STRUCTURE OF INDIAN FINANCIAL SYSTEM
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STRUCTURE OF
INDIAN FINANCIAL
SYSTEM
Financial System • A financial system functions as an
intermediary between savers and investors.
It facilitates the flow of funds from the areas
of surplus to the areas of deficit. It is
concerned about the money, credit and
finance.
• A financial system may be defined as a
set of institutions, instruments and
markets which promotes savings and
channels them to their most efficient use. It
consists of individuals (savers),
intermediaries, markets and users of
savings (investors).
Financial
Institutions • They are business organizations
dealing in financial resources.
• They collect resources by accepting
deposits from individuals and
institutions and lend them to trade,
industry and others.
• This means financial institutions
mobilize the savings of savers and
give credit or finance to the investors.
On the basis of the nature of activities,
financial institutions may be classified
as:
1.Banking financial institutions
• Banking institutions mobilize the
savings of the people.
• They provide a mechanism for the
smooth exchange of goods and
services.
• They extend credit while lending
money.
• They not only supply credit but also
create credit.
Contd
.. 2. Non-banking financial institutions
• The non-banking financial institutions also mobilize financial resources directly or indirectly from the people.
• They lend funds but do not create credit. Companies like LIC, GIC,UTI, Development Financial Institutions.
• Non-banking financial institutions can be categorized as investment companies, housing companies, leasing companies, hire purchase companies, specialized financial institutions
Financial Markets
• Financial markets are the centres or arrangements that provide facilities for buying and selling of financial claims and services.they create finacial assets.
• Financial markets exist wherever
financial transactions take place.
• Financial transactions include issue of equity stock by a company, purchase of bonds in the secondary market, deposit of money in a bank account, transfer of funds from a current account to a savings account etc.
Classification on the basis of the
type of financial claim:
1.Debt market: The debt market is the
financial market for fixed claims like debt
instruments
2.Equity Market: The equity market is the
financial market for residual claims i.e.,
equity instruments
Classification on the basis of
maturity of claims:
1. Money markets
• A market where short term funds are borrowed and lend is called money market.
• It deals in short term monetary assets with a maturity period of one year or less.
2. Capital Markets
• Capital market is the market for long term funds.
• This market deals in the long term claims, securities and stocks with a maturity period of more than one year.
Classification on the basis of
seasoning of claim
1. Primary markets
• Primary markets are those markets which deal in the new securities.
• Therefore, they are also known as new issue markets.
• These are markets where securities are issued for the first time.
2. Secondary market
• Secondary markets are those markets which deal in existing securities.
• Existing securities are those securities that have already been issued and are already outstanding.
• Secondary market consists of stock exchanges.
Classification on the basis of
structure 1. Organized markets
• These are financial markets in which financial transactions take place within the well established exchanges or in the systematic and orderly structure.
2. Unorganized markets.
• These are financial markets in which financial transactions take place outside the well established exchange or without systematic and orderly structure or arrangements.
Financial Instruments
⮚ The instruments used for raising resources
for corporate activities through the
capital market are known as ‘capital market
instruments’.
⮚ Example: Preference shares, equity
shares, warrants, debentures and
bonds.
Contd
.. ⮚The instruments used for raising and
supplying money in short period not
exceeding one year are called ‘money market
instruments’.
⮚Example: treasury bills, gilt-edge securities,
state government and public sector
instruments, commercial paper, certificate of
deposit,commercial bills etc.
Financial Services
• The new sector in the matured financial system is known as financial services sector. Its objective is to intermediate and facilitate financial transactions of individuals and institutional investors.
• The financial institutions and financial markets help the financial system through financial instruments and financial services.
Contd
.. • The financial services include all activities
connected with the transformation of
savings into investment.
• Important financial services include
lease financing, hire purchase,
installment payment systems,
merchant banking, factoring,mutual
funds,credit rating,stock broking etc
Banking made its first appearance in Italy in
1157,which is Bank of Venice.Banking in India in the modern sense
originated in the last decades of the 18th century. The first banks
were Bank of Hindustan (1770-1829) and The General Bank of India,
established 1786 .
The largest bank, and the oldest still in existence,
is the State Bank of India, which originated from the Bank of
Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other
two being the Bank of Bombay and the Bank of Madras, all three of
which were established under charters from the British East India
Company. The three banks merged in 1921 to form the Imperial
Bank of India, which, upon India's independence, became the State
Bank of India in 1955. For many years the presidency banks acted as
quasi-central banks, as did their successors, until the Reserve Bank
of India was established in 1935.
In 1969 the Indian government nationalized all
the major banks that it did not already own and these have
remained under government ownership. They are run under a
structure known as 'profit-making public sector undertaking'
(PSU) and are allowed to compete and operate as commercial
banks. The Indian banking sector is made up of four types of
banks i.e., Public sector banks,private commercial banks,
RRB’s and foreign banks.
Banking in India was generally fairly mature in
terms of supply, product range and reach-even though reach in
rural India and to the poor still remains a challenge. The
government has developed initiatives to address this through
the State Bank of India expanding its branch network and
through the National Bank for Agriculture and Rural
Development with things like microfinance.
Established in 1935
Apex body of Indian banking system
Headquarters is in Mumbai
India’s monetary authority
Supervisor of financial system
Issuer of currency
Banker to bank
Banker to government
Maintains financial stability
SCHEDULED BANKS
Scheduled banks are those banks
whose name appears in the 2nd schedule of
Reserve Bank Of India Act, 1934.
NON-SCHEDULED BANKS
Non-scheduled banks are those
banks whose name doesn’t appear in the 2nd
schedule of Reserve Bank Of India Act, 1934.
Scheduled bank
1. Their paid up capital and reserves should not
be less than 5 lacs.
2. Their activities should not cause any damage
to the depositors.
3. They should be registered as a body corporate
or a Cooperative but not as a sole proprietor or partnership business.
BANKS UNDER SCHEDULED BANKS
COMMERCIAL BANKS
They are the banks mainly deal with commercial banking operations like acceptance of deposits and granting loans to the public. They are mainly classified into four:-
Scheduled
banks
Commercial
banks
Co-operative
banks
1. PUBLIC SECTOR
BANKS Public sector banks are those banks which are
owned and controlled by the government . All the nationalized
banks and regional rural banks are public sector banks.
Examples:
State Bank of India and it’s 7
Subsidiaries. Bank Of Baroda
Syndicate Bank
Vijaya Bank
Canara Bank etc.
2. PRIVATE SECTOR
BANKS These banks are owned and controlled by private
institutions or individuals and not by the government.
Examples:
South Indian Bank
ICICI
HDFC
Axis bank etc.
3. FOREIGN BANKS
These banks are formed and registered in foreign
countries and have their head office in foreign country.as far as
India is concerned, any bank registered outside India and have a
branch in India is a foreign bank.
