The document provides an overview of the origin and evolution of banking in India. It begins with the earliest forms of banking in ancient times in India and Babylon. It then discusses the establishment of the first banks by the East India Company in India in the 1800s and the subsequent nationalization of banks in the 1950s and 1960s. It also outlines some key reforms and developments in the banking sector in India after independence, including the liberalization of the sector starting in the 1990s. The key functions and regulations governing banking as per the Banking Regulation Act of 1949 are also summarized.

1. Origin of banking
• The term “BANK” derived from German word
“Bancus”, “Banque” means bench.
• Jews were the early bankers
• Babylonian developed banking system in 2000BC
• In 14th century Royal exchangers did banking on
behalf of kings
• Then goldsmith did the job of accepting money
• Bank of England was started in 1694
• 1708 Act provided the note issue power to them
• 1844 Act restricted power of note issue by private
banks.
• Lack of increase in circulation of notes led to need for
modern banking
1

2. Banking in India
 Origin was in vedic period
 In 3rd century Vedic scholar Manu gave the idea of
accepting deposits& lending money
 He laid rule for interest charging
 During Mogul period indigenous bankers lend money
 Many started this function like Shroof, sheth, shah,
Chettiars etc.
2

3. Money lenders in India
• They transferred money from place to place &
person to person
• They used their money for lending
• Not accepted deposits from public
• They collected money through hundies
• Because of high risk high interest was collected
• No banks in villages. No alternative for farmers to
get money. So they depend on these people
• The English traders also depend on them
3

4. Banks started by East India Company
 The Bank of Bengal in 1809
 The Bank of Bombay in 1840
 The Bank of Madras in 1843
These 3 banks were known as Presidency Bank.
The Imperial Bank of India Act was passed in
1920.These 3 banks were amalgamated into one and
known as Imperial Bank of India in 1921.This bank was
nationalized in 1955 by the State Bank of India Act
4

5. Banking in the pre independence period:
• Lack of development of banking due to the
following reasons:
• I and II world war
• Partition of the country in 1947
• Adversely affected states like Punjab and West
Bengal
• Most of the private banks collapsed
• Many of the exchange banks owned by Europeans
concentrated to finance on foreign trade
• Indian joint stock companies were under capitalized
and lacked the experience and maturity to compete
with the Presidency banks and exchange banks.
5

6. Banking after independence
 In 1949 the Banking Regulation Act was enacted
which empowered RBI to regulate, control and
inspect the banks in India
 In 1955 it nationalised the Imperial Bank of India.
 State bank of India became the principal agent of
RBI to handle banking transactions
 In 1960s the banking industry gained momentum in
the devt. of the economy
 In 1969, 14 major banks were nationalised
 In 1980, 6 more banks were nationalised
6

7.  Banking system has reached even in the remote villages
in India.
 Funds were largely given to traders
 Insurance cover extended to the deposits
 creation of regional rural banks
 Liberalisation, privatisation,globalisation
 Emergence of private sector banks and foreign banks
7

8. To day’s condition…
 There are 27 public sector banks accounting for more
than 80% commercial banking assets
 Banking system in India consists of commercial banks
and co operative banks of which the former account
for 98% of the banking system assets
8

9. Reforms introduced in banking sector
 The main intention of reforms is to bring
competitiveness, operational flexibility, efficiency and
functional autonomy
 banking became market oriented sector
 SLR to be brought down to 25% in 5 years
 CRR to be reduced progressively
 Interest rate to be on par with other market rates
 Entry of many private sector banks were encouraged
9

10. 1. Dealing in money
2. Agency services
3. Credit creation
4. Commercial nature
5. Withdrawable deposits
10

11.  Dealing in money: They accept deposits from
public- savings, current, fixed, recurring etc. They
advance money as loans to the needy people – cash
credit, term loans, bill discounting overdrafts etc.
 Agency: Banks act as agents of the customer. They
provide agency services like transfer of money,
credit cards, telebanking, cheque clearing, bill
collection are some of the services provide by the
banks as an agent.
 Credit creation: The banks create credit. It is an
additional function of the bank. It is the unique
function of banks. Every deposit can create credit.
11

12. Additional money can be created for the purpose of
lending. But there is a limit for such credit. The RBI
has adopted certain measures to control credit
created by the banks.
Commercial nature: All banking functions are
carried out with the profit motive. They pay interest
on deposits and these deposits are advanced to the
needy persons at a higher rate of interest. There is a
margin of profit in banking operations. It also charge
for the services rendered by them.
12

13.  Withdraw able deposits: The deposits made by
the public can be withdrawn by cheques, draft or
otherwise. The banks issue books to the customers.
The customers have an option of withdrawing
money by using cheques or withdrawal slips. The
deposits are also withdrawal on demand. There are
certain restrictions on the number of withdrawals
in case of saving deposit. Fixed deposit can be
withdrawn at maturity and these deposits can not
be withdrawn by cheques by the customers.
13

14. Concepts of banking
• Banking: Banking means accepting for the purpose
of lending or investment of deposits of money from
the public repayable on demand otherwise and
withdraw able by cheque, draft order or otherwise
• Banker: banker is a person who accept deposits,
money on current accounts issue and pay cheques
for his customers.
• Customer: He is a person who has an account with
the bank, performs at least a transaction of a
banking activity nature.
• Banking company : Banking company means a
company, which transact the business of banking in
India.
14

15. 15
1949 Enactment of Banking Regulation
1955 Nationalisation of SBI
1959 Nationalisation of SBI subsidiaries
1961 Insurance cover extended to deposits
1969 Nationalisation of 14 major banks
1975 Creation of regional rural banks
1980 Nationalisation of 6 major banks
1982-83 Establishment of NABARD
1985-86 Introduction of MICR technology,permission to
banks to float Mutual funds
1999-00 Introduction of Kisan Credit cards
2000-01 Banks and NBFCs permitted to undertake insurance
business

16. Scope for banking
 Banking activity is useful for trade and industry
 Distributors & protectors of liquid capital
 Money and precious metals can be kept safe
 Provides credit facility to customers
 It encourages the habit of saving
 It meets the financial needs of small scale business people
 it also provide payment settlements through cheque, pay orders, DD,
debit and crdeit cards etc
 Rural banks provide financial support for agriculture, cottage
industries and to buy the rawmaterials etc.
 Regional rural banks provide credit facilities to small and marginal
farmers, agricultural labourers,artisands and small entrepreneurs
16

17. Financial assistance in indian money or in foreign
currency is available to start any industry
Financial support in the form of loan, equity
participation, guarantees, refinance and other
forms of credit are available from the banks to the
industries .
Scheduled commercial banks and financial
institutions get financial assistance from the exim
bank against their export-import financing
activities.
Corporate sectors also get assistance from banks
for many of their acitivities.
17

18. Main Functions of Banking
I Accepting deposits:
 Current deposits
 Fixed deposits
 Savings deposits
 Recurring deposits
18

19. To know about…..
Customer’s relationship with the bank
Opening a new account
Closing of a bank account
 Nomination
Insurance of bank deposits
19

20. II. Lending money: Banks act as brokers and dealers of
society’s money.
Mobilise funds for needy like agriculture, industry etc.
By this banks earn interest, discounts and conversion
fees.
Principles of lending :
 Principle of safety and security
 Principle of liquidity
 Principle of profitability
20

21.  Liquidity means ability of the bank to produce cash on
demand. Bank must ensure that it get backs the
money in time. So its obligation to pay his depositor is
not affected.
 Safety becoz it is using the money received from the
public. To ensure safety he must see the ability and
willingness of the borrower.
 Profitability to cover the cost of funds, interest and risk
cost, some money for its growth’
21

22. Types of Loan
 On the basis of time:
 Short and medium term loan(Less than 1 year)
 Long term loan (1 to 5 years)
 Bridge finance
 Loan syndication
 On the basis of purpose:
 Consumption loan(education, medical loan)
 Composite loan(to buy capital assets, working capital)
 On the basis of security
 Secured loan
 Unsecured loan
22

23. Modes of creating charges
Types of charge Nature of securities
Lien Goods and securities
Pledge or
hypothecation
Movable property
Assignment Book debt
Mortgage Immovable property
23

24. • Lien: right of the debtor to retain goods and securities of
debtor until he pays the debt. Bank cannot sell ; cannot
transfer the ownership of the goods from customer to
bank.
• Pledge: It is a bailment of goods as security for debt.
Shares, FD, units of UTI; NSC can be used for security.
Transfer of possession is compulsory. Ownership is
retained with the customer. Bank can sell if he fails to
repay.
• Mortgage: customer gets advance against immovable
property. Bank can sell and recover the loan amount if he
fails. In case of limited company the charge must be
registered with the Registrar of companies within 30days.
24

25. Differences between Legal and Equitable MortgageLegal Equitable
Legal title can be
transferred from
customer to bank and
vice versa
Legal title cannot be
transferred ;only
document title can be
It is expensive Not expensive
Reputation of the
customer will be affected
Reputation will not be
affected
Not risky Highly risky
25

26.  Hypothecation: Charge over a movable property for
loan. Neither ownership nor possession is passed on
to the bank. Bank can anytime inspect. customer give
undertaking to give possession of goods whenever
required by the bank. Higher risk of multiple
financing
 Assignment: Transfer of any existing or future right,
property or debt by the borrower to the bank (eg)
LIC policy
26

27. Legal framework of banking
The structure and pattern of banking system in India
is based on British banking system. The commercial
banks in India were started in the 2nd half
19thCentury.Before 1944 banks were regulated by
Indian Companies Act of 1913. It was insufficient and
so incorporated in 1949, The Banking Regulation Act
of 1949 empowers the RBI to regulate the banking
activities in India.
27

28. DEFINITION OF BANKINGSECTION 5(B) DEFINES BANKING AS
ACCEPTING FOR THE PURPOSE OF LENDING OR
INVESTMENT OF DEPOSITS OF MONEY FROM
THE PUBLIC, REPAYABLE ON DEMAND OR
OTHERWISE AND WITHDRAWABLE BY CHEQUE,
DRAFT, ORDER OR OTHERWISE.
28

29. What is a Banking Company?
 A banking company is a company which
performs both the functions of accepting
deposits and lending or investing. (Section
49)
 This prohibits any institution other than banking
company to accept deposit of money from public
withdrawable by cheques.
 Any company which is engaged in the manufacture of
goods (trading) accept deposit from the public for its
finance cannot be deemed to transact banking business.
 The banker can refuse to open an account in the name of
a person who is considered as unreliable person like
robber, thief, etc.
29

30.  Acceptance of deposit should be the main business
of a banking company.
 The banker cannot refund the deposit to the
customer on his own accord even if the period of
deposit expires.
 The withdrawables can be done only by cheques, pay
orders, draft or otherwise.
 Demand can be made only by proper instrument in
writing and not by verbal order or telephone
message.
30

31. Contents of Section 7
 Every company doing banking business should have
any one of the word such as bank/banker/banking
company in its name.
 Any other firm or institute or company should not use
these words in its name.
31

32. Contents of Section 6
What other businesses can be undertaken by a
banking company?
 Borrowing, raising or taking money and lending
or advancing money, discounting of bills, granting
letter of credit, traveller’s cheque, buying and
selling of bullion and species, buying and selling
of foreign exchange, providing safe deposit vaults,
collection and transmitting money and securities,
underwriting and dealing in shares, debentures,
bonds and investments of all kinds.
 Act as an agent of the government, local authority
and can carry on agency business.
32

33.  It may contract for public and private loans and
negotiate and issue the same.
 It may insure, guarantee, underwrite, participate in
managing and carrying out of any issue of state,
municipal or other loans or of shares, debentures and
may lend money for the purpose of any such issue.
• It may manage, sell and realize any property
which may come into its possession in
satisfaction of its claims.
33

34.  It may acquire, construct and maintain any building
for its own purpose.
 It may sell, improve, manage, develop, exchange, lease,
mortgage, dispose of or turn into otherwise deal with
all or any part of the property and rights of the
company.
34

35. No banking company shall directly or indirectly deal in the
buying or selling or bartering of goods, except in connection
with the realisation of security given to or held by it, or
engage in any trade, or buy, sell or barter goods for others
otherwise than in connection with bills of exchange received
for collection or negotiation or with such of its business.
" goods" means every kind of movable property, other than
actionable claims, stocks, shares, money, bullion and all
instruments .
It also prohibits a banking company from holding a
immovable property however so acquired except as it is
required for its own use only for a period of 7 years from
date of acquisition.
35
Contents of Section 8

36. Property for its own use may be held by a banking
company on a permanent basis.
When can a banking company form a subsidiary
company?(Section 19)
A banking company is permitted to form subsidiary
company for the following purposes:
 For undertaking any business permitted for a banking
company
 For carrying out banking activity outside India
 For undertaking such other business necessary/useful
in the interest of the public.
36

