Equitable MortgageLegal Equitable
Legal title can be
customer to bank and
Legal title cannot be
document title can be
It is expensive Not expensive
Reputation of the
customer will be affected
Reputation will not be
Not risky Highly risky
Hypothecation: Charge over a movable property for
loan. Neither ownership nor possession is passed on
to the bank. Bank can anytime inspect. customer give
undertaking to give possession of goods whenever
required by the bank. Higher risk of multiple
Assignment: Transfer of any existing or future right,
property or debt by the borrower to the bank (eg)
Legal framework of banking
The structure and pattern of banking system in India
is based on British banking system. The commercial
banks in India were started in the 2nd half
19thCentury.Before 1944 banks were regulated by
Indian Companies Act of 1913. It was insufficient and
so incorporated in 1949, The Banking Regulation Act
of 1949 empowers the RBI to regulate the banking
activities in India.
DEFINITION OF BANKINGSECTION 5(B) DEFINES BANKING AS
ACCEPTING FOR THE PURPOSE OF LENDING OR
INVESTMENT OF DEPOSITS OF MONEY FROM
THE PUBLIC, REPAYABLE ON DEMAND OR
OTHERWISE AND WITHDRAWABLE BY CHEQUE,
DRAFT, ORDER OR OTHERWISE.
What is a Banking Company?
A banking company is a company which
performs both the functions of accepting
deposits and lending or investing. (Section
This prohibits any institution other than banking
company to accept deposit of money from public
withdrawable by cheques.
Any company which is engaged in the manufacture of
goods (trading) accept deposit from the public for its
finance cannot be deemed to transact banking business.
The banker can refuse to open an account in the name of
a person who is considered as unreliable person like
robber, thief, etc.
Acceptance of deposit should be the main business
of a banking company.
The banker cannot refund the deposit to the
customer on his own accord even if the period of
The withdrawables can be done only by cheques, pay
orders, draft or otherwise.
Demand can be made only by proper instrument in
writing and not by verbal order or telephone
Contents of Section 7
Every company doing banking business should have
any one of the word such as bank/banker/banking
company in its name.
Any other firm or institute or company should not use
these words in its name.
Contents of Section 6
What other businesses can be undertaken by a
Borrowing, raising or taking money and lending
or advancing money, discounting of bills, granting
letter of credit, traveller’s cheque, buying and
selling of bullion and species, buying and selling
of foreign exchange, providing safe deposit vaults,
collection and transmitting money and securities,
underwriting and dealing in shares, debentures,
bonds and investments of all kinds.
Act as an agent of the government, local authority
and can carry on agency business.
It may contract for public and private loans and
negotiate and issue the same.
It may insure, guarantee, underwrite, participate in
managing and carrying out of any issue of state,
municipal or other loans or of shares, debentures and
may lend money for the purpose of any such issue.
• It may manage, sell and realize any property
which may come into its possession in
satisfaction of its claims.
It may acquire, construct and maintain any building
for its own purpose.
It may sell, improve, manage, develop, exchange, lease,
mortgage, dispose of or turn into otherwise deal with
all or any part of the property and rights of the
No banking company shall directly or indirectly deal in the
buying or selling or bartering of goods, except in connection
with the realisation of security given to or held by it, or
engage in any trade, or buy, sell or barter goods for others
otherwise than in connection with bills of exchange received
for collection or negotiation or with such of its business.
" goods" means every kind of movable property, other than
actionable claims, stocks, shares, money, bullion and all
It also prohibits a banking company from holding a
immovable property however so acquired except as it is
required for its own use only for a period of 7 years from
date of acquisition.
Contents of Section 8
Property for its own use may be held by a banking
company on a permanent basis.
When can a banking company form a subsidiary
A banking company is permitted to form subsidiary
company for the following purposes:
For undertaking any business permitted for a banking
For carrying out banking activity outside India
For undertaking such other business necessary/useful
in the interest of the public.
Minimum paid up capital and Reserves
A sound banking company requires adequate capital
As per 1962 act minimum amount of paid up capital
required for banking company is Rs.5 lakhs
Value here means exchangable value and not nominal
Subscribed capital should not be less than half of its
Paid up capital should not be less than half of its
Banking companies capital may consist of equity
shares or preference shares which were issued prior to
A banking company incorporated in India, should have the
minimum capital as follows
If it has in more than 1 state Rs.5 lakhs
If in any place in Mumbai or Kolkatta Rs.10 lakhs
If it is other than Mumbai or Kolkatta
a) If it is in the principal place Rs.1 lakh +
b) If it is situated in district of principal
Rs. 10,000 +
c) If it is situated elsewhere in the State
outside the same district
If it has only one place of business Rs.50,000
If it has all its places of business in one state
that too in Mumbai/calcutta
Rs 5 lakhs +
Foreign banks: Incase of a company incorporated outside
India the value of its paid up capital and reserves shall be
less than Rs.15 lakhs and if it has a place of business in the
city of Mumbai and kolkatta or both should have Rs20lakhs.
These banks also are required to maintain CRR and SLR
with the RBI
The foreign banking company should deposit 20% of its
profit annually with the RBI
As per the recommendations of the RBI, the Central Govt.
may exempt any banking company to do so if its deposit
liabilities are sufficient.
This amount is considered as the asset of the bank and
incase of any problem(bankruptcy) creditors of the bank
can claim first.
Restrictions on Advances
Section 20 lays down the following restrictions for
issuing loans and advances:
A banking company cannot grant loans and advances
against its own shares
The banking company cannot enter into any
commitment to grant loans and advances to or on
a) any of its directors
b) any firm in which any of its directors is interested
as partner, manager, employee
c) any company
d) any individual with whom any of its director is a
Contents of Section 21
The RBI may give directions regarding loans and
1. The purpose for which loans can be given or not
2. The margins to be maintained
3. The maximum amount of advance to any
4. The maximum amount up to which guarantee can be
given by the bank on behalf of any one company
5. The rate of interest, terms and conditions on which
loans can be made, etc.
Licensing of Banking Companies
As per section 22, every bank should hold a license issued by
RBI. The RBI issue a license only when it is satisfied with
The company will be in a position to pay its present and
future depositor in full when they claim
The affairs of the company shouldn’t be a obstacle to the
interest of the depositors
The company has adequate capital structure and earning
The general character of the proposed management of the
company will not be harmful to the public interest or for the
interest of the depositors
The grant of a license would not be harmful to the operation
and consolidation of the banking system which has
monetary stability and economic growth
While granting license for a banking company
incorporated outside India
Whether the company complies with all the provisions
of the Act applicable to such companies
Whether the Govt. or the law of the incorporated
company is not discriminating with the companies
registered in India
Whether starting a banking company with the other
countries will be in the public interest
Opening a Branch
Every banking company should take the permission of
the RBI for opening a new branch in India / change the
location of the existing place of business / open a branch
Change of location within the city/for a temporary place
for a period of a month for the purpose of providing
banking facilities in an exhibition, mela etc no such
permission is required form RBI
Before giving permission, RBI has to see
The financial conditions and history of the company
The general character of the company
The adequacy of its capital structure and earning
The public interest
Maintenance of Liquid Assets
Section 24 of the Banking Regulation Act 1983 says
every banking company is required to maintain in India
in cash, gold approved securities the amount which is
not less than 25% of total of its demand & time
liabilities on any particular day. This is known as
Statutory liquidity ratio(SLR)RBI can raise this to 40%
The approved securities must be valued at current
market price. Approved securities means the securities
in which the trustees may invest trust money
Apart form SLR, every bank is required to maintain
liquid assets including cash
The cash balance to be maintained by each schedule
bank with the RBI is known as cash reserve ratio(CRR)
Once in 15 days every bank has to submit its monthly
report about its demand and time liabilities
If they fail to maintain the minimum prescribed
balance the bank has to pay penal interest of 3% per
annum and later up to 9%.
