This document provides an overview of banking in India. It begins with introducing different types of banking institutions in India such as commercial banks, cooperative banks, development banks, investment institutions, and money market institutions. It then discusses the Reserve Bank of India's role as the central bank, including its functions like credit control using quantitative and qualitative methods. Finally, it provides classifications of banking institutions such as public sector banks, private sector banks, foreign banks, and cooperative banks.

1. Practice of Banking & Insurance
COH 331
HARESH R
Asst. Professor
Department of Commerce
Christ University, Bengaluru

2. • Introduction
• Classification of Banking Institutions

3. Banking - Introduction
• Banks are the important segment in Indian Financial
System.
• An efficient banking system helps the nation’s economic
development.
• Various categories of stakeholders of the Society use the
banks for their different requirements.
• Banks are financial intermediaries between the depositors
and the borrowers.
• Apart from accepting deposits and lending money, banks in
today’s changed global business environment offer many
more value added services to their clients.
• The Reserve Bank of India as the Central Bank of the
country plays different roles like the regulator, supervisor
and facilitator of the Indian Banking System.

4. Introduction – Contd.
• Banks are institutions that take care of the
money of individuals and corporates, provide
loans to people for business or personal use.
• They also offer a wide range of services like
exchange of foreign currency, Investment
Banking, Mutual Funds, Insurance Business, D-
mat services, Online trading of shares,
providing public utility services like e-tickets,
payment of bills, educative services etc.

5. Bank
A financial institution which deals with
deposits and advances and other related services.
Definition
As per Section 5(b) of the Banking Regulation
Act, 1949 , "banking" means the accepting, for the
purpose of lending or investment, of deposits of
money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft,
order or otherwise.

6. Evolution of Banking
• The term bank is either derived from Old Italian
word banca or from a French word banque both
mean a Bench or money exchange table.
• 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 some authorities, the work “Bank”
itself is derived from the words “bancus” or
“banqee,” that is, a bench.
• The early bankers, the Jews in Lombardy,
transacted their business on benches in the
market place.

7. • There are others, who are of the opinion that
the word “bank” is originally derived from the
German word “back” meaning a joint stock
fund, which was Italianized into “banco” when
the Germans were masters of a great part of
Italy. This appears to be more possible.
• But whatever is the origin of the word ‘bank’,
“It would trace the history of banking in
Europe from the Middle Ages.”

8. Money Market
• Money Market is a very important segment of a
financial system.
• Monetary assets of short-term nature up to one
year and financial assets that are close
substitutes for money are dealt in the Money
Market.
• Mostly Government, banks and financial
institutions dominate this market.
• Money Market instruments have the
characteristics of
– liquidity (quick conversion into money),
– minimum transaction cost and no loss in value.

9. Money Market - Contd
• According to Crowther, “Money market is a
collective name given to various firms and
institutions that deal in the various grades of
near money”.
• The Reserve Bank of India is the most
important constituent of Indian money
market. RBI describes money market as “the
centre for dealings, mainly of a short-term
character, in monetary assets, it meets the
short-term requirements of borrowers and
provides liquidity or cash to lenders”.

10. Functions of Money Market
Money market performs the following functions:
1. Facilitating adjustment of liquidity position of
commercial banks, business undertakings and other non-
banking financial institutions.
2. Enabling the central bank to influence and regulate
liquidity in the economy through its intervention in the
market and control on the creation of credit.
3. Providing a reasonable access to users of short term
funds to meet their requirements quickly at reasonable
costs.
4. Providing short term funds to government
institutions.

11. Functions of Money Market
5. Enabling businessmen to invest their temporary
surplus funds for short period.
6. Facilitating flow of funds to the most important
uses.
7. Money market plays a crucial role in financing
both internal as well as international trade.
8. Money market provides short-term funds to
businessmen, industrialists, traders etc. to meet
their day-to-day requirements of working capital.

12. Players in Money Market
• Central Bank(RBI)
• Government
• Financial Institutions/Institutional Investors
• Corporates, Private Individuals, Partnerships
and companies.
• Mutual Funds
• FII’s (Foreign Institutional Investors)

13. MONEY MARKET INSTRUMENTS
– Government Securities
– Gilt-edged (Government ) Securities
– Repo Market
– Money at Call and Short Notice
– Bills Rediscounting
– Money Market Mutual Funds
– Call Money Market and Short-term Deposit Market
– Treasury Bills
– Certificates of Deposits
– Inter-Corporate Deposits
– Commercial Bills
– Commercial Paper

14. Structure of the Money Market

15. Reserve Bank of India (RBI)
• Central Bank of our country.
• Financial and monetary system.
• RBI came into existence on 1st April, 1935 as per the RBI
act 1935.
• Nationalised by the government after Independence.
• It became the public sector bank from 1st January, 1949.
• Thus, RBI was established as per the Act 1935 and
empowerment took place in banking regulation Act 1949.
• RBI has 4 local boards basically in North, South, East and
West – Delhi, Chennai, Calcutta, and Mumbai.
• It issues notes, buys and sells government securities,
regulates the volume, direction and cost of credit, manages
foreign exchange and acts as banker to the government and
banking institutions.