37. Minimum paid up capital and Reserves
 A sound banking company requires adequate capital
 As per 1962 act minimum amount of paid up capital
required for banking company is Rs.5 lakhs
 Value here means exchangable value and not nominal
value
 Subscribed capital should not be less than half of its
authorised capital
 Paid up capital should not be less than half of its
subscribed capital
 Banking companies capital may consist of equity
shares or preference shares which were issued prior to
1944
37

38. Indian Banks
A banking company incorporated in India, should have the
minimum capital as follows
38
If it has in more than 1 state Rs.5 lakhs
If in any place in Mumbai or Kolkatta Rs.10 lakhs
If it is other than Mumbai or Kolkatta
a) If it is in the principal place Rs.1 lakh +
b) If it is situated in district of principal
business
Rs. 10,000 +
c) If it is situated elsewhere in the State
outside the same district
Rs. 25,000
If it has only one place of business Rs.50,000
If it has all its places of business in one state
that too in Mumbai/calcutta
Rs 5 lakhs +

39.  Foreign banks: Incase of a company incorporated outside
India the value of its paid up capital and reserves shall be
less than Rs.15 lakhs and if it has a place of business in the
city of Mumbai and kolkatta or both should have Rs20lakhs.
 These banks also are required to maintain CRR and SLR
with the RBI
 The foreign banking company should deposit 20% of its
profit annually with the RBI
 As per the recommendations of the RBI, the Central Govt.
may exempt any banking company to do so if its deposit
liabilities are sufficient.
 This amount is considered as the asset of the bank and
incase of any problem(bankruptcy) creditors of the bank
can claim first.
39

40. Restrictions on Advances
 Section 20 lays down the following restrictions for
issuing loans and advances:
 A banking company cannot grant loans and advances
against its own shares
 The banking company cannot enter into any
commitment to grant loans and advances to or on
behalf of
a) any of its directors
b) any firm in which any of its directors is interested
as partner, manager, employee
c) any company
d) any individual with whom any of its director is a
partner 40

41. Contents of Section 21
The RBI may give directions regarding loans and
advances:
1. The purpose for which loans can be given or not
2. The margins to be maintained
3. The maximum amount of advance to any
company/person
4. The maximum amount up to which guarantee can be
given by the bank on behalf of any one company
5. The rate of interest, terms and conditions on which
loans can be made, etc.
41

42. Licensing of Banking Companies
As per section 22, every bank should hold a license issued by
RBI. The RBI issue a license only when it is satisfied with
conditions like:
 The company will be in a position to pay its present and
future depositor in full when they claim
 The affairs of the company shouldn’t be a obstacle to the
interest of the depositors
 The company has adequate capital structure and earning
prospects
 The general character of the proposed management of the
company will not be harmful to the public interest or for the
interest of the depositors
 The grant of a license would not be harmful to the operation
and consolidation of the banking system which has
monetary stability and economic growth
42

43. While granting license for a banking company
incorporated outside India
 Whether the company complies with all the provisions
of the Act applicable to such companies
 Whether the Govt. or the law of the incorporated
company is not discriminating with the companies
registered in India
 Whether starting a banking company with the other
countries will be in the public interest
43

44. Opening a Branch
 Every banking company should take the permission of
the RBI for opening a new branch in India / change the
location of the existing place of business / open a branch
outside India
 Change of location within the city/for a temporary place
for a period of a month for the purpose of providing
banking facilities in an exhibition, mela etc no such
permission is required form RBI
 Before giving permission, RBI has to see
 The financial conditions and history of the company
 The general character of the company
 The adequacy of its capital structure and earning
prospects
 The public interest
44

45. Maintenance of Liquid Assets
 Section 24 of the Banking Regulation Act 1983 says
every banking company is required to maintain in India
in cash, gold approved securities the amount which is
not less than 25% of total of its demand & time
liabilities on any particular day. This is known as
Statutory liquidity ratio(SLR)RBI can raise this to 40%
 The approved securities must be valued at current
market price. Approved securities means the securities
in which the trustees may invest trust money
45

46.  Apart form SLR, every bank is required to maintain
liquid assets including cash
 The cash balance to be maintained by each schedule
bank with the RBI is known as cash reserve ratio(CRR)
 Once in 15 days every bank has to submit its monthly
report about its demand and time liabilities
 If they fail to maintain the minimum prescribed
balance the bank has to pay penal interest of 3% per
annum and later up to 9%.
46

47. Inspection of Banks
 As per of the section 35 act, the RBI on its own or as per the
instance of central government can inspect any branch of
the banking company and its books of accounts
 Every director, officer, employer of the banking company
has an obligation to furnish the RBI officer books,
accounts and other documents in his custody and
information relating to day to day working of the company
 If the central government finds that the banking company
is conducting a banking business detriment to the interest
of the public then it can prohibit the bank from receiving
fresh deposits, asked the RB to windup the banking
company
47

48. Powers of RBI
 Call for a meeting of board of directors to discuss the
matter
 Can call an officer of the banking company to discuss
with the officer of the RBI about that matter
 Can appoint an officer to observe the manner in which
the affairs of the banking company
 To make the changes in the management specified a
per the RBI’s guidelines.
48

49. Management of Banking Companies
Board of Directors: Every b.company should have BOD in such a
way not < 51% of the total no. of members should satisfy the
following conditions:
1.1. They should have special knowledge or practical experience
about any subjects like accountancy, agriculture, economics,
finance, law, small scale industries etc.
1.2. Out of total no. of directors at least 2 should have special
knowledge or practical experience about agriculture, rural
economy, co operation and small scale industry.
2.1. They do not have substantial interest in any company or firm
which carries on trade, commerce, industry
2.2. They should not be employee or manager of a firm/company
2.3. They should not be owner of any company
49

50.  The above conditions won’t be applicable for the
persons who are owners of small scale industry or
company regulated under 25 of company Act of
1956
 Meaning of substantial interest:
 In case of a company it means the BOD’s wife or
children solely or jointly should not have shares
worth more than Rs.5lakhs or 10% of the paid up
capital of the same company (whichever is less)
 In case of a firm the BOD’s wife or children should
not hold solely or jointly 10% of the total capital
subscribed by all partners.
50

51.  If the above conditions are not fulfilled then the
RBI has the power to direct the banking company to
reconstitute the Board and if it is not done within 2
months, the RBI can remove the director and
appoint a suitable person.
 A director can hold office not more than 8 years
 He is not eligible for reappointment for the same
post for 4 years
51

52. Appointment of Chairman
 He will be one among the BOD
 Will be guided by the BOD
 Term – 5 years full time
 Eligible for reselection / reappointment
 Should have knowledge of economics, agriculture
52
Ground for Disqualification
• Director of a company other than subsidiary company
registered under Section 25 of Company Act 1956
• If has any interest in any other company / firm
• Director/Manager/Partner/Proprietor of any other
company
• If engaged in any other business

53. Control over Top Management
 Every banking company should get prior
permission for appointment, reappointment, or
termination of the Director/chairman
 Approval of RBI is necessary for amending the
provisions relating to do the above
 RBI can remove the top managerial personnel if it
is necessary in the interest of public/for preventing
the affairs of the company
53

54. Types of Loans offered by Banks to Customers
Term loans
Cash credit
Overdraft
Bill discounting
54

55.  1. Term loans
 Short term
 Term loans (Medium & long term)
 Bridge Finance: There is a time gap between the date
of sanctioning and its disbursement by the financial
institution to the borrowing company. To bridge the
gap company takes this loan. Delay in the project
can be reduced
 Loan syndication:2 or more banks agree to finance
a particular project. The borrower can directly meet
the lead bank and it will get in touch with the other
banks.
55

56. • 2.Cash credit: Most favorable type of loan. Banker fixes
cash limit on an annual basis. The customer can
withdraw any amount as and when he likes. Interest is
only on the amount withdrawn.
• 3 Overdraft: Given to current account holder. Can
withdraw more than what is there in his account.
Maximum limit is there for amount and time. collateral
security. Interest is only on the amount withdrawn.
• 4 Bill discounting: This is for working capital by
discounting and purchasing of bills. when customer
provides a bill of exchange as security banker deducts a
certain amount from the value of the bill and advances
the rest of the amount to the customer.
56

57. Secondary Functions of Commercial Banks
 Merchant banking
 Leasing
 Mutual funds
 Money transfers
 factoring
 Housing finances
 credit cards
 ATM
 Telebanking
 Internet banking
 Portfolio management
57

58. Reserve Bank
of India
Commercial
Banks
Public Sector
Banks
State Bank
Group
State Bank of
India
Subsidiary
Bank
Nationalised
Banks
Private Sector
Banks
Indian
Old Banks
New Banks
Local Area
Banks
Foreign
Regional
Rural Banks
Co,Op. Banks
State Co.Op.
Banks
Central /
District Co.op.
Banks
Primary Credit
Societies
58

59. Reserve Bank of India
 Established in 1935 as per RBI Act of 1934
 Till Jan 1949,it was a private shareholders institution
 Oldest central bank
 As the apex bank, it guides, monitors, regulates & promotes
the destiny of the Indian financial system
Objectives of RBI
 Issue notes, keep reserves to secure monetary stability in the
country
 Plays lead role in the devt. of a sound financial system
 Ensures safe and efficient execution of financial transactions
 In developing counties it plays additional role-developmental
and promotional functions
59

60. Functions of RBI
Note Issue:
sole right to issue currency notes1Re &coins by
the Finance Secretary to Govt. of India They are
unlimited legal tender throughout India Its
responsibility is not only circulation/withdraw
but also exchange notes and coins of 1
denomination into another as demanded by
public.
60

61. Currency Management
 What is the role of the Reserve Bank in currency management?
The Reserve Bank manages currency in India. The Government, on
the advice of the Reserve Bank, decides on the various
denominations. The Reserve Bank also co-ordinates with the
Government in the designing of bank notes, including the security
features. The Reserve Bank estimates the quantity of notes that are
likely to be needed denomination-wise and places the indent with
the various presses through the Government of India. The notes
received from the presses are issued and a reserve stock maintained.
Notes received from banks and currency chests are examined. Notes
fit for circulation are reissued and the others (soiled and mutilated)
are destroyed so as to maintain the quality of notes in circulation.
The Reserve Bank derives its role in currency management on the
basis of the Reserve Bank of India Act, 1934.
 What is the role of Government of India?
The responsibility for coinage vests with Government of India on the
basis of the Coinage Act, 1906 as amended from time to time. The
designing and minting of coins in various denominations is also
attended to by the Government of India.
61

62.  Who decides on the volume and value of bank notes to be printed
and on what basis?
The Reserve Bank decides upon the volume and value of bank notes to
be printed. The quantum of bank notes that needs to be printed broadly
depends on the annual increase in bank notes required for circulation
purposes, replacement of soiled notes and reserve requirements.
 Who decides on the quantity of coins to be minted?
The Government of India decides upon the quantity of coins to be
minted.
 How does the Reserve Bank estimate the demand for bank notes?
The Reserve Bank estimates the demand for bank notes on the basis of
the growth rate of the economy, the replacement demand and reserve
requirements by using statistical models.
 How does the Reserve Bank reach the currency to people?
The Reserve Bank manages the currency operations through its offices
located at various places. These offices receive fresh notes from the note
presses. Similarly, the Reserve Bank offices located at Kolkata,
Hyderabad, Mumbai and New Delhi initially receive the coins from the
mints. These offices then send them to the other offices of the Reserve
Bank. The notes and rupee coins are stocked at the currency chests and
small coins at the small coin depots. The bank branches receive the
bank notes and coins from the currency chests and small coin depots for
further distribution among the public.
62

63.  What is a currency chest?
These are actually storehouses where bank notes and rupee coins are
stocked on behalf of the Reserve Bank. The currency chest branches are
expected to distribute notes and rupee coins to other bank branches in
their area of operation.
 What is a small coin depot?
Some bank branches are also authorised to establish small coin depots to
stock small coins.. The small coin depots also distribute small coins to
other bank branches in their area of operation.
 What happens when the notes and coins return from circulation?
Notes and coins returned from circulation are deposited at the offices of
the Reserve Bank. The Reserve Bank then separates the notes that are fit
for reissue and those which are not fit for reissue. The notes which are fit
for reissue are sent back in circulation and those which are unfit for
reissue are destroyed after processing shredded. The same is the case
with coins. The coins withdrawn are sent to the Mints for melting.
 From where can the general public obtain bank notes and coins?
Bank notes and coins can be obtained at any of the offices of the Reserve
Bank and at all branches of banks maintaining currency chests and
small coin depots.
63

64. Banker to the Govt.
Banker to Central and State Govts.
 It provides all banking services- acceptance,
withdrawal of deposits, making & collecting
money on behalf of the Govt, transfer of funds &
management of public debt
 It does not receive any remuneration for this
business Can charger commission for managing
public debt
It is authorized to make ways & means advances
(Repayable in 3 months)
64