Inspection of Banks
As per of the section 35 act, the RBI on its own or as per the
instance of central government can inspect any branch of
the banking company and its books of accounts
Every director, officer, employer of the banking company
has an obligation to furnish the RBI officer books,
accounts and other documents in his custody and
information relating to day to day working of the company
If the central government finds that the banking company
is conducting a banking business detriment to the interest
of the public then it can prohibit the bank from receiving
fresh deposits, asked the RB to windup the banking
Powers of RBI
Call for a meeting of board of directors to discuss the
Can call an officer of the banking company to discuss
with the officer of the RBI about that matter
Can appoint an officer to observe the manner in which
the affairs of the banking company
To make the changes in the management specified a
per the RBI’s guidelines.
Management of Banking Companies
Board of Directors: Every b.company should have BOD in such a
way not < 51% of the total no. of members should satisfy the
1.1. They should have special knowledge or practical experience
about any subjects like accountancy, agriculture, economics,
finance, law, small scale industries etc.
1.2. Out of total no. of directors at least 2 should have special
knowledge or practical experience about agriculture, rural
economy, co operation and small scale industry.
2.1. They do not have substantial interest in any company or firm
which carries on trade, commerce, industry
2.2. They should not be employee or manager of a firm/company
2.3. They should not be owner of any company
The above conditions won’t be applicable for the
persons who are owners of small scale industry or
company regulated under 25 of company Act of
Meaning of substantial interest:
In case of a company it means the BOD’s wife or
children solely or jointly should not have shares
worth more than Rs.5lakhs or 10% of the paid up
capital of the same company (whichever is less)
In case of a firm the BOD’s wife or children should
not hold solely or jointly 10% of the total capital
subscribed by all partners.
If the above conditions are not fulfilled then the
RBI has the power to direct the banking company to
reconstitute the Board and if it is not done within 2
months, the RBI can remove the director and
appoint a suitable person.
A director can hold office not more than 8 years
He is not eligible for reappointment for the same
post for 4 years
Appointment of Chairman
He will be one among the BOD
Will be guided by the BOD
Term – 5 years full time
Eligible for reselection / reappointment
Should have knowledge of economics, agriculture
Ground for Disqualification
• Director of a company other than subsidiary company
registered under Section 25 of Company Act 1956
• If has any interest in any other company / firm
• Director/Manager/Partner/Proprietor of any other
• If engaged in any other business
Control over Top Management
Every banking company should get prior
permission for appointment, reappointment, or
termination of the Director/chairman
Approval of RBI is necessary for amending the
provisions relating to do the above
RBI can remove the top managerial personnel if it
is necessary in the interest of public/for preventing
the affairs of the company
Types of Loans offered by Banks to Customers
1. Term loans
Term loans (Medium & long term)
Bridge Finance: There is a time gap between the date
of sanctioning and its disbursement by the financial
institution to the borrowing company. To bridge the
gap company takes this loan. Delay in the project
can be reduced
Loan syndication:2 or more banks agree to finance
a particular project. The borrower can directly meet
the lead bank and it will get in touch with the other
• 2.Cash credit: Most favorable type of loan. Banker fixes
cash limit on an annual basis. The customer can
withdraw any amount as and when he likes. Interest is
only on the amount withdrawn.
• 3 Overdraft: Given to current account holder. Can
withdraw more than what is there in his account.
Maximum limit is there for amount and time. collateral
security. Interest is only on the amount withdrawn.
• 4 Bill discounting: This is for working capital by
discounting and purchasing of bills. when customer
provides a bill of exchange as security banker deducts a
certain amount from the value of the bill and advances
the rest of the amount to the customer.
State Bank of
Reserve Bank of India
Established in 1935 as per RBI Act of 1934
Till Jan 1949,it was a private shareholders institution
Oldest central bank
As the apex bank, it guides, monitors, regulates & promotes
the destiny of the Indian financial system
Objectives of RBI
Issue notes, keep reserves to secure monetary stability in the
Plays lead role in the devt. of a sound financial system
Ensures safe and efficient execution of financial transactions
In developing counties it plays additional role-developmental
and promotional functions
Functions of RBI
sole right to issue currency notes1Re &coins by
the Finance Secretary to Govt. of India They are
unlimited legal tender throughout India Its
responsibility is not only circulation/withdraw
but also exchange notes and coins of 1
denomination into another as demanded by
What is the role of the Reserve Bank in currency management?
The Reserve Bank manages currency in India. The Government, on
the advice of the Reserve Bank, decides on the various
denominations. The Reserve Bank also co-ordinates with the
Government in the designing of bank notes, including the security
features. The Reserve Bank estimates the quantity of notes that are
likely to be needed denomination-wise and places the indent with
the various presses through the Government of India. The notes
received from the presses are issued and a reserve stock maintained.
Notes received from banks and currency chests are examined. Notes
fit for circulation are reissued and the others (soiled and mutilated)
are destroyed so as to maintain the quality of notes in circulation.
The Reserve Bank derives its role in currency management on the
basis of the Reserve Bank of India Act, 1934.
What is the role of Government of India?
The responsibility for coinage vests with Government of India on the
basis of the Coinage Act, 1906 as amended from time to time. The
designing and minting of coins in various denominations is also
attended to by the Government of India.
Who decides on the volume and value of bank notes to be printed
and on what basis?
The Reserve Bank decides upon the volume and value of bank notes to
be printed. The quantum of bank notes that needs to be printed broadly
depends on the annual increase in bank notes required for circulation
purposes, replacement of soiled notes and reserve requirements.
Who decides on the quantity of coins to be minted?
The Government of India decides upon the quantity of coins to be
How does the Reserve Bank estimate the demand for bank notes?
The Reserve Bank estimates the demand for bank notes on the basis of
the growth rate of the economy, the replacement demand and reserve
requirements by using statistical models.
How does the Reserve Bank reach the currency to people?
The Reserve Bank manages the currency operations through its offices
located at various places. These offices receive fresh notes from the note
presses. Similarly, the Reserve Bank offices located at Kolkata,
Hyderabad, Mumbai and New Delhi initially receive the coins from the
mints. These offices then send them to the other offices of the Reserve
Bank. The notes and rupee coins are stocked at the currency chests and
small coins at the small coin depots. The bank branches receive the
bank notes and coins from the currency chests and small coin depots for
further distribution among the public.
What is a currency chest?
These are actually storehouses where bank notes and rupee coins are
stocked on behalf of the Reserve Bank. The currency chest branches are
expected to distribute notes and rupee coins to other bank branches in
their area of operation.
What is a small coin depot?
Some bank branches are also authorised to establish small coin depots to
stock small coins.. The small coin depots also distribute small coins to
other bank branches in their area of operation.
What happens when the notes and coins return from circulation?
Notes and coins returned from circulation are deposited at the offices of
the Reserve Bank. The Reserve Bank then separates the notes that are fit
for reissue and those which are not fit for reissue. The notes which are fit
for reissue are sent back in circulation and those which are unfit for
reissue are destroyed after processing shredded. The same is the case
with coins. The coins withdrawn are sent to the Mints for melting.
From where can the general public obtain bank notes and coins?
Bank notes and coins can be obtained at any of the offices of the Reserve
Bank and at all branches of banks maintaining currency chests and
small coin depots.
Banker to the Govt.
Banker to Central and State Govts.
It provides all banking services- acceptance,
withdrawal of deposits, making & collecting
money on behalf of the Govt, transfer of funds &
management of public debt
It does not receive any remuneration for this
business Can charger commission for managing
It is authorized to make ways & means advances
(Repayable in 3 months)
It controls volume of reserves of commercial, co
operative and regional & rural banks
It determines the deposit/credit creating ability of the
Banks have to maintain CRR with the RBI against their
demand & time liabilities
The banks can borrow funds from RBI in case of need.
