5th sem comp in bankiing

Increasing competition in banking sector in india
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CHAPTER-1
HISTORY AND DEVELOPMENT OF
BANKING INDUSTRY
Finance is the life blood of trade, commerce and industry. Financial services
refer to services provided by the finance industry. The finance industry
encompasses a broad range of organizations that deal with the management of
money. Among these organizations are credit unions, banks, credit card
companies, insurance companies, consumer finance companies, stock
brokerages, investment funds and some government sponsored enterprises.
A bank is a financial institution that serves as a financial intermediary. In other
words, bank is a financial organization where people deposit their money to
keep it safe. That’s only part of how a bank works, though. A bank is a business
like a video store, a restaurant, or a skating rink. The business needs to make
enough money to pay the people who work there and the cost of things like
electricity, paper, and even paper clips. If you look at the diagram below, you
will see an example of how a bank earns enough money to stay in business.
In order for a bank to stay open, it needs to get a lot of people to put their
money in it. Each bank tries to make THEIR bank look better than all of the
others by offering services that some other banks might not have. Another way
to get more people to put their money in the bank is to pay them interest.
Interest is extra money the bank gives you to keep your money there. This
means that you earn money on every dollar you put into the bank. . Now-a-days,
bank money acts as the backbone of modern business. Development of any
country mainly depends upon the banking system.

The term bank is derived from the French word Banco which means a Bench or
Money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countries in big heaps
(quantity) on benches or tables for the purpose of lending or exchanging.
According to Oxford Dictionary a bank is defined as "an establishment for
custody of money, which it pays out on customer's order."
Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009
financial year to a record $96.4 trillion while profits declined by 85% to
$115bn. Growth in assets in adverse market conditions was largely a result of
recapitalisation. EU banks held the largest share of the total, 56% in 2008/2009,
down from 61% in the previous year. Asian banks' share increased from 12% to
14% during the year, while the share of US banks increased from 11% to 13%.
Fee revenue generated by global investment banking totaled $66.3bn in 2009,
up 12% on the previous year.
The United States has the most banks in the world in terms of institutions (7,085
at the end of 2008) and possibly branches (82,000). This is an indicator of the
geography and regulatory structure of the USA, resulting in a large number of
small to medium-sized institutions in its banking system. As of Nov 2009,
China's top 4 banks have in excess of 67,000 branches (ICBC:18000+,
BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller
banks with an undetermined number of branches. Japan had 129 banks and
12,000 branches. In 2004, Germany, France, and Italy each had more than
30,000 branches—more than double the 15,000 branches in the UK
The economic functions of banks include:
1. Issue of money- in the form of banknotes and current accounts subject to cheque
or payment at the customer's order. These claims on banks can act as money
because they are negotiable or repayable on demand, and hence valued at par.
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They are effectively transferable by mere delivery, in the case of banknotes, or
by drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement systems
to collect, present, be presented with, and pay payment instruments. This
enables banks to economise on reserves held for settlement of payments, since
inward and outward payments offset each other. It also enables the offsetting of
payment flows between geographical areas, reducing the cost of settlement
between them.
3. Credit intermediation – banks borrow and lend back-to-back on their own
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account as middle men.
4. Credit quality improvement – banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's assets and capital which
provides a buffer to absorb losses without defaulting on its obligations.
However, banknotes and deposits are generally unsecured; if the bank gets into
difficulty and pledges assets as security, to raise the funding it needs to continue
to operate, this puts the note holders and depositors in an economically
subordinated position.
5. Maturity transformation – banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words, they borrow short and
lend long. With a stronger credit quality than most other borrowers, banks can
do this by aggregating issues (e.g. accepting deposits and issuing banknotes)
and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining
reserves of cash, investing in marketable securities that can be readily converted

to cash if needed, and raising replacement funding as needed from various
sources (e.g. wholesale cash markets and securities markets).
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors. For the past three decades India's banking system
has several outstanding achievements to its credit. The most striking is its
extensive reach. It is no longer confined to only metropolitans or cosmopolitans
in India. In fact, Indian banking system has reached even to the remote corners
of the country. This is one of the main reason of India's growth process. The
government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone
are days when the most efficient bank transferred money from one branch to
other in two days. Now it is simple as instant messaging or dial a pizza. Money
have become the order of the day.
The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated into
three distinct phases. They are as mentioned below:
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 Early phase from 1786 to 1969 of Indian Banks
 Nationalisation of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.
 New phase of Indian Banking System with the advent of Indian Financial
& Banking Sector Reforms after 1991.

The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
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 1949 : Enactment of Banking Regulation Act.
 1955 : Nationalisation of State Bank of India.
 1959 : Nationalisation of SBI subsidiaries.
 1961 : Insurance cover extended to deposits.
 1969 : Nationalisation of 14 major banks.
 1971 : Creation of credit guarantee corporation.
 1975 : Creation of regional rural banks.
 1980 : Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net

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banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
The financial system ofx India has shown a great deal of resilience. It is
sheltered from any crisis triggered by any external macroeconomics shock as
other East Asian Countries suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange
exposure.
The Banking Industry was once a simple and reliable business that took
deposits from investors at a lower interest rate and loaned it out to
borrowers at a higher rate.
However deregulation and technology led to a revolution in the Banking
Industry that saw it transformed. Banks have become global industrial
powerhouses that have created ever more complex products that use risk and
securitisation in models that only PhD students can understand. Through
technology development, banking services have become available 24 hours a
day, 365 days a week, through ATMs, at online bankings, and in electronically
enabled exchanges where everything from stocks to currency futures contracts
can be traded .
The Banking Industry at its core provides access to credit. In the lenders case,
this includes access to their own savings and investments, and interest payments
on those amounts. In the case of borrowers, it includes access to loans for the
creditworthy, at a competitive interest rate.
Banking services include transactional services, such as verification of account
details, account balance details and the transfer of funds, as well as advisory
services, that help individuals and institutions to properly plan and manage their
finances. Online banking channels have become key in the last 10 years.

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The collapse of the Banking Industry in the Financial Crisis, however, means
that some of the more extreme risk-taking and complex securitization activities
that banks increasingly engaged in since 2000 will be limited and carefully
watched, to ensure that there is not another banking system meltdown in the
future.
Mortgage banking has been encompassing for the publicity or promotion of the
various mortgage loans to investors as well as individuals in the mortgage
business.Online banking services has developed the banking practices easier
worldwide. Banking in the small business sector plays an important role. Find
various banking services available for small businesses.
BANKING REGULATION ACT, 1949
The legal framework of banking in India can be understood in the Banking
Regulation Act, 1949. The Banking Regulation Act, 1949 defines a banking
company as a company which transacts the business of banking in India
(Section 5-c).
Section 5 (b) of the act 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
Section 49 A of the Act prohibits any institution other than a banking company
to accept deposit of money from public withdrawable by cheque. Thus, the
combination of the functions of acceptance of public deposits and withdrawable
of money by cheque by any institution cannot be performed without the
approval of Reserve Bank.
A banking company must perform both the essential functions of accepting
deposits and lending or investing. Any company which is engaged in the
manufacture of goods or carriers on any trade and which accepts deposits of

money from the public is important. The banker accepts deposits of money and
not of anything else. The word ‘public’ implies that a banker accepts deposits
from any one who offers money for such purpose. The banker can refuse to
open an account in the name of a person who is considered as an undesirable
person such as a thief or a robber. Acceptance of deposits sjpi;d be the known
business of a banker. The essential feature of banking business is that the banker
does not refund the money on his own accord, even if the period for which it
was deposited expired. The depositor must make a demand for the same. The
Act also specifies that the withdrawal should be effected through order, cheque,
draft or otherwise. It implies that the demand should be made in a proper
manner and through an instrument in writing and not merely by verbal order or
a telephone message.
Section 7 of the Act, makes it essential for every company carrying on the
business of banking in India to use as part of its name at least one of the words -
bank, banker, banking or banking company. It also prohibits any other
company, or firm, individual, or group of individuals, from using any of these
words as part of its/ his name. Under Section 6 of the Act, the following
businesses may be undertaken by a banking company.
1. Borrowing, raising or taking money and lending or advancing money,
discounting of bills, granting letter of credit, traveller’s cheques, 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.
2. Act as an agent of the government, local authority a person and can carry on
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agency business
3. It may contract for public and private loans and negotiate and issue the same

4. 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.
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5. It may carry on and transact every kind of guarantee and indemnity business
6. It may manage, sell and realize any property which may come into its possession
in satisfaction of its claims.
7. It may acquire and hold and deal with any property, or any right, title or interest
in any such property which may form the security for any loan or advance
8. It may undertake and execute trusts and undertake the administration of estates
as executor, trustee or otherwise
9. It may acquire, construct and maintain any building for its own purpose
10. It may sell, improve, manage, develop, exchange, lease, mortgage, dispose of
or turn into account.