Examples
Yes Bank
Citi Bank
HSBC
Deutsche Bank etc.
4.Regional rural banks
Regional rural banks are government banks operating at
regional level in different states of India.These are designed
to cater the needs of people in rural areas. These banks
helps to bring the financial inclusion at the primary level .
currently there are 43 regional rural banks in India.
eg.,Telangana Grameena bank
B) CO-OPERATIVE BANKS
These are banks where co-operative societies that are formed at a state or district level have a share of more than 51%. these are primarily set-up for the purpose of services the farming community or to aid in land or infrastructure development at the state or district level. They are of two:-
1. URBAN CO-OPERATIVE BANKS
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses
examples:-
Maharashtra state apex co-operative bank
Karnataka state apex co-operative bank
2. STATE CO-OPERATIVE
BANKS State co-operative banks are the apex co-operative
institution in a state . They are federations of district co-
operative banks, and they monitor the activities of all co-
operative banks in the state.
Examples:-
Kerala state co-operative bank
Orissa state co-operative bank x
West Bengal state co-operative
bank
3. National bank for agriculture and rural
development (NABARD)
National bank for agriculture and rural
development (NABARD) was established as an
apex bank that provides finance for agriculture
and rural development.
MEANING & DEFINITION
What is a Bank?
• In simple terms bank is a financial institution whose main business is accepting deposits and lending loans.
• A banker is a dealer of money and credit.
Bank - Origin
Some of the banking scholars and authors believe that the word „bank‟ is derived from a French word „bancus‟ or „banque‟ which means a bench.
The early bankers transacted business on benches in market places.
When the banker failed, the bench was broken by banks. The act was called „bankrupt‟.
Some argue that the term bank is derived from the German word „banc‟ meaning joint stock fund or heap.
Bank - Definition
The word banking has been defined as “accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.
-Banking Regulation Act 1949
AB
SBI
AXIS
Meaning:
Under branch banking system a single institution operates through a network of branches which are established throughout the country and some times outside the country. The policy making and planning authorities will be at the head office. With decentralized authority, the routine work will be undertaken by the subordinates. Branches are linked to the head office through effective communication systems.
Branch Banking System
Definition:
“The system of banking in which a banking institution conducts branches or offices at locations other than that of the head office”.
Eg: Banking system in UK, India, Canada, Australia etc.
Branch Banking System
Economies of large scale operations: Banks under branch
banking are large size corporate enterprises. Their capital resources are huge and the operations are in large scale. As a result their business turnover is very high.
Improved efficiency and skills: Branch banks enjoy
larger resources at their disposal. Scale of operations is also large. Therefore they can appoint highly skilled persons for each specialized task in the bank. Every department is equipped with professionally skilled and highly qualified personnel. Thus they can enjoy the benefits of division of labour and specialization. This improves the work efficiency and the quality of services. Eg.: CA and ICWA holders for finance, agricultural graduates for agriculture section etc.
Features / Advantages
Public Confidence: The survival and growth of banking
entirely depends on public confidence. A bank with a large network of branches and huge financial resources wins the public confidence. People believe that the banks do not close the business suddenly. Even short term losses the banks can encounter efficiently. Due to these strengths public will have more confidence on branch banking.
Spread of Risk: Under branch banking system, large number of
branches provide banking services. If one branch or some branches in a particular area fails or gets losses, they need not close the business. The losses are offset by the profits of other branches and the bank remains healthy and active. Gradually with the support of other branches, loss making branches can turn to profit making units.
Features / Advantages
Economic use of cash reserves: Every bank maintains cash reserves to
meet routine demands. Idle cash does not add to profits. Branch banks can manage their regular obligations with lower cash reserves. In times of emergency funds can be transferred from one branch to another branch. Due to less idle cash reserves, branch banks can improve their investments. This leads to improved profits.
Cheap remittance facility: Branch banking system consists of a
network of branches spread all over the country, some times outside the country. This network facilitates easy, cheap and convenient mechanism to transfer money from one place to another.
Diversified investments: Large capital resources, low cash reserve
requirements encourage branch banks to diversify investments into more profitable channels. This also facilitates business expansion and diversification. Ex.: Several commercial banks in India launched mutual funds, merchant banking divisions, capital investment cells etc. This results in more profits and high quality services to customers
Features / Advantages
Uniform interest rates: Under branch banking several branches work
under single management. Thus the interest rates are uniform throughout the country, irrespective of area such as rural, urban or industrial and irrespective of locality in the same region. This feature is the strength of organized financial market.
Effective control by the Central Bank: Under branch banking system,
number of banks is less with a large share in the market. This facilitates efficient control and regulation by the central bank. Credit control weapons can be effectively applied in branch banking system.
Global experiences and knowledge: Under branch banking, banks
spread branches throughout the country and also in other countries. Employees are frequently transferred from one branch to another. Thus they acquire better knowledge about the developments and changes in other areas. Through their own branches they get latest information and developments in other countries. This experience and knowledge provides base for the development of banking and also contributes indirectly for economic progress.
Features / Advantages
More savings can be mobilized: Branch banking covers
all the areas - rural, urban etc. Banks can mobilize savings from all those regions where demand for investments is less and which can spare significant percentage of income towards savings. Ex.: In agriculturally developed rural areas, surplus is always greater than investment needs. By introducing suitable schemes, banks can attract deposits from all income groups.
Balanced regional development: Banks open branches in urban and also rural areas. Some times branches may operate with losses. Still the branches continue to work with the profits of other branches and try to develop the neglected, remote rural areas. This can be possible only under branch banking. Otherwise no bank prefers to establish its office in less viable backward areas.
Features / Advantages
Good quality services are offered: Banks with a large
network of branches enjoy huge capital resources, professionally skilled employees and more profits. Thus they can offer several financial services of high quality standards at a reasonable price. Ex: Facility of ATM, online banking, automated banking services etc.
Human resource development: Due to specialization and division of labour, more staff is recruited. Branch banks are capable of providing training to the staff on the latest technology. They maintain separate institutions to impart training to the staff regularly. They also maintain separate research & development departments and publications wing to encourage innovative ideas of staff and banks can design new schemes and services.
Features / Advantages
Difficult to manage and supervise: Branch banking spreads to
a wider area, which is far to the head office. It is difficult to assure efficient management and supervision. The superior authority has less control over the branches and employees. The supervision requires special attention. This adds financial burden on the management in the form of inspection, internal control and checking. If the bank is big with large network of branches the chance of mismanagement is more.
Delay in decisions: Under branch banking total authority concentrates at the head office. Branch managers are not given freedom or authority to make certain decisions because of fear of mismanagement. As a result for several banking and financial services they have to wait for the approval of higher authorities. Delay causes inconvenience to the customers, especially in the days of speed and instant services.
Limitations
Creates monopoly power: Important feature of
branch banking system is that the total banking will be concentrated in a few hands. Thus it leads to the concentration of economic power. Monopoly is not good for the healthy progress of the economy.