Exchange management and control :
It has to maintain the stability of external value of rupee
All f.exchange reserves including gold, foreign assets,
govt. balances held abroad are centralized with the RBI
It has to buy & sell currencies of all members of the IMF
FERA Act of 1973 empowers it to exercise control over
foreign securities, foreign payments & transfer of
currency ,bullion, securities to foreign nationals.
It has vast powers to supervise & control the
commercial and co operative banks in the country It
To issue licenses for new banks/new branches
1. To inspect the working of banks in India & abroad
2. To prescribe minimum requirements for paid up
capital, reserves, transfer to reserve fund,
maintenance of CRR etc
3. To control methods of operation of banks
4. To appoint, reappoint, terminate Directors,
Chairman and Chief Executive officers to private
Most important function
Can use all quantitative and qualitative methods
of credit control
It has to regulate the volume, cost & direction of
2 Types of credit control:
Qualitative & quantitative
Regulation of consumer credit
Bank rate (BR)
Open market operations (OMO)
Varying reserve requirements (VRR )
Main objective is free export sector from restriction
of domestic credit
Exports should not suffer due to scarcity of finance
It has following schemes for this purpose:
1. Export bill credit scheme,
2. Pre shipment credit scheme,
3. Export credit Interest subsidy scheme
4. Concessional rate of exchange, interest, discount
Development and Promotion
Development of institutional agricultural credit is
an important function of RBI
It has established NABARD in 1962
It has started ARDC in 1963
It has also started various institutions like IDBI,
Oldest and fastest growing bank in India
It is a unique system in the world
Their objective is to make profit
Profitability, liquidity, safety and social welfare are their
It has grown enormously in 40 years interms of bank
branches, deposits etc
They developed innovative approaches like single
window, participatory lending and consortium
A loan in which one or more lenders share, or
participate, with the originating bank in advancing
funds to a borrower. A participation loan is useful when
the amount of the loan is too large for any single lender.
Major changes brought by LPG:
Expansion and devt. of branch banking system
Opening branches in rural and semi urban areas
Share of priority sector increased in total bank credit
RBI controls these banks through SLR& CRR
Debt-Recovery Tribunals were set up to expedite
recovery of overdue
These banks were facing problems of non-performing
assets. This adversely affect the profitability of these
Importance of Commercial Banks
1. Increase productivity
2. Development of trade & industry
3. Optimum use of funds
4. Capital formation in the country
5. To achieve economic development
6. To generate employment opportunities
7. To reduce regional disparities
8. To cultivate the habit of saving
9. Creation of credit in the economy
10. Expansion of business
Co operative banks
They are part of set of institutions financing for rural
and agricultural development.
It is a small scale banking carried on a no profit no loss
basis for mutual co operation and help
started in India in 1904
Its structure is federal in nature with 3 tier linkages
between State, district and village level
Co.Op.Banks Rural Co.Op.Banks
State Co.Op. Agril.
& Rural Devt.
Agril. & Rural Devt.
Features of co operative banks They are govt, sponsored, supported & subsidized financial
Managed by BOD on the principles of cooperation, self help, &
Their rule is one -member one- vote
Their aim is not profit maximization
Perform all banking functions .but their range of services is
Their geographic coverage is the widest
Most of these are non-scheduled banks
They have a federal structure of 3 tier linkages and vertical
They are only financial intermediaries
They can take part in money as well as capital markets
They face stiff competition from commercial banks & other
Too much dependence on RBI, NABARD, and the govt.
To much officialistion and politicization
Quality of loan assets and their recovery are poor
Primary agricultural co operative societies are small in size,
very weak and are dormant
Many urban co operative banks have failed or are in the
process of liquidation
They ace stiff competition from commercial banks, LIC,
UTI, savings organizations
Suffer from multiple regulations and control authorities
Commercial Banks Co.Op. Banks
Function for profit Work on the principles of
self-help and mutual
cooperation for member’s
Organised on Unitary
3 tier setup organisation
Governed by all sections
of the Banking Regulation
Only some sections are
applicable to them
Most commercial banks
are scheduled banks
oriented; now finance
rural sector also
Basically rural oriented –
financing agriculture &
Wide branch network –
within and outside the
Operation restricted to
particular district / state
Regional Rural Banks
They are set up by govt of India under the Regional Rural
Banks Act of 1976
Its main objective is to provide credit and other facilities
to small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs in rural areas
It is jointly set up by Govt. of India/the state Govt and the
sponsor commercial bank
Each RRB operates within specified local limits
Initially they started with a capital of Rs 1cr
In this ,50% is by central Govt,15% by state govt.,& 35% by
the sponsor bank
Sponsoring com. banks also help in managerial assistance,
recruitment,& training of personnel in the initial period.
Public sector banks Private sector banks
At least 51% ownership
is with govt.
Majority shareholding lies with the
Branches are more Branches are Comparatively less
Number of employees
is much more
Less number of personnel
They have organised
Unions do not pose a problem
They have old set up,
so capital asset is more
They have lower capital base
Are less technology
Use technology which helps for
faster growth, with less investment
Govt. control is more Comparatively more freedom to
They are set up during the planning period.
Dominate the financial system in India
Cannot be classified as banks
Cannot be considered as financial
intermediaries –mobilizes resources from the
Govt. and RBI & not from savers
Some are set up by Govt. while others are by
private sector participation in the ownership &
functioning of the institution
How it came into existence?
The scenario of India was characterized by:
Savings of the country was low
Dominated by public sector
Private sector was not developed
Capital market was at its infancy stage
Industries had to depend on their own profits
Unable to reconstruct the war affected nation
Development process was very slow
No individual bank was ready to cater to the
growing & diversified needs of different
Functioning of development
They were permitted to issue bonds of their own
either with or without the guarantees from the
govt. They did not face any competition in using
As a result of LPG, and as per the
recommendations of Narashimhan committee
the Devt. Finance institutions were converted
into Banks. It also insisted that there should be
only two intermediaries -–banking and non
banking finance companies
Need for devt. banks
To reconstruct the war affected country
To speed up /accelerate the rate of devt.
to take up promotional activities
To accelerate the pace of industrialization
To promote certain key industries
To meet the capital needs
To help small and medium size industries
Thus in India and in many developing countries in
Asia Devt. Banks came into existence with some
Types of development banks
Industrial finance corporation of India
First term lending institution set up in 1948
Objective-to provide medium & long term loan
finance to large industries in private sector
Provides direct rupee & foreign currency loans
for setting up new industrial projects, expansion,
diversification ,renovation & modernization of
It raises its resource from RBI, issue of bonds,
loans from Govts and lines of credit from
foreign agencies & international capital markets
It is managed by BOD consisting of a chairman
& 12 Directors. The chairman is appointed by
Central govt. 2 directors are nominated by central
govt. 4 are by IDBI & 6 by elected shareholders It
can subscribe to debentures, underwrite,
guarantee for companies for the loans sanctioned
by commercial banks
Financial assistance to corporate sector
Grant loans repayable within 25 years
Financial assistance to start a new business,
expansion or diversification of existing business
Playing an important role in the devt. Of the country
Industrial credit & investment corporation of India
First institution providing foreign currency loans
Set up in 1955 as a public limited company under the sponsorship of
Encourage & provide assistance to the corporate sector in India
Also provides assistance to private sector in the following ways:
1. For creation, expansion , modernization of industrial
2. Encouraging private ownership
3. Long term and medium term loans
4. Sanctioning loans to import machinery
5. Technical and management services to corporate sectors
6. Expanding the investment market
7. Underwriting services for the issue of shares and debentures
It raises resources in the form of share capital,
loans from govt., advancing foreign currency
from the world bank, borrowings from RBI
issue of bonds etc.