65. Banker’s Bank:
It controls volume of reserves of commercial, co
operative and regional & rural banks
It determines the deposit/credit creating ability of the
banks
Banks have to maintain CRR with the RBI against their
demand & time liabilities
The banks can borrow funds from RBI in case of need.
Exchange management and control :
It has to maintain the stability of external value of rupee
All f.exchange reserves including gold, foreign assets,
govt. balances held abroad are centralized with the RBI
It has to buy & sell currencies of all members of the IMF
FERA Act of 1973 empowers it to exercise control over
foreign securities, foreign payments & transfer of
currency ,bullion, securities to foreign nationals.
65

66. Supervising authority:
It has vast powers to supervise & control the
commercial and co operative banks in the country It
includes:
To issue licenses for new banks/new branches
1. To inspect the working of banks in India & abroad
2. To prescribe minimum requirements for paid up
capital, reserves, transfer to reserve fund,
maintenance of CRR etc
3. To control methods of operation of banks
4. To appoint, reappoint, terminate Directors,
Chairman and Chief Executive officers to private
sector banks
66

67. Credit control:
 Most important function
 Can use all quantitative and qualitative methods
of credit control
 It has to regulate the volume, cost & direction of
bank loans
2 Types of credit control:
Qualitative & quantitative
Qualitative tools:
 Margin requirements
 Issuing directions
 Regulation of consumer credit
67

68. Qualitatitve tools:
 Bank rate (BR)
 Open market operations (OMO)
 Varying reserve requirements (VRR )
Export finance:
 Main objective is free export sector from restriction
of domestic credit
 Exports should not suffer due to scarcity of finance
It has following schemes for this purpose:
1. Export bill credit scheme,
2. Pre shipment credit scheme,
3. Export credit Interest subsidy scheme
4. Concessional rate of exchange, interest, discount
68

69. Development and Promotion
Development of institutional agricultural credit is
an important function of RBI
It has established NABARD in 1962
It has started ARDC in 1963
It has also started various institutions like IDBI,
IFCI
69

70. Commercial Banks
 Oldest and fastest growing bank in India
 It is a unique system in the world
 Their objective is to make profit
 Profitability, liquidity, safety and social welfare are their
major principles
 It has grown enormously in 40 years interms of bank
branches, deposits etc
 They developed innovative approaches like single
window, participatory lending and consortium
 A loan in which one or more lenders share, or
participate, with the originating bank in advancing
funds to a borrower. A participation loan is useful when
the amount of the loan is too large for any single lender.
70

71. Achievements :
 Massive quantitative expansion
 Quick, reliable, better customer service
 Diversified services like merchant banking, mutual
funds, venture capital, equipment leasing, housing
finance, hire purchase credit etc
Drawbacks/problems:
Bad debts
Low efficiency
Overdues
Low productivity
Defaults
71

72. Major changes brought by LPG:
 Expansion and devt. of branch banking system
 Opening branches in rural and semi urban areas
 Share of priority sector increased in total bank credit
 RBI controls these banks through SLR& CRR
 Debt-Recovery Tribunals were set up to expedite
recovery of overdue
 These banks were facing problems of non-performing
assets. This adversely affect the profitability of these
banks.
72

73. Importance of Commercial Banks
1. Increase productivity
2. Development of trade & industry
3. Optimum use of funds
4. Capital formation in the country
5. To achieve economic development
6. To generate employment opportunities
7. To reduce regional disparities
8. To cultivate the habit of saving
9. Creation of credit in the economy
10. Expansion of business
73

74. Co operative banks
 They are part of set of institutions financing for rural
and agricultural development.
 It is a small scale banking carried on a no profit no loss
basis for mutual co operation and help
 started in India in 1904
 Its structure is federal in nature with 3 tier linkages
between State, district and village level
74

75. Co.Operative
Credit Banks
Urban
Co.Op.Banks Rural Co.Op.Banks
Short Term
State Co.Op.
Banks
Central Co.Op.
Banks
Primary Agril.
Credit Societies
Long Term
State Co.Op. Agril.
& Rural Devt.
Banks
Primary Co.Op.
Agril. & Rural Devt.
Banks
75

76. Features of co operative banks They are govt, sponsored, supported & subsidized financial
agencies
 Managed by BOD on the principles of cooperation, self help, &
mutual help
 Their rule is one -member one- vote
 Their aim is not profit maximization
 Perform all banking functions .but their range of services is
narrower .
 Their geographic coverage is the widest
 Most of these are non-scheduled banks
 They have a federal structure of 3 tier linkages and vertical
integration
 They are only financial intermediaries
 They can take part in money as well as capital markets
 They face stiff competition from commercial banks & other
financial instituions
76

77. Weaknesses
 Too much dependence on RBI, NABARD, and the govt.
 To much officialistion and politicization
 Quality of loan assets and their recovery are poor
 Primary agricultural co operative societies are small in size,
very weak and are dormant
 Many urban co operative banks have failed or are in the
process of liquidation
 They ace stiff competition from commercial banks, LIC,
UTI, savings organizations
 Suffer from multiple regulations and control authorities
77

78. 78
Commercial Banks Co.Op. Banks
Function for profit Work on the principles of
self-help and mutual
cooperation for member’s
benefit
Organised on Unitary
basis
3 tier setup organisation
Governed by all sections
of the Banking Regulation
Act 1949
Only some sections are
applicable to them
Most commercial banks
are scheduled banks
Mostly non-scheduled
Traditionally Urban
oriented; now finance
rural sector also
Basically rural oriented –
financing agriculture &
allied sector
Wide branch network –
within and outside the
Operation restricted to
particular district / state

79. Regional Rural Banks
 They are set up by govt of India under the Regional Rural
Banks Act of 1976
 Its main objective is to provide credit and other facilities
to small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs in rural areas
 It is jointly set up by Govt. of India/the state Govt and the
sponsor commercial bank
 Each RRB operates within specified local limits
 Initially they started with a capital of Rs 1cr
 In this ,50% is by central Govt,15% by state govt.,& 35% by
the sponsor bank
 Sponsoring com. banks also help in managerial assistance,
recruitment,& training of personnel in the initial period.
79

80. Distinguish between
80
Public sector banks Private sector banks
At least 51% ownership
is with govt.
Majority shareholding lies with the
general public
Branches are more Branches are Comparatively less
Number of employees
is much more
Less number of personnel
They have organised
trade union
Unions do not pose a problem
They have old set up,
so capital asset is more
They have lower capital base
Are less technology
savvy
Use technology which helps for
faster growth, with less investment
Govt. control is more Comparatively more freedom to
operate

81. Development Banks
 They are set up during the planning period.
 Dominate the financial system in India
 Cannot be classified as banks
 Cannot be considered as financial
intermediaries –mobilizes resources from the
Govt. and RBI & not from savers
 Some are set up by Govt. while others are by
private sector participation in the ownership &
functioning of the institution
81

82. How it came into existence?
The scenario of India was characterized by:
Savings of the country was low
Dominated by public sector
Private sector was not developed
Capital market was at its infancy stage
Industries had to depend on their own profits
Unable to reconstruct the war affected nation
Development process was very slow
No individual bank was ready to cater to the
growing & diversified needs of different
sectors
82

83. Functioning of development
banks
 They were permitted to issue bonds of their own
either with or without the guarantees from the
govt. They did not face any competition in using
their funds
Transformation:
As a result of LPG, and as per the
recommendations of Narashimhan committee
the Devt. Finance institutions were converted
into Banks. It also insisted that there should be
only two intermediaries -–banking and non
banking finance companies
83

84. Need for devt. banks
 To reconstruct the war affected country
 To speed up /accelerate the rate of devt.
 to take up promotional activities
 To accelerate the pace of industrialization
 To promote certain key industries
 To meet the capital needs
 To help small and medium size industries
Thus in India and in many developing countries in
Asia Devt. Banks came into existence with some
goals
84

85. Types of development banks
Industrial finance corporation of India
(IFCI)
 First term lending institution set up in 1948
 Objective-to provide medium & long term loan
finance to large industries in private sector
 Provides direct rupee & foreign currency loans
for setting up new industrial projects, expansion,
diversification ,renovation & modernization of
existing units.
 It raises its resource from RBI, issue of bonds,
loans from Govts and lines of credit from
foreign agencies & international capital markets
85

86. Management:
It is managed by BOD consisting of a chairman
& 12 Directors. The chairman is appointed by
Central govt. 2 directors are nominated by central
govt. 4 are by IDBI & 6 by elected shareholders It
can subscribe to debentures, underwrite,
guarantee for companies for the loans sanctioned
by commercial banks
Objectives:
 Financial assistance to corporate sector
 Grant loans repayable within 25 years
 Financial assistance to start a new business,
expansion or diversification of existing business
 Playing an important role in the devt. Of the country
86

87. Industrial credit & investment corporation of India
(ICICI)
 First institution providing foreign currency loans
 Set up in 1955 as a public limited company under the sponsorship of
world bank
 Encourage & provide assistance to the corporate sector in India
 Also provides assistance to private sector in the following ways:
1. For creation, expansion , modernization of industrial
organizations
2. Encouraging private ownership
3. Long term and medium term loans
4. Sanctioning loans to import machinery
5. Technical and management services to corporate sectors
6. Expanding the investment market
7. Underwriting services for the issue of shares and debentures
87

88. Working:
It raises resources in the form of share capital,
loans from govt., advancing foreign currency
from the world bank, borrowings from RBI
issue of bonds etc.
Its major shareholders –LIC,UTI, GIC
It is managed by BOD consisting of 15 directors,
2 are by shareholders in Up & the remaining are
nominated by Govt. of India & USA
Objectives
Financial assistance to industrial projects for
foreign currency
Encourages and promotes industries in the
private sector
88

89. Recent developments:
It has become a privately owned company
It’s share capital is partly owned by pvt. sector & partly
by foreign institutions
It has developed merchant banking, lease finance and
installment sales
It is converted into ICICI Bank
It is the largest private sector bank
It is the 1st universal bank; 2nd largest bank in terms of
assets
It is the largest retail financial supermarket
Its ATM network accepts Master card, Visa card
89

90. Industrial development bank of India (IDBI)
 It was set up in 1964 as a wholly owned subsidiary of RBI
 Apex in the field of industrial finance
 It is an independent entity owned by govt.
 It is co coordinating, supplementing,& monitoring the
operations other long term lending institutions in the
country.
 It provides indirect assistance in the form of discounting
re discounting long term bills & promissory notes.
90

91.  I institution promoting industrial growth in the country
 It is actively involved in planning, promoting and
developing industries
Objectives:
To provide excellent service to new enterprises
To provide technical and administrative assistance for
expansion, to co ordinate, guide & monitor the entire
range of credit facilities offered by other institutions to
small scale industries
91

92. Management:
It is managed by 22 BOD including a chairman.
The chairman is appointed by RBI
It provides term loans for new projects as well as
for expansion, modernization & renovation of
existing units
It extends financial support to medium & large
scale projects by public limited company
It pays special attention to mega projects &
sophisticated technology promoted by
technocrats located in backward areas &
exploring new technology units
It provides foreign currency loans to projects for
the purchase of fixed assets
92

93. Recent development
 IDBI introduced a scheme for “no industries districts”
by which it provides training, financial technical &
administrative assistance to potential entrepreneurs
in these districts
93

94. National bank for agricultural & rural development
(NABARD)
 It is a central Institute for financing agricultural & rural
sectors
 It is set up by the central govt. & RBI in 1982
 Entire rural credit is taken from RBI
 It act as co coordinating agency for agricultural & Rural
devt.
 It provides credit for devt. of agriculture, SSI, cottage
industries, handicrafts and rural & other related
activities.
94

95.  It acts as a Refinancing agency to state co operatives
banks, commercial banks, regional rural banks.
 The loans are refinanced for short term for various
purposes like production, trading, marketing, storage
and packing
 Also provides long term loans for 20 to 25 years
 It raises its resources from RBI, Central govt., world
bank, sale of bonds and accepting deposits
95

96. Present status
 It is the premier institution in the field of rural credit.
 It looks after the financing functions of production,
marketing and investment activities relating to rural
devt., SSI, village industries and handicrafts
 The lending rates and deposit rates changes from time
to time
 It sanctions medium and long term loans to
agriculture
 It charges less rate of interest for agriculture than
other purposes
96

97. Investment Banks
Definition :
A financial intermediary that performs a variety of
services. This includes underwriting, acting as an
intermediary between an issuer of securities and the
investing public, facilitating mergers and other
corporate reorganizations, and also acting as a broker for
institutional clients.
97