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CHAPTER-2
BUSINESS PROHIBITED FOR A BANKING
COMPANY
Section 8, of the Banking Regulation Act, 1949, prohibits a banking company
from engaging directly or indirectly in trading activities and undertaking trading
risks. However, a banking company is permitted to deal in buying or selling or
bartering of goods or engage in any trade or buy, sell or barter goods for others
in order to:
a) Realize the securities given to it or held by it for a loan, if need arised for
realization of the amount lent.
b) In connection with the bills of exchange received for collection or negotiation
and undertaking the administrative of estates as executor, trustee etc.
For the purpose of this section, goods, means every kind of movable property,
other than actionable claims, stocks, shares, money bullion and species and all
other instruments
Section 9, prohibits a banking company from holding any immovable property,
howsoever acquired, except as is required for its own use for a period exceeding
seven years from the acquisition of the property. This period may be extended
upto 12 years by the Reserve bank. Property for its own use can be held by a
banking company on a permanent basis.
Section 19, of the Banking Act,(Amended in 1983) provides that a banking
company is permitted to form a subsidiary company for any or more of the
following purposes.
a) For undertaking of any business permitted for a banking company

b) For carrying on the business of banking exclusively outside India (with previous
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permission of the Reserve Bank)
MINIMUM PAID UP CAPITAL AND RESERVES
Section 11, contains provisions to ensure adequacy of minimum paid up capital
and reserves. Adequacy of capital is essential for the soundness of a banking
company. The banking companies (Amendment) Act, 1962, raised the
minimum amount of the value of paid up capital to Rs. 5 lakhs for any Indian
Bank commencing business after the commencement of the Act. The term
‘value’ means the real or exchangeable value and not the nominal value which
may be shown in the books of the banking company. The real or exchangeable
value of capital and reserves is computed by estimating the realizable value of
all the assets and deducting therefrom the amounts of outside liabilities. Section
12 also provides that the subscribed capital of a banking company should not be
less than one half of its authorized capital and the paid up capital should not be
less than one-half of the subscribed capital. Banking companies capital may
consist of equity shares or preference shares which were issued prior to 1944.
The minimum paid up capital and reserves of different banks are given below.
1. INDIAN BANKS
A Banking company incorporated in India, should have the minimum aggregate
value of its paid up capital and reserves as prescribed in the Act:
a) If it has places of business in more than one state Rs 5,00,000
b) If any such place of business is situated in Mumbai or Kolkata or both Rs. 10
lakhs
c) If it has all its places of business in one state, none of which is situated in the
city of Mumbai or Kolkata :

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i. In respect of its principal place of business is Rs. 1 lakh plus
ii. In respect of each of its other places of business situated in the district of
principal business is Rs. 10,000 plus
iii. In respect of each place of business situated elsewhere in the state outside
the same district, is Rs. 25,000 subject to the total of Rs. 5 lakhs
d) If it has only one place of business, is Rs. 50,000
e) If it has all its places of business in one state, one or more of which is, or are
situated in the city of Mumbai or Calcutta, Rs. 5 lakhs plus. Inrespect of each
place of business situated outside the city of Mumbai or Kolkatta is Rs. 25,000.
Subject to a total of Rs. 10 lakhs
The above requirements apply to those banks which were established before,
1962. The Banking Companies (Amendement) Act,1962, raised the minimum
amount of the value of the paid up capital to Rs. 5 lakhs for any Indian Bank
commencing businesses after that Act.
2. Foreign Banks
In case of a banking company incorporated outside India, the aggregate value of
its paid up capital and reserves shall not be less than Rs. 15 lakhs, and if it has a
place of business in the city of Mumbai or Kolkatta, or both Rs. 20 lakhs. The
banking company incorporated outside India is also required to deposit with the
Reserve Bank either in cash or in the form of unencumbered approved
securities, or both an amount equal to the minimum amount specified above.
The Act also requires a foreign banking company to deposit with the Reserve
Bank at the end of each calendar year an amount equal to 20% of the profit for
that year in respect of all businesses transacted through its branches in India.

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CHAPTER-3
BANKING IS NEED OF TIME
Although using a bank is the most common method of storing and accessing
your money, there are some alternatives you should consider. If you feel that
your bank isn't giving you what you want, then perhaps it is time for a change.
Here are some banking alternatives that might be able to offer you the features
and services that you require.
Of course, the main reason to use a bank is the fact that banks are widely
available, and they are the first option that comes to mind when dealing with
finances. In fact, some people aren't even aware that there are alternatives to
banking apart from keeping your money at home. Although banking has its
uses, it can cost you money for day-to-day financial matters that you can get for
less. Bank fees can be extremely expensive, but there are some alternatives.
Credit unions are one alternative to using conventional banks. Unlike banks,
credit unions are not for profit organisations that are run by their members.
Credit unions are used by people who share a workplace or occupation, or even
a religion. They offer many of the same services as banks, but because profit is
not their main function they can offer lower fees and higher interest rates on
savings than normal banks. Credit unions can be fairly large and organisations,
and some offer similar levels of convenience to a regular bank. If you are
looking for cheaper fees and better interest rates on savings then a credit union
might be right for you. However, credit unions are still small compared to
banks, and you cannot simply join the credit union of your choice. You have to
meet their specific requirements or be related to someone who is already a

member in order to join. Also, you generally have to save money with a credit
union before you can have access to other financial products
Perhaps the best alternative to traditional banking is online banking. There are
many banks that operate solely online, and there are a lot of benefits to this sort
of bank. Although you might not be able to get money as easily as you could
with a normal bank, you can transfer funds and pay bills much more efficiently.
Also, online banks usually operate all day every day, meaning that you can
access your account and carry out transactions whenever you want. For paying
bills and transferring money, you can't really beat online banking
Although there are viable alternatives to traditional banking, perhaps the best
way to save yourself time and money is to have a combination of accounts. If
you are eligible for a credit union, then saving with them is probably the best
option as you can get great rates and you might be able to borrow money at a
much more reasonable rate if you need to do so in the future. You could
combine this with an online account to pay your bills, as this allows you to pay
bills quickly and manage your money more effectively so that you always pay
on time. Thirdly, having a traditional bank account is usually a good idea,
because if any problems arise you can go to your bank and speak to someone
face to face. If you look around at all the alternatives to regular banking then
you could save yourself money and make banking work more effectively for
you.
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CHAPTER-4
DIFFERENT TYPES OF BANKS
1. CENTRAL BANK
A central bank, reserve bank, or monetary authority is a public institution that
usually issues the currency, regulates the money supply, and controls the
interest rates in a country. Central banks often also oversee the commercial
banking system of their respective countries. In contrast to a commercial bank, a
central bank possesses a monopoly on printing the national currency, which
usually serves as the nation's legal tender.
The primary function of a central bank is to provide the nation's money supply,
but more active duties include controlling interest rates, and acting as a lender
of last resort to the banking sector during times of financial crisis. It may also
have supervisory powers, to ensure that banks and other financial institutions do
not behave recklessly or fraudulently.
Central banks in most developed nations are independent in that they operate
under rules designed to render them free from political interference. Examples
include the European Central Bank (ECB), the Bank of England, and the
Federal Reserve System of the United States
2. ADVISING BANK
An advising bank (also known as a notifying bank) advises a beneficiary
(exporter) that a letter of credit (L/C) opened by an issuing bank for anapplicant
(importer) is available. Advising Bank's responsibility is to authenticate the
letter of credit issued by the issuer to avoid fraud. The advising bank is not
necessarily responsible for the payment of the credit which it advises the
beneficiary of.