No personal contact with customers: Banking business entirely depends on public confidence and customer relation with the banker. One of the serious limitations of branch banking is that the contact between customers and higher authorities of bank is completely absent. Employees at the branch level are neither local people nor permanent employees. They change very frequently. As a result the personal touch is completely vanished in branch banking.
Limitations
Less involvement by the employees: Employees at the branch level implement what the higher authorities say. This is a mechanical job. There is no opportunity to show the skills of employees to improve the business. Gradually they lose enthusiasm. This makes the banking industry rigid. Thus branch banking is not suitable to those who are skilled and good in innovative ideas.
Existence of less viable branches: Under branch banking system weak, inefficient and loss making branches continue to work. They are able to survive with the profits of other branches. Such unviable units are not good for the industry. Such situation makes the banking industry weak and inefficient and they cannot compete with other banks in international markets. If it is a unit banking system, non-viable units are automatically closed and only the efficient banks survive in the market.
Limitations
Unnecessary expenditure: Branches in this banking system are
widely spread. To coordinate the activities of highly dispersed branches and to supervise the working, the management spends additional funds. The administrative charges, telecommunication charges, travel and transport expenses, supervision and inspection charges etc, are unnecessary burden on the bank management. Such expenses constitute a significant percentage in total expenditure of the bank.
Duplication of banking services: Under branch banking the chance of duplication of banking services are more compared to other systems. When branches of different banks are located at the same area, same person may get benefit from different banks. In countries like India, the limited resources are diverted to limited people and others are totally deprived of banking or financial services. Ex.: Bank lockers, concessional loans etc.
Limitations
Savings of one area are invested in other areas: This is another
limitation of branch banks. Branches in semi-urban and rural areas mobilize deposits. But the same is not utilized for the development of the same area. These funds are invested usually in urban and industrial areas. Thus in reality branch banking fails to bring balanced regional development.
Unhealthy competition: Banks under branch banking are large corporate entities. Huge funds at their disposal and extensively spread branch network motivates them to unhealthy competition. Such competition cannot add to the development of banking industry, because most of their financial and personnel resources are spent in attracting new customers.
Problems with foreign branches: Branches opened in other countries encounter several problems due to differences in banking laws, trade policies and priorities of the local areas. Some times foreign branches face the threat of nationalization by the respective government. The foreign exchange rules and regulations impose several restrictions on the business of banks.
Limitations
Meaning:
Unit banking is a system where individual bank undertakes banking business through a single office or a limited number of offices. Thus it is a bank with no branches and operates as an individual independent bank. Unit banking is developed in the USA.
Unit Banking System
A B
Advantages of small scale operations
Efficient management
Coordination
Check the concentration of wealth
Quick decision making
Inefficient banks are eliminated
Flexible system
Local development
Involvement of the staff
Personal touch with customers
Advantages / Features of Unit Banking System
Easy to establish and close
Less administrative expenses
Healthy interpersonal relations
Advantages / Features of Unit Banking System
Limited resources:
Maintain additional cash reserves:
Risk cannot be distributed:
Neglect backward areas:
No chance of cheap remittance facilities :
Interest rates differ:
Cannot appoint highly skilled personnel:
Less national and international exposure :
Central banks have limited control over banks:
Local pressure :
Limitations
Meaning: Group banking refers to the system of
banking in which two or more banks are controlled by a corporation or a business trust, called the holding company. Each bank is an independent entity but its management is in the hands of the holding company.
Group Banking
Group banking is a system where some banks are directly or
indirectly controlled by a holding company which may be or may not be a bank. The holding company acquires the control by having 25% of ownership or by having control over two or more banks. The holding company is the parent company and the others are operating companies. But each operating company/ bank is a separate entity with its own name and operations.
Under group banking, each group may consist of 5 or more banks. One bank may play a key role and others may be small banks. There are no restrictions with regard to the type of bank to be in the group. It may be a branch bank, unit bank or investment bank or any other bank. Group of banks in the system may be located within the country or outside the country
Group Banking
Group banking is system where different banks
work independently under the management of the holding company.
Holding company may be a bank or may not be a bank.
One group may comprise as many as 110 members as in some groups in USA and some groups may consist of less number of members may be around 5 to 10 banks.
Group Banking - Features
Chain banking also developed in the USA during
middle of nineteenth century. Chain banking refers to the system in which two or more banks are controlled by an individual or a group of individuals. Chain banking works just like the group banking system. The only difference is that in group banking central administration and control are exercised by a holding company. But in chain banking a group of individuals or institutions have control on other member banks.
Chain Banking
Correspondent banking system developed in those
countries where unit banking system is in operation. This system is developed to fill up the gaps in unit banking system and to rectify the limitations of unit banking. Under correspondent banking system banks maintain a correspondent relationship with one another and gain the benefits. In this system a rural bank deposits its surplus in a nearby city bank and the city bank in turn open deposit accounts in larger banks working in major trade and financial centers. Thus all the banks share some facilities such as clearance of cheques, remittance facilities, loan participation etc. Correspondent banking system enjoys the advantages of both unit banking and branch banking.
Correspondent Banking
Mixed Banking
Mixed banking is a system of banking under which the commercial banks provide both short term and long term loans to commerce and industry. Under mixed banking system, the commercial banks provide all types of loans. It implies that commercial banks take the responsibility of commercial banking and also industrial/ investment banking. Therefore this banking system is known as mixed banking. Example: Mixed banking developed in Germany, Netherlands, Belgium, Hungary etc. Mixed banks in Germany are also popular as universal banks, because the scope of activities of banks in Germany is so wide that they include large variety of functions.
Definition: Banking is the business of accepting for the purpose of lending or
investment, of deposits of money from the public repayable on
demand or otherwise and withdraw-able by cheque, draft, and
order or otherwise.” Indian Banking Regulation Act, 1949
”
Meaning: “Banking means
transacting business with a bank; deposting or withdrawing funds or requesting a loan etc.”
Functions Of A Bank:
Primary FunctionSecondaryFunction
The main functions of banks are accepting deposit and lending loans.
A) Accepting deposits1. Fixed deposits: These deposits mature after a considerable long
period like 1 year or more than that the rate of interest is fixed .
Primary Function:
2. CurrentA/C deposit: These are mainly maintain by business
community to facilitate frequent transaction with big amounts.
3. Savings bank A/C: It is kind of demand deposits which is generally kept by the people for the sake of safety. .
4. Recurring deposit A/C: In case of recurring deposit the fixed
amount is deposited in a bank every month for a fixed
period of time.
Primary Function:
Primary Function: B) Lending loans
1. Call loans: These loan are called back at any time. Normally, this loans are taken by bill brokers or stock brokers
2. Short term loans: These are sanctioned
for a period up to 1 year.
3. Medium term loans: These are sanctioned for the period
varying between 1and 5 years.