98.  An investment bank is a financial institution that assists
individuals, corporations and governments in raising capital by
underwriting and/or acting as the client's agent in the issuance
of securities. They invest funds in shares or bonds of the
companies.
 Unlike commercial banks and retail banks, investment banks do
not take deposits.
98
Business
organisation
s
Investment
Banks
Investors

99. i. Invest funds in the shares & bonds of the companies
ii. They act as middlemen between business organization &
investors
iii.They act as agent & undertake the public issues.
iv.Perform highly useful service to the business world by
providing necessary capital for long term needs of the
companies
v. They are called as:
― ORIGINATORS,
― UNDERWRITERS,
― RETAILERS.
99

100. ORIGINATORS:
They bring out new issues of the securities to
individuals & institutional investors.
UNDERWRITERS/RETAIILORS:
They provide best opportunity of investment to small
savers & investors. The purpose is to provide the
investors the combined efforts of low risk, steady
return & capital appreciation through diversification
& expert management.
100

101. Investment Banking advice relates to corporate action rather
than product or organizational matters.
An investment banker needs to have an understanding of all
these things because they too will have an impact on share
holder value
IB helps the commercial company by advising them for: .
 Increasing the range of products
Increasing the business geographical footprint
Protecting a position
Also advice Industrialist sector team.
Raising profitability & therefore the share price
Increasing in size
Financial growth
Shifting the business towards sectors more favorably
viewed by the market
101

102. Investment banks advice on the raising of
capital
―IN WHAT FORM?
―HOW MUCH?
―FROM WHOM?
Investment Bank may charges a fee for
arranging the financing or for
“UNDERWRITING” i.e. for advising &
provision, service provided
There are many way in which IB raise its capital
―PUBLIC OFFERING
―RIGHT OFFERING
―PRIVATE PLACEMENT 102

103.  They purchase new shares or securities of the
companies or government corporations and reissue
them for public subscription at a higher price
 They also act as agents and undertake the public issues.
 They are known as originators (For new
companies)underwriters (for well established
companies)
 Thus it perform highly useful service to the business
world by providing long term needs of the companies
103

104. Investment banking +commercial banking
Mixed banking
Commercial banks ==liquidity === risk
Investment banks====longer investment risk
Investment banks include: Banks & non bank financial
institutions
Investment trusts, loan and finance companies nidhis, chit
funds, which give loan to commerce, trade, & for
consumption.UTI, Mutual funds, LIC
Their coverage is narrow & specialized
104

105.  Investment banks can be close ended or open ended
 Close ended- authorized capital & issued capital is
fixed (Investment Trusts)provide useful services by
conserving & managing property of public who cannot
manage their own funds, give expert advice & on
lucrative investment channels
 Open ended –can go increasing its resources by selling
units (UTI)
105

106.  Role of an Investment Bank
The major work of investment banks
includes a lot of consulting. For instance,
they offer advices on mergers and
acquisitions to companies. The other arena
where they give advice are tracking the
market and determining when should a
company come out with a public offering
and what is the best possible way to manage
the public assets of businesses. The role that
an investment bank plays sometimes gets
overlapped with that of a private brokerage
house. The usual advice of buying and
selling is also given by investment banks.
106

107. Largest full-service investment banks
 The following are the largest full-service global
investment banks; Full-service investment banks usually
provides both advisory and financing banking services,
as well as the sales, market making, and research on a
broad array of financial products including equities,
credit, rates, currency, commodities, and their
derivatives:
 Bank of America Goldman Sachs
 JPMorgan Chase
 Morgan Stanley
 Nomura Securities
 UBS
 Wells Fargo Securities
107

108. MERCHANT BANKING INVESTMENT BANKING
Expands in securities &
underwritings
Trade financing activities
Participated only in selling with
general public
Raise funds for business &
government
No dealing with general public Facilitates mergers &
acquisition through share
sales.
Perform international activities
focus on small scale companies
Focus on IPOs & large public
Offers trade financing products Rarely offers trade financing
products
Focus on small scale companies Focus on IPOs & large public
108

109. Many investment banks offer both buy side &
sell side services. The sell side typically refers to
selling shares of newly issued IPOs, placing
new bond issues, engaging in market making
services, or helping clients facilitate
transactions. The buy side, in contrast, worked
with pension funds, mutual funds, hedge funds,
&the investing public to help when maximize
their returns when trading or investing in
securities such as stocks & bonds.
109

110. 110

111. Merchant Banking
 Organization – underwrites securities for companies
 Merchant Banker – Engaged in the business of issue
mangt. Either by making arrangements regarding
selling, buying or subscribing to securities or acting as
manager/consultant/adviser/rendering corporate
advisory services – he has certificate granted by SEBI
 Merchant Banks – financial institutions providing
services – acceptance of bills of exchange, corporate
finance, portfolio management and other services
111

112. Banks provide services to businessman –
finance, management consultancy, preparation
of project report, feasibility study, technical
consultancy, managing public issues,
underwriting, loan syndication by coordinating
with other banks, etc.
Banks have separate divisions, appoint
experienced managers to carry out these
finances
112

113. Mutual Funds
 They are new subsidiaries floated by banks to
mobilize savings of general public and invest them in
stock market and money markets.
 Unit Trust was the first one to be started in India
in 1964.
 There are > 63 mutual funds in operation in the
country.
 These are open or close ended schemes – i.e. the
investor can invest or exit at any point of time or there
is a lock in period of 3 – 5 years.
 Important schemes – Growth schemes, Income
schemes, Balance schemes, Tax saving schemes
113

114.  They are managed by financial and professional
experts.
 The mutual funds are relatively secured hence they are
profitable for the small investors in particular
114

115. Money Transfers
Banks help individuals , society to
transfer money from place to place
and from person to person
DD, pay orders, telegraphic transfer,
mail transfer, credit cards are used.
115

116. Housing Finance
Bank’s subsidiaries undertake housing
finance as a specialized business.
Now a days all banks are permitted to
provide housing finance to the people
at a reasonable rate of interest.
To buy a new home, home
improvement, extension, land
purchase, bridge loans and balance
transfer loans etc are provided
116

117. CREDIT CARDS
 They are small plastic cards issued by banks that allow
the card holders to buy goods and services on credit
and pay at fixed intervals through the card issuing
bank.
 This could also be used for obtaining cash from the
branches of the same bank which has issued it or form
other specified banks .
 There is an annual charge for this card.
 There is no need to have an account with the bank and
no money is needed to be paid in advance
 Card holders are given 30 – 40 days credit at a certain
rate of interest.
117

118. ATM
 This is one of the service provided by the bank
through Automated Teller Machine (ATM)
 There is a unique Personal Identification Number
(PIN) on the card, and also a magnetic strip with the
account number of the card holder.
 Money withdrawn is immediately debited in the card
holder’s account and an SMS is sent to the holder of
the card.
 PIN number is very important in this and has to be
maintained secretly by the card holder to avoid frauds
and robberies.
118

119. Leasing
 Banks started funding the fixed assets
through leasing i.e renting out of immovable
property by the banks to the businessmen on
a specified period rent fro a specific period
which is mutually agreed upon.
 Written agreement is made
 Banks now have subsidiaries to transact
equipment leasing business with the
permission of RBI.
119

120. Tele-Banking
 This is a service provided through the phone.
 Each customer is given a specific Telephone PIM (T-
PIN)
 Customer can call the exclusive tele-banking
numbers, provide details to identify himself to the
automated voice
 When the respective number match the
computerized system, the customer is given access
to his account to query or transact on his account.
 Cash delivery to the customer is not there except for
certain class of customers.
120

121. Internet Banking
 This service is similar to that of the ATM. Here
also the customers can request the ban to
provide them with this service.
 Customers are given a PIN number, Login id
(which he can change) and also a Transaction
password (which he has to change)
 Using internet the customer can log on to his
account and carry out any transaction.
 Here also there is a need to change the
passwords now and then and keep them safely
121

122. Factoring It is an arrangement in which receivables
arising out lf sale of goods are sold by a firm
to the factor as a result of which the title to
the goods passes to the factor.
 The factor becomes responsible for all credit control,
sales accounting, and debt collection from the buyers.
 In case of insolvency or inability of the debtor the
factor has to absorbs the losses.
122

123.  The factor provide services of -finance, maintenance
of accounts, collections of debts, protection against
credit risk
 Realization of credit is the main function of factoring
services
 In case bank undertakes collect and manage clients
debts and also finances the clients either by lending
against account receivables or purchasing or
discounting them outright for a charge which is
called as discount
123

124. Portfolio Management
 It is a process of investment in securities
 It involves a proper investment decision making.
 It involves proper money management
 Objective-to help investors with the expertise of
professionals
 It involves construction of portfolio based on the
investor’s objectives, constraints, preferences and tax
liability
 It should be reviewed from time to time in tune with
the market conditions
124

125.  Portfolio manager is an important person who holds the
dreams of millions of investors.
 This scheme floated by many banks and financial
institutions
 They do for a fee. They should get a SEBI certificate to
do. It frames certain rules and regulations Violating the
this is an offence and punishable
 Banks extend services for managing surplus funds of
their corporate customers either directly or through this
 It provides safety, liquidity and maximum yield to the
customers
125

126. Insurance

127. Defining Insurance
 Insurance in broad terms may be described as a method of
sharing financial losses of few from a common fund who are
equally exposed to the same loss.
 Insurance is defined as the equitable transfer of the risk of a loss,
from one entity to another, in exchange for a premium, and can
be thought of a guaranteed small loss to prevent a large, possibly
devastating loss.
 An insurer is a company selling the insurance. The insurance rate
is a factor used to determine the amount, called the premium, to
be charged for a certain amount of insurance coverage.

128. Concept of risk

129. Massive risk with high magnitude
Day to day risk of lesser magnitude

130. Defining Risk
 A variation in the possible outcome
 The degree of uncertainty associated with a particular loss
 Greater the accuracy with which the outcome can be predicted the
lower is the risk.
 Risk is the possibility of an unfortunate occurrence
 Risk is the possibility of loss
 The combination of hazards
 Uncertainty of loss
 The tendency that actual results may differ from predicted results

131. Basic Terminology
 Peril : Cause of a risk and losses. E.g. Earthquake, flood , fire,
criminal activities etc.

132. Basic Terminology
 Hazard : Condition that increases the frequency or severity of loss.
E.g. absence of proper security or fencing , poorly maintained fire
alarm system etc.

133. Basic Terminology
 Moral Hazard: It refers to the dishonesty of the insured person
leading to increase probability of loss from given risk exposure.
E.g. setting fire to your own house.
 Morale Hazard: This refers to attitude of indifference to losses
that results out of a known fact that the said losses were insured.
 Catastrophic loss: It is a potential loss that is unpredictable such
as flood, but is capable of producing an extra ordinary large
amount of damage related to assets held in insurance pool. These
are generally natural disasters like earthquake flood etc.

134. Requirements of Insurable Risk
 Should be a Pure risk
 Involves a chance of loss or no loss
 Large number of exposure units
 to predict average loss
 Accidental and unintentional loss
 to control moral hazard
 to assure randomness
 Determinable and measurable loss
 to facilitate loss adjustment

135. Requirements of Insurable Risk
 No catastrophic loss
 to allow the pooling technique to work
 Probability of loss must not be very high
 to determine the premium need
 Economically feasible premium
 so people can afford to buy

136. Concept of Insurance

137. Basic Characteristics of Insurance
 Pooling of losses
 Spreading losses incurred by the few over the entire group
 Risk reduction based on the Law of Large Numbers
 Payment of fortuitous losses
 Insurance pays for losses that are unforeseen, unexpected,
and occur as a result of chance
 Risk transfer
 A pure risk is transferred from the insured to the insurer, who
typically is in a stronger financial position
 Indemnification
 The insured is restored to his or her approximate financial
position prior to the occurrence of the loss

138. Example
 Say 1000 motor cars valued @ 300000/- are observed over a
period of five years. On an average say per year two are total loss
by accident. Then the total annual loss would be Rs.600000. If the
loss is to shared by all the thousand owners then they have to
contribute Rs.600/-
 The loss experience will be established by taking the past
experience, geographical area in which the vehicles are used and
density of traffic.

139. Basic terms
 Insurer : The party to an insurance arrangement who undertakes
to indemnify for losses.
 Insured: A person whose interests are protected by an insurance
policy.
 Premium: Financial cost of obtaining an insurance cover, paid as a
lump sum or in installments during the duration of the policy.
 Policy: Written contract or certificate of insurance
 Exposure to Loss: In insurance, areas in which the risk of loss
exists. Four loss risk areas are: (1) property; (2) income; (3) legal
vulnerability; and (4) key personnel in an organization

140. Basic terms
 Life annuity: A life annuity is a financial contract in the form of an
insurance product according to which a seller (issuer) — typically a
financial institution such as a life insurance company — makes a
series of future payments to a buyer (annuitant) in exchange for
the immediate payment of a lump sum (single-payment annuity) or
a series of regular payments (regular-payment annuity), prior to
the onset of the annuity.
 Nomination: It is the right of the policy holder on his/ her own life
to designate a living person to receive the policy proceeds in the
event of him predeceasing the nominee before the maturity of the
policy.
 Nominee: Nominee should not be a stranger because its against
the objective of insurance which in most cases is family protection.