16. • An active role in the development activities by
helping the establishment and working of
specialised institutions, providing term finance
to agriculture, industry, housing and foreign
trade.

17. Functions of the RBI
• According to the preamble of the Reserve
Bank of India Act, the main functions of the
bank is “to regulate the issue of bank notes
and the keeping of reserves with a view to
securing monetary stability in India and
generally to operate the currency and credit
system of the country to its advantage.”

18. Functions of the RBI – Contd.
The functions of RBI can be conveniently
classified in three parts as follows:
– Traditional Central Banking Functions
– Promotional functions
– Supervisory functions

19. Traditional Central Banking Functions
• Monopoly of Note Issue
• Banker to the Government
• Banker’s Bank
• Lender of the Last Resort
• National Clearing House
• Credit Control
• Custodian of foreign exchange reserve
• Collection of data and publication

20. Promotional Functions
• Promotion of commercial banking
• Promotion of co-operative banking
• Promotion of agricultural and rural credit
• Promotion of industrial finance
• Promotion of finance for exports.

21. Supervisory Functions
• Licensing of Banks
• Approval of Capital, Reserves and Liquid Assets of Bank
• Branch Licensing Policy
• Inspection of Banks
• Control Over Management
• Control Over Methods ( Operation of banks)
• Audit
• Credit Information Service
• Control Over Amalgamation and Liquidation
• Deposit Insurance
• Training and Banking Education

22. Credit Control
• Commercial Banks  Loans & advance 
creates credit or bank deposits  excessive
creation of credit leads to inflation 
excessive contraction of credit leads to
deflation  central bank  has to control and
regulate the availability of credit, the cost of
credit and the use of credit flow in the
economy.

23. Methods of Credit Control
• Quantitative or General Methods
– Bank Rate ( “the standard rate at which it (the Bank) is
prepared to buy or rediscount bills of exchange or other
commercial paper eligible for purchase under the Act.”)
– Open Market Operations (Direct buying and selling of
government securities by the central bank)
– Cash-Reserve Requirement (CRR)
– Statutory Liquidity Ratio (SLR)

24. Methods of Credit Control
• Qualitative or Selective Credit Control
Methods
– Variation of Margin Requirements
– Credit Authorisation Scheme (CAS)
– Control of Bank Advances
– Differential Interest Rates
– Credit Squeeze Policy
– Moral Suasion

25. Classification of Banking Institutions
• Apex Banking Institutions( IDBI, NABARD,
EXIM, IRBI, NHB)
• Banking Institutions
– Commercial Banks
• Public sector banks
– State Bank Group
– Nationalised Banks
• Private Sector Banks
– Indian Banks
– Foreign Banks
– Regional Rural Banks

26. • Co-operative Banks
– Primary Credit Societies
• Primary Agricultural Credit Societies
• Primary Urban Co-operative Banks
– Secondary Credit Institutions
• Central or District Co-operative Banks
• State Co-operative Banks

27. • Development Banks
– All India Level Development Banks
• Industrial Finance Corporation of India
• Industrial Credit & Investment Corporation of India
• Small Industries Development Bank of India
– State Level Development Banks
• State Finance Corporations
• State Industrial Development Corporations
• North Eastern Development Finance Corporation Ltd.

28. • Investment Institutions
– Life Insurance Corporation of India
– General Insurance Corporation of India
– Unit Trust of India
• Credit Guarantee Institutions
– Export Credit & Guarantee Corporation of India
– Deposit Insurance & Credit Guarantee Corporation
of India

29. • Money Market Institutions
– Discount & Finance House of India Ltd.
– Stock Holding Corporation of India Ltd.
– Securities Trading Corporation of India Ltd.
• Credit Rating Institutions
– Credit Rating Information & Services of India Ltd.
(CRISIL)
– Investment Information & Credit Rating Agency of
India (ICRA)
– Credit Analysis & Research Ltd. (CARE)

30. Banking System in India
The constituents of the Indian Banking System can be broadly listed as under :
(a) Commercial Banks:
(i) Public Sector Banks
(ii) Private Sector Banks
(iii) Foreign Banks
(b) Cooperative Banks:
(i) Short term agricultural institutions
(ii) Long term agricultural credit institutions
(iii) Non-agricultural credit institutions
(c) Development Banks:
(i) National Bank for Agriculture and Rural Development (NABARD)
(ii) Small Industries Development Bank of India (SIDBI)
(iii) EXIM Bank
(iv) National Housing Bank

31. Commercial Banks
• A FI which accepts deposits against which
cheques can be drawn, lends money to
commerce and industry and renders a number
of other useful services to the customers and
the society.
• The commercial banks may be owned by
government or owned by private sector. For
eg: Canara Bank, Punjab National Bank,
Lakshmi Vilas Bank, Karur Visya Bank etc., are
called as commercial banks.