Long TermLoans:
These loan are sanctioned for a period of more than 5 years it
inc1lu. dOesv: erdraft: The bank grants overdraft facility to its reliable
and respectable depositors.
2.Cash credit: Under this facility, the bank allows the borrower to
withdraw cash againstcertain security.
3. Bills of Exchange: The bank provide funds to their customers by purchasing or
discounting bills of exchange.
Secondary Function: Apart from the main functions, the banks also
provide financial services to the corporate sector and business and society. They are
as follows:
1.Merchant Banking: Merchant banking is an
organization which underwrites securities for companies, advises
in various activities.
Secondary Function: 2. Leasing: Banks have started funding the
fixed assets through leasing. It refers to the renting out of immovable property by the
bank to the businessmen.
3.Mutual funds: The main function of mutual fund is to
mobilize the savings of the general public and invest them in stock
market and money market.
Secondary Function: 4. Venture Capital (VC): Venture Capital is financial capital provided to early stage, high
potential, high risk, growth startupcompanies.
The venture capital fund makes moneyby owning equity in the companies it
invests in, which usually have a novel technology
or business .
Secondary Function:
5. ATM: An ATM is also known as cash point. The banks nowadays provide ATM facilities. The
customers can withdrawmoney easily and quickly 24 hours a day. .
6. Telebanking: Telebanking is a throwback to the days when
people would call into a central number at their bank/financial
institution in order to get balance.
Secondary Function: 7. Credit cards: Credit cards allow a person to buy
goods and services up to a certain limit without immediate payment. The amount is paid to the shops,
hotel, etc. by the commercial banks.
8.Locker Service: Under this service, lockers are provided to the public in various
sizes on payment of fixed rent.
Secondary Function:
9. Underwriting: This facility is provided to the joint stock companies and to the government. The banks
guarantee the purchase of certain proportion of shares,
if not sold in the market.
10.BCSBI: The Banking Codes Standards Board of India is an independent banking industry
watchdog that protects consumers ofbanking services in India.
CREDIT CREATION
Banks : The Creators of Credit
◻ Through the process of credit Creation banks provide finance to all the sectors of economy, and thus Called “ Factories of Credit”.
◻ They advance much more than what they receive as deposits.
Basics of Credit Creation
◻ The money that banks possess, comes from bank deposits.
◻ Bank Deposits are of two Kinds :✔ Primary deposits✔ Secondary or derivative deposits
Process of Credit Creation
◻ The process can be better understood with two assumptions :
The entire banking system is one unitAll transactions flow through this unit
Process of Credit Creation
◻ Any experienced banker knows two things by experience :
Not all the depositors approach the bank for the withdrawal of money at the same time and will never withdraw all money at once.
There would be constant flow of deposits in the bank and credit could be given.
But.. There is something that controls Credit too !!!◻ Central Banks imposes a requirement on the
commercial banks to keep a certain percentage of total money supply with themselves as reserves.
◻ This is Legal Reserve requirement(LRR)
◻ These act as a strong catalyst in controlling the flow of credit when required.
What forms the LRR
◻ The Legal reserve requirements is formed with:
Cash Reserve Ratio (CRR)Part of money supply banks need to keep with the central Bank.
Statutory Liquidity Ratio (SLR)Part of money supply banks need to keep with themselves, to maintain directed level of liquidity.
Let’s take an example of credit creation◻ Suppose, the initial deposits with the bank
is Rs. 1000◻ And the LRR is 20 %◻ Which implies that the bank is free to lend 80%
of the money which remains as balance.
Observe the Table
Deposits Loans LRR (20%)Initial Deposits 1000 800 200Round 1 800 640 160Round 2 640 512 128Total 2440 1952 448
What did we learnt ?
◻ Based on the example, Its Clear that :
◻ The banks are able to create more credit than that of the initial deposit received.
◻ This Function of Banks is Called “ Money Multiplier”.
◻ Shown as : 1/LRR◻ Hence, credit flow remains unchanged and
unaffected.
PRIORITY SECTOR LENDING
MEANING & INTRODUCTION
Priority Sector Lending refers to lending to those sectors of the
economy which may not get timely and adequate credit.
Priority Sector Lending is an important role given by the (RBI)
to the banks for providing a specified portion of the bank lending
to few specific sectors like agriculture and allied activities, micro
and small enterprises, poor people for housing, students for
education and other low income groups and weaker sections..
This is essentially meant for an all round development of the
economy as opposed to focusing only on the financial sector.
The concept of priority sector is to extend credit
facilities to the borrowers of so far neglected
sectors of the economy. one of the main
objective of nationalisation of banks is priority
sector lending.
REASONS FOR NEGLECTING THESE SECTORS:
⚫ The banks were designed to cater to the needs of trade. ⚫ The banks were mostly established in the urban
areas. ⚫ The banks were providing banking services to those
sectors which are profitable and less risky as their main objective was only profit maximisation.
⚫ Lending policies were only based on security offered as backing to the loans by the loan applicants.
⚫ Agricultural sector was associated with lot of risk as it mainly depended on the monsoons.
⚫ Small and cottage industries were also risk associated. ⚫ Illiteracy and less awareness among the farmers and
small traders regarding the banking practices.
GUIDELINES BY RBI
Reserve Bank of India prescribed guidelines and targets to all the commercial banks in public sector, private sector and foreign banks operating in India with regard to priority sector services.
The main aim of Reserve Bank of India is to make sure that some prescribed amount will be diverted towards priority sector.
Total priority sector loans and advances should be 40% of net bank credit.
18% of the total net credit of banks should be for agricultural sector and
12% for small scale industries.
out of the above 50% of the credit should be for weaker sections in
agricultural sector.
out of the advances to small industries 12.5% should be for rural artisans
village craftsman and cottage industries.
loans to self help groups and NGOs are also included in priority sector.
TARGETS SET FOR BANKS
⚫ RBI sets targets for lending to the priority sectors by banks in India. They are as follows: ⚫ Total priority sector loans and advances should be 40% of net
bank credit.
⚫ This is equally applicable to both public and private sector banks in India.
⚫ Advances to weaker sections should be according to the percentage fixed by the bank.
⚫ Foreign banks operating in India should lend loans to priority sector.
⚫ They can lend to exports and small industry.
If there is a shortfall in priority sector lending from the prescribed targets,
such bank should deposit equal amount with SIDBI.
Priority sectors
Loans to weaker sections
Loans to farmers
Loans to small scale and cottage industries
Loans to professionals and self employed people
Transport operators
Housing Loans
Educational Loans
Export trade
Retail business
Infrastructure facilities
Micro Finance etc
“Retail banking is typically mass – market banking where individual customers use local branches of larger commercial banks. Services offered include savings and transactional accounts, mortgages,personal loans, debit cards, credit cards and so”.
Retail banks provide banking services to individuals and small business.