The advising bank is usually located in the beneficiary's country. It can be (1) a
branch office of the issuing bank or a correspondent bank, or (2) a bank
appointed by the beneficiary. Important point is the beneficiary has to be
comfortable with the advising bank.
In case (1), the issuing bank most often sends the L/C through its branch office
or correspondent bank to avoid fraud. The branch office or the correspondent
bank maintains specimen signature(s) on file where it may counter-check the
signature(s) on the L/C, and it has a coding system (a secret test key) to
distinguish a genuine L/C from a fraudulent one (authentication) .
In case (2), the beneficiary can request the applicant to specify his/her bank (the
beneficiary's bank) as the advising bank in an L/C application. In many
countries, this is beneficial to the beneficiary, who may avail the reduced bank
charges and fees because of special relationships with the bank. Under normal
circumstances, advising charges is standard and minimal. In addition, it is more
convenient to deal with the beneficiary's own bank over a bank with which the
beneficiary does not maintain an account.
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3. COMMERCIAL BANK
A commercial bank (or business bank) is a type of financial institution and
intermediary. It is a bank that provides transactional, savings, and money
market accounts and that accepts time deposits Commercial banks engage in
processing of payments by way of telegraphic transfer, EFTPOS, internet
banking, or other means, issuing bank drafts and bank cheques, accepting
money on term deposit, lending money by overdraft, installment loan, or other
means, providing documentary and standby letter of credit, guarantees,
performance bonds, securities underwriting commitments and other forms of off
balance sheet exposures, safekeeping of documents and other items in safe
deposit boxes, distribution or brokerage, with or without advice, of insurance,

unit trusts and similar financial products as a “financial supermarket”, cash
management and treasury, merchant banking and private equity financing
Traditionally, large commercial banks also underwrite bonds, and make markets
in currency, interest rates, and credit-related securities, but today large
commercial banks usually have an investment bank arm that is involved in the
mentioned activities.
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4. COMMUNITY DEVELOPMENT BANK
In the United States, community development banks (CDBs or CDFI Banks) are
commercial banks that operate with a mission to generate economic
development in low- to moderate-income (LMI) geographical areas and serve
residents of these communities. In the United States, community development
banks are certified as such by the Community Development Financial
Institutions Fund, a department within the U.S. Department of the Treasury.
In order to become a certified CDFI, CD Banks must apply to the United States
Community Development Financial Institutions Fund. Successful applicants
will have a primary mission of promoting community development and
principally serve under served markets and provide development services, in
addition to meeting other requirements[1]. CDFI Banks provide retail banking
services, they usually target customers from "financially underserved"
demographics.
While community development banks are one type of community development
financial institution, or CDFI,[2] some organizations use the terms
interchangeably. grants official certification of CDFI status to eligible CDBs.
Organizers wishing to start a new CDB can seek a state or national bank charter.
Federally chartered CDBs are regulated primarily by the Office of the
Comptroller of the Currency, like any national bank. According to the OCC
Charter Licensing Manual, CDBs are required "to lend, invest, and provide

services primarily to LMI individuals or communities in which it is chartered to
conduct business." State-chartered community development banks are subject to
regulations, qualifications, and definitions that vary from state to state.
The Grameen Bank of Bangladesh is a microfinance organization and
community development bank founded by Muhammad Yunus. The bank has
grown into a family of over two dozen for-profit and nonprofit enterprises
including the Grameen Foundation, and the Grameen Bank and its founder were
awarded the Nobel Peace Prize in 2006.
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5. CREDIT UNION
A credit union is a cooperative financial institution that is owned and controlled
by its members and operated for the purpose of promoting thrift, providing
credit at competitive rates, and providing other financial services to its
members. Many credit unions exist to further community development or
sustainable international development on a local level.
Worldwide, credit union systems vary significantly in terms of total system
assets and average institution asset size, ranging from volunteer operations with
a handful of members to institutions with several billion dollars in assets and
hundreds of thousands of members. Credit unions are typically smaller than
banks; for example, the average U.S. credit union has $93 million in assets,
while the average U.S. bank has $1.53 billion, as of 2007.
The World Council of Credit Unions (WOCCU) defines credit unions as "not-for-
profit cooperative institutions". In practice however, legal arrangements
vary by jurisdiction. For example in Canada credit unions are regulated as for-profit
institutions, and view their mandate as earning a reasonable profit to
enhance services to members and ensure stable growth.
This difference in viewpoints reflects credit unions' unusual organizational
structure, which attempts to solve the principal-agent problem by ensuring that

the owners and the users of the institution are the same people. In any case,
credit unions generally cannot accept donations and must be able to prosper in a
competitive market economy.
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6. CUSTODIAN BANK
A Custodian bank, or simply custodian, is a specialized financial institution
responsible for safeguarding a firm's or individual's financial assets and is not
likely to engage in "traditional" commercial or consumer/retail banking such as
mortgage or personal lending, branch banking, personal accounts, ATMs and so
forth.
The role of a custodian in such a case would be to hold in safekeeping
assets/securities such as stocks, bonds, commodities such as precious metals and
currency (cash), domestic and foreign, arrange settlement of any purchases and
sales and deliveries in/out of such securities and currency, collect information
on and income from such assets (dividends in the case of stocks/equities and
coupons (interest payments) in the case of bonds) and administer related tax
withholding documents and foreign tax reclamation, administer voluntary and
involuntary corporate actions on securities held such as stock dividends, splits,
business combinations (mergers), tender offers, bond calls, etc.
It provide information on the securities and their issuers such as annual general
meetings and related proxies, maintain currency/cash bank accounts, effect
deposits and withdrawals and manage other cash transactions, perform foreign
exchange transactions, often perform additional services for particular clients
such as mutual funds; examples include fund accounting, administration, legal,
compliance and tax support services, provide regular and special reporting on
any or all their activities to their clients or authorized third parties such as
MAIC Trust Account services for mergers & acquisitions payments.

Custodian banks are often referred to as global custodians if they safekeep
assets for their clients in multiple jurisdictions around the world, using their
own local branches or other local custodian banks with which they contract to
be in their "global network" in each market to hold accounts for their respective
clients. Assets held in such a manner are typically owned by larger institutional
firms with a considerable amount of investments such as MAIC Trust services
& (QI) Qualified Intermediary services banks, insurance companies, mutual
funds, hedge funds and pension funds.
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7. DEPOSITORY BANK
A depository bank (U.S. usage) is a bank organized in the United States which
provides all the stock transfer and agency services in connection with a
depository receipt program. This function includes arranging for a custodian to
accept deposits of ordinary shares, issuing the negotiable receipts which back up
the shares, maintaining the register of holders to reflect all transfers and
exchanges, and distributing dividends in U.S. dollars.
8. EXPORT CREDIT AGENCY
An export credit agency (known in trade finance as ECA) or Investment
Insurance Agency, is a private or quasi-governmental institution that act as an
intermediary between national governments and exporters to issue export
financing. The financing can take the form of credits (financial support) or
credit insurance and guarantees (pure cover) or both, depending on the mandate
the ECA has been given by its government. ECAs can also offer credit or cover
on their own account. This does not differ from normal banking activities. Some
agencies are government-sponsored, others private, and others a bit of both.
ECAs currently finance or underwrite about $430 billion of business activity
abroad - about $55 billion of which goes towards project finance in developing

countries - and provide $14 billion of insurance for new foreign direct
investment, dwarfing all other official sources combined (such as the World
Bank and Regional Development Banks, bilateral and multilateral aid, etc.). As
a result of the claims against developing countries that have resulted from ECA
transactions, ECAs hold over 25% of these developing countries' US$2.2 trillion
debt. These data are unreliable in the absence of source, definition, or date.
Export credit agencies use three methods to provide funds to an importing entity
one is Direct lending which is the simplest structure whereby the loan is
conditioned upon the purchase of goods or services from businesses in the
organizing country, second is Financial intermediary loans where the export–
import bank lends funds to a financial intermediary, such as a commercial bank,
that in turn loans the funds to the importing entity and Interest rate equalization
is a commercial lender provides a loan to the importing entity at below market
interest rates, and in turn receives compensation from the export–import bank
for the difference between the below-market rate and the commercial rate.
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9. INVESTMENT BANKING
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. An investment bank may also
assist companies involved in mergers and acquisitions, and provide ancillary
services such as market making, trading of derivatives, fixed income
instruments, foreign exchange, commodities, and equity securities.
Unlike commercial banks and retail banks, investment banks do not take
deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley
Act), the United States maintained a separation between investment banking
and commercial banks. Other industrialized countries, including G8countries,
have historically not maintained such a separation.