32. Commercial banks
• Receive deposits in the form of fixed deposits,
savings bank accounts and current accounts and
advance money, generally for short periods, in
the form of cash credits, overdrafts and loans.
• They also render a number of service to their
customers, such as collection of cheques, safe
custody of valuables, remittance facilities and
payment of insurance premium, electricity bills,
etc.

33. • Public Sector Banks: These types of banks are
owned and controlled by the government. The
nationalized banks and regional rural banks
come under this category.
• Private sector Banks: These Banks are owned
by private individuals and corporations.

34. FUNCTIONS OF COMMERCIAL BANKS
Sections 5 & 6 of Banking Regulation Act, 1949
contain the functions which a commercial banks
can transact.
These functions can be divided into two parts:
(a) Major functions
(b) Other functions/ancillary services
(a) Major functions:
(i) Accepting Deposits
(ii) Granting Advances

35. (b)Other functions:
(i) Discounting of bills and cheques
(ii) Collection of bills and cheques
(iii) Remittances
(iv) Safe custody of articles
(v) Safe Deposit Lockers
(vi) Issue of Letter of Credit
(vii) Issue of Guarantees

36. • Besides the above functions, Banks now-a-days
associate themselves in the following activities also
either by opening separate departments or through
separately floated independent subsidiaries:
(i) Investment Counseling
(ii) Investment Banking
(iii) Mutual Fund
(iv) Project Appraisal
(v) Merchant Banking Services
(vi) Taxation Advisory Services
(vii) Executor Trustee Services

37. (viii) Credit Card Services
(ix) Forex Consultancy
(x) Transactions of Government Business
(xi) Securities Trading
(xii) Factoring
(xiii) Gold/Silver/Platinum Trading
(xiv) Venture Capital Financing
(xv) Bankassurance - Selling of Life and General
Insurance policies as Corporate Agent

38. Co-operative Banks
• These banks are operated on cooperative
principles. It is a voluntary association of
members for self-help and caters to their
financial needs on a mutual basis. These banks
are also subject to control and inspection by
Reserve Bank of India.
• The main function of co-operative banking is
to link the farmers with the money markets of
the country.

39. Banking
• The term banking is defined as per Banking
Regulation Act 1949 Sec 5(i) (b), “as
acceptance of deposits of money from the
public for the purpose of lending and/or
investment. Such deposits can be repayable
on demand or otherwise and withdraw able
by means of cheque, drafts, order or
otherwise.”

40. Characteristics of Banking Business
• Acceptance of deposits from public
• For the purpose of lending or investment
• Repayable on demand or otherwise
• Withdrawable by means of any
instrument whether a cheque or
otherwise.

41. FUNCTIONS OF COMMERCIAL BANKS
‘General Banking’ functions of the commercial
banks.
Primary Functions
Secondary Functions

42. Commercial Banks
Primary
Functions
Acceptance of
Deposits
Lending of
Funds
Overdraft Cash Credit
Discounting
Trade Bills
Money at Call Term Loans
Consumer
Credit
Miscellaneous
Advances
Creation of
Credit
Clearing of
Cheques
Financing
Foreign trade
Remittance of
Funds
Secondary
Functions
Agency
Services
General
Utility
Services

43. A. Primary Functions
1. Acceptance of deposits
2. Lending of Funds
3. Creation of credit
4. Clearing of cheques
5. Financing foreign trade
6. Remittance of funds

44. 1. Acceptance of Deposits
• Main source of funds for commercial banks.
• Bank mobilise savings of the household sector.
• Banks receives the idle savings of people in the
form of deposits and finances the temporary
needs of commercial and industrial firms.
• The bank acts as an intermediary by accepting
deposits and paying interest on them and making
loans and charging the borrowers interest at a
higher rate.(Profit/Spread)

45. Commercial bank accepts following types of
deposits.
a) Demand deposits
b) Time deposits

46. Demand Deposits
• Deposits, which are withdrawn by depositor at
any time without previous notice.
• It is withdrawable by cheque/draft.
• They are in two forms
– Current account deposits
– Savings account deposits.

47. Current Deposits
• RBI defines current account as “ a form of demand deposit wherefrom
withdrawals are allowed for any number of times depending upon the
balance in the account or upto a particular agreed amount and shall also
deemed to include other deposit account that are neither a savings
deposit or a term deposit.”
Features
• Short term deposits or demand deposits
• Generally, no interest is allowed on current deposits. However some banks
offer interest.
• Businessmen, industrialists and people who meet a large number of
monetary transactions in their routine.
• Incidental charges on the customer for the services rendered.
• Overdraft facilities are also available on current account.
• The current accounts do not have any fixed maturity as these are on
continuous basis accounts

48. Saving Bank Deposits
• Savings account is defined as “ a deposit account,
which is subject to restrictions as to the number of
withdrawals as also the amount of withdrawals
permitted by the bank during any specified period.”
• Can be held by individuals and non-profit institutions.
• The rate of interest allowed on saving bank deposits is
less than that on fixed deposits.
• Depositor is given a pass book and a cheque book.
Withdrawals are allowed by cheques and withdrawal
form.