Its major shareholders –LIC,UTI, GIC
It is managed by BOD consisting of 15 directors,
2 are by shareholders in Up & the remaining are
nominated by Govt. of India & USA
Financial assistance to industrial projects for
Encourages and promotes industries in the
It has become a privately owned company
It’s share capital is partly owned by pvt. sector & partly
by foreign institutions
It has developed merchant banking, lease finance and
It is converted into ICICI Bank
It is the largest private sector bank
It is the 1st universal bank; 2nd largest bank in terms of
It is the largest retail financial supermarket
Its ATM network accepts Master card, Visa card
Industrial development bank of India (IDBI)
It was set up in 1964 as a wholly owned subsidiary of RBI
Apex in the field of industrial finance
It is an independent entity owned by govt.
It is co coordinating, supplementing,& monitoring the
operations other long term lending institutions in the
It provides indirect assistance in the form of discounting
re discounting long term bills & promissory notes.
I institution promoting industrial growth in the country
It is actively involved in planning, promoting and
To provide excellent service to new enterprises
To provide technical and administrative assistance for
expansion, to co ordinate, guide & monitor the entire
range of credit facilities offered by other institutions to
small scale industries
It is managed by 22 BOD including a chairman.
The chairman is appointed by RBI
It provides term loans for new projects as well as
for expansion, modernization & renovation of
It extends financial support to medium & large
scale projects by public limited company
It pays special attention to mega projects &
sophisticated technology promoted by
technocrats located in backward areas &
exploring new technology units
It provides foreign currency loans to projects for
the purchase of fixed assets
IDBI introduced a scheme for “no industries districts”
by which it provides training, financial technical &
administrative assistance to potential entrepreneurs
in these districts
National bank for agricultural & rural development
It is a central Institute for financing agricultural & rural
It is set up by the central govt. & RBI in 1982
Entire rural credit is taken from RBI
It act as co coordinating agency for agricultural & Rural
It provides credit for devt. of agriculture, SSI, cottage
industries, handicrafts and rural & other related
It acts as a Refinancing agency to state co operatives
banks, commercial banks, regional rural banks.
The loans are refinanced for short term for various
purposes like production, trading, marketing, storage
Also provides long term loans for 20 to 25 years
It raises its resources from RBI, Central govt., world
bank, sale of bonds and accepting deposits
It is the premier institution in the field of rural credit.
It looks after the financing functions of production,
marketing and investment activities relating to rural
devt., SSI, village industries and handicrafts
The lending rates and deposit rates changes from time
It sanctions medium and long term loans to
It charges less rate of interest for agriculture than
A financial intermediary that performs a variety of
services. This includes underwriting, acting as an
intermediary between an issuer of securities and the
investing public, facilitating mergers and other
corporate reorganizations, and also acting as a broker for
An investment bank is a financial institution that assists
individuals, corporations and governments in raising capital by
underwriting and/or acting as the client's agent in the issuance
of securities. They invest funds in shares or bonds of the
Unlike commercial banks and retail banks, investment banks do
not take deposits.
i. Invest funds in the shares & bonds of the companies
ii. They act as middlemen between business organization &
iii.They act as agent & undertake the public issues.
iv.Perform highly useful service to the business world by
providing necessary capital for long term needs of the
v. They are called as:
They bring out new issues of the securities to
individuals & institutional investors.
They provide best opportunity of investment to small
savers & investors. The purpose is to provide the
investors the combined efforts of low risk, steady
return & capital appreciation through diversification
& expert management.
Investment Banking advice relates to corporate action rather
than product or organizational matters.
An investment banker needs to have an understanding of all
these things because they too will have an impact on share
IB helps the commercial company by advising them for: .
Increasing the range of products
Increasing the business geographical footprint
Protecting a position
Also advice Industrialist sector team.
Raising profitability & therefore the share price
Increasing in size
Shifting the business towards sectors more favorably
viewed by the market
Investment banks advice on the raising of
―IN WHAT FORM?
Investment Bank may charges a fee for
arranging the financing or for
“UNDERWRITING” i.e. for advising &
provision, service provided
There are many way in which IB raise its capital
―PRIVATE PLACEMENT 102
They purchase new shares or securities of the
companies or government corporations and reissue
them for public subscription at a higher price
They also act as agents and undertake the public issues.
They are known as originators (For new
companies)underwriters (for well established
Thus it perform highly useful service to the business
world by providing long term needs of the companies
Investment banking +commercial banking
Commercial banks ==liquidity === risk
Investment banks====longer investment risk
Investment banks include: Banks & non bank financial
Investment trusts, loan and finance companies nidhis, chit
funds, which give loan to commerce, trade, & for
consumption.UTI, Mutual funds, LIC
Their coverage is narrow & specialized
Investment banks can be close ended or open ended
Close ended- authorized capital & issued capital is
fixed (Investment Trusts)provide useful services by
conserving & managing property of public who cannot
manage their own funds, give expert advice & on
lucrative investment channels
Open ended –can go increasing its resources by selling
Role of an Investment Bank
The major work of investment banks
includes a lot of consulting. For instance,
they offer advices on mergers and
acquisitions to companies. The other arena
where they give advice are tracking the
market and determining when should a
company come out with a public offering
and what is the best possible way to manage
the public assets of businesses. The role that
an investment bank plays sometimes gets
overlapped with that of a private brokerage
house. The usual advice of buying and
selling is also given by investment banks.
Largest full-service investment banks
The following are the largest full-service global
investment banks; Full-service investment banks usually
provides both advisory and financing banking services,
as well as the sales, market making, and research on a
broad array of financial products including equities,
credit, rates, currency, commodities, and their
Bank of America Goldman Sachs
Wells Fargo Securities
MERCHANT BANKING INVESTMENT BANKING
Expands in securities &
Trade financing activities
Participated only in selling with
Raise funds for business &
No dealing with general public Facilitates mergers &
acquisition through share
Perform international activities
focus on small scale companies
Focus on IPOs & large public
Offers trade financing products Rarely offers trade financing
Focus on small scale companies Focus on IPOs & large public
Many investment banks offer both buy side &
sell side services. The sell side typically refers to
selling shares of newly issued IPOs, placing
new bond issues, engaging in market making
services, or helping clients facilitate
transactions. The buy side, in contrast, worked
with pension funds, mutual funds, hedge funds,
&the investing public to help when maximize
their returns when trading or investing in
securities such as stocks & bonds.
Organization – underwrites securities for companies
Merchant Banker – Engaged in the business of issue
mangt. Either by making arrangements regarding
selling, buying or subscribing to securities or acting as
advisory services – he has certificate granted by SEBI
Merchant Banks – financial institutions providing
services – acceptance of bills of exchange, corporate
finance, portfolio management and other services
Banks provide services to businessman –
finance, management consultancy, preparation
of project report, feasibility study, technical
consultancy, managing public issues,
underwriting, loan syndication by coordinating
with other banks, etc.
Banks have separate divisions, appoint
experienced managers to carry out these
They are new subsidiaries floated by banks to
mobilize savings of general public and invest them in
stock market and money markets.
Unit Trust was the first one to be started in India
There are > 63 mutual funds in operation in the
These are open or close ended schemes – i.e. the
investor can invest or exit at any point of time or there
is a lock in period of 3 – 5 years.
Important schemes – Growth schemes, Income
schemes, Balance schemes, Tax saving schemes
They are managed by financial and professional
The mutual funds are relatively secured hence they are
profitable for the small investors in particular
Banks help individuals , society to
transfer money from place to place
and from person to person
DD, pay orders, telegraphic transfer,
mail transfer, credit cards are used.