There are two main lines of business in investment banking. Trading securities
for cash or for other securities (i.e., facilitating transactions, market-making), or
the promotion of securities (i.e., underwriting, research, etc.) is the "sell side",
while dealing with pension funds, mutual funds, hedge funds, and the investing
public (who consume the products and services of the sell-side in order to
maximize their return on investment) constitutes the "buy side". Many firms
have buy and sell side components.
An investment bank can also be split into private and public functions with a
Chinese wall which separates the two to prevent information from crossing. The
private areas of the bank deal with private insider information that may not be
publicly disclosed, while the public areas such as stock analysis deal with public
information.
An advisor who provides investment banking services in the United States must
be a licensed broker-dealer and subject to Securities & Exchange Commission
(SEC) and Financial Industry Regulatory Authority (FINRA) regulation.[1]
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10. INDUSTRIAL BANK
An industrial loan company (ILC) or industrial bank is a financial institution
in the United States that lends money, and may be owned by non-financial
institutions. Though such banks offer FDIC-insured deposits and are subject to
FDIC and state regulator oversight, a debate exists to allow parent companies
such as Wal-Mart to remain unregulated by the financial regulators. "FDIC-insured
entities are subject to Sections 23A and 23B of the Federal Reserve Act,
which limits bank transactions with affiliates, including the parent company."
(FDIC.gov) The ILC is permitted to have branches in multiple states (which is
permitted by many states on a reciprocal basis). They are state-chartered, and
insured by the Federal Deposit Insurance Corporation. They are currently

chartered by seven states, with most chartered by Utah. Other states permitting
them
Companies that have set up industrial banks include UBS, General Electric Co.,
General Motors, Merrill Lynch & Co. Inc., Morgan Stanley, American Express
Co. Target Corp, Nordstrom, Harley-Davidson, First Data, UnitedHealth Group,
BMW, and Sallie Mae. In May 2005, Warren Buffett's Berkshire Hathaway,
Inc. announced plans to operate a Utah industrial bank to handle consumer
loans for its R. C. Willey Home Furnishings stores. The Blue Cross and Blue
Shield Association, Ford Motor Co., Ceridian Corp. and Home Depot await
approval.
However, the assets held by an ILC tend to paint an incomplete picture. The
actual loan book amount can be considered more important. In this view, for
example, UBS would replace Merrill Lynch as number 1.
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11. MERCHANT BANK
A merchant bank is a financial institution which provides capital to companies
in the form of share ownership instead of loans. A merchant bank also provides
advisory on corporate matters to the firms they lend to.
Today, according to the US Federal Deposit Insurance Corporation (acronym
FDIC), "the term merchant banking is generally understood to mean negotiated
private equity investment by financial institutions in the unregistered securities
of either privately or publicly held companies."[1] Bothcommercial banks and
investment banks may engage in merchant banking activities. Historically,
merchant banks' original purpose was to facilitate and/or finance production and
trade of commodities, hence the name "merchant". Few banks today restrict
their activities to such a narrow scope.

24
12. MUTUAL SAVINGS BANK
A mutual savings bank is a financial institution chartered through a state or
federal government to provide a safe place for individuals to save and toinvest
those savings in mortgages, loans, stocks, bonds and other securities.
Mutual savings banks were designed to stimulate savings by individuals; the
exclusive function of these banks is to protect deposits, make limited, secure
investments, and provide depositors with interest. Unlikecommercial banks,
savings banks have no stockholders; the entirety of profits beyond the upkeep of
the bank belongs to the depositors of the mutual savings bank. Mutual savings
banks prioritize security, and as a result, have historically been characteristically
conservative in their investments. This conservatism is what allowed mutual
savings banks to remain stable throughout the turbulent period of the Great
Depression, despite the failing of commercial banks and savings and loan
associations.
13. NATIONAL BANK
In banking, the term national bank carries several meanings:
developing countries, a bank owned by the state
locally or even internationally)
ating within a specific
regulatory structure, which may or may not operate nationally, under the
supervision of the Office of the Comptroller of the Currency.
In the past, the term "national bank" has been used synonymously with "central
bank", but it is no longer used in this sense today. Some central banks may have
the words "National Bank" in their name; conversely if a bank is named in this
way, it is not automatically considered a central bank. For example, National-
Bank AG in Essen, Germany is a privately owned commercial bank, just like

National Bank of Canada of Montreal, Canada. On the other side, National
Bank of Ethiopia is the central bank of Ethiopia and National Bank of
Cambodia is the central bank of Cambodia.
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14. OFFSHORE BANK
An offshore bank is a bank located outside the country of residence of the
depositor, typically in a low tax jurisdiction (or tax haven) that provides
financial and legal advantages. These advantages typically include greater
privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking
Act), low or no taxation (i.e. tax havens), easy access to deposits (at least in
terms of regulation) and protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the
United Kingdom, and most offshore banks are located in island nations to this
day, the term is used figuratively to refer to such banks regardless of location,
including Swiss banks and those of other landlocked nations such as
Luxembourg and Andorra.
Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering; however, legally,
offshore banking does not prevent assets from being subject to personal income
tax on interest. Except for certain persons who meet fairly complex
requirements, the personal income tax of many countries[2] makes no distinction
between interest earned in local banks and those earned abroad. Persons subject
to US income tax
For example, are required to declare on penalty of perjury, any offshore bank
accounts—which may or may not be numbered bank accounts—they may have.
Although offshore banks may decide not to report income to other tax
authorities, and have no legal obligation to do so as they are protected by bank

secrecy, this does not make the non-declaration of the income by the tax-payer
or the evasion of the tax on that income legal. Following September 11, 2001,
there have been many calls for more regulation on international finance, in
particular concerning offshore banks, tax havens, and clearing houses such as
Clearstream, based in Luxembourg, being possible crossroads for major illegal
money flows.
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15. POSTAL SAVINGS SYSTEM
Many nations' post offices operated, or continue to operate postal savings
systems, to provide depositors who did not have access to banks a safe,
convenient method to save money and to promote saving among the poor.
16. PRIVATE BANK
Private banks are banks that are not incorporated. A private bank is owned by
either an individual or a general partner(s) with limited partner(s). In any such
case, the creditors can look to both the "entirety of the bank's assets" as well as
the entirety of the sole-proprietor's/general-partners' assets.
These banks have a long tradition in Switzerland, dating back to at least the
revocation of the Edict of Nantes (1685). However most have now become
incorporated companies, so the term is rarely true anymore. There are a few
private banks remaining in the U.S. One is Brown Brothers Harriman & Co., a
general partnership with about 30 members. Private banking also has a long
tradition in the UK where Coutts & Co has been in business since 1692.
"Private banks" and "private banking" can also refer to non-government owned
banks in general, in contrast to government-owned (or nationalized) banks,
which were prevalent in communist, socialist and some social democratic states
in the 20th century. Private banks as a form of organization should also not be

confused with "Private Banks" that offer financial services to high net worth
individuals and others.
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17. RETAIL BANK
Retail banking refers to banking in which banking institutions execute
transactions directly with consumers, rather than corporations or other banks.
Services offered include: savings and transactional accounts, mortgages,
personal loans, debit cards, credit cards, and so forth.
18. SAVINGS AND LOAN ASSOCIATION
A savings and loan association (or S&L), also known as a thrift, is a financial
institution that specializes in accepting savings deposits and making mortgage
and other loans. The terms "S&L" or "thrift" are mainly used in the United
States; similar institutions in the United Kingdom, Ireland and some
Commonwealth countries include building societies and trustee savings banks.
They are often mutually held (often called mutual savings banks[citation needed]),
meaning that the depositors and borrowers are members with voting rights, and
have the ability to direct the financial and managerial goals of the organization,
similar to the policyholders of a mutual insurance company. It is possible for an
S&L to be a joint stock companyand even publicly traded. However, this means
that it is no longer truly an association, and depositors and borrowers no longer
have managerial control. By law, thrifts must have at least 65 percent of their
lending in mortgages and other consumer loans — making them particularly
vulnerable to housing downturns such as the deep one the U.S. has experienced
since 2007.

28
19. SAVINGS BANK
A savings bank is a financial institution whose primary purpose is accepting
savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th
century. Their original objective was to provide easily accessible savings
products to all strata of the population. In some countries, savings banks were
created on public initiative, while in others, socially committed individuals
created foundations to put in place the necessary infrastructure.
20. UNIVERSAL BANK
A savings bank is a financial institution whose primary purpose is accepting
savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th
century. Their original objective was to provide easily accessible savings
products to all strata of the population. In some countries, savings banks were
created on public initiative, while in others, socially committed individuals
created foundations to put in place the necessary infrastructure.