49. Bank Interest Rate on Savings Deposit
Citibank 7.25%
Yes Bank, Kotak Mahindra 6%
IndusInd 5.5%
SBI, IDBI, PNB, ICICI, AXIS, HDFC 4%

50. • W.e.f. 25th October, 2011, RBI has
deregulated Saving Fund account interest
rates and now banks are free to decide the
same within certain conditions imposed by
RBI.
• Under directions of RBI, now banks are also
required to open no frill accounts (this term is
used for accounts which do not have any
minimum balance requirements).

51. Time Deposits
• Deposits, which are repayable after a certain
period of time, are known as time deposits.
They are in two forms:
– Recurring Deposits
– Fixed Deposits
– Cash Certificates

52. Recurring Deposits(RD)
• Popularly known as RD accounts and are special kind of Term Deposits.
• Suitable for people who do not have lump sum amount of savings, but are ready to
save a small amount every month.
• The person has to usually deposit a fixed amount of money every month (usually a
minimum of Rs,100/- p.m.).
• Any default in payment within the month attracts a small penalty.
• Fixed installment RD, have also introduced a flexible / variable RD.
• These are best if you wish to create a fund for your child's education or marriage
of your daughter or buy a car without loans or save for the future.
• Recurring Deposit accounts are normally allowed for maturities ranging from 6
months to 120 months.
• A Pass book is usually issued wherein the person can get the entries for all the
deposits made by him / her and the interest earned.
• Banks also indicate the maturity value of the RD assuming that the monthly
instalments will be paid regularly on due dates.
• Premature withdrawal of accumulated amount permitted is usually allowed
(however, penalty may be imposed for early withdrawals). These accounts can be
opened in single or joint names. Nomination facility is also available.

53. Fixed Deposits
• A fixed or time deposit is defined as “ a
deposit received by a bank for a fixed period
and which is withdrawable only after expiry of
the said fixed period and shall include
deposits such as recurring, cumulative,
annuity, reinvestment deposits, cash
certificates and so on.”
• Fixed period, interest rate is higher, repayable
on expiry of the period.

54. Cash Certificates
• Issued to public for a longer period of time.
• Maturity value is in multiples of sum invested.
• Attractive and highly yielding to meet future
financial requirements.
• Cash certificates are generally issued at a
discount to face value. (eg. Rs. 1,00,000
payable after 4 years issued at Rs.25,000)

55. 2. Lending of Funds
• Overdraft
• Cash Credit
• Discounting of Bills
• Loans and Advances
• Money at call
• Housing Finance
• Educational Loan Scheme
• Loans against shares/securities
• Loans against savings certificates.(NSC, FDR,IVP)
• Consumer loans and advances
• Securitisation of loans( transferring a part of credit risk – non liquid
asset into liquid asset)
• Others (Jewellery loans, venture capital loans)

56. Overdraft
• Current account holders enjoy this facility.
• Customer can withdraw money over and above
the balance in his account.
• “the act of overdrawing from a bank account.”
• An extension of credit from a lending institution
when an account reaches zero.
• An overdraft allows the individual to continue
withdrawing money even if the account has no
funds in it.

57. Cash Credit
• Cash credit is the most popular method of lending by
the banks in India.
• Under cash credit system, a limit, called the credit limit
is specified by the bank. A borrower is entitled to
borrow upto that limit.
• It is granted against the security of tangible assets or
guarantee. The borrower can withdraw money, any
number of times upto that limit.
• He can also deposit any amount of surplus funds with
him from time to time. He is charged interest on the
actual amount withdrawn and for the period such
amount is drawn.

58. Discounting of Bills
• It is another important way of giving loans.
The bank provides the customers with the
facility of purchasing and discounting their
bills receivable.
• After the maturity of the bills, the banks get
back its full value. Thus these bills are good
liquid assets and moreover this investment is
also very safe.

59. Loans & Advances
Loans
– A loan is granted for a specific time period. The
borrower may withdraw the entire amount in
lumpsum or in instalments. However, interest is
charged on the full amount of loan.
– Loans are generally granted against the security of
certain assets. A loan may be repaid either in
lumpsum or in instalments.

60. Advances
• An advance is a credit facility provided by the
bank to its customers.
• Advances are normally granted for a short
period of time. The purpose of granting
advances is to meet the day to day
requirements of business.
• The rate of interest charged on advances
varies from bank to bank. Interest is charged
only on the amount withdrawn and not on the
sanctioned amount.