Retail banks deals with individual customers, both on liabilities andassets sides of the balance sheet.
Fixed/current/saving accounts on the liabilities side, and mortgages loans on asset side.
Financial institutions are dealing with large number of low value transactions.
It is typically mass-market banking.
Multiple ProductsThe products included in retail banking
are—Various types of deposits/accounts.Credit and debit cardsLoans (Personal, Auto, Housing etc.) Insurance, mutual funds etc.
Multiple channels of distributionInternet banking Mobile banking Call centers
Multiple Customer GroupsIndividual customers Petty businessesSmall and Medium Enterprises (SMEs)
1. All round increase in economic activity.
2. Increase in the purchasing power. The rural areas have the large purchasing power at their disposal and this is an opportunity to market Retail Banking.
3. India has 200 million households and 400 million middleclass population more than 90% of the savings come from the house hold sector. Falling interest rates have resulted in a shift. “Now People Want To Save Less And Spend More.”
4. Nuclear family concept is gaining much importance which may lead to large savings, large number of banking services to be provided are day-by-day increasing.
5. Tax benefits are available, for example, in case of housing loans the borrower can avail tax benefits for the loan repayment and the interest charged for the loan.
Future of Retail Banking is for the CUSTOMER.
Pricing is determined by Customer. Competition among Banks would ensure him
better service at cheaper rate. Customer would be able to discount his future
earnings as Retail Credit for his higher standard of living.
BANKING INNOVATION
❑ Stands for making something new in banking operations by using
electronic devices & internet.
❑ To strengthen the operations by putting the services faster,
easy, cheaper and accurate.
❑ These are rightly called as “Electronic Banking”
ADVANTAGES OF BANKING INNOVATION
• Faster & convenient transactions
• No longer required to wait in long queues
• Opening of a/c simple & easy
• Larger customer coverage
• Promoting banking services & products internationally
• Increase customer satisfaction
• Abolishing the use of paper in transactions
• Fund transfer become faster &convenient
DISADVANTAGE / LIMITATION
Lack of customer knowledge & skill on computers & browsing
Security risk
❑ Increased no. of fraudulent bank website
❑ Fake emails❑ Use of Trojan horse programmes tocapture user ID
& passwords
1.
2.
3. Viruses & worms
ELECTRONIC BANKING SERVICES
• Internet Banking
• Mobile Banking
• Debit Cards
• Automated Teller machine(ATM) Banking
• Electronic Fund Transfer
• Mail Transfer / Mail Order
• Magnetic Ink Character Reader (MICR) Technology
“The performance of banking activities
via the internet. online banking also known
as ‘internet banking’ or ‘web banking’.
INTERNET BANKING
ADVANTAGES & NEEDS
• convenience banking for customers
• 24/7*365
• low cost, unlimited access
• customer –banker relationship
• wider reach to public
• competitive edge
• an effective marketing tool for promotion
Is a system that allows customers of a financial
institution to conduct a no. Of financial
transactions through a mobile device such as
mobile phone or personal digital assistant.
MOBILE BANKING
SERVICES OFFERED
❑ Mini statements &checking of a/c history
❑ Alerts on a/c activity or passing of thresholds
❑ Access to loan statement
❑ Insurance policy management
❑ Pension plan management
❑ Blocking of cards
❑ Balance checking in the a/c
❑ Mobile recharging
ADVANTAGES & LIMITATIONS
Mobile connectivityUser friendly
Cost effective
Reduces the risk offraud
Improves customer services
❑ Smart mobile users- less than 20%. Mobile banking not possible in
basic model. So, they have to depend on SMS.
❑ One mobile banking a/c for one customer(says RBI)
An electronic card issued by a
bank which allows bank clients,
access to their a/c to withdraw
cash or pay for goods and services
DEBIT CARDS
TYPES OF DEBIT CARDS
• ONLINE DEBT CARDS
• OFFLINE DEBIT CARDS
• ELECTRONIC PURSE CARDS
• PREPAID DEBIT CADRDS
ADVANTAGES
24 hours access to cash per day50,000 upto 2LView a/c balances & mini statements
Transfer funds between a/c’s
Refill your prepaid mobile
Request a cheque book & a/c statement
Credit card
A credit card is a postpaid card. it is a plastic card issued to customers. It is thus a debt instrument. it is one step forward to cashless and chequeless Society.The objective of card is to provide convenience and security which eliminates cash transactions and protect the holder from the danger of theft of cash.It is an interest free card for 30 to 45 days. credit card can be used in Shops ,restaurants Railways ,hotels ,telephone services extra. Card holder is issued a password or PIN to enable the use of card for accessing his card account of ATM. credit card empowers the card holder to make payment for goods and services upto the sanctioned credit limit at some rate of interest on payment of annual fee.
Advantages 1. A credit card is convenient to carry and simple to operate it is a convenient method of payment. 2. The card holder can withdraw cash up to sanctioned limit. 3. Credit cards are accepted by merchants, travel companies, hotels ,Railways, for payment of utility bills etc.
ATM banking is a banking operation
through a machine at a bank branch or
other location which enables a customer to
perform basic banking activities (checking
balance, withdrawing or transferring
funds) even when the bank is closed.
ATM BANKING
BENEFITS
Benefits to customers
Benefits to banks
Benefits to others
ELECTRONIC FUND TRANSFER (EFT)
❑ “Moving funds between different account in the same or different bank,through the use of wire transfer, automatic teller machines, or computers
but without the use of paper documents.”
❑ For ex. When you use your debit cards to make a purchase at a store or
online the transaction is processed using an EFT system. The transaction is
very similar to an ATM withdrawal ,with near instantaneous payment to the
merchant and deduction from your checking account.
❑ Direct deposit is another form of an electronic funds transfer .In this
case ,funds from your employer’s bank account are transferred
electronically to your bank account ,with no need for paper based payment
systems.
MAIL TRANSFER / MAIL ORDER
❑ This is the mode used when you wish to transfer money from your account in
Center 'A' to either your own account in Center 'B' or to somebody else's
account.
❑ In this mode of transfer, you are required to fill in an application form
similar to the one for DD, sign a charge slip or give a cheque for the amount
to be transferred plus exchange and collect a receipt.
❑ The Bank will, on its own, send an order to its branch at center 'B' to
deposit the said amount in the account number designated by you.
❑ This is, however, a dying product and many banks like State Bank of India
have since withdrawn this.
wholly owned by The Reserve Bank
isthe
of
Government of India. The CentralBoard
Directors oversees theReserve Bank’s business.
The Governor is the Reserve Bank’s chief executive. The Governor supervises and directs the affairs and business of the Reserve Bank.