Bank’s subsidiaries undertake housing
finance as a specialized business.
Now a days all banks are permitted to
provide housing finance to the people
at a reasonable rate of interest.
To buy a new home, home
improvement, extension, land
purchase, bridge loans and balance
transfer loans etc are provided
They are small plastic cards issued by banks that allow
the card holders to buy goods and services on credit
and pay at fixed intervals through the card issuing
This could also be used for obtaining cash from the
branches of the same bank which has issued it or form
other specified banks .
There is an annual charge for this card.
There is no need to have an account with the bank and
no money is needed to be paid in advance
Card holders are given 30 – 40 days credit at a certain
rate of interest.
This is one of the service provided by the bank
through Automated Teller Machine (ATM)
There is a unique Personal Identification Number
(PIN) on the card, and also a magnetic strip with the
account number of the card holder.
Money withdrawn is immediately debited in the card
holder’s account and an SMS is sent to the holder of
PIN number is very important in this and has to be
maintained secretly by the card holder to avoid frauds
Banks started funding the fixed assets
through leasing i.e renting out of immovable
property by the banks to the businessmen on
a specified period rent fro a specific period
which is mutually agreed upon.
Written agreement is made
Banks now have subsidiaries to transact
equipment leasing business with the
permission of RBI.
This is a service provided through the phone.
Each customer is given a specific Telephone PIM (T-
Customer can call the exclusive tele-banking
numbers, provide details to identify himself to the
When the respective number match the
computerized system, the customer is given access
to his account to query or transact on his account.
Cash delivery to the customer is not there except for
certain class of customers.
This service is similar to that of the ATM. Here
also the customers can request the ban to
provide them with this service.
Customers are given a PIN number, Login id
(which he can change) and also a Transaction
password (which he has to change)
Using internet the customer can log on to his
account and carry out any transaction.
Here also there is a need to change the
passwords now and then and keep them safely
Factoring It is an arrangement in which receivables
arising out lf sale of goods are sold by a firm
to the factor as a result of which the title to
the goods passes to the factor.
The factor becomes responsible for all credit control,
sales accounting, and debt collection from the buyers.
In case of insolvency or inability of the debtor the
factor has to absorbs the losses.
The factor provide services of -finance, maintenance
of accounts, collections of debts, protection against
Realization of credit is the main function of factoring
In case bank undertakes collect and manage clients
debts and also finances the clients either by lending
against account receivables or purchasing or
discounting them outright for a charge which is
called as discount
It is a process of investment in securities
It involves a proper investment decision making.
It involves proper money management
Objective-to help investors with the expertise of
It involves construction of portfolio based on the
investor’s objectives, constraints, preferences and tax
It should be reviewed from time to time in tune with
the market conditions
Portfolio manager is an important person who holds the
dreams of millions of investors.
This scheme floated by many banks and financial
They do for a fee. They should get a SEBI certificate to
do. It frames certain rules and regulations Violating the
this is an offence and punishable
Banks extend services for managing surplus funds of
their corporate customers either directly or through this
It provides safety, liquidity and maximum yield to the
Insurance in broad terms may be described as a method of
sharing financial losses of few from a common fund who are
equally exposed to the same loss.
Insurance is defined as the equitable transfer of the risk of a loss,
from one entity to another, in exchange for a premium, and can
be thought of a guaranteed small loss to prevent a large, possibly
An insurer is a company selling the insurance. The insurance rate
is a factor used to determine the amount, called the premium, to
be charged for a certain amount of insurance coverage.
Massive risk with high magnitude
Day to day risk of lesser magnitude
A variation in the possible outcome
The degree of uncertainty associated with a particular loss
Greater the accuracy with which the outcome can be predicted the
lower is the risk.
Risk is the possibility of an unfortunate occurrence
Risk is the possibility of loss
The combination of hazards
Uncertainty of loss
The tendency that actual results may differ from predicted results
Peril : Cause of a risk and losses. E.g. Earthquake, flood , fire,
criminal activities etc.
Hazard : Condition that increases the frequency or severity of loss.
E.g. absence of proper security or fencing , poorly maintained fire
alarm system etc.
Moral Hazard: It refers to the dishonesty of the insured person
leading to increase probability of loss from given risk exposure.
E.g. setting fire to your own house.
Morale Hazard: This refers to attitude of indifference to losses
that results out of a known fact that the said losses were insured.
Catastrophic loss: It is a potential loss that is unpredictable such
as flood, but is capable of producing an extra ordinary large
amount of damage related to assets held in insurance pool. These
are generally natural disasters like earthquake flood etc.
Requirements of Insurable Risk
Should be a Pure risk
Involves a chance of loss or no loss
Large number of exposure units
to predict average loss
Accidental and unintentional loss
to control moral hazard
to assure randomness
Determinable and measurable loss
to facilitate loss adjustment
Requirements of Insurable Risk
No catastrophic loss
to allow the pooling technique to work
Probability of loss must not be very high
to determine the premium need
Economically feasible premium
so people can afford to buy
Basic Characteristics of Insurance
Pooling of losses
Spreading losses incurred by the few over the entire group
Risk reduction based on the Law of Large Numbers
Payment of fortuitous losses
Insurance pays for losses that are unforeseen, unexpected,
and occur as a result of chance
A pure risk is transferred from the insured to the insurer, who
typically is in a stronger financial position
The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
Say 1000 motor cars valued @ 300000/- are observed over a
period of five years. On an average say per year two are total loss
by accident. Then the total annual loss would be Rs.600000. If the
loss is to shared by all the thousand owners then they have to
The loss experience will be established by taking the past
experience, geographical area in which the vehicles are used and
density of traffic.
Insurer : The party to an insurance arrangement who undertakes
to indemnify for losses.
Insured: A person whose interests are protected by an insurance
Premium: Financial cost of obtaining an insurance cover, paid as a
lump sum or in installments during the duration of the policy.
Policy: Written contract or certificate of insurance
Exposure to Loss: In insurance, areas in which the risk of loss
exists. Four loss risk areas are: (1) property; (2) income; (3) legal
vulnerability; and (4) key personnel in an organization
Life annuity: A life annuity is a financial contract in the form of an
insurance product according to which a seller (issuer) — typically a
financial institution such as a life insurance company — makes a
series of future payments to a buyer (annuitant) in exchange for
the immediate payment of a lump sum (single-payment annuity) or
a series of regular payments (regular-payment annuity), prior to
the onset of the annuity.
Nomination: It is the right of the policy holder on his/ her own life
to designate a living person to receive the policy proceeds in the
event of him predeceasing the nominee before the maturity of the
Nominee: Nominee should not be a stranger because its against
the objective of insurance which in most cases is family protection.
Assignment: An agreement under which one party–the assignor–
transfers some or all of his ownership rights in a particular
property, such as a life insurance policy or an annuity contract, to
another party–the assignee.
Assignor: A property owner who transfers some or all of the
ownership rights in a particular property to another party by
means of an assignment.
Assignee: A person or party to whom a property owner transfers
some or all of the property owner's rights in a particular property
by means of an assignment.
The Insurance Regulatory and Development Authority (IRDA) is a
national agency of the Government of India, based in Hyderabad. It
was formed by an act of Indian Parliament known as IRDA Act 1999,
which was amended in 2002 to incorporate some emerging
"to protect the interests of the policyholders, to regulate, promote
and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto."
Benefits of Insurance to an Individual
Peace of mind
Aversion of risk
Protects mortgaged properties
Provides self dependency
Tool of savings
Tool of investment
Satisfies various needs
Benefits of Insurance to Business
Reduced reserve requirements
Capital freed for investment
Reduction of uncertainty
Reduced cost of capital
Reduced credit risk
Loss control activities
Business and social stability
Benefits of Insurance to Society
Protects wealth of the country
Helps in economic growth
Cost of Insurance
Policy Administration Cost
Moral Hazard resulting in extra cost
Life Insurance General Insurance
Fire Marine Health Auto
Players in the Industry
Life Insurance General Insurance
Life Insurance Corporation of India. General Insurance Corporation of India.