61. • Clean, Secured, Unsecured Loans and
Advances.
• Loans – Demand Loans, Term Loans(Short,
Medium & Long Term)
• Personal, Business, Education, Gold, Housing,
Vehicle, Loan against Insurance Policy, Loan
against PPF.

62. 3. Credit Creation
• It is a unique function of Commercial Banks.
• Primary Deposit , Derivative Deposit.
• Whenever a bank grants loan, it creates an equal
amount of bank deposits. Creation of deposits is
called Credit Creation.
• In simple words we can define Credit creation as
multiple expansions of deposits.
• Methods of credit creation by banks include loans
& advances, money at call & short notice,
discounting of bills, investments.

63. 4. Clearing of Cheques
• A cheque is nothing but an instruction to the
bank by the account holder to pay money to
someone or to the account holder herself.
• It is evident that the use of cheques for
settling any transaction, is much more
convenient than the use of cash.

64. 5. Financing Internal and Foreign
Trade
• The bank finances internal and foreign trade
through discounting of exchange bills.
• Sometimes, the bank gives short-term loans to
traders on the security of commercial papers.
• This discounting business greatly facilitates
the movement of internal and external trade.

65. 6. Remittance of Funds
• Commercial banks, on account of their
network of branches throughout the country,
also provide facilities to remit funds from one
place to another for their customers by issuing
bank drafts, mail transfers or telegraphic
transfers on nominal commission charges.

66. Secondary Functions
Agency Services
Banks also perform certain agency functions for
and on behalf of their customers.
• Collection and Payment of Credit Instruments
• Execution of Standing Orders (payment of rent, insurance
premium, etc.)
• Purchase and Sale of Securities
• Collection of Dividends on Shares
• Acts as Correspondent, Trustee and Executor
• Deal in foreign exchange transactions
• To accept tax proceeds, tax returns and to provide Income-
tax Consultancy

67. General Utility Services
• Locker facility
• Traveller’s cheques
• Credit cards, Debit cards and Smart cards
• Letter of Credit
• Collection of Statistics
• Money transfer facility
• Acting as a Referee
• Underwriting Securities
• Gift cheques
• Insurance related services
• Wealth management services
• Accepting Bills of Exchange on Behalf of Customers
• Merchant Banking functions

68. PLASTIC CARDS
CREDIT CARD
DEBIT CARD
SMART CARD…

69. History of Credit Cards
• 3000 B.C. the term “credit” was first used in
Assyria, Babylon and Egypt .
• 1887 – Socialist writer Edward Bellamy used
the phrase “Credit Card” in his novel “Looking
Backward”.

70. CREDIT CARDS
• A form of money that provides both the capacity
to buy goods and services and the capacity to
borrow funds (i.e., gain access to credit).
• The term “credit card” usually/generally refers to
– a plastic card assigned to a cardholder,
– with a credit limit, that can be used to purchase goods
and services on credit or obtain cash advances.

71. • Credit card purchases normally become payable
after a free credit period, during which no
interest or finance charge is imposed.
• Interest is charged on the unpaid balance after
the payment is due.
• Cardholders may pay the entire amount due and
save on the interest that would otherwise be
charged.
• Alternatively, they have the option of paying any
amount, as long as it is higher than the minimum
amount due, and carrying forward the balance.

73. 1. Issuing Bank Logo
2. EMV chip (only on "smart cards")
3. Hologram
4. Card number
5. Card Network Logo
6. Expiration Date
7. Card Holder Name
8. Contactless Chip

74. 1. Magnetic Stripe
2. Signature Strip
3. Card Security Code

75. Parties Involved in Credit Card Processing
• Cardholders - persons who are authorized to use credit
cards for the payment of goods and services;
• Card issuers - institutions which issue credit cards;
• Merchants - entities which agree to accept credit cards for
payment of goods and services;
• Merchant acquirers – Banks/NBFCs which enter into
agreements with merchants to process their credit card
transactions; and
• Credit card associations - organisations that license card
issuers to issue credit cards under their trademark, e.g. Visa
and MasterCard, and provide settlement services for their
members (i.e. card issuers and merchant acquirers).

76. Types of credit cards
• Credit cards can be broadly categorised into two
types:
– General purpose cards: issued under the trademark
of credit card associations (VISA and Mastercard) and
accepted by many merchants
– Private label cards: only accepted by specific retailers
(e.g. a departmental store).
• General purpose credit cards are normally
categorised by banks as platinum, gold or classic
to differentiate the services offered on each card
and the income eligibility criteria.

77. Funds Transfer Mechanism
NEFT
RTGS

78. NEFT
• National Electronic Funds Transfer (NEFT)
• a nation-wide payment system facilitating one-to-one funds
transfer.
• individuals, firms and corporates can electronically transfer funds
from any bank branch to any individual, firm or corporate having an
account with any other bank branch in the country participating in
the Scheme.
• cash remittances will be restricted to a maximum of Rs.50,000/- per
transaction.
• customers have to furnish full details including complete address,
telephone number, etc.
• NEFT operates in hourly batches - there are twelve settlements
from 8 am to 7 pm on week days (Monday through Friday) and six
settlements from 8 am to 1 pm on Saturdays.