29
CHAPTER-5
DIFFERENT TYPES OF PRODUCT
Bank deposits serve different purposes for different people. Some people cannot
save regularly; they deposit money in the bank only when they have extra
income. The purpose of deposit then is to keep money safe for future needs.
Some may want to deposit money in a bank for as long as possible to earn
interest or to accumulate savings with interest so as to buy a flat, or to meet
hospital expenses in old age, etc. Some, mostly businessmen, deposit all their
income from sales in a bank account and pay all business expenses out of the
deposits. Keeping in view these differences, banks offer the facility of opening
different types of deposit accounts by people to suit their purpose and
convenience.
On the basis of purpose they serve, bank deposit accounts may be classified as
follows:
1. Savings Bank Account
If a person has limited income and wants to save money for future needs, the
Saving Bank Account is most suited for his purpose. This type of account can
be opened with a minimum initial deposit that varies from bank to bank. Money
can be deposited any time in this account. Withdrawals can be made either by
signing a withdrawal form or by issuing a cheque or by using ATM card.
Normally banks put some restriction on the number of withdrawal from this
account. Interest is allowed on the balance of deposit in the account. The rate of
interest on savings bank account varies from bank to bank and also changes

from time to time. A minimum balance has to be maintained in the account as
prescribed by the bank.
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2. Current Deposit Account
Big businessmen, companies and institutions such as schools, colleges, and
hospitals have to make payment through their bank accounts. Since there are
restriction on number of withdrawals from savings bank account, that type of
account is not suitable for them. They need to have an account from which
withdrawal can be made any number of times. Banks open current account for
them. Like savings bank account, this account also requires certain minimum
amount of deposit while opening the account. On this deposit bank does not pay
any interest on the balances. Rather the accountholder pays certain amount each
year as operational charge. For the convenience of the accountholders banks
also allow withdrawal of amounts in excess of the balance of deposit. This
facility is known as overdraft facility. It is allowed to some specific customers
and upto a certain limit subject to previous agreement with the bank concerned.
3. Fixed Deposit Account
Fixed Deposit Account is also known as Term Deposit Account. Many a time
people want to save money for long period. If money is deposited in savings
bank account, banks allow a lower rate of interest. Therefore, money is
deposited in a fixed deposit account to earn a interest at a higher rate. This type
of deposit account allows deposit to be made of an amount for a specified
period. This period of deposit may range from 15 days to three years or more
during which no withdrawal is allowed. However, on request, the depositor can
encash the amount before its maturity. In that case banks give lower interest
than what was agreed upon. The interest on fixed deposit account can be
withdrawn at certain intervals of time. At the end of the period, the deposit may
be withdrawn or renewed for a further period. Banks also grant loan on the
security of fixed deposit receipt.

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4. Recurring Deposit Account.
This type of account is suitable for those who can save regularly and expect to
earn a fair return on the deposits over a period of time. While opening the
account a person has to agree to deposit a fixed amount once in a month for a
certain period. The total deposit along with the interest therein is payable on
maturity. However, the depositor can also be allowed to close the account
before its maturity and get back the money along with the interest till that
period. The account can be opened by a person individually, or jointly with
another, or by the guardian in the name of a minor. The rate of interest allowed
on the deposits is higher than that on a savings bank deposit but lower than the
rate allowed on a fixed deposit for the same period.
Recurring Deposit Accounts may be of different types depending on the
purpose underlying the deposit. Some of these are as follows:
a) Home Safe Account (also known as Money Box Scheme):
Small savers find it convenient to deposit money under this scheme. For regular
savings, the bank provides a safe or box (Gullak) to the depositor. The safe or
box cannot be opened by the depositor, who can put money in it regularly,
which is collected by the bank’s representative at intervals and the amount is
credited to the depositor’s account. The deposits carry a nominal rate of interest.
b) Cumulative-cum-Sickness Deposit Account:
Regular deposits made in this type of account serve the purpose of having
money to meet large expenses in case there is sudden illness or other unforeseen
expenses. A certain fixed sum is deposited at regular intervals in this account.
The accumulated deposits over time along with interest can be used for payment
of medical expenses, hospital charges, etc.

32
c) Home Construction deposit Scheme/Saving Account:
This is also a type of recurring deposit account in which money can be
deposited regularly either for the purchase or construction of a flat or house in
future. The rate of interest offered on the deposit in this case is relatively higher
than in other recurring deposit accounts.
LOANS AND ADVANCES
The term ‘loan’ refers to the amount borrowed by one person from another. The
amount is in the nature of loan and refers to the sum paid to the borrower. Thus.
from the view point of borrower, it is ‘borrowing’ and from the view point of
bank, it is ‘lending’. Loan may be regarded as ‘credit’ granted where the money
is disbursed and its recovery is made on a later date. It is a debt for the
borrower. While granting loans, credit is given for a definite purpose and for a
predetermined period. Interest is charged on the loan at agreed rate and intervals
of payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by the
bank. Banks grant advances largely for short-term purposes, such as purchase of
goods traded in and meeting other short-term trading liabilities. There is a sense
of debt in loan, whereas an advance is a facility being availed of by the
borrower. However, like loans, advances are also to be repaid. Thus a credit
facility- repayable in instalments over a period is termed as loan while a credit
facility repayable within one year may be known as advances. However, in the
present lesson these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial to
individuals, firms, companies and industrial concerns. The growth and
diversification of business activities are effected to a large extent through bank
financing. Loans and advances granted by banks help in meeting short-term and
long term financial needs of business enterprises.

Banks also borrow from other institutions as well as from the Reserve Bank of
India. When the Reserve Bank of India lends money to commercial banks, the
rate of interest it charges for lending is known as ‘Bank Rate’. The rate at which
commercial banks make funds available to people is known as ‘Lending-rate’.
The lending rates also vary depending upon the nature of loans and advances.
The rates also vary according to the purpose in view. For example if the loan is
sanctioned for the purpose of activities for the development of backward areas,
the rate of interest is relatively lower as against loans and advances for
commercial/business purposes. Similarly for smaller amounts of loan the rate of
interest is higher as compared to larger amounts. Again lending rates for
consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators,
etc. are relatively higher than for commercial borrowings.
However, the Reserve Bank of India from time to time announces changes in
the interest-rate structure to regulate the lending of funds by banks. Different
rates of interest are prescribed for various categories of advances, such as
advances to agriculture, small scale industries, road transport, etc. Graded rates
of interest are prescribed for backward areas. Lower rate is normally charged
from agencies selling food-grains at fixed price through Govt. approved outlets.
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34
CHAPTER-6
TYPES OF LOANS
1. Loans
Loan is the amount borrowed from bank. The nature of borrowing is that the
money is disbursed and recovery is made in instalments. While lending money
by way of loan, credit is given for a definite purpose and for a pre-determined
period. Depending upon the purpose and period of loan, each bank has its own
procedure for granting loan. However the bank is at liberty to grant the loan
requested or refuse it depending upon its own cash position and lending policy.
There are two types of loan available from banks:
a) Demand loan
A Demand Loan is a loan which is repayable on demand by the bank. In other
words, it is repayable at short-notice. The entire amount of demand loan is
disbursed at one time and the borrower has to pay interest on it. The borrower
can repay the loan either in lumpsum (one time) or as agreed with the bank. For
example, if it is so agreed the amount of loan may be repaid in suitable
instalments. Such loans are normally granted by banks against security. The
security may include materials or goods in stock, shares of companies or any
other asset. Demand loans are raised normally for working capital purposes , like
purchase of raw materials, making payment of short-term liabilities.
b) Term loan
Medium and long term loans are called term loans. Term loans are granted for
more than a year and repayment of such loans is spread over a longer period.
The repayment is generally made in suitable instalments of a fixed amount.
Term loan is required for the purpose of starting a new business activity,
renovation, modernization, expansion/ extension of existing units, purchase of

plant and machinery, purchase of land for setting up of a factory, construction
of factory building or purchase of other immovable assets. These loans are
generally secured against the mortgage of land, plant and machinery, building
and the like.
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2. Cash credit
Cash credit is a flexible system of lending under which the borrower has the
option to withdraw the funds as and when required and to the extent of his
needs. Under this arrangement the banker specifies a limit of loan for the
customer (known as cash credit limit) up to which the customer is allowed to
draw. The cash credit limit is based on the borrower’s need and as agreed with
the bank. Against the limit of cash credit, the borrower is permitted to withdraw
as and when he needs money subject to the limit sanctioned. It is normally
sanctioned for a period of one year and secured by the security of some tangible
assets or personal guarantee. If the account is running satisfactorily, the limit of
cash credit may be renewed by the bank at the end of year. The interest is
calculated and charged to the customer’s account.
Cash credit, is one of the types of bank lending against security by way of
pledge or /hypothetication of goods. ‘Pledge’ means bailment of goods as
security for payment of debt. Its primary purpose is to put the goods pledged in
the possession of the lender. It ensures recovery of loan in case of failure of the
borrower to repay the borrowed amount. In ‘Hypothetication’, goods remain in
the possession of the borrower, who binds himself under the agreement to give
possession of goods to the banker whenever the banker requires him to do so.
So hypothetication is a device to create a charge over the asset under
circumstances in which transfer of possession is either inconvenient or
impracticable.