Monetary Authority Issuer of Currency Banker to Government Banker to Banks Regulator of the Banking System Manager of Foreign Exchange Regulator and Supervisor of the Payment and
Settlement Systems Developmental Role
1. Monetary Authority❑ Frames monetary policy
objectives:with the following main
✔ Maintaining price stability.✔ Ensuring adequate flowof credit to the productive sectors
to support economic growth.✔ Financial stability.❑ Tools to achieve objectives:✔ Cash Reserve Ratio✔ Statutory Liquidity Ratio✔ *Controls credit creation through various qualitative and quantitative
methods
2. Issuer of Currency❑ The Reserve Bank is the nation’s sole note
issuingauthority.
❑ Ensures adequate supply of clean and genuine notes.❑ Routinely address security issues and target ways to enhance
security features to reduce the risk of forgery.❑ Printing of notes and minting of coins.✔ Four printing presses – Dewas in Madhya Pradesh, Nasik in
Maharashtra, Mysore in Karnataka and Salboni in West Bengal.✔ Four mints are in operation – Mumbai, Noida in U.P, Kolkata and
Hyderabad.❑
3. Banker to Government❑ Undertaking banking transactions for the central and state
governments to facilitate receipts and payments and maintaining their accounts.
❑ Developing the market for government securities to enable the government to raise debt at a reasonable cost.
4. Banker to Banks❑ Enabling smooth, swift and seamless clearing and settlement
of inter-bank obligations.❑ Providing an efficient means of funds transfer for banks.❑ Enabling banks to maintain their accounts for purpose of statutory
reserve requirements and maintain transaction balances.❑ Acting as lender of the last resort.
5. Regulator of Banking System❑ Supervises the nation’s financial system.❑ Financial system comprises of:✔ Regulatory authorities✔ Financial institutions✔ Financial markets✔ Financial instruments✔ Payment and settlement
6. Manager of Foreign Exchange❑ Regulating forex transactionsand facilitating the
development of the foreign exchange market.❑ Managing the foreign currency assets andgold reserves
of the country.7. Regulator and supervisor of payment and
settlement system.❑ Systematic transfer of money, paper instruments and various
electronic channels.❑ NEFT, RTGS etc.
8. Development role❑ Deposit Insurance and Credit Guarantee Corporation (1962) -
guarantee cover to credit facilities extended to certain categories of small borrowers.
❑ Unit Trust of India (1964), the first mutual fund of the country.❑ Industrial Development Bank of India (1964), a development
finance institution for industry.❑ National Bank for Agriculture and Rural Development (1982), for
promoting rural and agricultural credit.❑ Ensures development by:✔ Priority sector lending✔ Lead bank scheme✔ Strengthening and supporting small and local banks✔ Financial inclusion
CREDIT CONTROL BY RESERVE BANK OF INDIA
INTRODUCTION
• The most important functionof thecentral bank ( RBI ) is to
commercial banks. Moneycontrol credit created by
&credit represent a powerful force to good or evil in the economy. It is the duty of the central bank to ensure that money & credit is managed.
THEME : CREDIT CONTROL BY RESERVE BANK OF INDIA
• Commercial banks create credit in the process of lending. They have the power of credit creation. The importance of credit in the settlement of business transactions has increased. There has been a shift from money economy to credit economy in which traders & businessmen are able to carry out their business transactions without immediate payment or receipt of money.
• Neither too much nor to little credit is not desirable for the economy.• The control over the volume or quantity of credit created is one
aspect of credit control. The central bank also has the responsibilities to control the direction of credit flow in line with the overall economic priorities.
IMPORTANCE OF CREDIT CONTROL
1) To obtain stability in the internal price level.
2) To attain stability in exchange rate.
3) To stabilize money market of a country.4) To eliminate business cycles –inflation & depression –by controlling
supply of credit.
5) To maximize income, employment & output in a country.6) To meet the financial requirements of an economy not only during normal
times but also during emergency or war
7) To help the economic growth of a country within specified period of time.
Methods and instruments of credit control
Quantitative Or General Methods
Qualitative Or Selective Methods
1. Bank Rate
2. Open Market Operations
3. Variable Cash Reserve Ratio
4. Statutory Liquidity Ratio
1. Rationing Of Credit
2. Margin Requirements3. Regulation Of
Consumer Credit
4. Control Through Directives
5. Publicity
6. Moral Suasion
7. Direct Action
Methods / instruments of credit control
A. Quantitative methods:-
• Quantitative methods are those which aim at controlling the total volume of credit. They are used to regulate the quantity of credit created by banks. By using these methods the central banks controls the amount of credit.
• These includes:-1. Bank rate
2. Open market operations
3. Variable cash reserve ratio
4. Statutory liquidity ratio
• Bank rate is the rate at which central bank ( RBI in India ) grant loans to the commercial banks against the Govt. security & other approved first class securities.
• Reserve Bank adopts Cheap & Dear Monetary Policy according to economic condition of the country
a. Cheap Monetary Policy :-RBI decreases bank rate to increase the quantity of credit in the country,this is called cheap monetary policy.Decrease in bank rate » decrease cost of credit i.e. Decrease in interest rate …As a result of this quantity of credit increases.
b. Dear Monetary Policy :-RBI increases bank rate to decrease the quantity of credit in the country, this is called dear monetary policy.increase in bank rate » increase cost of credit i.e. increase in interest rate …this will result in decrease in quantity of credit.
( Current bank rate is 4.25 % )
1. Bank Rate
2. Open market operations
• Open Market Operations refers to the deliberate & direct buying & selling of securities & bills in the money market by the central bank.
• Purchase & sale of securities may lead to expansion & contraction of money supply in the money market. It influences the cash reserves with the commercial banks & hence these operations control their credit creation power.
• Inflationary pressure:- the central bank would sell the govt. securities to the commercial banks. the banks would transfer a part of their cash reserves to the central bank towards the payments of these securities. Consequently the cash reserves with the commercial banks will be reduced. It would lead to a contraction in the credit creation power of the commercial banks.
• Deflationary pressure :- in this situation the central bank will purchase securities from the commercial banks. In the process the cash reserves with the commercial bank will increase & they would enable to create more credit
• This weapon is used to fulfill the seasonal credit requirements of commercial banks.
3. Cash Reserve Ratio
• The RBI controls credit through change in Cash Reserve Ratio (CRR ) of commercial banks.
• Every commercial bank is required by law to maintain certain percentage of its deposit with the central bank which is called cash reserve ratio.
• The central bank has a power to change the percentage of cash reserve to be kept with it.
• If the ratio increases the credit creation capacity of commercial banks decreases. On the other hand if the ratio decreases the credit creation capacity if commercial banks increases.
• This ratio can be varied from 3 % to 15% as directed by the RBI.• By changing the reserve requirement, the central bank is able to effect the
amount of cash with the commercial banks & force them to curtail or expand credit.