141. Basic terms
 Assignment: An agreement under which one party–the assignor–
transfers some or all of his ownership rights in a particular
property, such as a life insurance policy or an annuity contract, to
another party–the assignee.
 Assignor: A property owner who transfers some or all of the
ownership rights in a particular property to another party by
means of an assignment.
 Assignee: A person or party to whom a property owner transfers
some or all of the property owner's rights in a particular property
by means of an assignment.

142. IRDA
The Insurance Regulatory and Development Authority (IRDA) is a
national agency of the Government of India, based in Hyderabad. It
was formed by an act of Indian Parliament known as IRDA Act 1999,
which was amended in 2002 to incorporate some emerging
requirements.
Mission
"to protect the interests of the policyholders, to regulate, promote
and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto."

143. Benefits of Insurance to an Individual
 Peace of mind
 Aversion of risk
 Protects mortgaged properties
 Provides self dependency
 Tool of savings
 Tool of investment
 Satisfies various needs

144. Benefits of Insurance to Business
 Reduced reserve requirements
 Capital freed for investment
 Indemnification
 Reduction of uncertainty
 Reduced cost of capital
 Reduced credit risk
 Loss control activities
 Business and social stability

145. Benefits of Insurance to Society
 Protects wealth of the country
 Helps in economic growth
 Control inflation

146. Cost of Insurance
 Operating Expense
 Distribution cost
 Underwriting cost
 Policy Administration Cost
 Reserve cost
 Moral Hazard resulting in extra cost
 Exaggerated Losses
 Benefit-cost Tradeoff

147. Insurance Classification
Insurance
Life Insurance General Insurance
Fire Marine Health Auto

148. Players in the Industry
Life Insurance General Insurance
Life Insurance Corporation of India. General Insurance Corporation of India.
1. Oriental Insurance Company Ltd.
2. New India Assurance Company Ltd.
3. National Insurance Company Ltd.
4. United India Insurance Company Ltd.
New Entrants
ICICI Prudential Life Insurance Ltd. Bajaj Alliaz General Insurance Company Ltd.
Tata AIG Life Insurance Corporation Ltd. Reliance General Insurance Company Ltd.
ING Vysya Life Insurance Corporation Ltd. Tata AIG General Insurance Company Ltd.
Kotak Mahindra Life Insurance
Corporation Ltd.
Royal Sundaram Alliance Insurance Company
Ltd.

149. Concept of General Insurance

150. Defining General Insurance
 General insurance or non-life insurance policies, including
automobile and homeowners policies, provide payments
depending on the loss from a particular financial event.
 General insurance typically comprises any insurance that is not
determined to be life insurance.
 It is called property and casualty insurance in the U.S. and Non-Life
Insurance in Continental Europe.

151. Classification
 Commercial lines: products are usually designed for relatively
small legal entities. These would include workers' comp (employers
liability), public liability, product liability, commercial fleet and
other general insurance products sold in a relatively standard
fashion to many organizations. There are many companies that
supply comprehensive commercial insurance packages for a wide
range of different industries, including shops, restaurants and
hotels.
 Personal lines: products are designed to be sold in large quantities.
This would include autos (private car), homeowners (household),
pet insurance, creditor insurance and others.

152. Principles of Insurance
 Utmost Good Faith
 Insurable Interest
 Principle of Indemnity
 Principle of Contribution
 Principle of Subrogation
 Principle of loss Minimization
 Principle of ‘CAUSA PROXIMA’

153. Utmost Good Faith
 Both the parties i.e. the insured and the insurer should a good
faith towards each other.
 The insurer must provide the insured complete ,correct and clear
information of subject matter.
 The insurer must provide the insured complete ,correct and clear
information regarding terms and conditions of the contract.
 This principle is applicable to all contracts of insurance i.e. life, fire
and marine insurance.

154. Insurable Interest
 The insured must have insurable interest in the subject matter of
insurance.
 In life insurance it refers to the life insured.
 In marine insurance it is enough if the insurable interest exits only
at the time of occurrence of the loss
 In fire and general insurance it must be present at the time of
taking policy and also at the time of the occurrence of loss.
 The owner of the party is said to have insurable interest as long as
he is the owner of the it.
 It is applicable to all contracts of insurance.

155. Principle of Indemnity
 Indemnity means a guarantee or assurance to put the insured in
the same position in which he was immediately prior to the
happening of the uncertain event. The insurer undertakes to make
good the loss.
 It is applicable to fire ,marine and other general insurance.
 Under this the insurer agrees to compensate the insured for the
actual loss suffered.

156. Principle of Contribution
 The principle is a corollary of the principle of indemnity.
 It is applicable to all contracts of indemnity.
 Under this principle the insured can claim the compensation only
to the extent of actual loss either from any one insurer or all the
insurers.

157. Principle of Subrogation
 As per this principle after the insured is compensated for the loss
due to damage to property insured , then the right of ownership of
such property passes on to the insurer.
 This principle is corollary of the principle of indemnity and is
applicable to all contracts of indemnity

158. Principle of Loss of Minimization
Under this principle it is the duty of the insured to take all possible
steps to minimize the loss to the insured property on the happening
of uncertain event.

159. Principle of ‘Causa Proximal’
 The loss of insured property can be caused by more than one
cause in succession to another.
 The property may be insured against some causes and not against
all causes.
 In such an instance, the proximate cause or nearest cause of loss is
to be found out.
 If the proximate cause is the one which is insured against ,the
insurance company is bound to pay the compensation and vice
versa.

160. General Rules
 Mis-description
 Reasonable care
 Fraud
 Basic principles
 Insurable interest
 Utmost good faith
 Subrogation
 Contribution
 Indemnity
 Risk of loss not covered

161. Types of General Insurance
Main types of general insurance are:
 Fire
 Health
 Marine
 Motor Vehicle

162. Fire Insurance

163. Fire Insurance
Fire insurance is a form of property insurance which protects people
from the costs incurred by fires. When a structure is covered by fire
insurance, the insurance policy will pay out in the event that the
structure is damaged or destroyed by fire.

164. Types of Fire Insurance Policies
 Specific policy: In this type of policy, the insurance company is
liable to pay a sum, which may be less than the property’s real
value. The insured is called to bear a part of the loss, as the actual
value of the property is not considered in deciding the amount of
indemnity.
 Comprehensive policy: Known as “all-in-one” policy, the insurance
company indemnifies the policyholder for loss arising out of fire,
burglary, theft and third party risks. In this type of policy, the
policyholder also gets paid for loss of profits incurred, due to fire,
till the time the business remains shut.
 Valued policy: In this type of policy, the value of the commodity is
already set and actual loss is not taken into consideration. The
policy follows a standard contract of indemnity, wherein the
policyholder gets paid a specific amount of indemnity, without
considering the actual loss.

165. Types of Fire Insurance Policies
 Floating policy: This type of policy is subject to average clause and
the extent of coverage expands to different properties, belonging
to the policyholder, under the same contract and one premium.
The floating policy also provides protection of goods kept at two
different stores.
 Replacement or Re-instatement policy: As per replacement or re-
instatement policy, the insurance company instead of paying the
policyholder the amount of indemnity in cash, replaces the
damaged property/commodity with a new one.

166. Fire Insurance Claim Procedure
 Individuals/corporate must inform insurer as early as possible , in
no case later than 24 hours.
 Provide relevant information to the surveyor/claim representative
appointed by the insurer.
 The surveyor then analyzes the extent/ value of loss or damage.
 The claim process takes anywhere between one to three weeks.

167. Documents Required
 True copy of the policy along with schedule
 Report of fire brigade
 Claim Form
 Photographs
 Past claims experience

168. Need of Fire Insurance
Fire insurance is important because a disaster can occur at any time.
There could be many factors behind a fire, for example arson, natural
elements, faulty wiring, etc. Some facts that stress the importance of
fire insurance include:
 Fire contributes to the maximum number of deaths occurring in
America due to natural disasters.
 Eight out of ten fire deaths take place at home.
 A residential fire takes place after every 77 seconds.
 The major reason for a residential fire is unattended cooking.

169. Fire Insurance in India
Fire insurance business in India is governed by the All India Fire Tariff
that lays down the terms of coverage, the premium rates and the
conditions of the Fire Policy. The fire insurance policy has been
renamed as Standard Fire and Special Perils Policy. The risks covered
are as follows:
Dwellings, Offices, Shops, Hospitals (Located outside the compounds
of industrial/manufacturing risks) Industrial / Manufacturing Risks
Utilities located outside industrial/manufacturing risks Machinery
and Accessories Storage Risks outside the compound of industrial
risks Tank farms / Gas holders located outside the compound of
industrial risks

170. Fire Insurance in India
 Perils Covered: Cause of Loss Fire Lightning Explosion/Implosion
Aircraft damage Riot, Strike Terrorism Storm, Flood, inundation
Impact damage Subsidence, landslide Bursting or overflowing of
tanks Missile Testing Operations Bush fire etc.
 Exclusions:
 Loss or damage caused by war, civil war and kindered perils
 Loss or damage caused by nuclear activity
 Loss or damage to the stocks in cold storage caused by change
in temperature
 Loss or damage due to over-running of electric and/ or
electronic machines
 Claims: In the event of a fire loss covered under the fire insurance
policy, the Insured shall immediately give notice there of to the
insurance company. Within 15 days of the occurrence of such loss
the Insured should submit a claim in writing giving the details of
damages and their estimated values. Details of other insurances on
the same property should also be declared.

171. Indian Companies Offering FI
 ICICI Lombard General Insurance (Pvt.)
 United India Insurance (Govt.)
 New India Insurance (Govt.)
 Bajaj Allianz Insurance (Pvt.)
 Oriental Insurance (Govt.)
 Tata-AIG General Insurance (Pvt.)

172. Health Insurance

173. What is Health Insurance?
Health insurance, like other forms of insurance, is a form of
collectivism by means of which people collectively pool their risk, in
this case the risk of incurring medical expenses.

174. Importance of Health
 Rising medical costs
 Sharing of health related risk
 uncertain hospital bills
 Expensive/quality health care services
 Money value – Sick Vs Healthy
 Family health insurance
 Tax benefit
 Productivity of workforce
 Removes some of the burden from the state
 Keeping pace with the customer needs while achieving profitability

175. How to improve the access to health care and financial protection of
the poor?
Answer
The most obvious solution will be to improve the health
insurance penetration.

176. How to Improve Health Insurance Penetration?
 Regulator/Government
 Enhance customer awareness
 Enhance client confidence - real value benefits in the event of a claim
 Effective supervision
 Compulsory percentage of total business towards health
 Compulsory savings towards health
 Tax incentives to employers for promoting group health coverage
 Insurer
 Clients confidence - warrantable claim will be paid out in a reasonable
time frame
 New clients have to be reached
 Value for money
 Design products as per clients needs
 Product transparency
 Cost efficiency
 affordability
 Wellness programmes

177. Initiatives of IRDA
 Committee to formulate regulations
 Pure health insurance products
 Allowing the formation of an stand alone health insurance
company
 Standalone health insurance companies
 Renewability
 Senior citizens

178. Impediments in Health Insurance
 Lack of Data
 Moral Hazard/Adverse Selection
 Complex nature of the product
 Medical Inflation
 New treatments
 Unnecessary treatments
 Difficulty in pricing
 Government provision of health care
 Long term nature
 Changing life style
 Mis-selling/fraud

179. Mitigation of Impediments
 Insurer
 Designing a less complex products
 Transparency in the product features
 Clarity in policy terms, conditions & exclusions
 Efficient back-office support for underwriting and claims
processing
 Higher Reinsurance
 Need for quicker services. E.g. Toll free numbers, cashless,
quick response
 Expense analysis on a regular basis
 Product innovation
 Efficient training of sales force

180. Mitigation of Impediments
 Policyholder
 Pay attention to policy conditions
 Read the exclusions and limitations very carefully
 Compare premium costs, deductibles, co-payments
 Take an informed decision
 TPA
 Proper infrastructure
 Speedy claim settlement process
 Less paper work

181. Mitigation of Impediments
 Regulator/Government
 Come out with health insurance regulations
 Centralized data base for health insurance experience statistics
 Provider rating
 Cap on renewal premiums
 Ensure that a decent portfolio of health coverage represent
the rural sector
 Guard against ill effects of privatization
 Further tax incentives
 Compulsory savings towards health care

182. Types of Health Insurance Plans
 Individual health plan
 Family floater plan
 Senior Citizens’ plan
 Critical illness plan
 Daily hospital cash and
 Unit-linked health plan (ULHP).