1. Oriental Insurance Company Ltd.
2. New India Assurance Company Ltd.
3. National Insurance Company Ltd.
4. United India Insurance Company Ltd.
ICICI Prudential Life Insurance Ltd. Bajaj Alliaz General Insurance Company Ltd.
Tata AIG Life Insurance Corporation Ltd. Reliance General Insurance Company Ltd.
ING Vysya Life Insurance Corporation Ltd. Tata AIG General Insurance Company Ltd.
Kotak Mahindra Life Insurance
Royal Sundaram Alliance Insurance Company
Defining General Insurance
General insurance or non-life insurance policies, including
automobile and homeowners policies, provide payments
depending on the loss from a particular financial event.
General insurance typically comprises any insurance that is not
determined to be life insurance.
It is called property and casualty insurance in the U.S. and Non-Life
Insurance in Continental Europe.
Commercial lines: products are usually designed for relatively
small legal entities. These would include workers' comp (employers
liability), public liability, product liability, commercial fleet and
other general insurance products sold in a relatively standard
fashion to many organizations. There are many companies that
supply comprehensive commercial insurance packages for a wide
range of different industries, including shops, restaurants and
Personal lines: products are designed to be sold in large quantities.
This would include autos (private car), homeowners (household),
pet insurance, creditor insurance and others.
Principles of Insurance
Utmost Good Faith
Principle of Indemnity
Principle of Contribution
Principle of Subrogation
Principle of loss Minimization
Principle of ‘CAUSA PROXIMA’
Utmost Good Faith
Both the parties i.e. the insured and the insurer should a good
faith towards each other.
The insurer must provide the insured complete ,correct and clear
information of subject matter.
The insurer must provide the insured complete ,correct and clear
information regarding terms and conditions of the contract.
This principle is applicable to all contracts of insurance i.e. life, fire
and marine insurance.
The insured must have insurable interest in the subject matter of
In life insurance it refers to the life insured.
In marine insurance it is enough if the insurable interest exits only
at the time of occurrence of the loss
In fire and general insurance it must be present at the time of
taking policy and also at the time of the occurrence of loss.
The owner of the party is said to have insurable interest as long as
he is the owner of the it.
It is applicable to all contracts of insurance.
Principle of Indemnity
Indemnity means a guarantee or assurance to put the insured in
the same position in which he was immediately prior to the
happening of the uncertain event. The insurer undertakes to make
good the loss.
It is applicable to fire ,marine and other general insurance.
Under this the insurer agrees to compensate the insured for the
actual loss suffered.
Principle of Contribution
The principle is a corollary of the principle of indemnity.
It is applicable to all contracts of indemnity.
Under this principle the insured can claim the compensation only
to the extent of actual loss either from any one insurer or all the
Principle of Subrogation
As per this principle after the insured is compensated for the loss
due to damage to property insured , then the right of ownership of
such property passes on to the insurer.
This principle is corollary of the principle of indemnity and is
applicable to all contracts of indemnity
Principle of Loss of Minimization
Under this principle it is the duty of the insured to take all possible
steps to minimize the loss to the insured property on the happening
of uncertain event.
Principle of ‘Causa Proximal’
The loss of insured property can be caused by more than one
cause in succession to another.
The property may be insured against some causes and not against
In such an instance, the proximate cause or nearest cause of loss is
to be found out.
If the proximate cause is the one which is insured against ,the
insurance company is bound to pay the compensation and vice
Utmost good faith
Risk of loss not covered
Types of General Insurance
Main types of general insurance are:
Fire insurance is a form of property insurance which protects people
from the costs incurred by fires. When a structure is covered by fire
insurance, the insurance policy will pay out in the event that the
structure is damaged or destroyed by fire.
Types of Fire Insurance Policies
Specific policy: In this type of policy, the insurance company is
liable to pay a sum, which may be less than the property’s real
value. The insured is called to bear a part of the loss, as the actual
value of the property is not considered in deciding the amount of
Comprehensive policy: Known as “all-in-one” policy, the insurance
company indemnifies the policyholder for loss arising out of fire,
burglary, theft and third party risks. In this type of policy, the
policyholder also gets paid for loss of profits incurred, due to fire,
till the time the business remains shut.
Valued policy: In this type of policy, the value of the commodity is
already set and actual loss is not taken into consideration. The
policy follows a standard contract of indemnity, wherein the
policyholder gets paid a specific amount of indemnity, without
considering the actual loss.
Types of Fire Insurance Policies
Floating policy: This type of policy is subject to average clause and
the extent of coverage expands to different properties, belonging
to the policyholder, under the same contract and one premium.
The floating policy also provides protection of goods kept at two
Replacement or Re-instatement policy: As per replacement or re-
instatement policy, the insurance company instead of paying the
policyholder the amount of indemnity in cash, replaces the
damaged property/commodity with a new one.
Fire Insurance Claim Procedure
Individuals/corporate must inform insurer as early as possible , in
no case later than 24 hours.
Provide relevant information to the surveyor/claim representative
appointed by the insurer.
The surveyor then analyzes the extent/ value of loss or damage.
The claim process takes anywhere between one to three weeks.
True copy of the policy along with schedule
Report of fire brigade
Past claims experience
Need of Fire Insurance
Fire insurance is important because a disaster can occur at any time.
There could be many factors behind a fire, for example arson, natural
elements, faulty wiring, etc. Some facts that stress the importance of
fire insurance include:
Fire contributes to the maximum number of deaths occurring in
America due to natural disasters.
Eight out of ten fire deaths take place at home.
A residential fire takes place after every 77 seconds.
The major reason for a residential fire is unattended cooking.
Fire Insurance in India
Fire insurance business in India is governed by the All India Fire Tariff
that lays down the terms of coverage, the premium rates and the
conditions of the Fire Policy. The fire insurance policy has been
renamed as Standard Fire and Special Perils Policy. The risks covered
are as follows:
Dwellings, Offices, Shops, Hospitals (Located outside the compounds
of industrial/manufacturing risks) Industrial / Manufacturing Risks
Utilities located outside industrial/manufacturing risks Machinery
and Accessories Storage Risks outside the compound of industrial
risks Tank farms / Gas holders located outside the compound of
Fire Insurance in India
Perils Covered: Cause of Loss Fire Lightning Explosion/Implosion
Aircraft damage Riot, Strike Terrorism Storm, Flood, inundation
Impact damage Subsidence, landslide Bursting or overflowing of
tanks Missile Testing Operations Bush fire etc.
Loss or damage caused by war, civil war and kindered perils
Loss or damage caused by nuclear activity
Loss or damage to the stocks in cold storage caused by change
Loss or damage due to over-running of electric and/ or
Claims: In the event of a fire loss covered under the fire insurance
policy, the Insured shall immediately give notice there of to the
insurance company. Within 15 days of the occurrence of such loss
the Insured should submit a claim in writing giving the details of
damages and their estimated values. Details of other insurances on
the same property should also be declared.
Indian Companies Offering FI
ICICI Lombard General Insurance (Pvt.)
United India Insurance (Govt.)
New India Insurance (Govt.)
Bajaj Allianz Insurance (Pvt.)
Oriental Insurance (Govt.)
Tata-AIG General Insurance (Pvt.)
What is Health Insurance?
Health insurance, like other forms of insurance, is a form of
collectivism by means of which people collectively pool their risk, in
this case the risk of incurring medical expenses.