( Current CRR is 3%)
4. Statutory liquidity ratio
• Every scheduled bank is required by law to maintain a minimum of 20% as cash , gold or unencumbered securities of its total demand & time liabilities, which is called Statutory liquidity ratio ( SLR )
• The RBI is empowered to change this ratio.• It is also influence the credit creation capacity of the banks• The effect of both CRR & SLR on credit expansion is similar.• As on Oct 21, 1997, it was fixed to 25% of the total deposit of the
commercial banks.• Penalties are levied by RBI for not maintaining these ratio’s from
scheduled banks.( Current SLR is 18.5% )
B. QUALITATIVE METHODS :-• Qualitative methods are used to effect the use, distribution & direction of
credit.• It is used to encourage such economic authorities as desirable & to
discourage those which are injurious for the economy.• RBI from time to time had adopted the following qualitative methods of
credit control:-1. Rationing Of Credit2. Margin Requirements3. Regulation Of
Consumer Credit4. Control Through Directives5. Publicity6. Moral Suasion7. Direct Action
1. Rationing Of Credit
• In this method RBI seeks to limit the maximum or ceiling of loans & advances and also in certain cases, fixes ceiling for specific categories of loans & advances.
• It aims to control & regulate the purposes for which the credit is granted by commercial banks.
a) Variable portfolio ceiling:-According to this the central bank fixes a ceiling on the amount of loans & advances for each bank & the bank cannot advance loans beyond this limit.
b) Variable capital asset ratio :-This is the ratio which the central bank fixes in relation to the capital ofa bank to its total assets.
2. Margin Requirements
• Commercial banks do not lend up to the full amount of the value of security. the loan amount is less than the securities value. It keeps a ‘margin’ as a cushion against fall in the value of the security.
• ‘margin’ refers to the difference between the current market value and the loan value of a security. It is a portion of the value of the security charged to a bank, which the borrower is expected to pay out of his own resources.
• a rise in the margin requirement restricts the amount of loan that a bank can grant against a security , while a lower margin increases it.
• In this way, the amount of fixing margin requirements has a direct impact on theamount of credit for speculation purposes.
• during depression, the margin can be reduced so that there is increase in the level of economic activity through an increase in demand for bank credit.conversely, during inflation, margin requirements can be raised by the monetary authorities so as to contain the boom in the stock market.
3. Regulation Of Consumer Credit
• With the introduction of installment trading, the trading in non-essential consumer products like motor vehicles, electrical & electronic goods have gone up to an unpredicted level.
• The RBI may restrict consumer expenses on non-essential items by directing the commercial banks to fix the minimum percentage of down payment, length of period over which installment payment may be spread, etc.
• Example :-suppose, to buy a washing machine, the buyer is required to make a down payment of one-fourth of its total price & the rest is to be paid in 15 equal monthly installment.under regulation of consumer’ credit, the down payment amount may be increased & number of installments reduced. This reduce demand for the product & controls consumer spending which is necessary for controlling prices.
• During inflation, more restrictions can be prescribed to control prices by controlling demands, while during depression they can be relaxed in order to stimulate demand for goods.
4. Control Through Directives
• RBI have been empowered to issue directives to commercial banks in respect of their lending policies, purposes for which loans may or may not be granted , margin to be kept in case of secured loan ,etc.
• The power to issue directives may be given either by statute or by mutual agreement between the central banks and the commercial banks.
• Directives may be issued to encourage the flow of credit to certain areasor to prevent the flow of credit in undesirable directions.
5. Publicity
• The RBI may also follow the policy of publicity in order to make known to the public its view about the credit expansion or contraction.
• RBI regularly publish statements of assets & liabilities of commercial banks for information to the public. They also publish reports of general money market & banking condition.
• This is a way of exerting moral pressure on the commercial banks & also making the public aware of the policies being adopted by banks & the central bank in the light of prevailing economic conditions in the country.
6. Moral Suasion
• It refers to the advise or request made by the central bank to the commercial banks to follow the monetary policy and carry out their lending activities & other operations in such a way as to achieve the objective of the central banks policy.
• It can be in the form of advise to commercial banks regarding their investments or care to be taken while granting loans & advances against such commodities the prices of which may rise due to speculative activity.
• Being an apex institution & lender of the last resort , the RBI can used itsmore pressure & persuade the commercial bank to follow its policy.
7. Direct Action
Direct action refers to the direction & controls which the central bank may enforce on all banks or a particular bank concerning their lending & investments.In such case:-
1) RBI may refuse to sanction further accommodation to a bank.2) The RBI may reject altogether any application for grant of discounting
facilities to the bank.3) It may change penal rate of interest on loans taken by a bank beyond
the prescribed limit.
Conclusion
In modern times , bank credit has become the important source of money and commercial banks have unlimited power to expand or contract credit . for smooth functioning of the economy RBI controls credit through quantitative & qualitative methods. RBI encourage credit for productive purposes & discourage credit for non-productive purposes.
The Banking Ombudsperson
What is banking ombudsman• The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995.
Who is a banking ombudsman:The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.
Vision
• To provide an inexpensive, transparent and credible mechanism ensuring fair treatment of the common person utilizing Banking services.
Goals:
solving of grievances: to settle customer grievances and improve customer services.
Feedback/suggestions to Reserve Bank: • guidelines to banks to improve the level of customer service
& to strengthen their internal grievance redressal systems.
Create awareness: about Banking Ombudsman Scheme.
To facilitate: Quick and fair (non-discriminatory) redressal
of grievances through use of IT systems, comprehensive
and easily accessible database and enhanced capabilities of
staff through training.
• Which are the banks covered under the BankingOmbudsman Scheme, 2006?
All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.
Organizational Structure Deputy
Governor (Appellate Authority)
Executive Director
Customer Services Department
Office of the Banking Ombudsman
Commitments by Banking Ombudsman
• Introduced complaint tracking system(CTS) to solve thecomplaints issues as early as possible.
• Quick turnaround time.
• Inter district mobility of Banking Ombudsman within the state.
• Exchange information and post important decisions ondedicated blog-sites.
15 OBOs are situated across country:Ahmedabad Bangalore Bhopal Bhubaneswar Chandigarh Chennai Guwahati Hyderabad Jaipur Kanpur Kolkata Mumbai New Delhi PatnaThiruvananthapuram
Grounds of complaints in Banking Services• Forced closure of deposit accounts without due notice orwithout sufficient reason.
• Refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government.
• Refusal to open deposit accounts without any valid reason forrefusal.
• Complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank related matters.
• Non-payment or delay in payment of inward remittances.• Non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc,.
Card related problems:
• Charging Of amount for 'Free' Card,
• Authorization Of Loans Over Phone (oral),
• Wrong Billing,
• Excessive Charges,
• Wrong Debits To Account,
• Non-dispensation /Short Dispensation Of Cash From ATM . etc
Procedure for lodging complaints• Essential – grievance to be taken up with bank first;
• Aggrieved persons not satisfied by a bank’s service and its resolution of complaint can apply to the Banking Ombudsman within one year;
• The case is taken to court or arbitrator to solve
• Complaint in prescribed format or in any other but incorporating all the required information.