183. Individual Health Plans
 Largely, an individual health insurance plan (IHIP), or ‘mediclaim’,
would cover expenses if you are hospitalised for at least 24 hours.
 These plans are indemnity policies, that is, they reimburse the
actual expenses incurred up to the amount of the cover that you
buy.
 Some of the expenses that are covered are room rent, doctor’s
fees, anaesthetist’s fees, cost of blood and oxygen, and operation
theatre charges.

184. Family Floater Plans
 This is a fairly new entrant in the health insurance firmament.
 It takes advantage of the fact that the possibility of all members of
a family falling ill at the same time or within the same year is low.
 Under a family floater (FF) health plan, the entire sum insured can
be availed by any or all members and is not restricted to one
individual only as is the case in an individual health plan.
 Let’s look at an example. Say, a family of four has individual covers
of Rs 1 lakh each. If the cost of treating one person crosses Rs 1
lakh, then the rest has to be borne by the family out of its own
money. If, however, the entire family is insured for Rs 4 lakh
through a floater policy, then any of the members will be covered
for that amount in any year. To the extent of the annual cover, any
number of members can avail the money.

185. Senior Citizens’ Plans
 Insurance is considered a form of long-term savings for senior
citizens. This money provides financial stability and also helps
them in times of need. Medical insurance enables senior citizens to
pay for health checkups, emergency medical costs and long-term
treatment. The income tax benefit on insurance premiums is up to
Rs. 15,000 under Section 80 D of the Income Tax Act, as on March
31, 2007. Medical insurance is provided through several private
insurance companies and four public sector general insurance
companies. These are:
 National Insurance Company
 Oriental Insurance Company
 New India Assurance
 United India Insurance Company

186. Senior Citizens’ Plans
 The National Insurance Company offers the Varistha Mediclaim
Policy for senior citizens. This policy covers hospitalization and
domiciliary hospitalization expenses under Section I as well as
expenses for treatment of critical illnesses, if opted for, under
Section II. Diseases covered under critical illnesses are coronary
artery surgery, cancer, renal failure, stroke, multiple sclerosis and
major organ transplants. Paralysis and blindness are covered at
extra premium.
 Oriental Insurance Company provides a Comprehensive Health
Insurance Scheme, a Group Insurance and an Individual Mediclaim
Policy. These policies pay for hospitalization or domiciliary
hospitalization of the insured in case of a sudden illness, an
accident or surgery. These conditions should have arisen during
the policy period.

187. Critical Illness Plans
 A Critical Illness plan means to insure against the risk of serious
illness. It will give the same security of knowing that a guaranteed
cash sum will be paid if the unexpected happens and one is
diagnosed with a critical illness.
 The purpose of a critical illness plan is to let you put aside a small
regular amount now, as an insurance against all this happening.
 Bajaj Allianz, in its efforts to provide a customer centric solution is
offering an insurance policy to cover to some of these critical
illnesses like Cancer Coronary Artery bypass surgery First Heart
attack Kidney Failure Multiple sclerosis Major organ transplant
Stroke Arota graft surgery Paralysis Primary Pulmonary Arterial
Hypertension.

188. Daily Hospital Cash
 Expense benefit is paid on per day basis after hospitalization (most
plans mandate at least 48 hours of hospitalization).
 The pre-decided daily benefit amount is paid in full, irrespective of
the actual expenses.
 For example, a person buys a DHC plan with a limit of Rs 2,000 per
day. He gets hospitalised for 7 days and the total bill is Rs 35,000.
He would be reimbursed Rs 14,000 (2,000x7). If the bill is Rs 8,000,
he would still be reimbursed Rs 14,000.

189. Unit-linked health plan (ULHP)
 All ULHPs offer one or more combination of the other benefits (for
which risk premium is deducted from fund value).
Also, charges such as premium allocation charge and policy
administration charge are deducted from the fund value.
 LIC has launched Health Plus plan, a unique long term health
insurance plan that combines health insurance covers for the
entire family (husband, wife and the children) – Hospital Cash
Benefit (HCB) and Major Surgical Benefit (MSB) along with a ULIP
component (investment in the form of Units) that is specifically
designed to meet domiciliary treatment (DTB) related expenses for
the insured members.

190. Health Insurance in India
The health insurance market in India is very limited covering about
10% of the total population. The existing schemes can be categorized
as:
 Voluntary health insurance schemes or private-for-profit schemes;
 Mandatory health insurance schemes or government run schemes
(namely ESIS, CGHS).
 Insurance offered by NGOs / community based health insurance,
and
 Employer-based schemes

191. Voluntary health insurance schemes
 In private insurance, buyers are willing to pay premium to an
insurance company that pools similar risks and insures them for
health related expenses.
 The main distinction is that the premiums are set at a level, which
are based on assessment of risk status of the consumer (or of the
group of employees) and the level of benefits provided, rather
than as a proportion of consumer’s income.
 In the public sector, the General Insurance Corporation (GIC) and
its four subsidiary companies (National Insurance Corporation,
New India Assurance Company, Oriental Insurance Company and
United Insurance Company) provide voluntary insurance schemes.

192. Voluntary health insurance schemes
 The most popular health insurance cover offered by GIC is
Mediclaim policy.
 Mediclaim policy: It was introduced in 1986. It reimburses the
hospitalization expenses owing to illness or injury suffered by the
insured, whether the hospitalization is domiciliary or otherwise.
 Some of the various other voluntary health insurance schemes
available in the market are :- Asha deep plan II , Jeevan Asha plan
II, Jan Arogya policy, Raja Rajeswari policy, Overseas Mediclaim
policy, Cancer Insurance policy, Bhavishya Arogya policy, Dreaded
disease policy, Health Guard, Critical illness policy, Group Health
insurance policy, Shakti Shield etc.

193. Mandatory health insurance schemes
Employer State Insurance Scheme (ESI)
 Enacted in 1948, the employers’ state insurance (ESI) Act was the
first major legislation on social security in India.
 The scheme applies to power using factories employing 10 persons
or more and non-power & other specified establishments
employing 20 persons or more.
 It covers employees and the dependents against loss of wages due
to sickness, maternity, disability and death due to employment
injury. It also covers funeral expenses and rehabilitation allowance.
Medical care comprises outpatient care, hospitalization, medicines
and specialist care.
 These services are provided through network of ESIS facilities,
public care centers, non-governmental organizations (NGOs) and
empanelled private practitioners.

194. Mandatory health insurance schemes
Central Government Health Insurance Scheme (CGHS)
 Established in 1954, the CGHS covers employees and retirees of
the central government and certain autonomous and semi
autonomous and semi-government organizations.
 It also covers Members of Parliament, Governors, accredited
journalists and members of general public in some specified areas.
 Benefits under the scheme include medical care, home visits/care,
free medicines and diagnostic services.
 These services are provided through public facilities with some
specialized treatment (with reimbursement ceilings) being
permissible at private facilities.
 Most of the expenditure is met by the central government as only
12% is the share of contribution.

195. Mandatory health insurance schemes
Universal Health Insurance Scheme (UHIS)
 For providing financial risk protection to the poor, the government
announced UHIS in 2003.
 Under this scheme, for a premium of Rs. 165 per year per person,
Rs.248 for a family of five and Rs.330 for a family of seven , health
care for sum assured of Rs. 30000/- was provided.
 This scheme has been made eligible for below poverty line families
only. T
 o make the scheme more saleable, the insurance companies
provided for a floater clause that made any member of family
eligible as against mediclaim policy which is for an individual
member.

196. Insurance offered by NGOs
 Insurance offered by NGOs/Community based schemes are typically
targeted at poorer population living in communities. Such schemes are
generally run by charitable trusts or non-governmental organizations
(NGOs).
 In these schemes the members prepay a set amount each year for
specified services. The premia are usually flat rate (not income related)
and therefore not progressive.
 The benefits offered are mainly in terms of preventive care, though
ambulatory and inpatient care is also covered.
 Such schemes tend to be financed through patient collection,
government grants and donations.
 Some of the popular Community Based Health Insurance schemes are:
- Self-Employed Women’s Association (SEWA), Tribuvandas Foundation
(TF), The Mullur Milk Co-operative, Sewagram, Action for Community
Organization, Rehabilitation and Development (ACCORD), Voluntary
Health Services (VHS) etc.

197. Employer based schemes
 Employers in both public and private sector offers employer based
insurance schemes through their own employer.
 These facilities are by way of lump sum payments, reimbursement
of employees’ health expenditure for out patient care and
hospitalization, fixed medical allowance or covering them under
the group health insurance schemes.
 The Railways, Defense and Security forces, Plantation sector and
Mining sector run their own health services for employees and
their families.

198. Marine Insurance

199. Defining Marine Insurance
Marine Insurance covers the loss or damage of ships, cargo,
terminals, and any transport or cargo by which property is
transferred, acquired, or held between the points of origin and final
destination.

200. Two Broad Categories
 Ocean marine insurance
 Inland marine insurance

201. Ocean Marine Insurance
 Hull
 Cargo
 Freight
 Protection and indemnity insurance

202. Inland Marine Insurance
 Extension of Ocean marine insurance
 Domestic goods in transit
 Property held by Bailees
 Mobile equipment and property
 Block Policies- “all-risks” basis
 Means of transport and communication

203. Risks
Two types of risks are covered by ocean marine insurance.
 The first type is the perils of the sea that include both natural
calamities and fortuitous accidents.
 The second type of risks covered is extraneous risks. These risks
include ordinary risks such as theft, pilferage, rain damage,
shortage, breakage, etc and special risks such as strike, war, failure
to deliver, etc.

204. Covered Perils
 Perils of the sea, such as loss due to bad weather, high waves,
collision, and other navigable waters
 Fire, enemies, pirates, thieves, jettison
 Barratry, or fraud by crew members
 All risks

205. Further Cover
 Pollution Hazard
 War and strikes clause
 Bursting boilers or breaking shafts
 Accident or negligence of a third party

206. Common Exclusions
 Loss, damage or expenses attributable to willful misconduct of the
assured
 Ordinary or inevitable losses
 Loss, damage or expense caused by inherent vice or nature of the
subject matter insured
 Loss/damage due to insufficient, unsuitable or defective packing
(including storage)
 Loss/damage or expenses proximately caused by delay even if the
delay is caused by a peril insured against
 Loss damage or expenses arising from insolvency of the owners,
managers, operators of the vessel.
 Loss damage due to un seaworthiness of the vessel or craft,
container, lift van employed for carrying the insured matter.
 Wars, strikes and civil commotions unless covered under separate
endorsements.

207. Hull Insurance
 Covers physical damage to ship or vessel
 Always written with a deductible
 Contains collision liability clause
 Covers owner’s legal liability

208. Cargo Insurance
 Covers the loss to the shipper if the goods are damaged or lost
 Policy can be single or open cargo policy
 Salvage loss
 Follows forced sale of badly damaged cargo

209. Cargo Partial Loss
 Where goods delivered damage measure of indemnity is
 Proportion of sum fixed by policy
 equal to the gross sound value less damaged value at place of delivery

210. Freight Insurance
 Insures the profit made by a ship owners out of ships used to carry
cargo, both their own and others
 Loss occurs when cargo is not deliverable

211. Liability Insurance
 Covers the property damage or bodily injury to third party
 Damage caused by the ship to docks, harbor installation, fines,
penalties, injury to crew members, etc

212. Major Types of Policy
 Time policy
 Voyage policy
 Mixed policy
 Open policy

213. Time Policy
 A time policy is one that runs for a period of time usually not
exceeding 12 months.
 In using a time policy, the most important question is whether the
loss occurred at a time in which the policy was running because
sometimes it is difficult to prove in case where it is alleged that the
conditions giving rise to the loss (e.g. a hole in the ship) occurred
during the policy, although the final consequence (the foundering
of the vessel) occurred afterwards.

214. Voyage Policy
 This is a policy that operates for the period of the voyage.
 For cargo, the cover is from warehouse to warehouse.
 The policy will not apply if the actual voyage and/or ports are
different from those in the policy.

215. Mixed Policy
 This is a policy that covers the subject matter for the voyage within
a time period.
 It is used to cover the cargo from warehouse to warehouse with a
time limit.
 The cargo has to be warehoused within 60 days after discharge or
the policy will no longer cover the cargo.

216. Open Policy
 This is an arrangement in which terms such as types of risks to be
covered, validity of the insurance contract, rate, premium,
maximum value of each shipment and geographical limits, etc are
worked out when the contract is signed.
 Each shipment is covered once the assured declares the details.
The assured may be authorized to issue against payment a pre-
printed insurance certificate which is valid after completion of
shipment details and his signature for documentation purposes.
 The insurance certificate is pre signed by the insurer. If the contract
is effective only for a specified period, a clause of termination
should be included.