Importance of Health
Rising medical costs
Sharing of health related risk
uncertain hospital bills
Expensive/quality health care services
Money value – Sick Vs Healthy
Family health insurance
Productivity of workforce
Removes some of the burden from the state
Keeping pace with the customer needs while achieving profitability
How to improve the access to health care and financial protection of
The most obvious solution will be to improve the health
How to Improve Health Insurance Penetration?
Enhance customer awareness
Enhance client confidence - real value benefits in the event of a claim
Compulsory percentage of total business towards health
Compulsory savings towards health
Tax incentives to employers for promoting group health coverage
Clients confidence - warrantable claim will be paid out in a reasonable
New clients have to be reached
Value for money
Design products as per clients needs
Initiatives of IRDA
Committee to formulate regulations
Pure health insurance products
Allowing the formation of an stand alone health insurance
Standalone health insurance companies
Impediments in Health Insurance
Lack of Data
Moral Hazard/Adverse Selection
Complex nature of the product
Difficulty in pricing
Government provision of health care
Long term nature
Changing life style
Mitigation of Impediments
Designing a less complex products
Transparency in the product features
Clarity in policy terms, conditions & exclusions
Efficient back-office support for underwriting and claims
Need for quicker services. E.g. Toll free numbers, cashless,
Expense analysis on a regular basis
Efficient training of sales force
Mitigation of Impediments
Pay attention to policy conditions
Read the exclusions and limitations very carefully
Compare premium costs, deductibles, co-payments
Take an informed decision
Speedy claim settlement process
Less paper work
Mitigation of Impediments
Come out with health insurance regulations
Centralized data base for health insurance experience statistics
Cap on renewal premiums
Ensure that a decent portfolio of health coverage represent
the rural sector
Guard against ill effects of privatization
Further tax incentives
Compulsory savings towards health care
Types of Health Insurance Plans
Individual health plan
Family floater plan
Senior Citizens’ plan
Critical illness plan
Daily hospital cash and
Unit-linked health plan (ULHP).
Individual Health Plans
Largely, an individual health insurance plan (IHIP), or ‘mediclaim’,
would cover expenses if you are hospitalised for at least 24 hours.
These plans are indemnity policies, that is, they reimburse the
actual expenses incurred up to the amount of the cover that you
Some of the expenses that are covered are room rent, doctor’s
fees, anaesthetist’s fees, cost of blood and oxygen, and operation
Family Floater Plans
This is a fairly new entrant in the health insurance firmament.
It takes advantage of the fact that the possibility of all members of
a family falling ill at the same time or within the same year is low.
Under a family floater (FF) health plan, the entire sum insured can
be availed by any or all members and is not restricted to one
individual only as is the case in an individual health plan.
Let’s look at an example. Say, a family of four has individual covers
of Rs 1 lakh each. If the cost of treating one person crosses Rs 1
lakh, then the rest has to be borne by the family out of its own
money. If, however, the entire family is insured for Rs 4 lakh
through a floater policy, then any of the members will be covered
for that amount in any year. To the extent of the annual cover, any
number of members can avail the money.
Senior Citizens’ Plans
Insurance is considered a form of long-term savings for senior
citizens. This money provides financial stability and also helps
them in times of need. Medical insurance enables senior citizens to
pay for health checkups, emergency medical costs and long-term
treatment. The income tax benefit on insurance premiums is up to
Rs. 15,000 under Section 80 D of the Income Tax Act, as on March
31, 2007. Medical insurance is provided through several private
insurance companies and four public sector general insurance
companies. These are:
National Insurance Company
Oriental Insurance Company
New India Assurance
United India Insurance Company
Senior Citizens’ Plans
The National Insurance Company offers the Varistha Mediclaim
Policy for senior citizens. This policy covers hospitalization and
domiciliary hospitalization expenses under Section I as well as
expenses for treatment of critical illnesses, if opted for, under
Section II. Diseases covered under critical illnesses are coronary
artery surgery, cancer, renal failure, stroke, multiple sclerosis and
major organ transplants. Paralysis and blindness are covered at
Oriental Insurance Company provides a Comprehensive Health
Insurance Scheme, a Group Insurance and an Individual Mediclaim
Policy. These policies pay for hospitalization or domiciliary
hospitalization of the insured in case of a sudden illness, an
accident or surgery. These conditions should have arisen during
the policy period.
Critical Illness Plans
A Critical Illness plan means to insure against the risk of serious
illness. It will give the same security of knowing that a guaranteed
cash sum will be paid if the unexpected happens and one is
diagnosed with a critical illness.
The purpose of a critical illness plan is to let you put aside a small
regular amount now, as an insurance against all this happening.
Bajaj Allianz, in its efforts to provide a customer centric solution is
offering an insurance policy to cover to some of these critical
illnesses like Cancer Coronary Artery bypass surgery First Heart
attack Kidney Failure Multiple sclerosis Major organ transplant
Stroke Arota graft surgery Paralysis Primary Pulmonary Arterial
Daily Hospital Cash
Expense benefit is paid on per day basis after hospitalization (most
plans mandate at least 48 hours of hospitalization).
The pre-decided daily benefit amount is paid in full, irrespective of
the actual expenses.
For example, a person buys a DHC plan with a limit of Rs 2,000 per
day. He gets hospitalised for 7 days and the total bill is Rs 35,000.
He would be reimbursed Rs 14,000 (2,000x7). If the bill is Rs 8,000,
he would still be reimbursed Rs 14,000.
Unit-linked health plan (ULHP)
All ULHPs offer one or more combination of the other benefits (for
which risk premium is deducted from fund value).
Also, charges such as premium allocation charge and policy
administration charge are deducted from the fund value.
LIC has launched Health Plus plan, a unique long term health
insurance plan that combines health insurance covers for the
entire family (husband, wife and the children) – Hospital Cash
Benefit (HCB) and Major Surgical Benefit (MSB) along with a ULIP
component (investment in the form of Units) that is specifically
designed to meet domiciliary treatment (DTB) related expenses for
the insured members.
Health Insurance in India
The health insurance market in India is very limited covering about
10% of the total population. The existing schemes can be categorized
Voluntary health insurance schemes or private-for-profit schemes;
Mandatory health insurance schemes or government run schemes
(namely ESIS, CGHS).
Insurance offered by NGOs / community based health insurance,
Voluntary health insurance schemes
In private insurance, buyers are willing to pay premium to an
insurance company that pools similar risks and insures them for
health related expenses.
The main distinction is that the premiums are set at a level, which
are based on assessment of risk status of the consumer (or of the
group of employees) and the level of benefits provided, rather
than as a proportion of consumer’s income.
In the public sector, the General Insurance Corporation (GIC) and
its four subsidiary companies (National Insurance Corporation,
New India Assurance Company, Oriental Insurance Company and
United Insurance Company) provide voluntary insurance schemes.
Voluntary health insurance schemes
The most popular health insurance cover offered by GIC is
Mediclaim policy: It was introduced in 1986. It reimburses the
hospitalization expenses owing to illness or injury suffered by the
insured, whether the hospitalization is domiciliary or otherwise.
Some of the various other voluntary health insurance schemes
available in the market are :- Asha deep plan II , Jeevan Asha plan
II, Jan Arogya policy, Raja Rajeswari policy, Overseas Mediclaim
policy, Cancer Insurance policy, Bhavishya Arogya policy, Dreaded
disease policy, Health Guard, Critical illness policy, Group Health
insurance policy, Shakti Shield etc.
Mandatory health insurance schemes
Employer State Insurance Scheme (ESI)
Enacted in 1948, the employers’ state insurance (ESI) Act was the
first major legislation on social security in India.
The scheme applies to power using factories employing 10 persons
or more and non-power & other specified establishments
employing 20 persons or more.