79. IFSC
• IFSC or Indian Financial System Code
• an alpha-numeric code that uniquely identifies a bank-branch
participating in the NEFT system.
• IFSC is used by the NEFT system to identify the originating /
destination banks / branches and also to route the messages
appropriately to the concerned banks / branches.
• This is an 11 digit code with
– the first 4 alpha characters representing the bank, and
– the last 6 characters representing the branch.
– The 5th character is 0 (zero).

80. RTGS
• Real Time Gross Settlement
• the continuous (real-time) settlement of funds
transfers individually on an order by order basis.
• 'Real Time' means the processing of instructions at the
time they are received rather than at some later time;
'Gross Settlement' means the settlement of funds
transfer instructions occurs individually (on an
instruction by instruction basis).
• The RTGS system is primarily meant for large value
transactions. The minimum amount to be remitted
through RTGS is Rs. 2 lakh. There is no upper ceiling for
RTGS transactions.

81. ECS
• ECS is an electronic mode of payment / receipt for
transactions that are repetitive and periodic in nature.
• ECS is used by institutions for making bulk payment of
amounts towards distribution of dividend, interest,
salary, pension, etc.,(ECS credit) or for bulk collection
of amounts towards telephone / electricity / water
dues, cess / tax collections, loan installment
repayments, periodic investments in mutual funds,
insurance premium etc. (ECS debit).
• Essentially, ECS facilitates bulk transfer of money from
one bank account to many bank accounts or vice versa.

82. MICR
• MICR is an acronym for Magnetic Ink Character
Recognition.
• The MICR Code is a numeric code that uniquely
identifies a bank-branch participating in the ECS Credit
scheme.
• This is a 9 digit code to identify the location of the
bank branch;
– the first 3 characters represent the city,
– the next 3 the bank and
– the last 3 the branch.
• The MICR Code allotted to a bank branch is printed on
the MICR band of cheques issued by bank branches.

84. Core Banking Solutions(CBS)
• CBS is networking of branches, which enables
customers to operate their accounts, and avail
banking services from any bank on CBS
network, regardless of where they maintain
their account.
• The customer is no more the customer of a
particular bank. Thus, CBS is a step towards
enhancing customer convenience through
“Anywhere and Anytime Banking “.

85. Objectives of CBS
• To increase the number of customers
• To provide multiple delivery channels like
internet, mobile banking, ATMs, thereby bringing
access to financial services to the doorsteps of
the customers
• To enable faster fund transfers to reach out to
more customers
• To become one stop solution for financial
inclusion initiatives of the Government of India

86. Benefits of CBS
• Anytime and Anywhere banking
• Standardised, simple and automated processes
• Increase in quality of the service provided to the
customers
• Timely and accurate information for management
decision making
• Strong audit and internal controls
• Bring down the cost of transaction and thereby
improving operational efficiency
• Paving way for new value added services thereby
generating additional revenue for the Department

87. Cheques
• Cheques? Used to withdraw money from bank
• A negotiable instrument.
• According to Sec.6 of the Negotiable
Instruments Act defines, “ a cheque is a bill of
exchange drawn on a specified banker and not
expressed to be payable otherwise than on
demand and it includes the electronic image
of a truncated cheque and a cheque in the
electronic form.”

88. A cheque is defined in Sec 6 of NI Act as under :-
– A cheque is a bill of exchange
– Drawn on a specified banker
– Payable on demand
– Electronic image of a truncated cheque is
recognized under law. The Information Technology
Act, 2002 recognizes (a) digital signatures and (b)
electronic transfer as well

89. Features of a Cheque
• Unconditional written order
• Parties to a cheque
• Date of the cheque(validity)
• Amount
• Signature

90. Parties to a Cheque
Drawer
Drawer
Payee
Cheque

91. CTS
• Truncation is the process of stopping the flow
of the physical and an electronic image of the
cheque is transmitted to the paying branch
through the clearing house, along with
relevant information like data on the MICR
band, date of presentation, presenting bank,
etc.

93. CTS 2010
• In the year 2010, RBI came up with the guidelines
for Cheque Truncation system. (CTS 2010)
• The banks would need to upgrade a few things to
comply with CTS 2010 standards of RBI.
• Banks to have scanners and install special
software provided by RBI, to securely transfer
and receive the scanned image and data.
• Changes in the color-scheme of cheque books so
that signature and handwriting is visible in the
scanned image.

94. Benefits of Cheque Truncation
• Eliminates the time, money and manpower
wasted during physical movement of cheques
(from banks to clearing house).
• Cheque Truncation =faster clearing = better
service to customers
• Cheque Truncation system reduces the scope
for clearing-related frauds
• There is no fear of losing cheque in transit.