36
3. Overdraft
Overdraft facility is more or less similar to ‘cash credit’ facility. Overdraft
facility is the result of an agreement with the bank by which a current account
holder is allowed to draw over and above the credit balance in his/her account.
It is a short-period facility. This facility is made available to current account
holders who operate their account through cheques. The customer is permitted
to withdraw the amount of overdraft allowed as and when he/she needs it and to
repay it through deposits in the account as and when it is convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written request
by the customer. Sometimes the bank also insists on either a promissory note
from the borrower or personal security of the borrower to ensure safety of
amount withdrawn by the customer. The interest rate on overdraft is higher than
is charged on loan. The following are some of the benefits of cash credits and
overdraft:
i. Cash credit and overdraft allow flexibility of borrowing, which depends upon the
need of the borrower.
ii. There is no necessity of providing security and documentation again and again
for borrowing funds.
iii. This mode of borrowing is simple and elastic and meets the short term financial
needs of the business.
4. Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills of exchange by
bank is another way of making funds available to the customers. Bills of
exchange are negotiable instruments which enable debtors to discharge their
obligations to the creditors. Such Bills of exchange arise out of commercial
transactions both in inland trade and foreign trade. When the seller of goods has

to realise his dues from the buyer at a distant place immediately or after the
lapse of the agreed period of time, the bill of exchange facilitates this task with
the help of the banking institution.
Banks invest a good percentage of their funds in discounting bills of exchange.
These bills may be payable on demand or after a stated period. In discounting a
bill, the bank pays the amount to the customer in advance, i.e. before the due
date. For this purpose, the bank charges discount on the bill at a specified rate.
The bill so discounted, is retained by the bank till its due date and is presented
to the drawee on the date of maturity. In case the bill is dishonoured on due date
the amount due on bill together with interest and other charges is debited by the
bank to the customers account.
Apart from these the banks also provides financial services to the corporate
sector and business and society
1) Merchant Banking
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and to wealthy
individuals. The term can also be used to describe the private equity activities of
banking. The chief distinction between an investment bank and a merchant bank
is that a merchant bank invests its own capital in a client company whereas an
investment bank purely distributes (and trades) the securities of that company in
its capital raising role. Both merchant banks and investment banks provide fee
based corporate advisory services including in relation to mergers and
acquisitions.
2) Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets
for which it must pay a series of contractual, periodic, tax deductible payments.
37

The lessee is the receiver of the services or the assets under the lease contract
and the lessor is the owner of the assets. The relationship between the tenant
and the landlord is called a tenancy, and can be for a fixed or an indefinite
period of time (called the term of the lease). The consideration for the lease is
called rent. A gross lease is when the tenant pays a flat rental amount and the
landlord pays for all property charges regularly incurred by the ownership from
lawnmowers and washing machines to handbags and jewellry.[1]
Under normal circumstances, a freehold owner of property is at liberty to do
what they want with their property, including destroy it or hand over possession
of the property to a tenant. However, if the owner has surrendered possession to
another (the tenant) then any interference with the quiet enjoyment of the
property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though
the terminology would be different. Similar principles apply to sub-leasing, that
is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease
can be expressly prohibited by the main lease.
3) Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The
income earned through these investments and the capital appreciation realised
are shared by its unit holders in proportion to the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost.
38

4) Money Transfer
Banks are helping business and society for transfer of money from place to
place or person to person. For this purpose, Demand Draft, Pay orders,
Telegraphic Transfer, Mail Transfer, Credit Cards etc type methods are used
5) Factoring
Factoring is a financial transaction whereby a business job sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount in
exchange for immediate money with which to finance continued business.
Factoring differs from a bank loan in three main ways. First, the emphasis is on
the value of the receivables (essentially a financial asset),[1][2] not the firm’s
credit worthiness. Secondly, factoring is not a loan – it is the purchase of a
financial asset (the receivable). Finally, a bank loan involves two parties
whereas factoring involves three.
The three parties directly involved are: the one who sells the receivable, the
debtor, and the factor. The receivable is essentially a financial asset associated
with the debtor's liability to pay money owed to the seller (usually for work
performed or goods sold). The seller then sells one or more of its invoices (the
receivables) at a discount to the third party, the specialized financial
organization (aka the factor), to obtain cash. The sale of the receivables
essentially transfers ownership of the receivables to the factor, indicating the
factor obtains all of the rights and risks associated with the receivables.
Accordingly, the factor obtains the right to receive the payments made by the
debtor for the invoice amount and must bear the loss if the debtor does not pay
the invoice amount. Usually, the account debtor is notified of the sale of the
receivable, and the factor bills the debtor and makes all collections. Critical to
the factoring transaction, the seller should never collect the payments made by
the account debtor, otherwise the seller could potentially risk further advances
from the factor. There are three principal parts to the factoring transaction; a.)
39

the advance, a percentage of the invoice face value that is paid to the seller upon
submission, b.) the reserve, the remainder of the total invoice amount held until
the payment by the account debtor is made and c.) the fee, the cost associated
with the transaction which is deducted from the reserve prior to it being paid
back the seller. Sometimes the factor charges the seller a service charge, as well
as interest based on how long the factor must wait to receive payments from the
debtor. The factor also estimates the amount that may not be collected due to
non-payment, and makes accommodation for this when determining the amount
that will be given to the seller. The factor's overall profit is the difference
between the price it paid for the invoice and the money received from the
debtor, less the amount lost due to non-payment
6) Finance Housing
There are a variety of housing finance schemes started by banks. Such as
purchase of new house, construction of new home, home improvement, repairs,
extension, land purchase, bridge loans, and balance transfer loans. Commercial
banks through their subsidiaries undertake housing finance as a specialized
business. Now a days, all the banks are permitted to provide housing finance to
the people. They provide housing finance and other related services to the needy
people at reasonable rate of interest.
7) Credit Cards
A Lot of people miscomprehend the usage of credit card thinking that it only
augments their expenditure & nothing else, however they are not aware of the
proper usage of the card. A Credit Card is plastic money which is used as a way
of payment, facilitating you to purchase products/services on credit. It eases
your life & your shopping experience is made simpler as you are not required to
carry cash at all the places; just swipe your credit card & you are given a free
credit period of 50-55 days by the bank. A lot of people think that the credit
40

period starts from the date of purchase which is not correct; you should note that
the credit period is calculated from the date of billing and not from the date of
purchase. - As soon as you get the credit card, you need to sign on the signature
panel - Spend within your credit limit: You should not cross the limit of the
credit allotted by the bank as they charge hefty fine from the card holders. -
Always check sales vouchers/charge slips and the purchase amount when you
sign them. - Change your PIN regularly & do not give out your card number or
CVV number (three-digit number) to anyone on the phone, unless you are
dealing with a reputable company. - When shopping online, submit credit card
details only through secure websites. - Always keep a track of your billing cycle
& pay bills on time to avoid interest charges & late fees. - Always scan your
credit card statements for unauthorized transactions. If you've been defrauded,
contact the issuing bank instantly. - Withdrawing cash from ATM through your
credit card is really expensive as there is a fee of Rs 350, plus 3.5 percent
interest per day. You must make sure that you withdraw the cash only in an
emergency.
8) Portfolio Management
Portfolio management is a process of investment in securities. It involves a
proper investment decision making. It involves proper money management. The
objective of this service is to help investors with the expertise of professionals.
It involves construction of a portfolio based upon the fact sheet of the investor
giving out his objectives, constraints, preferences and tax liability. The portfolio
should be reviewed and adjusted from time to time in tune with the market
conditions. The portfolio manager is an important person who holds the
financial institutions and banks. They handle the funds of the investors for a fee.
As per SEBI guidelines, the portfolio manager should get a certificate from the
SEBI for rendering the portfolio management services to the clients. The SEBI
has framed the code of conduct for the portfolio managers. The violation of the
41

regulations of SEBI is an offence and is punishable under the SEBI Act. Banks
usually extend services for managing surplus funds of their corporate customers
either directly or through merchant bankers. It involves helping their clients in
investing their funds in a manner that balances the liquidity, safety and
maximum yield
9) ATM
One of the channels of banking service delivery is vide the Automated Teller
Machine (ATM) whose traditional and primary use is to dispense cash upon
insertion of a plastic card and its unique Personal Identification Number (PIN).
ATM card is a plastic card with a magnetic strip with the account number of the
individual. The bank issues ATM cards to its current and saving accountholders.
A typical transaction would be that of cash withdrawal. The bank generally
restricts the maximum amount and the frequency with which one can withdraw
cash. The amount withdrawn is immediately debited to the concerned account
through accounting entries pre programmed on the ATM. Cash or cheques can
be deposited through the ATM for the credit to an account. ATMs can be
accessed may time. No employee interface is necessary. ATM offers a cost
effective solution alternative to labour costs. The scope of frauds, robberies and
misappropriation are reduced considerably if the PIN is maintained diligently.
10) Tele banking
Tele banking is a banking service offered by banks to enable customers to
access their accounts for information or transactions. A Telephone PIN (T-PIN)
is provided to each accountholder. The customer can call the exclusive tele-banking
numbers and provide the details to identify himself to the automated
voice. Upon the respective numbers matching the computerized systems, the
customer is given access to his account to query or transact on his account. Cash
42