It covers employees and the dependents against loss of wages due
to sickness, maternity, disability and death due to employment
injury. It also covers funeral expenses and rehabilitation allowance.
Medical care comprises outpatient care, hospitalization, medicines
and specialist care.
These services are provided through network of ESIS facilities,
public care centers, non-governmental organizations (NGOs) and
empanelled private practitioners.
Mandatory health insurance schemes
Central Government Health Insurance Scheme (CGHS)
Established in 1954, the CGHS covers employees and retirees of
the central government and certain autonomous and semi
autonomous and semi-government organizations.
It also covers Members of Parliament, Governors, accredited
journalists and members of general public in some specified areas.
Benefits under the scheme include medical care, home visits/care,
free medicines and diagnostic services.
These services are provided through public facilities with some
specialized treatment (with reimbursement ceilings) being
permissible at private facilities.
Most of the expenditure is met by the central government as only
12% is the share of contribution.
Mandatory health insurance schemes
Universal Health Insurance Scheme (UHIS)
For providing financial risk protection to the poor, the government
announced UHIS in 2003.
Under this scheme, for a premium of Rs. 165 per year per person,
Rs.248 for a family of five and Rs.330 for a family of seven , health
care for sum assured of Rs. 30000/- was provided.
This scheme has been made eligible for below poverty line families
o make the scheme more saleable, the insurance companies
provided for a floater clause that made any member of family
eligible as against mediclaim policy which is for an individual
Insurance offered by NGOs
Insurance offered by NGOs/Community based schemes are typically
targeted at poorer population living in communities. Such schemes are
generally run by charitable trusts or non-governmental organizations
In these schemes the members prepay a set amount each year for
specified services. The premia are usually flat rate (not income related)
and therefore not progressive.
The benefits offered are mainly in terms of preventive care, though
ambulatory and inpatient care is also covered.
Such schemes tend to be financed through patient collection,
government grants and donations.
Some of the popular Community Based Health Insurance schemes are:
- Self-Employed Women’s Association (SEWA), Tribuvandas Foundation
(TF), The Mullur Milk Co-operative, Sewagram, Action for Community
Organization, Rehabilitation and Development (ACCORD), Voluntary
Health Services (VHS) etc.
Employer based schemes
Employers in both public and private sector offers employer based
insurance schemes through their own employer.
These facilities are by way of lump sum payments, reimbursement
of employees’ health expenditure for out patient care and
hospitalization, fixed medical allowance or covering them under
the group health insurance schemes.
The Railways, Defense and Security forces, Plantation sector and
Mining sector run their own health services for employees and
Defining Marine Insurance
Marine Insurance covers the loss or damage of ships, cargo,
terminals, and any transport or cargo by which property is
transferred, acquired, or held between the points of origin and final
Inland Marine Insurance
Extension of Ocean marine insurance
Domestic goods in transit
Property held by Bailees
Mobile equipment and property
Block Policies- “all-risks” basis
Means of transport and communication
Two types of risks are covered by ocean marine insurance.
The first type is the perils of the sea that include both natural
calamities and fortuitous accidents.
The second type of risks covered is extraneous risks. These risks
include ordinary risks such as theft, pilferage, rain damage,
shortage, breakage, etc and special risks such as strike, war, failure
to deliver, etc.
Perils of the sea, such as loss due to bad weather, high waves,
collision, and other navigable waters
Fire, enemies, pirates, thieves, jettison
Barratry, or fraud by crew members
War and strikes clause
Bursting boilers or breaking shafts
Accident or negligence of a third party
Loss, damage or expenses attributable to willful misconduct of the
Ordinary or inevitable losses
Loss, damage or expense caused by inherent vice or nature of the
subject matter insured
Loss/damage due to insufficient, unsuitable or defective packing
Loss/damage or expenses proximately caused by delay even if the
delay is caused by a peril insured against
Loss damage or expenses arising from insolvency of the owners,
managers, operators of the vessel.
Loss damage due to un seaworthiness of the vessel or craft,
container, lift van employed for carrying the insured matter.
Wars, strikes and civil commotions unless covered under separate
Covers physical damage to ship or vessel
Always written with a deductible
Contains collision liability clause
Covers owner’s legal liability
Covers the loss to the shipper if the goods are damaged or lost
Policy can be single or open cargo policy
Follows forced sale of badly damaged cargo
Cargo Partial Loss
Where goods delivered damage measure of indemnity is
Proportion of sum fixed by policy
equal to the gross sound value less damaged value at place of delivery
Insures the profit made by a ship owners out of ships used to carry
cargo, both their own and others
Loss occurs when cargo is not deliverable
Covers the property damage or bodily injury to third party
Damage caused by the ship to docks, harbor installation, fines,
penalties, injury to crew members, etc
Major Types of Policy
A time policy is one that runs for a period of time usually not
exceeding 12 months.
In using a time policy, the most important question is whether the
loss occurred at a time in which the policy was running because
sometimes it is difficult to prove in case where it is alleged that the
conditions giving rise to the loss (e.g. a hole in the ship) occurred
during the policy, although the final consequence (the foundering
of the vessel) occurred afterwards.
This is a policy that operates for the period of the voyage.
For cargo, the cover is from warehouse to warehouse.
The policy will not apply if the actual voyage and/or ports are
different from those in the policy.
This is a policy that covers the subject matter for the voyage within
a time period.
It is used to cover the cargo from warehouse to warehouse with a
The cargo has to be warehoused within 60 days after discharge or
the policy will no longer cover the cargo.
This is an arrangement in which terms such as types of risks to be
covered, validity of the insurance contract, rate, premium,
maximum value of each shipment and geographical limits, etc are
worked out when the contract is signed.
Each shipment is covered once the assured declares the details.
The assured may be authorized to issue against payment a pre-
printed insurance certificate which is valid after completion of
shipment details and his signature for documentation purposes.
The insurance certificate is pre signed by the insurer. If the contract
is effective only for a specified period, a clause of termination
should be included.
Defining Auto Insurance
Auto insurance (also known as vehicle insurance, car insurance, or
motor insurance) is insurance purchased for cars, trucks, and other
vehicles. Its primary use is to provide protection against losses
incurred as a result of traffic accidents and against liability that could
be incurred in an accident.
Auto Insurance Coverage
Auto insurance provides property, liability and medical
Property coverage pays for damage to or theft of the car.
Liability coverage pays for the legal responsibility to others for
bodily injury or property damage.
Medical coverage pays for the cost of treating injuries,
rehabilitation and sometimes lost wages and funeral expenses
Vehicle insurance can cover some or all of the following items:
The insured party
The insured vehicle
Third parties (car and people)
Third party, fire and theft
In some jurisdictions coverage for injuries to persons riding in the
insured vehicle is available without regard to fault in the auto
accident (No Fault Auto Insurance)
Types of Auto Insurance in India
There are different types of Auto Insurance in India :
Private car insurance: It is the fastest growing sector as it is
compulsory for all the new cars. The amount of premium depends on
the make and value of the car, state where the car is registered and
the year of manufacture.
Two wheeler insurance: It covers accidental insurance for the drivers
of the vehicle. The amount of premium depends on the current
showroom price multiplied by the depreciation rate fixed by the Tariff
Advisory Committee at the time of the beginning of policy period.
Commercial vehicle insurance: It provides cover for all the vehicles
which are not used for personal purposes, like the Trucks and HMVs.
The amount of premium depends on the showroom price of the
vehicle at the commencement of the insurance period, make of the
vehicle and the place of registration of the vehicle.
What it covers?
The auto insurance generally includes:
Loss or damage by accident, fire, lightning, self ignition, external
explosion, burglary, housebreaking or theft, malicious act.
Liability for third party injury/death, third party property and
liability to paid driver.
On payment of appropriate additional premium, loss/damage to