95. BANKER & CUSTOMER
• Banker
– a person or company carrying on the business of
receiving moneys, and
– collecting drafts, for customers subject to the
obligation of honouring cheques drawn upon
them from time to time by the customers to the
extent of the amounts available on their current
accounts.

96. • Customer
– In the ordinary language, a person who has an account in a bank
is considered its customer.
(a) There must be some recognizable course or habit of dealing
between the customer and the banker.
(b) The transactions must be in the form of regular banking
business.
– According to Dr. Hart “a customer is one who has an account
with a banker or for whom a banker habitually undertakes to act
as such.”
– The word ‘customer’ has been derived from the word ‘custom’,
which means a ‘habit or tendency’ to do certain things in a
regular or a particular manner’s .

97. Relationship Between Banker and Customer
• Depends on the activities; products or services
provided by bank to its customers or availed
by the customer.
• Transactional relationship.
• Strong bondage with the customer.
• “Trust” plays an important role in building
healthy relationship between a banker and
customer.

98. Bank customers
• Existing customers.
• Former Customers
• Those who do not maintain any account
relationship with the bank but frequently visit
branch of a bank for availing banking facilities
such as for purchasing a draft, encashing a
cheque, etc.
• Prospective/ Potential customers

99. Duration Theory
• Single transaction with banker is enough to
constitute a customer.(Ladbroke & Co., vs.
Todd(1914), Commissioner of Taxation vs.
English Scottish and Irish Bank Ltd.(1920)).

101. • Debtor – Creditor relationship (Folle vs Hill
(1848))
• Deposit of cash – Banker(Debtor),
Customer(Creditor).
• Repayment on demand by customer.
• Interest paid by the banker

102. • Loan from Bank, Cash Credit facility,
Overdraft–Banker(Creditor),
Customer(Debtor).

103. TRANSACTION-RELATIONSHIP
Transaction Bank Customer
Deposits in the bank Debtor Creditor
Loan from bank Creditor Debtor
Locker Lessor Lessee
Safe custody Bailee Bailor
Purchase of draft Debtor Creditor

104. Transaction Bank Customer
Payee of draft Trustee Beneficiary
Pledge Pawner Pawnee
(Pledger)
Mortgage Mortgagee Mortgagor
Standing instruction Agent Principal
Cheque Collection Agent Principal

105. Banker as a Trustee
• A trustee holds money or assets and performs
certain functions for the benefit of some other
person called the beneficiary.
• Example - if the customer deposits securities
or other valuables with the banker for safe
custody, the latter acts as a trustee of his
customer. (Customer will be the owner)

106. BANKER AS A BAILOR / BAILEE
• Section 148 of Indian Contract Act,1872
• The delivery of goods by one person to another
for some purpose upon a contract. As per the
contract, the goods should when the purpose is
accomplished, be returned or disposed off as per
the directions of the person delivering the goods.
• The person delivering the goods is called the
bailor and the person to whom the goods are
delivered is called the bailee.

107. • Banks secure their loans and advances by
obtaining tangible securities.
• In such loans and advances, the collateral
securities are held by banks and the
relationship between banks and customers
are that of bailee (bank) and bailor(borrowing
customer).

108. BANKER AS A LESSER / LESSEE
• Section 105 of ‘Transfer & Property Act’ deals
with lease, lesser, lessee.
• Banks lease the safe deposit lockers to the
clients on hire basis. Banks allow their locker
account holders the right to enjoy (make use
of ) the property for a specific period against
payment of rent.

109. OBLIGATIONS OF A BANKER
• Obligations to honour the cheques.
• Obligation to maintain secrecy of customer’s
account.
• Obligation to render proper accounts of
deposits made and withdrawn by customers.
• Obligation to give reasonable notice before
closing the customer’s accounts.

110. Customer’s Obligation
(a) Not to draw cheques without sufficient
balance.
(b) To draw cheques in such a manner so as to
avoid any change of alternation.
(c) To pay reasonable charges for services
rendered.
(d) To make a demand on the banker for
repayment of deposit.

111. Garnishee Order
• If a debtor fails to pay the debt owed to his
creditor, the latter may apply to the Court for
the issue of a Garnishee Order on the banker
of his debtor.
• The account of the customer with the banker,
thus, becomes suspended and the banker is
under an obligation not to make any payment
from the account concerned after the receipt
of the Garnishee Order.