withdrawal and deposit are not enabled through this service but many banks
offer a cash delivery or collection service to certain classes of cutomers.
11) Internet Banking
Internet is one of the channels of service delivery to a banking customer. The
access to account information as well as transaction is offered through the
worldwide network of computers on the internet. Every bank has special
firewalls and its own security measure to protect the accounts from non-authentic
use from unauthorized users. Each accountholder is provided a PIN
similar to that of the ATM. The access to the account is allowed upon a match
of the account details and PIN entered on the computer system. A higher level
of security may be reached by an electronic finger print. Account querying as
well as transaction are possible on the Internet Banking Platform. The
accounting is instantaneous and funds transfers can be effected immediately.
Financial services companies are using the Internet as the new distribution
channel.
INNOVATIVE STRATEGIES FOR NEW PRODUCT
These days banks are spending larger and larger percentages of their marketing
budgets to acquire customers. These efforts include outbound campaigns, both
online as well as through traditional methods. In this culture of instant response
and connectedness, customers expect to be able to make decisions when
presented with an offer in a very quick manner. However, in many cases the
inability to complete the acquisition process due to process that has does not
lend itself to support this type of behavior gets in the way of closing the loop.
As is demonstrated by the large number of online only banks that are popping
up every day, customers are getting more and more comfortable with these
types of transactions being handled online. Simply put, the ability to complete
43

the process of account opening online is a price to play in this business these
days.
Collabera's solution starts by streamlining the process by separating the require
steps from steps that can be completed at a later stage. This streamlined process
is then technology enables by leveraging existing platforms or in some cases
introducing new platforms that offer more flexible account opening processes.
Since the account opening process tends to vary by the product being offered, in
some cases providing a seamless and consistent customer experience is
achieved via integrating various services into a customer friendly front end.
Critical to this strategy is the integration of data flows for customer information
across the disparate data stores.
As is well understood, the initial process after the account is setup is a great
time to make a impression on the customer. This initial experience establishes
the foundation for the future. In our experience, there is an opportunity to do
more than just going through a checklist of items that make up the process of
on-boarding. The on-boarding process is a great time to gather information from
the customer that can then be sent off to the appropriate data stores for
consumption by various business functions. In many cases this on-boarding
process gets executed in silos.
The Collabera solution focuses on defining the process and then technology
enabling it in a way that can cover all bases. The process analysis includes all
aspects that are visible to the customer as well as background processes that are
triggered as part of this end to end process. The technical aspects focus on
integration and data enrichment prior to sharing the information with
appropriate resources.
44

The cost to acquire new customers is higher that it has ever been. Product
bundling is emerging as a key tactic in being able to offer products that will
increase the "stickiness factor" as well as increasing the revenue per customer
metric. Most banks are able to use the results of propensity analysis to
understand the most likely portfolio of products that would be of interest to a
customer. Using this data to identify the best primary product along with a
secondary set of products allows all customer communication to be much more
tailored. The result is a higher "redemption rate" on offers to the customer.
Executing on this type of a strategy requires a clear understanding of the overall
goals, the associated tactics, a clearly defined and completely integrated channel
strategy as well as a seamless integration amongst the technology platforms. In
many organizations the lack of an overall data strategy can be a challenge.
Collabera has assisted several banks in enabling these type of strategies. In our
opinion, traditional approaches to product bundling are limited to prepackaged
product bundling solutions. This one size fits all type of solution has yielded
some results in the past. However, given the competitive environment these
days, more sophisticated approaches are needed.
As banks struggle to increase the revenue per customer, cross sell strategies
have emerged as a way of achieving this target. In the past these type of
strategies have focused on offering multiple types of products from within a
segment of the banks business. Segments of Lines of Business, are typically
how the banks have internally organized themselves and no surprise that the
lack of customer centricity in this approach failed to deliver on the promise of
increasing wallet share by increase cross sell. Customers have looked for
solutions that cross multiple aspects of their profile – business and personal. As
banks rethink these strategies and align themselves behind better and more
robust cross sell strategies, it has become clear that knowing the customer at a
45

deeper level then before is key to success in the pursuit of higher cross sell
ratios.
Collabera's solutions associated with cross-sell strategies focus on two aspects.
1) Establishing a process that allows all customer facing function to truly act in
a way that will allow them to offer the entire portfolio of products and they are
incented to do so 2) Establishing metrics that allow the measurement of these
interactions in the form of measureable dashboards such as White Space
Analysis.
Banking customers are demanding tools that help manage their finances and
detect fraud. Alerts are a tool that can assist by proving timely, meaningful and
actionable notifications to customers on events related to their accounts. Alerts
can also be used to help customers conveniently transact business; for instance,
an alert may prompt a payment of a loan or transfer funds to prevent an
overdraft. Furthermore, functionality the functionality of a bank's online/mobile
alerts framework could be enhanced greatly by allowing clients to enroll/un-enroll
46
and tailor alerts that meet their needs.
In order to ensure customer adoption of these alerts, banks need to create a
positive experience for the user by allowing them to manage their alerts in one
location. This is best done by combining efforts with various business lines and
systems to guarantee that bank customers do not have to go to multiple
locations to manage their preferences. Typical lines of business that could
dramatically benefit from adopting the alerts functionality are Business
Banking, Collections, Credit Card, Debit Card, Deposits, Investments, Lending,
Line of Credit (overdraft), Marketing, Mobile Banking, Mortgage, Retail
Banking, Security, Web Banking. Email, SMS text messaging, and push
notifications are cost effective channels that reach customers quickly, which

increase the value of the products offered by many of these business units. The
Collabera solution focuses on defining the end-to-end alerts architecture,
including the process, technology, system integration, and business change
requirements. Collabera leverages its world-class toolkit of best-practice alerts,
and helps prioritize the adoption of the alerts functionality that meets the
business needs leveraging our proprietary Momentum methodology. Our alerts
architecture and design includes all aspects that are visible to the customer as
well as background processes that are triggered as part of this end to end
solution. A typical business case leveraging the Collabera Alerts framework to
monetize and setup a best practice alerts solution within their banking business
in mid-tier banks reflects between $5MM and $7MM of revenue over 3 years,
as a result of "monetized alerts" fee revenue and overall expense savings.
47
INNOVATIVE SERVICES TO CUSTOMERS
A conventional bank may treat its customers as coldly as the cash they deposit
or borrow. Many banks have conveniently used control and security as reasons
for their remarkably slow and impersonal services. In recent years, other service
industries, notably fast-food and airlines, have proven that customer service can
be a swift and enjoyable experience for both clients and employees without
sacrificing control, costs, and profits. Some banks have finally adopted these
new service paradigms and are now benchmarking with non-bank institutions to
learn about their best practices.
For instance, BayBanks of Massachusetts, is using the mail-order company L.L.
Bean, known for its superb order-taking and service delivery systems, as its
model for change. A major result of this functional benchmarking was the
establishment of a 24-hour customer service center that can not only respond to
queries and complaints but also promote and sell the bank's products and

services. The center even allows customers to open a checking account anytime
or negotiate an overdraft at 2 am. The ATM was also reconfigured from a mere
cash dispenser to a versatile and tireless account executive. The machine can
now buy and sell mutual funds. Inspired by L.L. Bean, Bay Banks published a
50-page catalogue to help customers appreciate and select from its more than
160 financial services.
Seafirst Bank in Seattle redefined itself from a "retail bank" to a "retailer" and
has benchmarked with retailers known for world class customer service such as
fast-food restaurant chains. Inspired by these models, Seafirst instituted a 5-
minute guarantee that says "Wait any longer than 5 minutes in line and the bank
guarantees $5 to your account." Moreover, if the customer complains of any
other inconvenience, he or she gets a $5 "I'm sorry coupon". Its branch offices
have official "greeters" to greet and guide customers to the right tellers or desks,
much like the guest relations officers (GRO) or receptionists of 5-star hotels.
The greeter mans a kiosk at the entrance of the bank. To reinforce this service
philosophy, branch managers are rated not only on sales but on service goals.
Achieving or even exceeding sales targets without achieving customer
satisfaction goals will not entitle a branch manager to receive the bank's
prestigious "Gold Club" award. Executives from the CEO down are encouraged
and expected to visit branches regularly to monitor service and get a first-hand
feel of the action. When Seafirst decided to redesign and re-layout its offices to
improve service, it acquired the services of an expert from the Godfather's Pizza
chain. One result was making the teller counter waist-high. It is now more open
and personal than the traditional counter that is intimidating and creates a
barrier between the client and the teller.
Like Seafirst, Citicorp looks as itself as less of a bank and more of a "factory".
This factory processes raw materials in the form of documents, application
48