• the complaint should be non frivolous in nature;
• the complaint is made before the expiry of the period of limitation prescribed under the Indian Limitation Act, 1963 for such claims.
• Complaints can be submitted online/ email/in hard copy
Redressal Process:
Receipt of complaint
Review by BO
RejectNon Maintainable Maintainable
Benefits of the BO scheme• Prompt and impartial resolution of complaints
• No cost to the customer
• Assessment based on overall fairness, good business practices, accepted banking law and practice
• Focus on customer education and financial literacy
• Customer Awareness and Empowerment
BANKER CUSTOMER RELATIONSHIP AND THEIR MUTUAL RIGHTS AND DUTIES
INTRODUCTION
The relationship between banker and his customer depends upon the nature of service provided by a banker. Accepting deposits and lending or investing are the core banking business of the bank. In addition to its primary functions it deals with various customers by providing other services like safe custody services, safe deposit lockers and assisting the clients by collecting their cheques and other instruments as an agent and trustees for them.
Banker
In general, bank or banker means a financial institution that accepts deposits and lends money to the needy people. It deals in money. A banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on their account.
Customer
A person who has an account with a bank is a customer. Customer can be any person for whom the bank agrees to conduct an account. The relation of a banker and customer begins as soon as the first cheque is paid in and accepted.
Different types ofrelationship
1. Debtor and Creditor
When customer deposits money, he becomes creditor and bank as debtor by accepting and then further utilizing it.
2. Bailor and Bailee
When banks provide safe custody facility to customers to keep their valuable belongings, Customer is bailor and bank is bailee.
3. Principal and Agent
Banks collect cheques, bills, and makes payment to various authorities through rent, bills, insurance, premium etc… Bank also abides by the standing instructions given by its customers. In all
such cases bank acts as an agent and customer acts as a principal.
4. Trustee and Beneficiary
Trustee holds property for the beneficiary, the profit earned from this property belongs to the beneficiary. If the
customer deposits securities or valuable with the banker for safe custody, banker becomes a trustee of his customer.
The customer is the beneficiary.
5. Advisor and Client
When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or
unofficially. While giving advice the banker has to take maximum care and caution. Here the banker is an
advisor, and the customer is a client.
Mutual RightsRight of lien-Lien is the right of a creditor to retain the property belonging to the debtor until the amount due is paid to the creditor .Lien is of two kinds .1. Particular Lien2.General Lien. Bankers lien is a General lien.
Right of set off-(combining accounts)
It is the right of a banker to set off (adjust) the debit balance in one a/c of the customer with the credit balance in another a/c of the same customer.
Right of appropriation-
If the customer has more than one loan account, the customer can direct the repayment of the loan as credit into anyone of the accounts. If there is no specific direction from the customer the banker has a right to appropriate as per his choice.Indian contract act recognises 3 rights
1.Appropriation by debtor
2.Appropriation by creditor
3.Appropriation by law
Right to charge interest and other incidental charges -
As a creditor the banker has right to charge interest on the funds he lends as per the norms and as per the contract.
MUTUAL OBLIGATIONS/ DUTIESA) Duty to maintain secrecy/confidentiality of customers’
account
B) duty to honor cheques drawn by customers on their accounts and collect cheque, bills on his behalf.
C) duty to pay bills etc.. As per standing instructions of the customer.
D) duty not to close the account of the customer without prior notice.
E) duty to act as per the directions given by the customer. If directions are not given, the banker has to act according to how he is expected to act.
F) duty to submit periodical statement like informingcustomers of the state of the account.
G) articles/ items kept should not be released to a third party without due authorization by the customer.
OBLIGATIONS OF THE BANK
1.Obligation to maintain secrecy• Section 13 of banking companies Act
1970 stipulates the banks to maintain secrecy of their customers accounts and dealings with them.
• However there are exceptions.The exceptions are :
� When law requires� When the practices and usages among
bankers warrants exchange of information.
• Secrecy of the customer’s account• The bank owes a contractual duty not to disclose
the customer’s financial position without his consent.
• However the obligation of secrecy is not considered essential on the following occasions.
– When a banker is required to give evidence in the court.
– When there is national emergency and disclosure is essential in the public interest.
– When there are clear proofs of treason to the state– When a consent is given by the customer to provide
information for the preparation of balance sheet.
OBLIGATIONS OF THE BANK
•
•
•
Special type of bank customers
Customer of a bank is a person who is maintains an account in his own name.
The special types of customers of a bank are:1.Minor 2.Married women 3.Drunkard 4.Lunatics 5.Partnership firm 6.Joint account7.Joint stock company 8.Illiterate person
Minors are considered as one type of special customers in a bank. A person who is below 18 years of age is considered as a minor and therefore is a special type of banking customer.A minor has to have a parent or guardian to help them open a bank account. Banker allows minor to open a savings a/c but not current a/c. A minor can borrow money, but most often needs a co- signer such as a guardian or parent. A minor in most banks cannot be appointed as a trustee of any account.
Minor
A person of unsound mind cannot make a valid contract. So, the bankers should not open an account in the name of a person of unsound mind. But a customer may become lunatic after opening an account with the bank. Once the banker comes to know of his customer’s lunacy, all operations of his account should be suspended until the receipt of an order from the court.
lunatics
An illiterate person means a person who can’t sign his name. While opening of an account of such a person is unavoidable, the banker should obtain:( 1) Left thumb impression on the account opening form and specimen signature card in the presence of an authorized bank official
(2)Details of identification marks should be noted on the account opening form and specimen signature card
(3)At the time of withdrawal he should attend personally along with pass book and affix his thumb impression on the withdrawal form in the presence of a bank official.
Illiterate person
A married woman can open a bank account but cannot make her husband liable for her debts.Bank has no remedy if she does not have a separate property in her name. She cannot make her husband liable for her debts except for necessaries of life. Thus, a banker should be careful while granting loans or allowing overdrafts.
Married women
DrunkardA drunkard is a person who is intoxicated and is incapable of understanding the nature and effect of a contract upon his interest. A contract entered with a drunkard is void. It is advisable for a banker not to allow a drunkard to start an account in his name when he is under the influence of alcohol.If a drunkard tenders a cheque, the banker insists upon a witness for payment of amount.
A firm’s account should always be opened in the name of the firm and not in the name(s) of the individual partner (s) because a partner does not have (implied) authority to open a bank account on behalf of the firm in his own name.
Partnership firm
A joint stock company is an artificial person and it has a separate legal entity. So, a bank account may be opened on its own name. A joint stock company may either be a Private Limited Company or a Public Limited Company.The banker should examine MoA, AoA and certificate of incorporation before opening a bank account.He should obtain board’s resolution in appointing him as company’s banker and a clear mandate about operation of account.
Joint stock company
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