217. Auto Insurance

218. Defining Auto Insurance
Auto insurance (also known as vehicle insurance, car insurance, or
motor insurance) is insurance purchased for cars, trucks, and other
vehicles. Its primary use is to provide protection against losses
incurred as a result of traffic accidents and against liability that could
be incurred in an accident.

219. Auto Insurance Coverage
Auto insurance provides property, liability and medical
coverage:
 Property coverage pays for damage to or theft of the car.
 Liability coverage pays for the legal responsibility to others for
bodily injury or property damage.
 Medical coverage pays for the cost of treating injuries,
rehabilitation and sometimes lost wages and funeral expenses

220. Coverage Levels
Vehicle insurance can cover some or all of the following items:
 The insured party
 The insured vehicle
 Third parties (car and people)
 Third party, fire and theft
 In some jurisdictions coverage for injuries to persons riding in the
insured vehicle is available without regard to fault in the auto
accident (No Fault Auto Insurance)

221. Types of Auto Insurance in India
There are different types of Auto Insurance in India :
 Private car insurance: It is the fastest growing sector as it is
compulsory for all the new cars. The amount of premium depends on
the make and value of the car, state where the car is registered and
the year of manufacture.
 Two wheeler insurance: It covers accidental insurance for the drivers
of the vehicle. The amount of premium depends on the current
showroom price multiplied by the depreciation rate fixed by the Tariff
Advisory Committee at the time of the beginning of policy period.
 Commercial vehicle insurance: It provides cover for all the vehicles
which are not used for personal purposes, like the Trucks and HMVs.
The amount of premium depends on the showroom price of the
vehicle at the commencement of the insurance period, make of the
vehicle and the place of registration of the vehicle.

222. What it covers?
The auto insurance generally includes:
 Loss or damage by accident, fire, lightning, self ignition, external
explosion, burglary, housebreaking or theft, malicious act.
 Liability for third party injury/death, third party property and
liability to paid driver.
 On payment of appropriate additional premium, loss/damage to
electrical/electronic accessories.

223. Exclusions
Typically, the motor insurance plan does not provide for:
 Normal wear and tear or general ageing of the vehicle
 Mechanical/electrical breakdown.
 Depreciation, wear and tear of consumables like tubes and tires.
 Damages that occur while a person is driving with invalid driving
license.
 Damage that occur while a person is under the influence of drugs
or liquor.
 Damage due to a war, civil war, mutiny, or nuclear risk.
 Claims arising out of contractual liability.
 Use of vehicle other than what it is meant for. For example, if a
private car is being used as a taxi and gets involved in an accident,
the owner will not be able to claim damages.

224. Indian Companies Offering AI
 HSBC India - Auto Secure
 Bajaj Allianz - Bajaj Allianz's Motor Insurance
 ICICI Lombard - Motor Plans, Two Wheeler Package Policy
 United India Insurance Co. - Motor Package and Liability Only
Policies
 The New India Assurance Co. - Motor Policy

226. Risk Management
Risk Management is a
scientific approach to deal
with pure risk by anticipating
possible accidental losses &
designing & implementing
procedures that minimize the
occurrence of loss or financial
impact of the losses that do
occur

227. Features of Risk Management
 Risk management is a scientific approach
It covers the risks of persons or property
It helps to evaluate the risk faced by a business enterprise
It is a solution to the challenges in dealing with pure risk.
It involves decision making
It helps to create the right business policies & stratergies
It helps to manage & control men and machines effectively
Select the suitable technique /mehod to handle the risk
Avod expenditure, interruption and misery relating to risks
Decide which risks are worth taking/pursuing and which are
not

228. Importance of Risk Management
To evaluate the risk of the business
For effective handling of spreading the risk, monitoring
and insuring against
To introduce various plans and techniques to minimize
the risks
To give advice and make suggestion for handling risk
To avoid cost, disruption, and unhappiness in relating to
risk
To fix the sum assured under the policy and to describe
on whether to insure or not
To select the appropriate technique /methods to manage
the risk
To create awareness about the risks among the people

229. Risk management toolsThe techniques used in Risk Management for dealing with risks are
Risk control and Risk Financing
Risk control :
Risk control focuses on minimizing the risk of loss to which the firm is
exposed and includes the techniques of risk avoidance and risk reduction
Risk financing
It involves arrangement of funds to meet losses arising from the risk. It is
a technique designed to guarantee the availability of funds to meet the
losses. It can take the form of risk retention or transfer. Risk retention is
an exposure which is not avoided or transferred. They are retained by the
company. It is accompanied by specific budgetary allocations to meet the
losses and may involve accumulations of funds to meet the deviations
from the losses.

230. Risk Management Process
Determination of objectives
Risk Identification
Risk Analysis
Considering Alternatives
Implementation of the
Decision
Evaluation and Review

231. Risk Management Process
Risk management process is divided into the following steps:
1. Determination of objectives : It is the process of deciding
precisely about the risk management programme of the
management. The objectives can be Pre loss and Post loss
Pre loss : Important objectives before a loss occurs includes
economy, reduction of anxiety & meeting legal obligations.
Ist objective : Economy means that the firm should prepare for
potential loss in the most economical way
2nd objective reduction of anxiety means certain loss exposure
can cause greater worry & fear for the risk manager
3rd objective is To meet any legal obligations (i.e) Government
regulations are met for the safety of the workers, disposal of
waste etc.

232. Post loss objectives : Objectives after a
loss occurs including survival, continued
operation, ability of earnings, continued
growth and social responsibility
1. After a loss the firm can resume at partial
operation within some time period
2. Continue operating (e.g) public utility,
banks etc
3. Earnings of the company has to be
maintained
4. A company can grow by developing new
products and markets
5. Minimizing the effects that a loss will
have on other persons or society

233. Identification of Risk
It is difficult to generalize about
the risk that an organization is
likely to face. Because differences
in operations and conditions give
rise to different risk. Risk
management managers use some
systematic approaches to the
problem of risk identification.
Analysis of documents, flow
charts, internal communication
system etc can be used to identify
the risk.

234. Evaluating Risk
It means using certain rankings
according to the importance of risk.
In this case the programmes like
critical analysis, probability theory
and loss unit concept can be used.
Considering alternatives: Once the
risk is evaluated the next step is to
find the best alternative. It is a
problem of decision making.
Deciding which technique available
should be used in dealing with risk.
The risk management policy should
be chosen in such a way the rules
allowed can be followed easily

235. After risk identification and evaluation, the alternatives
have to be considered it is a problem of decision
making. It is deciding which technique has to be used
in dealing with the risk. The organization's
Management policy establishes the criteria to be
applied in the choice of techniques outline the rules
within which the risk management may happen.

236. Implementation of Decision
The decision is made to retain the risk
in one business. If the fund is
accumulated proper administrative
procedure should be set up to
implement the decision. If loss
prevention sis selected to deal with the
risk, proper program must be designed
and implemented. The decision to
transfer the risk through reinsurance, it
should be followed by an insurer,
negotiations and placement of the
insurance

237. Evaluation and Review
This step permits the manager to review decisions
and discover mistakes. He has to reevaluate the
programme’s objectives, repeat identification
process to ensure that it ha been performed
correctly and then evaluate the risk that has been
identified and verified how to address.

238. Risk Management Information system (RMIS)
 These are software tools designed to assist risk
managers in their functions.
 Traditional tools emphasizes claim management, safety
monitoring and financing losses.
 Other tools available are insurance policies, exposure
data and insurance certificates.
 It helps the enterprise to a greater extent
 Once connected to an organization's existing
information system this gathers information from all
these various system into one database. It can be
analyzed from various angles to get different
perspective on the risks the organization faces

239. Distinguish Between
Credit card Debit card
 It is a pay later product
 Credit is granted for maximum
period of 50 days
 Interest & other charges have to be
paid
 Opening & maintaining an A/C is
not compulsory
 No sophisticated
telecommunication system is
required
 It is a pay now product
 No credit is allowed (directly
debited from the A/C)
 No interest charge
 It is essential
 Communication network is
required

240. In ordinary language Risk means a loss or
which cause harm to someone
Definitions:
Macmillan Dictionary:
The possibility that something unpleasant or
dangerous might happen
E.F Vaughan :
A condition in which there is a possibility of an
adverse deviation from a desired outcome that
is expected or hoped for
Concept of
Risk
240
Occurencnc
e of an
incident
Desired
outcome
Undesired
outcome/deviations

241. 241
Risk means ….. ?????????????
The possibility of unfavorable results
following any occurrence.
They are due to uncertainties
Uncertainty – a situation where the
outcome or result can only be estimated
but not predicted with precision
It is a subjective phenomenon
A concept based on an individual’s own
perception there by implying different
degrees to different individuals.
Decisions under these conditions are
difficult and depend not only upon an
individual’s skill, power of judgment but
to a great extent upon luck too.
Uncertainty is immeasurable & non
insurable

242. How uncertainty differs from…….
242
Uncertainty is a state of mind
Element of doubt due to lack of
knowledge about what will happen
in the future. It is the cause of
Risk
Peril
It is a serious & immediate
danger
It is the cause of a loss

243. An Example
243
Fire
Accident/Natu
ral calamity
Loss of human
lives/Damage of
assets/building etc
Peril Loss

244. Hazard
244
It refers to the conditions that increase the
severity of loss or the conditions affecting perils
Fall in
Sensex
Loss to the
business
Mental
breakdown
Fatal heart
attack
peril

245. Classification of Hazards
Physical
conditions
which
aggravate the
probability of
loss caused by
any peril (eg.)
Storing of
crackers in
congested
commercial
complex
Physical
Increase in
severity of loss
resulting from
dishonesty of
a person. (Eg.)
A person
destroying his
own asset to
get more
through
claims
Moral
Attitude of
people like
carelessness
towards the
cause of loss
as the
property is
insured (eg.)
Rash driving,
poor
maintenance
Morale
245

246. In a Nutshell….. The term peril is used for loss producing events
 Hazard is used for an aggravating factor
magnifying the impact of loss
 Loss is a section of losing
something/deterioration of value for which no
compensation has been received
 Chances of loss is the frequency of occurrence of
loss i.e probability of loss
246

247. Business Risk  Risk is an inherent part of any business
 It is this element which differentiates
business from other activities.
 Business aims at profit, but many a times
forced to face loss. Because it has
practically no control over several affecting
factors like change in customer’s taste,
fashion, demand, change in technology,
degree of competition, government policies
etc
 Business risk is a term used to define a factor
or factors that may have a negative impact on
the profitability or success of a company. A
business risk could stem from external
factors that a business may have little control
over, or issues within the company itself.
247

248. Factors -Major business risks
Factors that bring variation in cash flows and business value
are:
 Price risk: It refers to uncertainty over the magnitude of
cash flows due to possible change in output and input prices
Output risk –what u can demand from customers, input
price-what is give factor owners raw materials etc.
 Price risk may be due to
Commodity price risk ; Exchange rate risk; Interest rate risk
248
Interest
rate risk
Price risk
Commodit
y price risk
Exchange
rate risk

249.  Credit risk: A firm’s customers and the parties to
whom it has lent money will delay /fail to make
payments This will be more in financial institutions as
they frequently lend money Generally firms have to pay
more to borrow money as credit risk increases
 Pure risk : It is risk of reduction in the value of
business assets due to physical damage, theft and fire. It
also includes risk due to death, illness, disability of
employees etc for which business has agreed to pay
compensation
249

250. Degree of Risk
250
It is related with likelihood of occurrence
It is measured by probability of a adverse
deviation
It case of an individual, it may be
measured by what is hoped for
Incase of large number it can be measured
in terms of likelihood that given number of
losses will occur.
Predictions can be made on the basis of
these estimates
Insurance companies make predictions
about losses that are expected to occur and
charge a premium based on this predictions.