forms, and customer requests and the final product is a satisfied customer.
Desks, departments, offices, and other work stations serve as the machines and
equipment of this document factory. In reorganizing the bank into a leaner and
better service center, the CEO John Reed, who has an engineering background,
applied the lessons and practices he learned from his visits to Ford Motor,
Cummins Engine, General Electric, Core Industries and Exxon. The first
process his reengineered was the back-room operations which consist of many
repetitive operations. Back-office of banks are known for snail-pace
bureaucracy that hampers front line operations and the ultimate customer
service. By applying the concept of "mass production", streamlining, and
standardization of tasks, Citicorp aims to remove this critical bottleneck. The
bank also benchmarked with Chrysler in getting its functional departments to
work effectively as teams.
Others banks, shedding their conservative "finance and control" images, have
likewise adopted innovative service strategies and practices. Banco Frances has
established an information center or "encyclopaedia" in the waiting lounge.
Here customers can browse through various bits and pieces of important service
information like the average time to finish a transaction and the company's
products and services. Information about the busiest day or days in the branch
are displayed so that customers may want to avoid these periods. In the new
branches of Garanti Bankasi, phone lines dedicated to customer service were
installed. Any customer can pick up this phone and relay his or her a complain,
question, or difficulty. The facility is designed to represent the company's
commitment to service and also serves as the customer's last resort in case
everything else fails.
Similarly, ASB Bank Limited has established a phone center to accept , process,
and resolve customer complaints. It also has a customer feedback programme
49

whereby whoever the customer complains to, say a staff employee or manager,
will be responsible for giving the client feedback on the status and progress his
or her complaint. The bank’s customer service center has created two customer
flows or lines to deliver services more effectively. One was for loans and
similar products that require customized and personalized services. The other
lines was for the standard and repetitive services like deposits and withdrawals.
By creating two service environments that cater to two different types of needs,
service is enhanced and speeded up.
Bank Pertanian Malaysia (BPM) has extended the concept of "mobile banking."
To the convenience and delight of customers living in longhouses along the
river banks of the Sarawak river, the bank has launched floating branches on
boats that provide full branch bank services. To further enhance service, BPM
has also reconfigured its automated teller machines to dispense not only cash,
but also commodity prices and information about its products and services. The
Korean Technology Banking Corporation (KTB) is setting up a Technology
Financing Information Center to serve the various needs of its clients, most of
which are setting up joint-ventures overseas. The Center will contain a huge
database of information analyzed from various data from internal and external
sources. By accessing this database, clients will get information about specific
technologies, local information, and other data relevant to the ventures they are
setting up. To facilitate processing, development financial institutions like the
Industrial Development Bank of India, requires borrowers to submit loan
application forms in electronic floppy disks.
Some banks and financial institutions have done such a remarkable job in
improving and reinventing customer service that they themselves have become
the benchmarks of other companies outside the banking sector. For instance,
American Express, the credit card company, is the recognized benchmark to
50

emulate when it comes to improving a company's billing process. Amex's
billing is reportedly the fastest and most accurate in the world in any industry.
Xerox, the benchmark for many quality practices, used the Amex model in
enhancing its billing systems. In China, the benchmark for customer service and
customer courtesy is surprisingly a bank: The Industrial and Commercial Bank.
Hundreds of retail shops and department stores, many of which are known for
rude service, visit the bank's branches to learn a few lessons on satisfying and
delighting customers. Before sweeping changes were made, the Industrial and
Commercial Bank was also known for bad service and discourteous front line
employees who even swear at clients. One radical and highly effective policy it
instituted was coming about with a list of words and phrases their employees
are forbidden to use when dealing with customers. For instance the popular
expression "When will you stop complaining?" is included in the banned list.
While other banks may refuse to change or accept soiled or old currency notes,
the bank will replace these without question.
Even clearing houses have adopted the new service paradigms to support the
banks' initiatives. For instance, the Singapore Clearing House Association has
cut the clearing of US$ checks deposited in Singapore from two weeks to 3
days. The new system requires participating banks to open US dollar accounts
with Citibank to service their respective clients.
Innovative banking in customer service is indeed a welcome and long-awaited
development. We hope that other banks and financial institutions will follow
suit soon. Satisfied customers are the best guarantee of stability and growth. As
in other service sectors, bank customers deserve the very best. In the past, banks
have rarely treated customers as people, preferring to treat them as account
numbers, passbooks, and loan applications. Customer service, in contrast to
51

customer processing, is a concept whose time has come for the banking industry
world wide.
52

53
CHAPTER-7
FUTURE OF BANKING IN RURAL AND
URBAN AREAS
The Reserve Bank of India has a mandate to be closely involved in matters
relating to rural credit and banking by virtue of the provisions of Section 54 of
the RBI Act. The major initiative in pursuance of this mandate was taken with
sponsoring of All-India Rural Credit Survey in 1951-52. This study made
agency-wise estimates of rural indebtedness and observed that cooperation has
failed but it must succeed. The Report of the Committee on Directions is still
considered a classic on the subject, and two of the four members were,
incidentally, from Andhra Pradesh. This is the origin of the policy of extending
formal credit through institutions while viewing local, traditional and informal
agencies as usurious. In the first stage, therefore, efforts were concentrated on
developing and strengthening cooperative credit structures. The Reserve Bank
of India has also been making financial contributions to the cooperative
institutions through evolving institutional arrangements, especially for
refinancing of credit to agriculture.
While enacting the State Bank of India Act in 1955, the objective was stated to
be the extension of banking facilities on a large scale, more particularly, in rural
and semi-urban areas. SBI, therefore, became an important instrument of
extending rural credit to supplement the efforts of cooperative institutions. In
1969, 14 major commercial banks were nationalised and the objective, inter
alia, was "to control the heights of economy". The nationalised banks thus
became important instruments for advancement of rural banking in addition to
cooperatives and State Bank of India. The next step to supplement the efforts of

cooperatives and commercial banks was the establishment of Regional Rural
Banks in 1975 in different states with equity participation from commercial
banks, Central and State Governments.
By 1982, to consolidate the various arrangements made by the RBI to promote/
supervise institutions and channel credit to rural areas, NABARD was
established. Though several efforts were made to increase the flow of
institutional credit for agricultural and rural lending, there were mismatches in
credit and production. Field studies conducted to determine the reason, revealed
that it was due to absence of effective local level planning. It was felt that with
the establishment of large network of branches, a system could be adopted to
assign specific areas to 45 each bank branch in which it can concentrate on
focussed lending and contribute to the development of the area. With a view to
implementing this approach, RBI introduced a scheme of "Service Area
Approach" for commercial banks. To further supplement the institutional
mechanism, the concept of Local Area Banks was taken up in 1996-97 and in-principle
54
approval has been given for 8 Local Area Banks.
As regards cost of credit, for most of the period, the administered interest rate
regime was applicable for bank lending and this included concessional terms for
priority sector. Currently, all interest rates on bank advances including in rural
areas are deregulated and there is no link between priority sector and interest
rate, though there are some regulations on interest rates by size of advance i.e.
below Rs. 2 lakh in respect of commercial banks.
As regards policy measures to enhance flow of credit to rural areas, apart from
availability of credit lines from the Reserve Bank of India, the concept of
priority sector was evolved to ensure directed credit. Currently, the stipulation is
that domestic commercial banks should extend credit to the extent of 40 per

cent of the total net bank credit to priority sector as a whole, of which 18 per
cent should be specifically for agriculture. Out of the target of 18 per cent for
agriculture, at least 13.5 per cent should be by way of direct loans to agriculture
and remaining could be in the form of indirect loans.
Where a bank fails to fulfil its commitment towards priority sector lending, it is
currently required to contribute to Rural Infrastructure Development Fund set
up by NABARD. NABARD in turn provides these funds to State Governments
and state owned corporations to enable them to complete various types of rural
infrastructure projects. It is pertinent to recognise that there are a large number
of credit linked programmes sponsored by the Government for direct assault on
poverty. In programmes relating to self-employment and women welfare, the
multiplicity of programmes has been reduced by having a comprehensive and
consolidated programme named Swaranjayanti Gram Swarojgar Yojna.
The financial sector reforms, which were introduced from 1991 onwards were
aimed at transforming the credit institutions into organisationally strong,
financially viable and operationally efficient units. The measures introduced
include reduction in budgetary support and concessionality of resources,
preparation of Development Action Plans and signing of Memoranda of
Understanding with the major controllers, and introduction of prudential norms
relating to income recognition and asset classification for RRBs and cooperative
banks. The lending rates for these institutions have also been deregulated. Other
measures of liberalization include allowing non-target group financing for
RRBs, direct financing for SCBs and CCBs, and liberalisation in investment
policies and non-fund business.
These measures have contributed to many RRBs turning around and becoming
more vibrant institutions. In the case of cooperative banks, there is greater
55

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