112. Rights of a Banker
1. Right of general lien
2. Right of set-off
3. Right to appropriation
4. Right to charge interest, incidental charges
5. Right not to produce books of accounts
6. Right to close accounts

114. VARIOUS TYPES OF CUSTOMERS
• Minors
• Joint Account Holders
• Illiterate Persons
• Hindu Undivided Family (HUF)
• Firms
• Companies
• Trusts
• Clubs
• Local Authorities
• Co-operative societies

116. TERMINATION OF BANKER-CUSTOMER RELATIONSHIP
• Voluntary Termination
• Bank desires to close the account(Un-
operated A/c, not a desirable customer)
• Termination by law
– Death
– Bankruptcy
– Garnishee order
– Insanity

117. CUSTOMER GRIEVANCES
BANKING OMBUDSMAN

118. Bank’s Lending

119. • Deposits – repayable – interest – on demand.
• Banks – deploy deposit money in –
investments – lend loans – keeping apart
some reserves.
• While lending banks must take into account
risks inherent. So certain principles need to be
adhered.
• Lending principles can be conveniently divided
into two areas (i) activity, and (ii) individual.

120. Activity
(a) Principle of Safety of Funds
(b) Principle of Liquidity
(c) Principle of Profitability
(d) Principle of Purpose
(e) Principle of Risk Spread
(f) Principle of Security

122. Safety – Borrower’s capacity to repay loan along with
interest. Security of tangible assets also ensure safety.
Liquidity – Banks lend mainly to meet working capital
requirements. Liquidity means possibility of converting
loans into cash without loss of time and money.
Profitability - The funds of the bank should be invested to
earn highest return, so that it may pay a reasonable rate
of interest to its customers on their deposits, reasonably
good salaries to its employees and a good return to its
shareholders. However, a bank should not sacrifice either
safety or liquidity to earn a high rate of interest.

123. Diversification-
‘One should not put all his eggs in one basket’.
According to the principle of diversification, the
bank should diversify its investments in different
industries and should give loans to different
borrowers in one industry or different
industries. It is less probable that all the
borrowers and industries will fail at one and the
same time.

124. Object of Loan/ Purpose-
A banker should not grant loan for unproductive purposes
or to buy fixed asset. The bank may grant loan to meet
working capital requirements. However, after
nationalisation of banks, the banks have started granting
loans to meet long-term requirements. National policy
and objectives also to be considered.
The Central Government and the Reserve Bank have
issued a number of directions in this regard, highlighting
the social purpose which they have to sub serve.

125. Security- In case of unsecured loans chances of
bad debt will be very high. So banks must grant
secured loans. In case the borrower fails to
return the loan, the banker may recover his loan
after realising the security. Loans to weaker
sections of society may be given without
security if so directed by the government.

126. Margin Money- Difference between the value of
security and amount of loan is usually termed as
margin money. The amount of loan, should not
exceed 60 to 70% of the value of the
security.(Jewel Loans)

127. Individual
• Credit worthiness –
– Character / Reliability (honesty, integrity,
regularity, promptness)
– Capacity/ Responsibility (ability, competence and
experience)
– Capital/ Resourcefulness.

128. Types of Credit Facilities
• Fund Based
– Cash Credits
– Overdrafts
– Demand Loans
– Term Loans
– Bill Finance
• Non-Fund Based
– Bank Guarantees
– Letter of Credit

129. Priority Sector Lending
• 1968 - National Credit Council meeting
emphasized that commercial banks should
increase their involvement in the financing of
priority sectors, viz., agriculture and small
scale industries.
• A new dimension of social banking was added
to bank’s lending.

130. Categories under Priority Sector
(i) Agriculture
(ii) Micro and Small Enterprises (MSE)
(iii) Education
(iv) Housing
(v) Export Credit
(vi) Others

131. Agriculture
• Loans to individual farmers [including SHGs or
Joint Liability Groups (JLGs)], directly engaged
in Agriculture and Allied Activities, viz., dairy,
fishery, animal husbandry, poultry, bee-
keeping and sericulture (up to cocoon stage).
• Finance may be direct or indirect.

132. Agriculture – Direct Finance
• Short-term loans for raising crops
• Medium & Long-term loans to farmers for agriculture
& allied activities
• Loans to farmers under KCC scheme(Kisan Credit Card)
• Distressed farmers indebted to non-institutional
lenders.
• Production & processing of hybrid seeds.
• Construction of farm buildings.
• Construction & running of storage facilities.
• Payment of irrigation charges for hired facilities
• Export credit to farmers.

133. Agriculture – Indirect Finance
• Loans to corporates including farmers’ producer companies
of individual farmers, partnership firms and co-operatives
of farmers directly engaged in Agriculture and Allied
Activities
(i) If the aggregate loan limit per borrower is more than Rs. 2
crore, the entire loan should be treated as indirect finance to
agriculture.
(ii) Loans up to Rs. 50 lakh against pledge/hypothecation of
agricultural produce (including warehouse receipts) for a period
not exceeding 12 months, irrespective of whether the farmers
were given crop loans for raising the produce or not.
• Bank loans to Primary Agricultural Credit Societies (PACS),
Farmers’ Service Societies (FSS) and Large sized Adivasi
Multi- Purpose Societies (LAMPS)