251. Risk for individuals
251
Risk faced by individuals and families can
be classified as follows:
Earnings risk: It refers to the fluctuations in
the family’s earnings The family’s earnings will
also be uncertain.
Medical expenses risk: Health care cost and
liability suits can cause large unexpected
expenses
Physical asset risk : A family also faces loss
due to physical assets like vehicles, houses etc
Financial asset risk: The value financial asset
also subject to fluctuations due to inflation,
change in the value of shares, debentures and
bonds

252. Types of Business Risk
 Pure and Speculative risk
 Internal and External risk
 Financial and Non-
Financial risk
 Static and Dynamic risk
 Fundamental and Particular
risk
252

253. Pure Risk & Speculative Risk
Pure Risk refers to a chance of loss
without any possibility of gain to an
individual (e.g) a fire breaks out,
Similarly when a car is insured the
person will get compensation only
when accident occurs. otherwise not
Speculation Risk: It is a situation
which involves not only the chance of
loss but also a possibility of gain as
well. (e.g) share market, any innovation
in business may result in heavy loss or
huge profits
253

254. Classification of Pure Risk
254
Pure Risk
LiabilityPersonal Property

255. Personal Risk : Risk that directly affect the earning
capacity of individuals. It includes:
255
Premature Death
Sickness/Disability
Risk arising out of Failure
Old age,Unemployment

256. Property Risk: It includes the possibility of loss of
property or income from property. (e.g) immovable
property like HOUSE may get damaged due to flood,
fire etc. personal assets may be stolen/destroyed due to
fire.
Loss due to this risk may be
256
DIRECT-
DAMAGE TO
THE
PROPERTY
INDIRECT-
FINANCIAL
LOSS(INCOME
FROM THE P
INDIRECT-
FINANCIAL
LOSS
DIRECT –
DAMAGE TO
THE
PROPERTY

257. Liability Risk: It arise due to intentional
or unintentional damage to a
property/injury to a person, due to
invasion of rights of other person, loots for
which one is liable to pay damage or
compensation. It arises from the legal
provision. Workman’s compensation Act,
Labour law are examples of this.
257

258. Distinguish
Pure Risk Speculative Risk
 Inherent in business - they
cannot be avoided – can
only be minimized
 They are the cause of losses
but never cause gains
 These risks are insured for.
 Entrepreneur may avoid
insurance or ignore it
 Deliberately assumed by
entrepreneur with the hope
of making profit
 An element of gain is
inherent in some business;
they may cause either gain or
loss.
 These risks cannot be
insured for
 Possible to avoid or shift the
risk to others
258

259. Internal Risk & External Risk
259
Internal risk It is caused by internal events amounted
with the working of a business enterprise (e.g)
worker’s strike, breakdown of machinery, dishonesty
of employee, disharmony of worker & management –
adversely affect the working of an enterprise and
likely to cause losses It can be controlled to a greater
extent through efficient handling
External risk: Forces belonging to the external
environment affecting particular business enterprise
(e.g) changes in market conditions, production
technology, political environment, natural calamity
etc affect its profit capacity

260. Static and Dynamic risk
Static risk: It would occur irrespective of any change in
the economy. It results in destruction of an asset or
change in its possession (e.g) natural calamities. It
cannot be a source of gain to the society. These are
more or less predictable as they occur at regular
intervals of time; it can be insured for.
Dynamic risk: It is the result of changes in the economic
environment .These are less predictable; as they do not
have a defined pattern of occurrence. changes in price
level, consumer taste, technological changes, etc., They
cannot be insured for; They are the result of
adjustments to misallocation of resources & brings
gains to the society in the long run
260

261. Fundamental Risk and Particular Risk
Fundamental risk: General/Group risks which affects the
economy as a whole at the macro level; they are
consequences of factors beyond the control of
individuals who suffer from losses; it affects the society &
not individuals. They are impersonal in origin & are not
caused by fault of any particular individual but by
economic, social, cultural and natural factors. (e.g) earth
quake. Flood, war, inflation, unemployment, etc.
Particular Risk: These are personal in origin. They are
caused by the fault of particular individuals. They causes
loss only to a few individuals. (e.g) burning of a house,
factory, burglary, theft, murder of a manager, etc.
261

262. Financial and Non Financial Risk
Financial risk: These are risky situations likely to cause
financial losses. There is some element of risk in every
aspect of human endeavor and many of these risks
have no financial consequences. However insurance
involves only financial risks
Non financial: when the possibility of a financial loss
does not exist then it is called non financial risk
262

263. Insurable & Non-insurable Risk
Insurable Risk: These are pure risks which can be predicted, and
the chances of their occurrence can be determined. It can be
shifted through various types of insurance policies covering
the risk (e.g) Life Insurance, Marine insurance, Fire insurance
automobile insurance etc.
Non-Insurable risks: These cannot be covered or shifted
through insurance. The likelihood of these risks cannot be
determined. These cannot be predicted with any degree of
accuracy. They are speculative in nature. They can’t be
forecasted, cannot be insured(e.g) change in demand, change
in fashion, price fluctuations etc.
263

264. Essential requisites of insurable risk….
1. The risk to be insurable must be accidental/occur
by chance & not by artificially
2. The risk must be a common one ( a large no. of units
are facing this risk)
3. There must be an element of uncertainty regarding
the time & chance of occurrence of risk
4. The loss caused by the risk must be predictable and
measurable with a fair degree of accuracy
5. The risk must be capable of causing substantial loss
or damage and not through attack by enemies
6. The party must have genuine interest in the
avoidance of risk
264

265. Burden of Risk
265
Risk cannot be eliminated
completely.
But sensible handling of risk can
minimize the negative consequences
of business risks. The negligence of
someone may result in injury to a
person or damage to property or
financial loss.. It can be handled by
adopting any of the following
methods:

266. Methods of Handling risk
Prevention of risk or Avoiding risk
Reduction of risk
Shifting of risk
Acceptance of risk
Spreading of risk
266

267. 1. Avoiding or Prevention of risk: One can avoid risk by
avoiding the cause of risk. It is like a preventive measure.
An organizer may avoid getting involved in the action
that may give rise to risks particularly when the potential
results or gains are not considered to be worthy of the
risk.
(e.g)losses from theft can be minimized by giving effective
training to the employees of the firm.
Loss from fire can be completely avoided by conscious
constructing a fire proof building for stocking products
267

268. 2. Reduction of risk: many risks are neither transferable
nor avoidable. But business risks are reduced by
concentrated effort of risk management.
 e.g. loss due to market change can be minimized by
market research, fashion changes by stock clearance
sale at a discount rate etc
3. Shifting/transferring of risk: business people do not
want to bear certain risk which bring losses to the firm. so
they want to transfer them many such risks can be
avoided through insurance.
268

269.  Insurance companies cover such risks for a amount
known as premium
 E.g marine insurance, health insurance. fire insurance
etc A businessman can easily transfer the risk to the
insurer Insurance is a contract event by which the
assurer in consideration of the payment of a sum
(premium) agrees to pay a specified sum to the
insured on the happening of a certain event
269

270. 4. Acceptance of risks: Because the element of risk is
incidental to life and cannot usually be avoided it may
be accepted in following ways:
Some risks are accepted in ignorance
Some risks are accepted inadvertently -a family fails to
make adequate provision for his family in the event of
premature death/or disability through accident
Some risks are accepted intentionally
Many such risks are can be accepted by the professional
insurance companies like LIC, Bajaj Allianz Life
insurance company, Birla Sun Life insurance company
etc.
270

271. 5.Spreading of risks: It involves the combination of the
risks of many individuals who band together. It does
not reduce the aggregate amount of potential loss but
it does achieve a reduction of uncertainty and it
spreads the burden for those who are thus banded
together.
 E.g entering into a business where many country
people are involved
271

272. Risk Management
272
Risk Management is a
scientific approach to
deal with pure risk by
anticipating possible
accidental losses &
designing &
implementing
procedures that
minimize the
occurrence of loss or
financial impact of the
losses that do occur.

273. 273

274. •Principle of Uberrimae fidei (Utmost Good
Faith),
•Principle of Insurable Interest,
•Principle of Indemnity,
•Principle of Contribution,
•Principle of Subrogation,
•Principle of Loss Minimization, and
•Principle of Cause Proximal (Nearest Cause).
274

275. Principle of Insurable Interest
 The principle of insurable interest states that the person
getting insured must have insurable interest in the object
of insurance. A person has an insurable interest when the
physical existence of the insured object gives him some
gain but its non-existence will give him a loss. In simple
words, the insured person must suffer some financial loss
by the damage of the insured object.
 Contd.
275

276. Principle of Uberrimae fidei (a Latin phrase), or
in simple english words, the Principle of Utmost
Good Faith, is a very basic and first primary
principle of insurance. According to this
principle, the insurance contract must be signed
by both parties (i.e insurer and insured) in an
absolute good faith or belief or trust.
276

277. The person getting insured must willingly disclose and
surrender to the insurer his complete true information
regarding the subject matter of insurance. The insurer's
liability gets void (i.e legally revoked or cancelled) if any
facts, about the subject matter of insurance are either
omitted, hidden, falsified or presented in a wrong
manner by the insured.
The principle of Uberrimae fidei applies to all types of
insurance contracts.
277

278. Principle of Uberrimae fidei
(Utmost Good Faith
 For example :- The owner of a taxicab has insurable
interest in the taxicab because he is getting income
from it. But, if he sells it, he will not have an insurable
interest left in that taxicab.
 From above example, we can conclude that, ownership
plays a very crucial role in evaluating insurable
interest.
278

279. Principle of Indemnity
 Indemnity means security, protection and
compensation given against damage, loss or injury.
 According to the principle of indemnity, an insurance
contract is signed only for getting protection against
unpredicted financial losses arising due to future
uncertainties. Insurance contract is not made for
making profit else its sole purpose is to give
compensation in case of any damage or loss.
279

280. Principle of Contribution
 Principle of Contribution is a corollary of the principle
of indemnity. It applies to all contracts of indemnity, if
the insured has taken out more than one policy on the
same subject matter. According to this principle, the
insured can claim the compensation only to the extent
of actual loss either from all insurers or from any one
insurer. If one insurer pays full compensation then
that insurer can claim proportionate claim from the
other insurers.
280

281. Principle of Contribution
 For example :- Mr. John insures his property worth $
100,000 with two insurers "AIG Ltd." for $ 90,000 and
"MetLife Ltd." for $ 60,000. John's actual property
destroyed is worth $ 60,000, then Mr. John can claim
the full loss of $ 60,000 either from AIG Ltd. or
MetLife Ltd., or he can claim $ 36,000 from AIG Ltd.
and $ 24,000 from Metlife Ltd.
281

282. Principle of Contribution
 So, if the insured claims full amount of compensation
from one insurer then he cannot claim the same
compensation from other insurer and make a profit.
Secondly, if one insurance company pays the full
compensation then it can recover the proportionate
contribution from the other insurance company.
282

283. Principle of Subrogation
 Subrogation means substituting one creditor for
another.
 Principle of Subrogation is an extension and another
corollary of the principle of indemnity. It also applies
to all contracts of indemnity.
 According to the principle of subrogation, when the
insured is compensated for the losses due to damage to
his insured property, then the ownership right of such
property shifts to the insurer.
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284. Principle of Subrogation
 This principle is applicable only when the damaged
property has any value after the event causing the
damage. The insurer can benefit out of subrogation
rights only to the extent of the amount he has paid to
the insured as compensation.
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285. Principle of Subrogation
 For example :- Mr. John insures his house for $ 1
million. The house is totally destroyed by the
negligence of his neighbour Mr.Tom. The insurance
company shall settle the claim of Mr. John for $ 1
million. At the same time, it can file a law suit against
Mr.Tom for $ 1.2 million, the market value of the
house. If insurance company wins the case and collects
$ 1.2 million from Mr. Tom, then the insurance
company will retain $ 1 million (which it has already
paid to Mr. John) plus other expenses such as court
fees. The balance amount, if any will be given to Mr.
John, the insured.
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286. Principle of Loss Minimization
 According to the Principle of Loss Minimization,
insured must always try his level best to minimize the
loss of his insured property, in case of uncertain events
like a fire outbreak or blast, etc. The insured must take
all possible measures and necessary steps to control
and reduce the losses in such a scenario. The insured
must not neglect and behave irresponsibly during such
events just because the property is insured. Hence it is
a responsibility of the insured to protect his insured
property and avoid further losses.
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287. Principle of Loss Minimization
 For example :- Assume, Mr. John's house is set on fire
due to an electric short-circuit. In this tragic scenario,
Mr. John must try his level best to stop fire by all
possible means, like first calling nearest fire
department office, asking neighbors for emergency fire
extinguishers, etc. He must not remain inactive and
watch his house burning hoping, "Why should I
worry? I've insured my house."
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288. Principle of Cause Proximal (Nearest Cause)
 means when a loss is caused by more than one causes,
the proximate or the nearest or the closest cause
should be taken into consideration to decide the
liability of the insurer.
 The principle states that to find out whether the
insurer is liable for the loss or not, the proximate
(closest) and not the remote (farest) must be looked
into.
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289. Principle of Cause Proximal
(Nearest Cause)
 For example :- A cargo ship's base was punctured due to
rats and so sea water entered and cargo was damaged. Here
there are two causes for the damage of the cargo ship - (i)
The cargo ship getting punctured beacuse of rats, and (ii)
The sea water entering ship through puncture. The risk of
sea water is insured but the first cause is not. The nearest
cause of damage is sea water which is insured and therefore
the insurer must pay the compensation.
 However, in case of life insurance, the principle of Cause
Proximal does not apply. Whatever may be the reason of
death (whether a natural death or an unnatural death) the
insurer is liable to pay the amount of insurance.

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